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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission file number 1-10995
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Capital Re Corporation
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(Exact name of registrant as specified in its charter)
Delaware 52-1567009
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1325 Avenue of the Americas, New York, N.Y. 10019
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 212-974-0100
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.01 par value, and
Capital Re LLC 7.65% Cumulative Guaranteed
Monthly Income Preferred Shares, Series A
(guaranteed by Capital Re Corporation) New York Stock Exchange, Inc.
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(Title of Class) (Name of each exchange on
which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of Class)
Indicate by check mark whether registrant (1) has filled all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form-10-K. [X]
The approximate aggregate market value of voting stock held by non-affiliates of
the registrant as of March 25, 1997 was $702,148,469. The number of shares of
Common Stock outstanding as of March 25, 1997 was 15,867,762.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants Annual Report to Stockholders for the year ended
December 31, 1996 are incorporated by reference into Part II hereof. Portions
of the registrant's 1997 definitive Proxy Statement are incorporated by
reference into Part III hereof.
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PART I
ITEM 1. BUSINESS.
A. GENERAL:
(1) Company Overview -
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Capital Re Corporation (the "Company" or "Capital Re") is an insurance holding
company for a group of reinsurance companies that provide value-added products
in specialty insurance markets. The Company provides reinsurance capacity to
insurers in four principal areas of specialization: financial guaranty
insurance, mortgage guaranty insurance, trade credit insurance and title
insurance. Additionally, during 1996, the Company expanded its participation in
the global market for specialty insurance and reinsurance by acquiring a Lloyd's
of London managing general agency, and forming a Bermuda-based joint venture
company to write financial reinsurance products. The Company intends to continue
to diversify into additional specialty insurance and reinsurance markets on an
opportunistic basis.
The foundation of the Company's specialty reinsurance business has been
financial guaranty reinsurance, which the Company began providing in 1988
through its subsidiary, Capital Reinsurance Company (''Capital Reinsurance'').
More recently, the Company's strategy of diversifying into other specialty
reinsurance businesses has contributed to the Company's continued growth in
revenues and earnings. For the year ended December 31, 1996, financial guaranty
reinsurance accounted for 45.2% of net premiums written, mortgage guaranty
reinsurance accounted for 38.9% of net premiums written, trade credit
reinsurance accounted for 14.2% of net premiums written, and title reinsurance
accounted for 1.7% of net premiums written.
The Company provides reinsurance products through five wholly-owned insurance
subsidiaries: Capital Reinsurance, Capital Mortgage Reinsurance Company
(''Capital Mortgage''), KRE Reinsurance Ltd. (formerly, Capital Mortgage
Reinsurance Company (Bermuda) Ltd.) (''KRE''), Capital Credit Reinsurance
Company Ltd. (''Capital Credit'') and Capital Title Reinsurance Company
("Capital Title"). It also has established a corporate member at Lloyd's of
London, CRC Capital Ltd., which supports underwriting on the syndicates managed
by RGB Underwriting Agencies Ltd., the Lloyd's managing general agency that the
Company acquired in November 1996.
Capital Reinsurance is a professional reinsurance company dedicated to serving
the U.S. domestic and international financial guaranty insurance markets.
Capital Reinsurance has established itself as a leading specialty reinsurer (by
market share) of financial guaranties of investment grade debt obligations,
principally municipal debt obligations. Capital Reinsurance also reinsures
financial guaranties of investment grade non-municipal debt obligations and, to
a limited extent, reinsures mortgage guaranty, trade credit and other specialty
insurance lines. The claims-paying ability of Capital Reinsurance is rated AAA
by Standard and Poor's Corporation (''S&P'') and Moody's Investors Service, Inc.
(''Moody's''). Capital Reinsurance's underwriting process is premised on a
general policy of reinsuring only those obligations that are investment grade on
the date reinsured and where there is no expectation of loss on the risk
reinsured. Nevertheless, losses can be expected to occur in Capital
Reinsurance's existing and future reinsured portfolio.
The Company entered the mortgage guaranty reinsurance business through Capital
Mortgage and its subsidiary, KRE, in February 1994. Capital Mortgage is a
professional reinsurer dedicated to serving the mortgage guaranty insurance
market. Mortgage guaranty reinsurance is underwritten with the expectation that
losses will occur regularly. The claims-paying ability of Capital Mortgage is
rated AA by S&P. KRE is rated AA- by S&P and provides reinsurance capacity to
the mortgage guaranty and financial guaranty insurance markets as well as
retrocessional support to Capital Reinsurance and Capital Mortgage.
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Capital Credit, a Bermuda-domiciled insurance company, commenced operations in
February 1990 and since 1994 has provided reinsurance principally to the
international trade credit insurance markets. Trade credit insurance protects
sellers of goods and services from the risk of non-payment on trade receivables.
Capital Credit also reinsures surety, political risk, financial guaranty and
mortgage guaranty insurance. Portfolio losses will also occur regularly in the
trade credit reinsurance line of the Company's business.
Early in 1996, the Company entered the title reinsurance business through the
formation of Capital Title, a New York domiciled insurance company. Capital
Title is dedicated to providing structured reinsurance products to the title
insurance industry. Capital Title is rated AA- by S&P and Duff & Phelps Credit
Rating Co. ("Duff & Phelps").
In November 1996, the Company, through a newly formed United Kingdom holding
company, Capital Re (UK) Holdings, acquired 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 five syndicates operating in the Lloyd's of London insurance
market. In connection with this acquisition, the Company established a corporate
name at Lloyd's to support underwriting on the managed syndicates. For the 1997
year of account, the corporate name participates in a non-marine and a life
syndicate.
In December 1996, the Company 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 Capital Re corporate group also includes Capital Re Management Corporation,
a New York reinsurance intermediary, and Capital Re LLC, a Turks & Caicos
Islands finance subsidiary organized in 1993 to issue $75 million of Company
obligated mandatorily redeemable preferred stock, the proceeds of which were
loaned to Capital Re.
Set forth below is the organizational structure of Capital Re, its subsidiaries
and affiliates:
[CHART APPEARS HERE]
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At December 31, 1996, 86.5% of the Company's investment portfolio consisted
exclusively of fixed income securities rated AAA or A-1+ by S&P or Aaa or P-1 by
Moody's, or issues by the U.S. Government or its agencies or instrumentalities.
Overall portfolio weighted average quality is AAA. In 1996, the Company's Board
of Directors approved revisions to the Company's investment strategy to permit
greater investment diversification designed to improve the total risk/return
profile of the Company's investment portfolio. The Company has expanded its
investment guidelines to permit investments in investment grade non-dollar
denominated bonds and other financial instruments. See ''Business--
Investments.''
(2) Financial Guaranty Reinsurance -
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(a) Overview of Financial Guaranty Insurance Market -
Financial guaranty insurance is a type of credit enhancement in the form of a
surety which is regulated under the insurance laws of various jurisdictions. The
insurance provides an unconditional and irrevocable guaranty which indemnifies
the insured against nonpayment of principal and interest when due by an obligor
on an insured debt obligation. The two largest nationally recognized rating
agencies, S&P and Moody's, assign the claims-paying ability rating of a
financial guaranty insurance company to the obligations insured by that company.
Because all of the major U.S. primary financial guaranty insurance companies
have AAA claims-paying ratings from these rating agencies, bonds insured by
those companies are rated AAA.
Both issuers of and investors in financial instruments may benefit from
financial guaranty insurance. Issuers benefit because the insurance may have the
effect of lowering an issuer's cost of borrowing in the public and private debt
markets. The borrowing costs are lowered to the extent that the insurance
premium is less than the value of the difference between the yield on the AAA
insured obligation and the yield on the obligation if sold on the basis of its
uninsured credit rating. Financial guaranty insurance also increases the
marketability of obligations issued by infrequent or unknown issuers. Investors
benefit from increased liquidity in the secondary market, reduced exposure to
price volatility caused by changes in the credit quality of the underlying
insured issue, and added protection against loss in the event of the obligor's
default on its obligation. Upon nonpayment by an obligor, the financial guaranty
insurance company is obligated to pay the principal of and interest on the
insured obligation in accordance with the original payment schedule as if no
default had occurred.
The majority of financial guaranty insurance premiums are paid in full at policy
inception, although on certain financial guaranties, such as guaranties of most
non-municipal obligations, premiums are paid on an installment basis and
typically earned in the period paid. Financial guaranty premiums are non-
refundable and those paid in full are earned over the term of the related
insured obligation. Because most obligations insured by the financial guaranty
insurers have long maturities, the portion of premiums earned on a policy in any
year represents a relatively small percentage of initial premium received. This
methodology generates a predictable contribution to revenues over time that is
relatively independent of new business written in any given year. Premium rates
are generally calculated as a percentage of the principal amount of the insured
obligation or the principal and interest scheduled to come due during the stated
term of the insured obligation. A number of factors are considered in the
setting of premium rates including the type of credit obligation, collateral
security, maturity and rating agency capital charge.
The financial guaranty insurance market consists of two main product sectors:
municipal bond insurance and insurance of non-municipal debt obligations.
Municipal bond insurance provides credit enhancement of debt obligations issued
by or on behalf of states or their political subdivisions (counties, cities,
towns and villages, utility districts, public universities and hospitals, public
housing and transportation authorities) and other public and quasi-public
entities (including non-U.S. sovereigns and subdivisions thereof). Insurance
provided to the municipal bond market has been and continues to be the major
source of revenue for the financial guaranty insurance industry.
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The volume of long-term municipal debt issuances and municipal bond insurance
has increased significantly since 1983. In 1985, pending federal tax legislation
relating to municipal bonds prompted an unusual rise in total long-term new
issue municipal bond volume. The market for new issues returned to more normal
volumes in 1987 and grew steadily through 1991. In 1992 and 1993, historically
low interest rates prompted a dramatic increase in new issue volume, in part
arising from the refinancing of refunding activity. This increase ended in 1994
as rising interest rates and other market uncertainties developed throughout the
year. The table below sets forth the volume of long-term municipal bonds and the
volume of insured long-term municipal bonds issued over the period from 1983
through 1996.
<TABLE>
<CAPTION>
NEW TOTAL NEW INSURED NEW INSURED VOLUME
YEAR VOLUME VOLUME AS A PERCENT OF NEW
(IN BILLIONS) (IN BILLIONS) TOTAL VOLUME
<S> <C> <C> <C>
1983 $ 83.3 $ 12.8 15.4%
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1984 101.9 16.2 15.9
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1985 204.3 44.4 21.7
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1986 151.3 24.8 16.4
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1987 105.0 19.1 18.2
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1988 117.3 27.1 23.1
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1989 125.0 31.1 24.9
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1990 127.8 33.5 26.2
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1991 172.4 51.9 30.1
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1992 234.6 80.8 34.4
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1993 291.9 108.0 37.0
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1994 164.6 61.4 37.3
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1995 160.3 68.5 42.7
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1996 184.4 85.2 46.2
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</TABLE>
Source: Figures for 1983-1985 are based upon data provided by The Bond
Buyer, December 10, 1992; figures for 1986-1996 are based upon data
provided by The Bond Buyer, January 2, 1997. Amounts under the New Insured
Volume column include only the insured portion of an issue. Amounts under
the New Total Volume and New Insured Volume columns represent gross
principal amounts issued or insured, as the case may be, during such year.
The primary financial guaranty insurers also insure municipal bond investment
vehicles, such as unit investment trusts and mutual funds, and outstanding
municipal bonds trading in the secondary market.
The non-municipal financial guaranty insurance market is newer and more diverse
than the municipal bond insurance market. The types of securities supported by
guaranties of non-municipal debt obligations include various asset-backed
securities, including consumer and trade receivable-backed securities and
commercial and residential mortgage-backed securities, corporate bonds and
mutual funds. Although this market has been slower to develop than the municipal
market, demand for this type of insurance is being stimulated by innovations in
both domestic and foreign capital markets coupled with increasing investor and
issuer awareness of the value provided by financial guaranties.
There are currently six primary U.S. financial guaranty insurance companies
active in the business, the first four of which dominate the insured market:
Municipal Bond Investors Assurance Company (''MBIA''), AMBAC Indemnity Company
(''AMBAC''), Financial Guaranty Insurance Company (''FGIC''), Financial Security
Assurance Inc. (''FSA''), Capital Markets Assurance Company (''CapMAC''), and
Connie Lee Insurance Company (''Connie Lee'').
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(b) Financial Guaranty Reinsurance Market -
Reinsurance is a transaction whereby the reinsurer agrees to indemnify the
primary insurance company against part or all of the loss which the latter may
sustain under a policy which it has issued. The reinsurer may also assume
reinsurance from other reinsurers (''retrocessions''). In the event of loss, the
reinsured generally remains liable on its obligation to indemnify the insured.
The two major kinds of reinsurance are treaty and facultative. Treaty
reinsurance requires the reinsured to cede and the reinsurer to assume specific
classes of risk underwritten by the ceding company over a period of time,
typically one year. Facultative reinsurance is the reinsurance of part or all of
one or more reinsurance policies which is subject to separate negotiation for
each cession. It offers the option of accepting or rejecting individual
submissions by a ceding company as distinguished from the obligation to accept
specified classes of risk as a treaty reinsurer. Ceding companies generally will
seek facultative agreements when treaty terms preclude the cession or inclusion
of a particular risk, when the capacity of the treaty program is insufficient
for a given risk (for instance, when policy limits are in excess of the treaty
limits) or when special coverage is needed to comply with regulatory or other
capacity restrictions.
Reinsurance is written on a proportional or non-proportional basis. Proportional
reinsurance includes: (i) quota share reinsurance, whereby the assumed risk is a
fixed percentage of the reinsured's risk, (ii) surplus share reinsurance,
whereby the percentage of risk assumed is a multiple of the reinsured's net
retention up to a stated maximum, and (iii) variable quota share reinsurance,
whereby the percentage of assumed risk increases with the risk size to a stated
maximum. There are many possible variations of these three types of proportional
reinsurance. Non-proportional reinsurance includes: (i) risk assumption per risk
and per occurrence in excess of a reinsured's retention, subject to a specified
limit, and (ii) stop loss or aggregate excess of loss reinsurance, whereby the
reinsurer assumes an aggregate loss incurred over a specific time period (for
specific risks) above the reinsured's retention of loss incurred, up to a stated
maximum.
The purposes of reinsurance in the financial guaranty industry are to (i)
increase the insurance capacity of the reinsured, (ii) assist the reinsured in
meeting applicable regulatory and rating agency requirements, (iii) augment the
reinsured's financial strength, and (iv) manage the reinsured's risk exposure.
State insurance laws and regulations, as well as the rating agencies, impose
minimum capital requirements on financial guaranty companies, limiting the
aggregate amount of insurance which may be written and the maximum size of any
single risk which may be insured. Reinsurance allows the reinsured to increase
its capacity to write new business by effectively reducing the reinsured's gross
liability on an aggregate and single risk basis. Furthermore, primary insurers
manage the risk of their insured portfolios based on internal underwriting
criteria and portfolio management guidelines. Reinsurance is instrumental in
achieving those portfolio risk management goals. There are currently two
domestic reinsurance companies, Capital Reinsurance and Enhance Reinsurance
Company, specializing in the reinsurance of financial guaranties. Several non-
U.S. multiline insurers and a small number of domestic multiline insurers, also
participate in this reinsurance market. Based upon the 1996 annual statutory
statements filed by each of the U.S. primary financial guaranty insurers, the
Company believes that the Company and its principal competitor assumed most of
the reinsurance ceded by the U.S. primary financial guaranty insurers in 1996.
The size and growth of the financial guaranty reinsurance market is dependent on
(i) the size of the primary insurance market, (ii) the percentage of aggregate
risk that the primary insurers cede to the reinsurers, (iii) regulatory, rating
agency and other external risk retention limitations imposed on the primary
insurers and (iv) the price and availability of substitute AAA rated capital
facilities.
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(3) Mortgage Guaranty Reinsurance -
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(a) Overview of Mortgage Guaranty Insurance Market -
Mortgage guaranty insurance is a specialized class of credit insurance,
providing protection to mortgage lending institutions against the default of
borrowers on mortgage loans which at the time of the advance had a loan-to-value
(''LTV'') ratio in excess of 80%. The market for mortgage guaranty insurance is
competitively shared by three sectors: governmental agencies, principally the
Federal Housing Administration (''FHA'') and the Veterans Administration
(''VA''), private mortgage guaranty insurers, and the lending institutions which
choose to self-insure against the risk of loss on high LTV mortgage loans.
The private mortgage insurance industry, comprised of only monoline insurance
companies, as required by law, provides two basic types of coverage: primary
insurance, which protects lenders against default on individual residential
mortgage loans by covering losses on such loans to a stated coverage percentage;
and pool insurance, which protects lenders against aggregate default levels in
an underlying pool of individual mortgages by covering the full amount of loss
(less the proceeds from any primary insurance coverage that may be in place) on
individual residential mortgage loans in such pool of loans, with an aggregate
limit usually expressed as a percentage of the initial loan balances of the pool
of loans. Primary insurance also facilitates the sale of high LTV mortgage loans
in the secondary mortgage market, principally to the Federal Home Loan Mortgage
Corporation and Federal National Mortgage Association, while pool insurance is
often used to provide credit support for mortgage-backed securities and other
secondary mortgage market transactions. There are eight private mortgage
guaranty insurers writing new business: General Electric Mortgage Insurance
Company (''GEMICO''); Mortgage Guaranty Insurance Company; PMI Mortgage
Insurance Co. (''PMI''); United Guaranty Residential Insurance Company;
Commonwealth Mortgage Assurance Company (''CMAC''); Republic Mortgage Insurance
Company; Amerin Guaranty Corporation; and Triad Mortgage Insurance Company.
Mortgage guaranty insurers do not underwrite risk to a zero loss underwriting
standard as in the financial guaranty insurance industry; rather, they
underwrite with a view to target loss ratios ranging from 45% to 60%. A critical
factor to successfully underwriting this class of business is the ability to
consistently control the quality and diversity of insurance in-force, avoiding
catastrophic losses from regional depressions and declines in residential real
estate prices, by effective geographic and product dispersion.
(b) Mortgage Guaranty Reinsurance Market -
The purposes of reinsurance in the mortgage guaranty insurance industry are to
(i) increase the insurance capacity of the reinsured, (ii) assist the reinsured
in meeting applicable regulatory and rating agency requirements, (iii) augment
the reinsured's financial strength and (iv) manage the reinsured's risk
exposure.
Except for the Company, the external reinsurance capacity for the industry is
provided almost exclusively by European multiline insurers and reinsurers, who
offer modest amounts of traditional reinsurance products. Mortgage guaranty
insurers have traditionally relied upon proportional reinsurance for their risk
management needs. Recently, the need to profitably utilize invested capital and
the need to manage risk have become equally important and the trend has shifted
away from proportional reinsurance products. In addition to external reinsurance
support, primary mortgage insurers have developed a system of risk sharing
relationships with their own affiliates and other companies in the industry.
The profitable nature of the mortgage guaranty business over the last several
years has caused primary mortgage insurers to be reluctant to cede business to
reinsurers. Low loss ratios, higher premiums and streamlined operations have
allowed mortgage insurers to bolster capital thereby diminishing the need for
reinsurance support. The mortgage insurers, however, continue to rely on
reinsurance due to a combination of factors including regulations imposing more
stringent limits on exposure to risk, increased pressure to optimize financial
results and the
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strengthening of rating agency constraints on allocation of risk. The Company,
which through Capital Mortgage is the only dedicated mortgage guaranty
reinsurer, has been able to capitalize on these factors by providing
sophisticated mortgage reinsurance products in addition to the quota share
reinsurance products historically offered.
Rating agencies currently impose more stringent requirements on risk-to-capital
ratios for mortgage guaranty insurers than the 25:1 ratio imposed by applicable
law. Generally, S&P and Moody's require that AA rated mortgage guaranty insurers
operate at a risk-to-capital ratio of less than 20:1. The maintenance or
improvement of high quality (AA or better) claims-paying ratings directly
influences an insurer's ability to compete in the market and access capital
resources to support its book of business.
(4) Title Reinsurance -
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(a) Overview of Title Insurance Market -
Title insurance is currently written by seven national and dozens of regional
companies throughout the United States, all of which are required by statute to
be monoline insurers. Title insurance essentially provides the acquirer or the
mortgagor of real property with two forms of coverage. The first assures that
the search and examination of the real estate records upon which the acquirer or
mortgagor is relying for good and clean title was properly performed. In
insuring that a process was in fact properly done and recorded, the title
insurer is providing risk exclusion. The second form of coverage assures that
all previously existing mortgages and liens will be paid off from the proceeds
of the sale or refinancing of the property. In insuring that the existing
mortgages and liens are extinguished, the title insurer is providing risk
assumption.
(b) Title Reinsurance Market -
Capital Title was formed to take advantage of the strategic opportunities
presented by the recent trends in the title insurance business discussed above.
Specifically, reinsurance needs are becoming more complex as primary insurers
strive to react to the trends detailed above by diversifying reinsurance
recoverable risk, optimizing financial results and maintaining high quality
claims paying ability ratings. Risk syndication and access to larger,
independent pools of capital to support ever increasing industry exposure is an
important issue as the industry begins to compete in a rated environment. To
address the concerns of rating agencies and the resulting capital adequacy and
profitability issues, title insurers are adjusting their business practices,
especially with regard to commercial transactions. Rating agencies, lenders, and
regulators are increasingly concerned with the level of risk being taken by
insurer's on large commercial transactions. Single-risk limits on the order of
20% to 30% of policyholders surplus have been, and are likely to continue to be,
imposed on insurers. Accordingly, third party reinsurance, such as that provided
by Capital Title, to build single risk capacity and as an overall capital
substitute, has become important.
Capital Title applies its financial, reinsurance, rating agency, underwriting
and legal expertise to provide reinsurance solutions tailored to the particular
rating agency, financial, regulatory and risk management needs of each primary
title insurer. Capital Title represents a independent source of capacity in an
industry which has historically relied on a closed system of reinsurance
capacity provided by the industry's primary insurers. Capital Title offers
several specific products to the title insurance industry, all of which are
derived from two basic reinsurance product types, excess of loss and quota
share.
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(5) Trade Credit Reinsurance -
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(a) Overview of Trade Credit Insurance Market -
Trade credit insurance protects sellers of goods and services from the risk of
non-payment of trade receivables and is a large, well-established specialty
insurance product, particularly in Western Europe. Policyholders are generally
covered for short-term exposures (generally less than 180 days and averaging 60-
90 days) to insolvency or payment defaults by domestic and/or foreign buyers.
Some export credit policies also cover political events which can disrupt either
the flow of goods and services or payment for goods and services. Specialist
underwriters dominate the market, using sophisticated information management
systems to provide rapid approval of policy requests while maintaining
underwriting controls.
Credit insurance relies on credit analysis and portfolio diversification
techniques similar to those employed in financial guaranty and mortgage guaranty
insurance. Results are heavily dependent upon macroeconomic conditions, with
typical loss ratios of 30-50% during healthy economies and rising to 80-100%
during recessions.
(b) Trade Credit Reinsurance Market -
The reinsurance market is led by traditional multi-line players, principally
Munich Re and Swiss Re, who have been able to maintain their dominant market
position in part through their ownership interests in many of the leading
primary companies. Capital Credit has attempted to identify areas of opportunity
where its specialty focus provides some advantage over the traditional players.
Revenue targets have been set conservatively with the intention of selectively
choosing participations. The product mix combines quota share and structured
excess participations that are geared to produce results that outperform the
overall credit insurance market.
B. BUSINESS OF CAPITAL RE:
(1) Business Strategy -
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The Company is an insurance holding company for a group of reinsurance companies
that provide value-added products in specialty insurance markets. The Company
provides reinsurance capacity to insurers in four principal areas of
specialization: financial guaranty insurance, mortgage guaranty insurance, trade
credit insurance and title insurance. Additionally, during 1996, the Company
expanded its participation in the global market for specialty insurance and
reinsurance by acquiring a Lloyd's of London managing general agency, and
forming a Bermuda-based joint venture company to write financial reinsurance
products. The Company intends to continue to diversify into additional specialty
insurance and reinsurance markets on an opportunistic basis.
The foundation of the Company's specialty reinsurance business has been
financial guaranty reinsurance, which the Company began providing in 1988
through its subsidiary, Capital Reinsurance. More recently, the Company's
strategy of diversifying into other specialty reinsurance businesses has
contributed to the Company's growth in revenues and earnings. For the year ended
December 31, 1996, financial guaranty reinsurance accounted for 45.2% of net
premiums written, mortgage guaranty reinsurance accounted for 38.9% of net
premiums written, trade credit reinsurance accounted for 14.2% of net premiums
written, and title reinsurance accounted for 1.7% of net premiums written.
The Company provides reinsurance products through five wholly-owned insurance
subsidiaries: Capital Reinsurance, Capital Mortgage, KRE, Capital Credit and
Capital Title.
Capital Reinsurance's focus on the municipal bond reinsurance business
recognizes the fact that historically municipal bond insurance has been a proven
revenue source in the financial guaranty insurance market which, when managed
properly, can provide predictable revenues from an associated deferred premium
revenue account.
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In support of this strategy, Capital Reinsurance acquired several municipal bond
reinsurance portfolios to increase the Company's in-force book of business and
the diversification of its own reinsurance portfolio as to revenue source,
geography, maturity and exposure to ceding companies. Moreover, Capital
Reinsurance has sought to assume business with what it believes is a lower risk
profile and higher than average pricing for the municipal bond insurance
industry.
At the same time, consistent with its ''zero loss'' underwriting policies,
Capital Reinsurance has pursued the reinsurance of investment grade non-
municipal debt obligations, minimizing its exposure to commercial real estate
and directing its capacity to the reinsurance of financial guaranties of asset-
backed securities. In the case of both municipal bond reinsurance and the
reinsurance of non-municipal debt obligations, Capital Reinsurance has
emphasized facultative reinsurance, which Capital Reinsurance believes better
permits it to maintain portfolio diversification, pricing discipline and
conformity to its underwriting policies, because through facultative reinsurance
the reinsurer may exercise control over risks assumed as they are accepted only
on a risk-by-risk basis.
The successful establishment of Capital Reinsurance as a leading specialty
reinsurer (by market share) of financial guaranties of municipal bonds in the
U.S. domestic market, together with the creation of a quality reinsurance
portfolio that provides a substantial base of recurring revenues, have given the
Company a foundation to facilitate its diversification strategy. The first stage
in the execution of this strategy was the Company's expansion into mortgage
guaranty reinsurance through the organization and capitalization of Capital
Mortgage, which commenced operations in February 1994. Capital Mortgage has
become a leading reinsurer of mortgage guaranty insurance. Capital Mortgage's
strategy is based on the development of creative reinsurance programs targeted
to the individual capital, risk and portfolio management demands of the primary
mortgage guaranty insurers. In order to optimize capital utilization, the
business plan of Capital Mortgage includes the assumption of financial guaranty
insurance business by its subsidiary, KRE, both as a retrocessionaire of Capital
Reinsurance and directly from the U.S. primary financial guaranty insurers, as
well as the reinsurance of mortgage guaranty insurance business by KRE, both as
a retrocessionaire of Capital Mortgage and directly from the primary mortgage
guaranty insurers.
In 1994, the Company identified an opportunity to further its diversification by
the expansion of its trade credit reinsurance activities in the U.S. and Europe
through Capital Credit. Trade credit reinsurance is a logical extension of the
Company's underwriting focus, relying on trade credit analysis and portfolio
diversification techniques similar to those employed in financial guaranty and
mortgage guaranty reinsurance. Capital Credit's strategy is to build a limited
portfolio of trade credit reinsurance business from the leading European and
U.S. primary trade credit insurers, which outperforms the overall market by
combining quota share and structured excess of loss participations.
Trade credit insurance protects sellers of goods and services from the risk of
non-payment of trade receivables. Policyholders are covered for short-term
exposure (generally 60 to 90 days) to insolvency or payment default by domestic
and overseas buyers. Some export sales policies also cover political events
which can disrupt either the flow of goods or payment for goods. Specialist
underwriters, predominantly European insurers, dominate the private primary
market, using sophisticated information management systems to provide approval
of policy requests while maintaining underwriting controls.
In early 1996, the Company entered the title reinsurance business through a
newly formed, New York domiciled, monoline insurance company, Capital Title.
Opportunities in the field of title reinsurance have arisen due to rapid
consolidation among title insurers, an increased focus in the title insurance
industry on relatively high margin commercial business, and increased scrutiny
of title insurers' capital adequacy from financial institutions, rating agencies
and the National Association of Insurance Commissioners. Currently, there are no
dedicated title reinsurers, and only intra-industry facultative reinsurance is
available to support large commercial title insurance policies. Capital Title
provides coverages designed to aid title insurers in meeting capital adequacy
concerns and to achieve desired claims-paying ability ratings from nationally
recognized rating agencies. Capital Title derives business from relationships
with primary title insurers, financial institutions active in commercial real
estate
10
<PAGE>
lending and professionals involved in the real estate industry. Capital Title
offers excess of loss and quota share reinsurance products on both a treaty and
facultative basis.
During 1996, the Company expanded its participation in the global market for
specialty insurance and reinsurance by acquiring a Lloyd's of London managing
general agency, RGB Underwriting Agencies Ltd., and forming a Bermuda based
joint venture company to specialize in financial reinsurance, including
financial guaranty, mortgage guaranty and finite risk reinsurance. The Company's
strategy is to continue to diversify into additional specialty reinsurance
businesses as opportunities become available.
(2) Insurance in Force -
- --- ------------------
The information below is presented on a consolidated basis for Capital
Reinsurance, Capital Mortgage (including KRE), Capital Credit and Capital Title,
unless expressly indicated otherwise. The information includes estimates derived
from the accounting and statistical records of Capital Reinsurance, Capital
Mortgage (including KRE), Capital Credit and Capital Title. Capital Mortgage and
KRE were not in operation before February 1994 and are not included in the
information reported below for years prior to 1994 and Capital Title was not in
operation before February 1996 and is not included in the information reported
below for years prior to 1996.
The table below sets forth gross and net premiums written and net premiums
earned by line of business.
PREMIUMS BY LINE OF BUSINESS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
- -----------------------------------------------------------
<S> <C> <C> <C>
Gross Premiums Written:
- -----------------------------------------------------------
Municipal $ 48,411 $ 44,201 $56,875
- -----------------------------------------------------------
Mortgage 53,683 39,111 30,148
- -----------------------------------------------------------
Non-Municipal 10,902 17,244 5,264
- -----------------------------------------------------------
Credit 15,070 7,043 2,564
- -----------------------------------------------------------
Title 1,752 0 0
- -----------------------------------------------------------
Total Gross Premiums Written $129,818 $107,599 $94,851
- -----------------------------------------------------------
- -----------------------------------------------------------
Net Premiums Written:
- -----------------------------------------------------------
Municipal $ 36,707 $ 38,120 $50,073
- -----------------------------------------------------------
Mortgage 40,936 27,584 23,848
- -----------------------------------------------------------
Non-Municipal 10,902 17,244 6,310
- -----------------------------------------------------------
Credit 14,891 6,560 2,564
- -----------------------------------------------------------
Title 1,752 0 0
- -----------------------------------------------------------
Total Net Premiums Written $105,188 $ 89,508 $82,795
- -----------------------------------------------------------
- -----------------------------------------------------------
Net Premiums Earned:
- -----------------------------------------------------------
Municipal $ 27,540 $ 25,633 $34,510
- -----------------------------------------------------------
Mortgage 43,882 22,072 16,775
- -----------------------------------------------------------
Non-Municipal 7,199 6,433 5,307
- -----------------------------------------------------------
Credit 12,239 5,959 2,258
- -----------------------------------------------------------
Title 1,576 0 0
- -----------------------------------------------------------
Total Net Premiums Earned $ 92,436 $ 60,097 $58,850
- -----------------------------------------------------------
</TABLE>
11
<PAGE>
The following charts sets forth certain information regarding gross premiums
written on insurance ceded to the Company by its largest primary insurance
clients in each material line of business in 1996, 1995, and 1994.
GROSS PREMIUMS WRITTEN BY PRIMARY FINANCIAL GUARANTY INSURER
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------
PRIMARY GROSS PERCENT GROSS PERCENT GROSS PERCENT
INSURER PREMIUMS OF TOTAL PREMIUMS OF TOTAL PREMIUMS OF TOTAL
WRITTEN WRITTEN WRITTEN
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AMBAC $ 8,766 15% $12,995 21% $ 6,756 11%
- ------------------------------------------------------------------------
CapMAC 6,092 10 3,725 6 1,752 3
- ------------------------------------------------------------------------
FGIC 15,388 26 7,040 11 24,696 40
- ------------------------------------------------------------------------
FSA 8,590 14 15,968 26 10,303 16
- ------------------------------------------------------------------------
MBIA 19,589 33 19,474 32 18,765 30
- ------------------------------------------------------------------------
Other 888 2 2,243 4 (133) 0
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
Total $59,313 100% $61,446 100% $62,139 100%
- ------------------------------------------------------------------------
</TABLE>
GROSS PREMIUMS WRITTEN BY PRIMARY MORTGAGE GUARANTY INSURER
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------
PRIMARY GROSS PERCENT GROSS PERCENT GROSS PERCENT
INSURER PREMIUMS OF TOTAL PREMIUMS OF TOTAL PREMIUMS OF TOTAL
WRITTEN WRITTEN WRITTEN
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PMI $13,897 26% $11,304 29% $17,755 59%
- -------------------------------------------------------------------------------
CMAC 20,553 38 12,432 32 6,566 22
- -------------------------------------------------------------------------------
GEMICO 7,686 14 8,000 20 0 0
- -------------------------------------------------------------------------------
General 4,490 8 4,511 12 1,557 4
Accident (U.K.)
- -------------------------------------------------------------------------------
Other 7,057 14 2,864 7 4,270 15
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Total $53,683 100% $39,111 100% $30,148 100%
- -------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
GROSS PREMIUMS WRITTEN BY PRIMARY CREDIT INSURER
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------
PRIMARY GROSS PERCENT GROSS PERCENT GROSS PERCENT
INSURER PREMIUMS OF TOTAL PREMIUMS OF TOTAL PREMIUMS OF TOTAL
WRITTEN WRITTEN WRITTEN
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AIU $ 4,176 28% $1,695 24% $ 0 0%
- -----------------------------------------------------------------------
HERMES 3,513 23 1,263 18 410 16
- -----------------------------------------------------------------------
NCM 3,838 26 2,977 42 1,975 77
- -----------------------------------------------------------------------
Other 3,543 23 1,107 16 178 7
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
Total $15,070 100% $7,042 100% $2,563 100%
- -----------------------------------------------------------------------
</TABLE>
(3) Detail on Financial Guaranty Insurance in Force -
- --- -----------------------------------------------
The following table sets forth the Company's gross premiums written, net
premiums written and net premiums earned relating to its reinsured U.S. and non-
U.S. risks for each of the three years ended December 31, 1996, 1995 and 1994.
U.S. AND NON-U.S. PREMIUMS WRITTEN AND EARNED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
U.S. % NON-U.S.%
U.S. NON-U.S. TOTAL TOTAL TOTAL
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
- -----------------------------------------------------------------------------------------
Gross Premiums Written $108,869 $20,949 $129,818 83.9% 16.1%
- -----------------------------------------------------------------------------------------
Net Premiums Written 84,239 20,949 105,188 80.1 19.9
- -----------------------------------------------------------------------------------------
Net Premiums Earned 77,666 14,770 92,436 84.0 16.0
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1995
- -----------------------------------------------------------------------------------------
Gross Premiums Written $ 94,270 $13,329 $107,599 87.6% 12.4%
- -----------------------------------------------------------------------------------------
Net Premiums Written 76,739 12,769 89,508 85.7 14.3
- -----------------------------------------------------------------------------------------
Net Premiums Earned 53,373 6,724 60,097 88.8 11.2
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1994
- -----------------------------------------------------------------------------------------
Gross Premiums Written $ 86,287 $ 8,564 $ 94,851 91.0% 9.0%
- -----------------------------------------------------------------------------------------
Net Premiums Written 74,931 7,864 82,795 90.5 9.5
- -----------------------------------------------------------------------------------------
Net Premiums Earned 54,517 4,333 58,850 92.6 7.4
- -----------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
The following table shows the Company's ten largest financial guaranty single
risk exposures by consolidated net par in force as of December 31, 1996.
Collectively, these ten exposures accounted for 13.47% (consolidated net par) of
the Company's reinsured financial guaranty portfolio.
TEN LARGEST FINANCIAL GUARANTY SINGLE RISK EXPOSURES
NET PAR IN FORCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Credit (1) As of December 31, 1996
- -----------------------------------------------------------------
<S> <C>
Massachusetts State GO & Bay $757,687
Transportation Bonds
- -----------------------------------------------------------------
California General Obligation Bonds 706,110
- -----------------------------------------------------------------
New York City General Obligation Bonds 701,687
- -----------------------------------------------------------------
Washington Public Power Supply System 567,501
- -----------------------------------------------------------------
New York City Municipal Water Finance
Authority 517,570
- -----------------------------------------------------------------
New Jersey Transportation Trust Fund
Authority 431,194
- -----------------------------------------------------------------
Los Angeles County California Metro
Transportation 421,389
- -----------------------------------------------------------------
New York State General Obligation Bonds 419,562
- -----------------------------------------------------------------
Municipal Electric Authority of Georgia 405,269
- -----------------------------------------------------------------
Florida Department of Transportation -
Turnpike 381,842
- -----------------------------------------------------------------
</TABLE>
(1) All subject to non proportional Excess of Loss ("EOL") retrocessional
program and/or Annual Debt Service ("ADS") retrocessional program. See
"Business--Retrocessional Arrangements and Soft Capital Facilities."
Although the Company generally does not write financial guaranty reinsurance on
obligations that are non-investment grade at the time reinsured, the credit
ratings of certain obligations may be reduced after the date such obligations
are reinsured. The Company monitors its exposure to non-investment grade
obligations and in this regard relies in part on information provided by its
ceding companies, particularly with respect to certain municipal treaty
business. The Company is familiar on an ongoing basis with the criteria used by
S&P and Moody's for determining the investment grade status of the various
credit sectors reinsured by the Company. These criteria are specific to, and
vary considerably depending on, the line of business and type of credit
reinsured. In certain cases, the Company and/or its cedants may obtain access to
information on individual credits indicating that those credits no longer
conform to the rating agencies' investment grade criteria, even through the
rating agencies may not have yet reviewed those credits to determine their
investment grade status. In such cases, the Company and/or its cedants may
determine that certain individual credits are below investment grade quality.
Based upon these procedures, the Company believes that approximately 1.05% of
the reinsured financial guaranty portfolio (based on net par amount) or
approximately $412.9 million, was rated below investment grade (i.e., not rated
at least BBB- or Baa3 by either S&P or Moody's, or, if not rated, determined to
be below investment grade in the opinion of the ceding company or the Company)
at December 31, 1996.
Capital Reinsurance has developed several non-proportional retrocessional
programs which supplement its financial guaranty single risk capacity for a
number of selected large volume issuers of municipal bonds. In some cases, these
arrangements are effected on an excess of loss basis and involve the retention
by Capital Reinsurance of a first loss exposure (liability for all losses
related to a particular risk up to a stated dollar amount). Under these
arrangements, Capital Reinsurance's potential annual payment liability (the
annual amount of claims payments which Capital Reinsurance is obligated to pay)
related to an issue default during the period of such first loss exposure may be
several times Capital Reinsurance's net average annual debt service exposure to
such reinsured issue.
14
<PAGE>
The financial guaranty reinsured portfolio of the Company contained exposures in
each of the fifty states, the District of Columbia, Puerto Rico and several
foreign countries. The following table sets forth the distribution of
consolidated net book of business by state as of December 31, 1996.
DISTRIBUTION OF FINANCIAL GUARANTY NET BOOK OF BUSINESS BY STATE
AS OF DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
[PIE CHART APPEARS HERE]
Total: $39,405,087
New York 10.65%
California 11.07%
Florida 6.52%
Pennsylvania 4.70%
Texas 5.02%
New Jersey 3.47%
Illinois 3.55%
Massachusetts 3.16%
Washington 2.70%
Georgia 2.02%
Others 47.14%
(4) Marketing -
- --- ---------
The majority of the Company's business is derived from relationships it has
established and maintains with the major U.S. primary financial guaranty,
mortgage guaranty insurers and title insurers. European trade credit insurers,
U.S. title insurers and United Kingdom mortgage guaranty insurers also provide a
significant portion of the Company's business. These relationships provide
business opportunities for the Company on both a treaty and facultative basis.
The Company's international retrocessional relationships enable it to access
international sources of reinsurance. These relationships link the Company's
technical expertise in financial guaranty and related reinsurance risk
underwriting with the market knowledge and capital strength of the Company's
international retrocessionaires. See ''Business--Retrocessional Arrangements and
Soft Capital Facilities.'' These relationships have also aided the Company's
participation in the European financial guaranty business.
Substantially all of the Company's business to date has been derived from
reinsurance products written directly with insurers and not through
intermediaries. However, the Company does use reinsurance brokers to access
certain reinsurance opportunities, especially in the credit line of business.
For the year ended December 31, 1996, intermediaries and brokers had accounted
for 31% of U.S. gross premiums written and 79% of non-U.S. gross premiums
written. The Company's relationships with these brokers do not commit or
obligate the Company to accept business submitted by them. All applications for
reinsurance from both new and existing ceding companies
15
<PAGE>
are subject to review and acceptance by the Company in accordance with the
Company's underwriting guidelines. Brokers are compensated based on a percentage
of premium, which varies from transaction to transaction. Certain U.S. domestic
mortgage guaranty, non-municipal and other special risk reinsurance
opportunities may also be produced by reinsurance intermediaries and brokers.
Capital Mortgage and KRE derive their mortgage guaranty reinsurance business
principally through direct relationships with primary mortgage guaranty
insurance companies. Reinsurance intermediaries and brokers are used in
accessing reinsurance opportunities in the international market. Capital Credit
has developed credit reinsurance business opportunities principally through
reinsurance brokers and intermediaries. Capital Title has developed all of its
business opportunities through direct contacts with primary title insurers.
(5) Underwriting Guidelines, Policies and Procedures -
- --- ------------------------------------------------
(a) Financial Guaranty Reinsurance -
The underwriting process for the Company's financial guaranty insurance business
is premised on the Company's policy of reinsuring investment grade obligations.
Capital Reinsurance underwrites risks on a ''zero loss'' basis, meaning that
each reinsured policy obligation has been evaluated by Capital Reinsurance under
a standard of no loss expectation. However, losses in Capital Reinsurance's
reinsured portfolio can be expected to occur, and there can be no assurance that
these losses will not have a material adverse effect on financial condition and
results of operations. See ''Business--Losses and Reserves.'' In addition,
Capital Reinsurance's ongoing review of its portfolio does not involve any
commitment by rating agencies or ceding companies to provide credit rating
information on each assumed obligation.
Capital Reinsurance has organized its underwriting procedures to provide for
multiple levels of credit review and analysis. Facultative submissions, which
form the majority of Capital Reinsurance's business, are initially reviewed by
one of Capital Reinsurance's underwriting analysts who performs a detailed
evaluation of each individual submission to assure compliance with Capital
Reinsurance's underwriting guidelines and rating agency and regulatory criteria.
The analyst's recommendation is presented to one of Capital Reinsurance's
Underwriting Committees for consideration. There are separate committees for
municipal and non-municipal financial guaranty risks. The Company's Chief
Underwriting Officer must approve the decision of the Underwriting Committee
before the risk is written by Capital Reinsurance. The Board of Directors of the
Company also reviews underwriting policy and trends on a quarterly basis.
Capital Reinsurance has established treaty reinsurance relationships with most
of the U.S. primary financial guaranty insurance companies. Ceding insurers must
be financially strong. Generally, each ceding company must also adhere to the
underwriting standard of no loss expectation on financial guaranty insurance.
Prior to initiating any treaty relationship, and on an annual basis thereafter,
Capital Reinsurance conducts a review of the ceding company. Capital Reinsurance
evaluates the ceding company's capital position, in-force book of business,
reserves, cash flow, profitability and financial strength. The ceding company's
underwriting process is analyzed to determine compliance with established credit
guidelines and legal documentation requirements. Management of each ceding
company is reviewed in the areas of credit control, monitoring and surveillance
practices, claims administration and remedial management. After Capital
Reinsurance completes its ceding company review, a report is prepared and
presented to Capital Reinsurance's senior management and the Company's Board of
Directors. All new treaty relationships must be approved by the appropriate
Underwriting Committee and the Chief Underwriting Officer before the treaty is
accepted by Capital Reinsurance. Treaty results and compliance are reviewed by
Capital Reinsurance on quarterly and annual bases.
Capital Reinsurance also conducts its own due diligence and credit surveillance
of underlying credits in accordance with internally developed and maintained
standards. Capital Reinsurance's Chief Underwriting Officer formulates
16
<PAGE>
Capital Reinsurance's underwriting policy and is responsible for its
administration. The Board of Directors of Capital Reinsurance regularly reviews
Capital Reinsurance's underwriting policy.
The underwriting staff is also responsible for the ongoing monitoring and review
of ceding company underwriting practices and financial results. The annual
underwriting reviews of the ceding companies described above measure adherence
to the ceding company's own underwriting standards and monitor the relationship
of pricing to risk on business being reinsured by Capital Reinsurance. The
reviews are also used to monitor pricing by product line, bond type and risk
classification in an effort to allocate capital effectively to specific
portfolios and product areas that are considered to have a greater potential for
profitability.
Capital Reinsurance's ongoing credit management of its reinsured portfolio is
overseen by the Chief Underwriting Officer and the underwriting staff. The
underwriting analysts recommend appropriate bond and credit sector
representations and distributions. Capital Reinsurance's single and aggregate
risk underwriting policies, while complying with regulatory and rating agency
requirements, reflect Capital Reinsurance's capital resources, liquidity
capabilities and retrocessional programs. Portfolio diversification is monitored
regularly to improve the balance of geographic distribution, credit quality,
bond type and maturity.
(b) Mortgage Guaranty Reinsurance -
Unlike the "zero loss" standard applied in financial guaranty insurance
underwriting, mortgage guaranty insurance is underwritten with the expectation
of loss. Under normal economic conditions and in a stable interest rate
environment, loss ratios in this line of business are generally in the 15% to
40% range and are associated with frictional unemployment, divorce and other
social factors. By avoiding geographic concentrations and employing prudent
underwriting, mortgage insurers are better able to manage their risk.
Capital Mortgage has established underwriting standards, procedures and closely
monitored controls. A senior Mortgage Underwriting Committee, comprised of seven
voting members including the Chief Executive Officer and the Chief Underwriting
Officer, must approve each underwriting submission. Submissions are made through
preparation of a comprehensive underwriting report, which is derived from (i)
extensive meetings with senior management and staff of the ceding company, (ii)
underwriting, actuarial and financial analysis of detailed information including
historic mortgage performance, portfolio composition, origination procedures,
quality control, loss mitigation and claims management, and (iii) reinsurance
structure and profitability analysis.
Generally, ceding companies must demonstrate their capability to monitor
economic trends in markets in which they are providing insurance and to exercise
underwriting discipline. Capital Mortgage seeks to identify insurers having the
capability to prospectively analyze economic trends in various markets based on
local and regional market factors, political developments and global resource
factors, such as energy prices. The ceding company is required to maintain
analytical personnel dedicated to reviewing trends in local residential property
markets. Capital Mortgage closely examines analytical methods by which the
ceding company follows pricing adequacy and loss development patterns of its
insurance in force. Ceding company loss mitigation and claims management
procedures are evaluated and analyzed. The ceding company must demonstrate an
adequate investigative capability, engaging in a systematic review of early
payment defaults to detect fraud or potential defects in underwriting systems.
Capital Mortgage's underwriting staff reviews all reinsurance in force and
recommends portfolio balancing targets (e.g., amount of risk in force by region,
underwriting year, ceding company, loan type). On-site reviews of all ceding
companies are conducted on at least an annual basis, encompassing a review of
overall company organization, financial performance, developments in sales and
marketing, underwriting systems and operations, actuarial services and claims
management. Underwriting department analysts are charged with following rating
agency reviews and industry developments, including a detailed review of semi-
annual portfolio reports submitted by each ceding company to the rating
agencies. Quarterly reviews for the Company's Board of Directors are
17
<PAGE>
prepared, including analysis of new business written, reports following ceding
company audits and discussion of various trends in the mortgage insurance
industry.
(c) Trade Credit and Specialty Products Reinsurance -
Credit sales expose the seller to numerous risks ranging from the ability and
willingness of the buyer to make payments according to agreed terms to political
events which could disrupt the relationship between the seller and the buyer.
Credit insurance is available in a variety of forms, and in varying degrees of
comprehensiveness, to cover many of the potential risks encountered by the
seller of goods and services. There are two broad areas of risk assumed in
credit insurance and, consequently, reinsurance: commercial risks, including
bankruptcy of the buyer and political risks, which can interfere with the
fulfillment of an otherwise valid contract. Credit insurance underwriters
manage risk by modifying the terms of coverage, by diversifying exposures to
control aggregations of risks to particular buyers, industries, or territories,
and by developing sophisticated data bases of credit and political information.
The Company also writes a limited portfolio of other specialty lines. The
Company performs extensive diligence of prospective ceding companies to identify
those expected to produce superior underwriting results, structures its
reinsurance participation to eliminate unacceptable risks and actively monitors
exposures to identify any deterioration in risk profile and control aggregation
across participations.
(d) Title Reinsurance -
Similar to the "zero loss" standard applied in financial guaranty insurance
underwriting, title reinsurance is underwritten without the expectation of any
significant loss. Capital Title's underwriting decisions are, in major part, be
based on the underwriting audits of its ceding companies, focusing on (i)
underwriting policies, guidelines and procedures, the experience and quality of
underwriting personnel, including knowledge of localized issues and quality
control, (ii) financial performance and stability, reserve adequacy and
liquidity, (iii) claims handling procedures and personnel and loss management
techniques and procedures, with particular emphasis on salvage, (iv) record
keeping and title plant to ensure that all are well maintained and up to date,
(v) agent and branch office review procedures, and (vi) trust fund and escrow
account procedures. Preference is given to those companies whose overall
policies, procedures and personnel exhibit a strong commitment to quality
underwriting and loss management.
Capital Title automatically accepts for reinsurance all policies which fall
within the parameters of its various treaties. However, policies which contain
certain enumerated types of extraordinary risks will have to be submitted on a
special acceptance basis and separately underwritten by Capital Title's
underwriting staff. Such extraordinary risks may include insured interests
created by, under or concerning bankruptcy or state insolvency laws, federal or
state securities laws, mineral interests, Indian lands, wet lands, tide lands,
and mechanic's lien issues.
In designing and recommending various excess of loss reinsurance strategies,
Capital Title pays particular attention to each ceding company's loss
experience, including frequency, severity and type of loss, at various policy
sizes and levels of business. In conjunction therewith, salvage practices and
procedures are considered.
Capital Title is also called upon to provide facultative reinsurance capacity to
the industry, particularly on larger commercial transactions and securitized
pools of real estate. Capital Title maintains an underwriting staff experienced
in handling these types of transactions and familiar with the particular risks
attendant thereto.
(6) Retrocessional Arrangements and Soft Capital Facilities -
- --- -------------------------------------------------------
The Company's business strategy places emphasis on the development of
retrocessional relationships which provide the Company with a higher level of
reinsurance risk capacity and serve as a means of accessing additional
reinsurance opportunities. The Company's retrocessional strategy emphasizes
building single-risk capacity and risk management. The Company retroceded 19.0%
or $24.6 million of its gross premiums written in 1996, 16.8% or
18
<PAGE>
$18.1 million of its gross premiums written in 1995, and 12.8% or $12.1 million
of its gross premiums written in 1994.
In 1992, Capital Reinsurance entered into a portfolio first loss and excess of
loss reinsurance agreement with Centre Reinsurance Company of New York, a AA
rated reinsurer. The agreement, which covered the entire reinsured portfolio of
Capital Reinsurance, provided protection against currently unforeseen losses
which, should they occur, would, in the absence of the reinsurance cover,
require a significantly greater loss reserve in the year of occurrence. The
cover also provided Capital Reinsurance with catastrophic loss protection.
Capital Credit entered into a similar cover in 1992 with AXA Re. In 1993, in
response to accounting standards adopted by the EITF, these arrangements were
canceled and new agreements were entered into which effectively revised and
significantly downsized the coverage provided. Under these arrangements, Capital
Reinsurance has ceded $19.5 million in premium and Capital Credit has ceded
$4.25 million.
On January 31, 1994, Capital Reinsurance entered into an agreement with Deutsche
Bank AG for a credit facility of up to $75 million specifically designed to
provide rating agency qualified capital to further support the claims-paying
resources of Capital Reinsurance. The agreement expires on January 27, 2004.
As part of its original capital structure, in 1994 Capital Mortgage purchased
$30 million of portfolio excess of loss reinsurance. Additionally, in 1994
Capital Reinsurance established a $100 million portfolio excess of loss
reinsurance arrangement. Capital Credit's claims-paying resources are further
supported through a portfolio aggregate excess of loss reinsurance agreement
with Capital Reinsurance.
The Company creates specialized retrocessional structures for establishing large
financial guaranty single risk capacity, which the Company believes improve its
competitive position with the primary financial guaranty insurance market. The
Company believes that its ability to offer the primary financial guaranty market
reinsurance capacity for the largest insurable debt issues is a significant
marketing benefit, which allows it to access additional reinsurance
opportunities. The Company's retrocessional treaty programs are its EOL Program
and ADS Program. The EOL Program was a structured, non-proportional
retrocessional treaty which (i) produced single risk capacity for the largest
issuers of insurable municipal bonds, (ii) allowed international
retrocessionaires to participate at a variety of risk levels, (iii) improved
transactional profitability for the Company and (iv) complied with the Company's
external risk limitations. The EOL Program was active through the end of 1991,
and currently no new business is being ceded to it. The ADS Program is a
proportional treaty covering annual payment obligations of the Company on issues
reinsured under the EOL Program. The ADS Program was effective as of January 1,
1992.
Capital Reinsurance ceded to Capital Credit $0 million, $1.3 million, and $1.6
million in premiums, and $0 billion, $1.1 billion, and $1.3 billion in par
amounts, for the years ended December 31, 1996, 1995 and 1994, respectively.
Capital Credit interacts with Capital Reinsurance, and may in the future
interact with Capital Mortgage, as a captive retrocessionaire for reinsurance
opportunities which might otherwise be constrained in the context of Capital
Reinsurance's rating agency and regulatory limitations. In 1994, Capital Credit
began a measured expansion into the reinsurance of the international credit
insurance business. This business is being conducted directly with third party
ceding companies. To further support Capital Credit's credit reinsurance
business, Capital Credit entered into a reinsurance agreement with Capital
Reinsurance under which Capital Reinsurance provides $25 million in aggregate
excess coverage.
KRE also provides retrocessional capacity to Capital Reinsurance and Capital
Mortgage. For the year ended December 31, 1996, Capital Reinsurance retroceded
to KRE $1.1 million of premiums.
Approximately $85 million of per policy coverage is provided to Capital Title by
KRE pursuant to a Per Policy Excess of Loss Retrocession Agreement. Under this
agreement, KRE covers an amount of loss paid by Capital Title arising from each
of its policies equal to $90 million minus Capital Title's retention under the
agreement. Capital Title's retention under the agreement is equal to the
greater of: (i) $5 million, and (ii) 20% of Capital
19
<PAGE>
Title's policyholder's surplus. $25 million of additional coverage is provided
by KRE to Capital Title pursuant to the Excess of Loss Retrocession Agreement.
Under this agreement, KRE covers up to $25 million of loss paid by Capital Title
arising from its policies in excess of the lesser of: (i) 100% of Capital
Title's net written premium, and (ii) the amount by which Capital Title's
statutory capital exceeds $25 million. Capital Reinsurance has guaranteed
payment of all of KRE's title reinsurance obligations to the extent KRE is
unable to satisfy those obligations.
(7) Competition -
- --- -----------
(a) Financial Guaranty Reinsurance -
Capital Reinsurance competes directly with one U.S. financial guaranty
reinsurer, Enhance Reinsurance Company, and indirectly with various
international multiline reinsurers and insurers. Based upon the 1996 annual
statutory statements filed by each of the primary U.S. financial guaranty
insurers, the Company believes that the Company and its principal competitor
assumed most of the reinsurance ceded by the primary U.S. financial guaranty
insurers in 1996.
U.S. multiline insurance companies generally do not provide reinsurance to the
financial guaranty insurance industry. Although applicable state insurance
regulations have mandated a specialized form for the transaction of primary
financial guaranty insurance, multiline insurers may participate as reinsurers.
However, the Company believes, based upon its own experience, that almost all
U.S. multiline insurers have declined to participate in this market primarily
because of their lack of the special expertise and underwriting skills necessary
for this line of reinsurance.
Numerous non-U.S. insurers participate in financial guaranty reinsurance
treaties. Competition from international multiline reinsurance companies is best
understood in the context of the financial guaranty reinsurance market in
general. Cooperative channels of reinsurance capacity have developed throughout
the reinsurance market in order to spread financial guaranty risk across a broad
spectrum of insurers. As a result, international companies which may compete
with Capital Reinsurance are frequently Capital Reinsurance's retrocessionaires
and ceding companies. As the global market evolves, this interaction may become
more pronounced.
Competition in the financial guaranty reinsurance business is based upon many
factors, including overall financial strength, pricing, service and evaluation
of claims-paying ability by the major rating agencies, including S&P. S&P will
grant credit against a primary company's capital requirements and single risk
limits for reinsurance ceded, provided the reinsurer meets S&P claims-paying
ability standards. The primary company receives a 100% credit for reinsurance
ceded subject to the reinsurer's maintenance of a AAA claims-paying rating from
S&P. A 70% credit is assigned if the reinsurer is rated AA and 30% if the
reinsurer is rated A.
Capital Reinsurance also faces competition indirectly from other AAA rated
financial institutions which provide capital substitutes to the primary
financial guaranty insurance companies. Several international commercial banks
have developed credit facilities and letter of credit products that qualify as
rating agency capital and therefore provide primary insurers with increased
insurance capacity for rating agency purposes. However, these banking facilities
cannot provide regulatory capital or credit against liabilities. Further, the
current lack of substantial AAA bank credit has reduced banks as a competitive
force in the reinsurance market. Competition is also a function of the ease with
which primary insurers can raise capital in the private or public equity
markets. Increased primary capital increases the ability of insurers to retain
risk and the need for reinsurance in general is diminished. The Company believes
that primary insurers have recently increased their primary capital base and
that increased competition from foreign insurers is occurring. AXA Group Cie.,
one of France's largest insurers, established a subsidiary in 1995, AXA Re
Finance S.A., in an effort to compete more effectively with AAA rated U.S.
financial guaranty reinsurers. AXA Re Finance S.A. received a claims-paying
ability rating of AAA from S&P and Fitch and reinsures U.S. financial guaranty
insurance as well as European credit and surety insurance.
20
<PAGE>
(b) Mortgage Guaranty Reinsurance -
Capital Mortgage is not aware of any other U.S. professional reinsurer which
specializes in mortgage guaranty reinsurance. Several U.S. multiline reinsurers
offer capacity to the mortgage guaranty market but their participation has been
limited. Substantially all of the external reinsurance capacity for the
mortgage guaranty insurance industry is provided by European multiline insurers
and reinsurers, who offer modest amounts of traditional reinsurance products.
Capital Mortgage believes that those reinsurance providers typically lack the
orientation and flexibility to address the current risk management, capital and
financial problems of the mortgage guaranty insurance industry.
Like financial guaranty reinsurance, competition is also a function of the ease
with which primary insurers can raise capital in the private or public equity
markets. Increased primary capital increases the ability of insurers to retain
risk and reduces the need for reinsurance in general.
(c) Trade Credit and Specialty Products Reinsurance -
The reinsurance market is led by traditional multiline players, principally
Munich Re and Swiss Re, which have been able to maintain their dominant market
position in part through their ownership interests in many of the leading
primary companies. In addition to the market leaders, there are a large number
of mainly European and U.S. reinsurers that compete for the business. Reciprocal
reinsurance arrangements between primary companies are widespread, thus adding
to the degree of competition in the industry.
(d) Title Reinsurance -
Capital Title is the only U.S. professional reinsurer which specializes in
third-party title reinsurance. To date, substantially all title reinsurance has
been provided by the large title insurance companies, except for some minor
excess coverage. The global reinsurance market has not been tapped to any
significant extent by title insurers.
(8) Ratings -
- --- -------
(a) Financial Guaranty Reinsurance -
Maintenance of an S&P and Moody's AAA rating is very important for the business
of Capital Reinsurance, particularly in the area of financial guaranty
reinsurance, because S&P will permit a AAA rated ceding company 100% credit for
a cession only if the reinsurer is also AAA rated. The claims-paying ability of
Capital Reinsurance has been rated AAA by S&P and Moody's. The major rating
agencies have developed and published rating guidelines for rating financial
guaranty reinsurers. These criteria follow the standards used to evaluate the
claims-paying ability of primary financial guaranty insurers. The claims-paying
ratings assigned by S&P and Moody's are based upon factors relevant to
policyholders and are not directed towards the protection of investors in
Capital Re.
The claims-paying rating criteria used by S&P and Moody's focus on the following
factors: capital resources, financial strength; demonstrated management
expertise in financial guaranty and traditional reinsurance, credit analysis,
systems development, marketing, capital markets and investment operations; and a
minimum policyholders' surplus comparable to primary company requirements, with
capital sufficient to meet projected growth as well as access to such additional
capital as may be necessary to continue to meet standards for capital adequacy.
S&P has published standards as to capital charges and single risk categories to
which Capital Reinsurance and other AAA rated financial guaranty insurers and
reinsurers must adhere in order to maintain their highest ratings. These
standards weight numerous factors to types of obligations which are
significantly more complex than an
21
<PAGE>
insurance-in-force-to-capital ratio. In addition, capital adequacy is tested
against an economic model that simulates a growth period followed by an economic
depression which assumes no new business is written.
The Company's ability to compete with other AAA rated financial guarantors, and
its results of operations and financial condition, would be materially adversely
affected by any reduction in the claims-paying rating of Capital Reinsurance.
Under several treaties to which Capital Reinsurance is a party, the ceding
companies may recapture business previously ceded to Capital Reinsurance in the
event of a specified rating downgrade of Capital Reinsurance, which could result
in a material adverse effect on the Company's deferred premium revenue and its
recognition of future income from that reserve.
(b) Mortgage Guaranty Reinsurance -
Capital Mortgage's mortgage guaranty reinsurance business plan is premised on a
claims-paying rating of at least AA. S&P has rated the claims-paying ability of
Capital Mortgage AA and the claims-paying ability of KRE AA-. Although the
rating agencies have not published explicit rules regarding rating agency credit
for reinsurance in the mortgage guaranty insurance area, in practice, they
provide 100% credit to a AA rated ceding company for reinsurance to AA rated
reinsurers. Reinsurance to lesser rated reinsurers is substantially discounted.
A reinsurer's financial ability to pay claims is the standard of value to its
primary insurance market. The general standard of creditworthiness in the
mortgage guaranty industry is AA. Certain national mortgage lenders and a large
segment of the mortgage securitization market, including the Federal National
Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage
Corporation ("Freddie Mac"), generally will not purchase mortgages or
mortgage-backed securities unless the private mortgage insurance on the
mortgages has been issued by an insurer with a claims-paying ability rating of
at least AA- from S&P or Fitch or at least Aa3 from Moody's. As a result, all of
the eight U.S. primary mortgage guaranty insurers have claims-paying ratings of
at least AA and generally seek similarly rated reinsurance security. Ratings of
at least AA provide the ceding companies with confidence that the reinsurer has
the financial strength to meet its policy obligations.
(c) Title Reinsurance -
Capital Title is rated AA- by S&P and Duff & Phelps. Although the rating
agencies have not published explicit rules regarding rating agency credit for
reinsurance in the title insurance area, in practice, the primary title insurers
receive 100% credit for cessions to Capital Title. Title insurers are only
beginning to obtain claims paying ability ratings; the general standard of
creditworthiness that seems to be developing in the title insurance industry is
A.
(d) Other Ratings -
The Company's senior debt is rated A by S&P and Aa3 by Moody's, and the MIPS
issued by the Company's finance subsidiary, Capital Re LLC, are rated A- by S&P
and A1 by Moody's.
Capital Reinsurance, Capital Mortgage, KRE and Capital Title have not received
ratings from A.M. Best Company, Inc. ("A.M. Best"), a major rating agency
covering the insurance industry. A.M. Best rates insurance companies annually
and provides statistical reports on their financial condition and history.
However, A.M. Best has not rated financial guaranty insurers and reinsurers.
Because the claims-paying ability ratings discussed above from S&P, Moody's and
Duff & Phelps are generally considered far more important than A.M. Best
ratings, the Company believes the absence of an A.M. Best rating has no impact
on the Company's business or on its competitive position.
22
<PAGE>
(9) NAIC-IRIS Ratios -
- --- ----------------
The National Association of Insurance Commissioners' Insurance Regulatory
Information System ("IRIS") was developed by a committee of state insurance
regulators and is primarily intended to assist state insurance departments in
executing their statutory mandates to oversee the financial condition of
insurance companies operating in their respective states. IRIS identifies eleven
industry ratios and specifies "usual values" for each ratio. Departure from
the usual values on four or more of the ratios could lead to inquiries from
individual state insurance commissioners as to certain aspects of a company's
business.
For the year ended December 31, 1996, Capital Reinsurance had no unusual values
and Capital Mortgage fell outside the usual values for two of the eleven ratios.
One ratio was the change in net writings and was outside the range because of
the large increase in Capital Mortgage's gross premiums written from the prior
year. The other ratio was investment yield which was low because Capital
Mortgage received a capital infusion that it subsequently invested in an
insurance subsidiary, therefore, preventing Capital Mortgage from earning any
investment income on such capital infusion.
(10) Losses and Reserves -
- ---- -------------------
In the financial guaranty line of business, case basis loss reserves are
required to be established under generally accepted accounting principles
("GAAP") and statutory accounting practices ("SAP") when a payment default
on an insured obligation is probable and the amount of the probable loss can be
reasonably estimated. Moreover, under its various reinsurance treaties and
facultative agreements, Capital Reinsurance is obligated to establish and
maintain SAP case basis loss reserves. Under GAAP, the amount of the case basis
loss reserve is calculated as the present value of the losses expected to be
incurred through the full term of the obligation, including loss adjustment
expenses, net of anticipated salvage and subrogation. Under current Maryland
insurance law, case basis loss reserves may not be discounted under SAP.
In the mortgage guaranty reinsurance line, the Company's reserves are a function
of the reserving methodologies of the primary insurance companies from which
mortgage guaranty risk is assumed. A significant period of time may elapse
between the occurrence of the borrower's default on mortgage payments (the event
a potential future claim), the reporting of such default to the primary
insurance company, the primary company's notification of loss to the reinsurer
and the eventual payment of the claim related to the default. To recognize the
liability for unpaid mortgage guaranty losses related to defaulted mortgages,
primary mortgage guaranty insurers establish loss reserves in respect of such
defaults based upon the claim rate and estimated average claim amount. Included
in these loss reserves are Loss adjustment expense ("LAE") and Incurred But Not
Reported Reserves. These reserves are estimates and there can be no assurance
that they will prove adequate to cover ultimate loss developments on the
reported defaults. The reserving process is premised on the assumption that
historical experience relating to mortgage defaults, adjusted for the
anticipated effect of current economic conditions and projected future economic
trends, provides a reasonable basis for estimating future events. However,
estimation of loss reserves is a difficult process, especially in light of the
rapidly changing economic conditions that have affected certain regions of the
United States. Additionally, economic conditions that have affected the
development of the loss reserves in the past may not necessarily affect
development patterns in the future.
For the trade credit reinsurance business, loss reserves are established
according to management's loss expectations which are based on historical loss
development patterns experienced by the ceding companies on similar business as
well as management's view of current macroeconomic conditions in the countries
in which the policies apply.
For the title reinsurance business, case basis loss reserves are required to be
established under GAAP and SAP when a loss under a reinsured title policy is
probable and the amount of the probable loss can be reasonably estimated.
23
<PAGE>
The Chief Financial Officer of the Company is responsible for determining the
appropriate timing and amount of loss reserves after consultation with the
Company's Chief Executive Officer and Chief Underwriting Officer. In making his
determination, the Chief Financial Officer will also confer with the ceding
company which originally insured the obligation. The Company may, in its
discretion, establish a loss reserve independent of the originating ceding
company.
As of December 31, 1996, the Company had established a net $18.1 million in GAAP
case basis loss and LAE reserves (of which $5.8 million is classified as
incurred but not reported reserves in the Company's statutory financial
statements). The Company believes its loss and LAE reserves are adequate. The
following table sets forth for the periods indicated certain information
regarding the Company's loss experience.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
(DOLLARS IN THOUSANDS)
---------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
GAAP Net Premiums Earned $92,436 $60,097 $ 58,850
- ---------------------------------------------------------------------------
Net Reserve for Unpaid Losses and LAE at 10,245 7,702 1,776
Beginning of Period
- ---------------------------------------------------------------------------
Incurred Losses and LAE 9,483 2,637 2,167
- ---------------------------------------------------------------------------
Paid (Recovered) Losses and LAE 1,969 94 (3,759)/(1)/
- ---------------------------------------------------------------------------
Unrealized Foreign Currency Loss on 310 14 0
Reserve
Revaluation
- ---------------------------------------------------------------------------
Net Reserve for Unpaid Losses and LAE at 18,069 $10,259 $ 7,702
End of Period/(2)/
- ---------------------------------------------------------------------------
Ratio of Losses Incurred and LAE to GAAP 10.3% 4.4% 3.7%
Net Premiums Earned
- ---------------------------------------------------------------------------
</TABLE>
(1) Includes $4.0 million in recoveries received from retrocessionaires.
(2) Net of reinsurance recoverable on ceded losses of (in thousands) $1,833,
$2,524, and $1,310 for the years ended December 31, 1996, 1995 and 1994,
respectively.
(11) Investments -
- ------ -------------
In managing its investment portfolio, the Company places a high priority on
credit quality and liquidity. Investment policy is set by the Board of Directors
and specific investments are managed by two outside advisers: Lazard Freres
Asset Management, Inc. and Goldman Sachs Asset Management (the "Advisers"). The
Advisers act as investment managers of the Company's portfolio under contracts
terminable on 30 days' notice. Performance of the Advisers and the fees
associated with these arrangements have been and will continue to be
periodically reviewed by the Board of Directors of the Company. All investments
made by the Advisers for the Company are in accordance with the general
requirements and guidelines for investments established by the Board of
Directors and Investment Committee thereof, including guidelines relating to
average maturities, duration and quality, in accordance with applicable law. All
investments in municipal bonds and certain asset backed securities are subject
to prior approval by the Capital Reinsurance underwriting department. The
Company's current investment policy only permits investment in investment grade
fixed income securities. At December 31, 1996, 86.5% of the Company's
investment portfolio consisted exclusively of fixed income securities rated AAA
or A-1+ by S&P or Aaa or P-1 by Moody's, or issues by the U.S. Government or its
agencies or instrumentalities. Overall weighted average credit quality is AAA.
Two strategic changes to the Company's investment guidelines were approved by
the Board of Directors in 1996. The first was to allow the purchase of
securities rated BBB in order to increase returns without significantly
increasing overall portfolio risk. The second strategic change was to allow
tactical purchases of non-dollar fixed
24
<PAGE>
income securities at the discretion of the Advisers and within the constraints
established by the Board of Directors. The overall portfolio performance,
however, remains benchmarked to composite domestic benchmarks. No assurance can
be given that the Company's strategy of diversification will prove successful,
or that losses will not be incurred in excess of those realized under the prior
investment strategy.
AGGREGATE INVESTMENT PORTFOLIO BY MATURITY
AS OF DECEMBER 31
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------------------
CARRYING PERCENTAGE CARRYING PERCENTAGE CARRYING PERCENTAGE
VALUE OF TOTAL VALUE OF TOTAL VALUE OF TOTAL
MATURITY OF INVESTMENT INVESTMENT INVESTMENT
INVESTMENTS PORTFOLIO PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Due in One Year or $ 76,606 8.5% $ 96,837 12.6% $ 80,251 12.6%
Less
- -------------------------------------------------------------------------------------------
Due After One Year 117,503 13.0% 70,365 9.1% 44,530 7.0%
Through Five Years
- -------------------------------------------------------------------------------------------
Due After Five Years 74,723 8.3% 47,177 6.1% 13,522 2.1%
Through Ten Years
- -------------------------------------------------------------------------------------------
Due After Ten Years 632,270 70.2% 557,388 72.2% 500,448 78.3%
- -------------------------------------------------------------------------------------------
Total Investment $901,102 100% $771,767 100.0% $638,751 100.0%
Portfolio
- -------------------------------------------------------------------------------------------
</TABLE>
AGGREGATE INVESTMENT PORTFOLIO AND YIELD BY TYPE OF SECURITY
AS OF DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CARRYING VALUE ESTIMATED FAIR WEIGHTED AVERAGE YIELD
VALUE TO MATURITY/(1)/
INVESTMENT CATEGORY
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Long-Term Investments:
- ------------------------------------------------------------------------------------------------
Municipal Obligations $418,966 $418,966 6.47%
- ------------------------------------------------------------------------------------------------
Corporate Securities 115,533 115,533 6.99%
- ------------------------------------------------------------------------------------------------
U.S. Government and Agency Obligations 77,057 77,057 6.84%
- ------------------------------------------------------------------------------------------------
Mortgage-Backed Securities 200,762 200,762 7.66%
- ------------------------------------------------------------------------------------------------
Emerging Markets 13,360 13,360 7.67%
- ------------------------------------------------------------------------------------------------
Total Long Term Investments 825,678 825,678 6.88%
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Short-Term Investments 75,424 75,424 5.17%
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Total Investment Portfolio $901,102 $901,102 6.73%
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents yield to maturity on long-term investments and current yield on
short-term investments. All percentages are stated on a pre-tax basis,
based on contractual maturity periods. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
At December 31, 1996, approximately $200.76 million or 22.3% of the Company's
investment portfolio was comprised of mortgage-backed securities ("MBS"). Of the
MBS portfolio, approximately $142.8 million or 71.1%
25
<PAGE>
was backed by agencies or entities sponsored by the U.S. government as to the
full amount of principal and interest. As of December 31, 1996, 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 Company limits its
exposure to prepayments by purchasing less volatile types of MBS. As of
December 31, 1996, $52.2 million or approximately 26.0% 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, $148.6 million, or 74.0%, 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 Company 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 December 31, 1996, the Company 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.
(12) Banking Facilities -
- ---- ------------------
On January 27, 1996, the Company arranged with Deutsche Bank AG for the
provision of a $25 million liquidity facility which is available for general
corporate purposes for one year. The Company has not borrowed any funds under
this facility.
Additionally, on August 20, 1996, the Company arranged with the Chase Manhattan
Bank for the provision of a $25 million credit facility for general corporate
purposes. On August 26, 1996, the Company utilized $16 million of this facility
for the purpose of retiring its subordinated notes. The remaining $9 million was
used to acquire RGB.
(13) Data Processing -
- ---- ---------------
The Company believes that its data processing system is adequate to support its
current needs and that such system has the capacity to support a greater volume
of reinsurance business.
The Company uses microcomputers on a Novell network. The network has two
fileservers which provide for disk duplexing and complete data and application
redundancy. System applications files and databases are backed up to tape daily.
Backup tapes are shipped to an off-site storage facility monthly and on-site
backup is stored in a fire-proof safe outside the data center.
(14) Employees -
- ---- ---------
As of December 31, 1996, the Company employed 57 persons, of whom 29 were in
administration, legal, finance and management, 11 were in underwriting and
technical support, 11 in management information services and 6 in direct
marketing. None of these employees is covered by collective bargaining
agreements. The Company believes that its employee relations are excellent.
26
<PAGE>
(15) Executive Officers -
- ------ --------------------
The executive officers of the Company and their present ages and positions with
the Company are set forth below.
<TABLE>
<CAPTION>
Name Age Position and Term of Office
- --------------------------- --- ----------------------------------------------
<S> <C> <C>
Michael E. Satz 48 Chairman of the Board, President and Chief
Executive Officer (Officer since 1987)
Jerome F. Jurschak 49 Executive Vice President and Chief
Underwriting Officer (Officer since 1988)
David A. Buzen 37 Executive Vice President and Chief Financial
Officer (Officer since 1988)
Alan S. Roseman 40 Senior Vice President, General Counsel and
Secretary (Officer since 1989); First Vice
President and Associate General Counsel of
AMBAC Indemnity Corporation 1984 to 1989
Laurence C.D. Donnelly 38 Executive Vice President (Officer since 1988)
Joseph W. Swain III 44 Senior Vice President (Officer since 1988)
</TABLE>
(16) Regulatory Status of Insurance Subsidiaries -
- ---- -------------------------------------------
Capital Reinsurance is licensed as a surety, property and casualty insurer
(including mortgage guaranty insurance) in the State of Maryland and is licensed
or authorized to transact reinsurance business in the States of New York,
Florida and California and is an approved or accredited reinsurer in Alaska,
Colorado, Kentucky, North Carolina, Pennsylvania and Texas. Under its New York
license, Capital Reinsurance is authorized to reinsure risks of every kind or
description permitted by its charter (including financial guaranty risks).
Notwithstanding the breadth of its New York license, Capital Reinsurance has
committed to the New York Insurance Department that it will act in the United
States only as a reinsurer and intends to reinsure only financial guaranty and
related special risks consistent with its business strategy as a specialty
reinsurer. Capital Mortgage is licensed as a mortgage guaranty insurer in the
State of New York and is thereby authorized to transact solely the business of
mortgage guaranty reinsurance. Similarly, Capital Title is licensed as a title
insurer in the State of New York and is thereby authorized to transact solely
the business of title reinsurance.
Capital Reinsurance is subject to the insurance laws and regulations of the
State of Maryland and Capital Mortgage and Capital Title are subject to the
insurance laws of the State of New York. Additionally, Capital Reinsurance,
Capital Mortgage and Capital Title are subject to the laws of the other
jurisdictions in which they are, or may be, licensed to transact business. In
general, such insurance laws and regulations are primarily for the protection of
the policyholders of these companies, i.e., their ceding insurers, and
ultimately the policyholders of those ceding insurers.
These laws and regulations, as well as the level of supervisory authority that
may be exercised by the various state insurance departments, vary by
jurisdiction, but generally require reinsurance companies to maintain minimum
standards of business conduct and solvency, including the satisfaction of
minimum capital requirements, and certain financial tests, the maintenance of
deposits of securities with state insurance departments for the benefit of
ceding insurers and the filing of certain reports with regulatory authorities.
Capital Reinsurance, Capital Mortgage and Capital Title are required to file
quarterly and annual SAP financial statements in each jurisdiction where they
27
<PAGE>
are licensed and with the National Association of Insurance Commissioners, and
are subject to certain risk limits and other statutory restrictions concerning
the types and quality of, and limitations on, investments.
The operations and accounts of Capital Reinsurance, Capital Mortgage and Capital
Title are subject to periodic examination by the insurance departments of the
jurisdictions in which they are licensed, authorized or accredited. The Maryland
Insurance Administration, the regulatory authority of the domiciliary
jurisdiction of Capital Reinsurance, conducts a triennial examination of
insurance companies domiciled in Maryland. The most recent complete triennial
report of Capital Reinsurance covered the period from January 1, 1990 through
December 31, 1993 and the report on examination was issued on May 22, 1995. The
report contained comments and recommendations concerning various compliance
deficiencies found in several areas, which deficiencies were largely technical
in nature. Capital Reinsurance responded to the comments and recommendations in
a manner satisfactory to the Maryland Insurance Administration and has taken
action to assure compliance in all areas noted the future. The New York
Insurance Department, the regulatory authority of the domiciliary jurisdiction
of Capital Mortgage and Capital Title, will conduct examinations of these
companies on a periodic basis.
Although the rates and policy terms of primary insurance agreements are
generally closely regulated by state insurance departments, the terms and
conditions of reinsurance agreements generally are not subject to regulation by
any regulatory authority with respect to rates or policy terms. However, as a
practical matter, the rates charged by the primary insurers have an effect on
the rates that can be charged by reinsurers and, with respect to reinsurance of
financial guaranty, mortgage guaranty and title primary insurers licensed in the
States of California, Florida and New York, certain terms must often be included
in the reinsurance agreement in order for such primary insurer to receive credit
for the reinsurance on its statutory financial statements.
Capital Credit and KRE are insurance companies registered and licensed as
general insurers under the laws of the Islands of Bermuda. Each is subject to
the Insurance Act of 1978, as amended, of the Islands of Bermuda. It is the
policy of the government of Bermuda that the insurance industry be essentially
self-regulating and the Insurance Act is drawn to require certification by the
appropriate officers and professionals of each company of compliance with the
applicable statutory standards. Capital Credit and KRE are required under the
Act to prepare annual statutory financial statements and file a statutory
financial return, including a declaration of compliance with the statutory
ratios (premium to statutory surplus ratio; five-year operating ratio and change
in statutory surplus ratio) and a general business solvency certificate
demonstrating compliance with the Insurance Act's minimum solvency ratio.
(17) Insurance Holding Company Regulations -
- ---- -------------------------------------
The Company, Capital Reinsurance, Capital Mortgage and Capital Title are subject
to regulation under the insurance holding company statutes of Maryland, the
domiciliary state of Capital Reinsurance, New York, the domiciliary state of
Capital Mortgage and Capital Title, and of other jurisdictions in which they
are, or may be, licensed. The insurance holding company laws and regulations
vary from jurisdiction to jurisdiction, but generally require an insurance
holding company, such as the Company, and insurers and reinsurers that are
subsidiaries of insurance holding companies, to register with the applicable
state regulatory authorities and to file with those authorities certain reports
describing, among other information, their capital structure, ownership,
financial condition, certain inter-company transactions and general business
operations. The insurance holding company statutes also require prior
regulatory agency approval or, in certain circumstances, prior notice of certain
material inter-company transfers of assets and certain transactions between
insurance companies, their parent companies and affiliates. The insurance
holding company statutes impose standards on certain transactions between
affiliated companies within the holding company structure, which include, among
other requirements, that all transactions be fair and reasonable and have terms
no less favorable than terms that would result from transactions between parties
negotiating at arm's length and that those exceeding specified limits receive
prior regulatory approval.
28
<PAGE>
(18) Maryland and New York Insurance Acquisitions Disclosure and Control Acts -
- ---- ------------------------------------------------------------------------
Under the Maryland Insurance Code and New York Insurance Laws, unless certain
filings are made with the Insurance Commissioner, no person may acquire any
voting security, or security convertible into a voting security, of an insurance
holding company, such as the Company, which controls a Maryland or New York
insurance company, as applicable, such as Capital Reinsurance, Capital Mortgage
or Capital Title, or merge with such holding company, if, as a result of such
transaction, such person would "control" such insurance holding company. Under
current law, the transaction may not proceed without prior approval or exemption
by the Insurance Commissioner unless following the required provision of certain
information to the Insurance Commissioner, the Insurance Commissioner
affirmatively approves the acquisition within a specified time period.
"Control" is presumed to exist if a person, directly or indirectly, owns or
controls 10% or more of the voting securities of another person. This
presumption may be rebutted by establishing by a preponderance of evidence that
control does not exist in fact.
(19) Restrictions on Dividends -
- ---- -------------------------
(a) Maryland Law:
The principal source of cash for the payment of debt service and dividends by
the Company is the receipt of dividends from Capital Reinsurance. Under current
Maryland insurance law, as it applies to Capital Reinsurance, any proposed
payment of a dividend or distribution in excess of certain amounts is called an
"extraordinary dividend." "Extraordinary dividends" must be reported to, and
approved by, the Maryland Commissioner prior to payment. An "extraordinary
dividend" is defined to be any dividend or distribution to stockholders, such as
the Company, which together with dividends paid during the preceding twelve
months, exceeds 10% of an insurance company's policyholders' surplus at the
preceding December 31. Further, an insurer may not pay any dividend or make any
distribution to its shareholders, such as the Company, unless the insurer
notifies the Commissioner of the proposed payment within five business days
following declaration and at least ten days before payment. The Commissioner
may declare that such dividend not be paid if he finds that the insurer's
policyholders surplus would be inadequate after payment of the dividend or could
lead the insurer to a hazardous financial condition. Based on the Maryland
restrictions, at December 31, 1996, the maximum amount available during 1997,
with notice to, but without prior approval of the Maryland Insurance
Administration, for payment of dividends by Capital Reinsurance to the Company
which would not be characterized as "extraordinary dividends" is approximately
$33 million.
(b) New York Law:
Capital Mortgage is subject to the dividend restrictions imposed under sections
4105 and 6502(b)(2) of the New York Insurance Law. Those sections provide that
dividends may only be declared and distributed out of earned surplus.
Additionally, no dividend may be declared or distributed in an amount which,
together with all dividends declared or distributed by the company 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 Department, or 100% of adjusted net investment income during such
period, unless, upon prior application therefor, the superintendent approves a
greater dividend distribution based upon his finding that the company will
retain sufficient surplus to support its obligations and writings. "Earned
surplus" is defined as the portion of the company's surplus that represents the
net earnings, gains or profits, after deduction of all losses, that have not
been distributed to shareholders as dividends or transferred to stated capital
or capital surplus or contingency reserves or applied to other purposes
permitted by law but does not include unrealized appreciation of assets.
"Adjusted net investment income" is defined as net investment income for the
twelve months immediately preceding the declaration of the dividend increased by
the excess, if any, of net investment income over dividends declared or
distributed during the period commencing thirty-six months before the
declaration of the current dividend and ending twelve months prior thereto.
29
<PAGE>
Capital Title is subject to the dividend restrictions imposed under sections
4105 and 6407 of the New York Insurance Law. Those sections provide that
dividends may only be declared and distributed out of earned surplus and only if
such dividends do not reduce the company's surplus to less than 50% of its
outstanding capital shares, i.e., the value of its outstanding common equity.
Additionally, no dividend may be declared or distributed in an amount which,
together with all dividends declared or distributed by the company during the
preceding twelve months, exceeds 10% of the company's outstanding capital
shares, unless, after deducting such dividends, it has a surplus at least equal
to 50% of its statutory reinsurance reserve or a surplus at least equal to
$250,000, whichever is greater. "Earned surplus" is defined as the portion of
the company's surplus is not attributable to contributions to surplus made in
the preceding five years or to appreciation in the value of the company's
investments not sold or otherwise disposed of.
(c) Bermuda Law:
Capital Credit and KRE have never declared nor paid dividends. Under Bermuda
Law and the Bye-Laws of Capital Credit and KRE, dividends may be paid out of
their profits (defined as accumulated realized profits less accumulated realized
losses). Distributions to shareholders may also be paid out of their surplus
limited by the requirements that they 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.
(20) Credit for Reinsurance -
- ---- ----------------------
Through the "credit for reinsurance" mechanism, Capital Re's insurance
subsidiaries are indirectly subject to the effects of regulatory requirements
imposed by jurisdictions in which ceding primary insurers are licensed. In
general, a ceding insurer will ordinarily enter into reinsurance agreements only
if the ceding insurer can obtain credit for reinsurance on its statutory
financial statements. Credit is allowed when the reinsurer is licensed,
authorized or accredited in a jurisdiction where the ceding company is domiciled
or, in some cases, licensed. In addition, many jurisdictions allow credit for
reinsurance ceded to a reinsurer that is licensed in another jurisdiction and
which meets certain financial requirements, provided, in some instances, that
the jurisdiction has substantially similar reinsurance credit law requirements.
Alternatively, most jurisdictions permit a ceding insurer to take credit for
reinsurance on its statutory financial statements if the reinsurer is not
licensed, accredited or authorized if the reinsurer provides security against
the reserves ceded in the form of a letter of credit, funds withheld or through
a trust fund mechanism. Capital Reinsurance is licensed, or meets the financial
requirements in each of the jurisdictions in which the primary U.S. financial
guaranty insurers are domiciled. Capital Mortgage is licensed, or meets the
financial requirements in each of the jurisdictions in which the primary private
U.S. mortgage guaranty insurers are domiciled. Capital Title is licensed or
meets the financial requirements in each of the jurisdictions in which it has
ceding companies and that impose such requirements.
(21) SAP Reserves -
- ---- ------------
(a) Financial Guaranty Contingency Reserve -
Capital Reinsurance maintains the contingency reserves which the Company
believes are required by the New York, California and Florida insurance laws to
provide credit for reinsurance to ceding financial guaranty insurers licensed in
New York, California and Florida. Under those laws, all financial guaranty
insurers, or their reinsurers, are required to maintain a contingency reserve to
protect policyholders against the impact of excessive losses occurring during
adverse economic cycles.
Under the New York Insurance Law, for financial guaranty policies written on and
after July 1, 1989 contributions are required to be made to the contingency
reserve equal to the greater of 50% of premiums written for the relevant
30
<PAGE>
category of insurance or a percentage of the principal guaranteed, varying from
0.55% to 2.50%, depending upon the type of obligation. Contributions to the
contingency reserve are required to be made as follows: (a) for municipal bonds,
special revenue bonds and substantially equivalent obligations, by quarterly
payments equal to one-eightieth of the total reserve required over a 20 year
period; (b) for all other obligations, by quarterly payments equal to one-
sixtieth of the total reserve required over a 15 year period. Contributions may
be discontinued if the required total contingency reserve for all categories of
obligations has been reached. The contingency reserves must be maintained for
the period specified above, except that withdrawals by the insurer may be
permitted, with the prior written approval of or written notice to the
Superintendent of Insurance, under specified circumstances in the event that the
actual incurred loss experience exceeds certain thresholds or if the reserve
accumulated is deemed excessive in relation to the insurer's outstanding insured
obligations.
As of December 31, 1996, 1995 and 1994, the contingency reserve recorded on
Capital Reinsurance's statutory financial statements was $87.4 million, $71.4
million, and $56.1 million, respectively.
(b) Mortgage Guaranty Contingency Reserve:
Under the New York Insurance Law, Capital Mortgage is required to establish a
contingency reserve in an amount equal to 50% of earned premiums. Contributions
to the contingency reserve made during each calendar year must be maintained for
a period of one hundred and twenty months, except that withdrawals may be made
by the company with the prior approval of the superintendent in any year in
which the actual incurred losses exceed 35% of corresponding earned premiums.
(c) Title Reinsurance Reserve:
Under the New York Insurance Law, Capital Title is required to establish a
reinsurance reserve in an amount equal to one-eightieth of one percent of the
exposure assumed by it. Capital Title may release from the reinsurance reserve
five percent of the amount added to the reinsurance reserve during each year
following the year in which the sum was added.
(22) Single and Aggregate Risk Limitations -
- ---- -------------------------------------
(a) Financial Guaranty Business -
The New York Insurance Law limits the single and aggregate risks that a
financial guaranty insurer may insure on a net basis. Capital Reinsurance
complies with the single and aggregate risk limits of the New York Insurance Law
for financial guaranty insurers. For example, the New York Insurance Law limits
the insured average annual debt service on insured municipal bonds, special
revenue bonds and substantially equivalent obligations with respect to a single
entity and backed by a single revenue source (net of qualifying collateral and
reinsurance) to not more than 10% of the sum of the insurer's policyholders'
surplus and contingency reserves. In addition, insured principal of municipal
bonds attributable to any single risk, net of qualifying collateral and
reinsurance, is limited to not more than 75% of the sum of the insurer's
policyholders' surplus and contingency reserves. Single risk limits, which
generally are more restrictive than the municipal bond single risk limit are
also specified for several other categories of insured obligations. The New York
Insurance Law also limits the aggregate insured outstanding principal and
interest of guaranteed obligations, net of qualifying collateral and
reinsurance, to certain multiples of the insurer's policyholders' surplus and
contingency reserve. Aggregate risk limits vary for different categories of
insured obligations.
(b) Mortgage Guaranty Business:
Capital Mortgage is subject to the various limitations and requirements of the
New York Insurance Law governing mortgage guaranty insurance. For example, the
aggregate risk (i.e., total liability under its aggregate insurance
31
<PAGE>
and reinsurance policies) that a mortgage guaranty insurer may insure on a net
basis cannot exceed twenty-five times its policyholders' surplus. The
regulations promulgated under the New York Insurance Laws also contain detailed
limitations on the conduct of mortgage pool insurance business by a New York
licensed mortgage guaranty insurer.
(c) Title Business:
Capital Title is subject to the various limitations and requirements of the New
York Insurance Law governing title insurance. For example, Capital Title may
not assume any single risk in excess of its, capital, policyholders' surplus,
statutory premium and voluntary reserves.
ITEM 2. PROPERTIES.
Capital Re Corporation, Capital Reinsurance and Capital Mortgage maintain
offices at 1325 Avenue of the Americas, New York, New York 10019. The office
comprises the entire 18th floor of the building, approximately 23,000 square
feet of space. The companies began occupying these offices in April 1993.
Prior to that, Capital Re and Capital Reinsurance maintained offices at 787
Seventh Avenue, New York, New York. The offices at 787 Seventh were sublet to a
third party upon the move to 1325 Avenue of the Americas.
ITEM 3. LEGAL PROCEEDINGS.
There are no lawsuits pending, or to the knowledge of the Company threatened, to
which the Company or any of its subsidiaries is a party or of which any of their
properties is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
32
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information concerning a market for the Company's Common Stock and the
payment of dividends set forth on page 55 of the Company's 1996 Annual Report to
Stockholders is incorporated herein by reference. Information concerning
restrictions on the payment of dividends is set forth in Item 1 above, under the
caption "Insurance Regulatory Matters - Restrictions on Dividends."
As of March 25, 1997, there were 33 stockholders of record of the Company's
Common Stock.
ITEM 6. SELECTED FINANCIAL DATA.
The information concerning selected financial data set forth on page 2 of the
Company's 1996 Annual Report to Stockholders is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information set forth on pages 22 through 30 of the Company's 1996 Annual
Report to Stockholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's 1996 Consolidated Financial Statements, the Report of Independent
Auditors thereon and the unaudited "Quarterly Financial Information" set forth
on pages 31 through 53 of the Company's 1996 Annual Report to Stockholders are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
33
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning directors set forth under "Election of Directors" in
the Company's 1997 Proxy Statement is incorporated herein by reference.
Information concerning executive officers is set forth under PART I, Item 1
"BUSINESS OF CAPITAL RE: Executive Officers -" in this report.
ITEM 11. EXECUTIVE COMPENSATION.
The information concerning compensation of the Company's executive officers set
forth in the Company's 1997 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information concerning security ownership of certain beneficial owners and
management set forth in the Company's 1997 Proxy Statement is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information concerning certain relationships and related transactions set
forth in the Company's 1997 Proxy Statement is incorporated herein by reference.
34
<PAGE>
PART IV
ITEM 14.
(a) Financial Statements, Financial Statement Schedules and Exhibits.
1. Financial Statements
---------------------
Capital Re Corporation has incorporated by reference from the 1996 Annual
Report to Stockholders the following consolidated financial statements of
the Company:
<TABLE>
<CAPTION>
1996 Annual
Report to
Stockholders
------------
CAPITAL RE CORPORATION AND SUBSIDIARIES Page(s)
<S> <C>
Report of Independent Auditors 31
Consolidated Balance Sheets
at December 31, 1996 and 1995 32 - 33
Consolidated Statements of
Income For the Years Ended
December 31, 1996, 1995 and
1994 34
Consolidated Statements of
Stockholders' Equity for the
Years Ended December 31,
1996, 1995 and 1994 35
Consolidated Statements of
Cash Flows for the Years
Ended December 31, 1996,
1995 and 1994 36
Notes to Consolidated
Financial Statements 37 - 53
</TABLE>
2. Financial Statement Schedules
-----------------------------
The Following Financial Statement Schedules are filed as part of this
Report.
Schedule Title
-------- -----
II Condensed Financial Information of Registrant
IV Reinsurance
The report of the Registrant's independent auditors with respect to the above
listed financial statement schedules is set forth in Exhibit 24.01 of this
Report.
All other schedules are omitted because they are either inapplicable or the
required information is presented in the consolidated financial statements of
the Company or the notes thereto.
3. Exhibits
---------
The following are annexed as exhibits to this Report:
Exhibit No. Exhibit
----------- -------
3.01 Certificate of Incorporation of the Company, dated December
3, 1991, 1992 (Filed as exhibit 3.01 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-45286) and
incorporated herein by reference)
35
<PAGE>
3.02 By-laws of the Company (Filed as exhibit 3.02 to the
Company's Registration Statement on Form S-1 (Reg. No. 33-
45286) and incorporated herein by reference)
3.03 Certificate of Ownership and Merger of Capital Re Delaware
Corporation and Capital Re Corporation (Filed as exhibit
3.03 to the Company's Registration Statement on Form S-1
(Reg. No. 33-45286) and incorporated herein by reference)
4.01 Specimen Stock Certificate representing shares of Common
Stock (Filed as exhibit 4.01 to the Company's Registration
Statement on Form S-1 (Reg. No. 33-45286) and incorporated
herein by reference)
4.02 Form of Indenture between the Company and Morgan Guaranty
Trust Company of New York, as Trustee including form of
specimen Debenture (Filed as exhibit 4.01 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-53618) and
incorporated herein by reference)
4.03 Form of Subordinated Promissory Notes (Filed as Exhibits
10.01 - 10.03 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1993 (Comm. File No. 1-
10995) and incorporated herein by reference)
4.04 Form of Payment and Guarantee Agreement between Capital Re
LLC and the Company (Filed as exhibit 4.1 to the Company's
Registration Statement on Form S-3 (Reg. No. 33-72090) and
incorporated herein by reference)
4.05 Form of the Declaration of Terms of Capital Re LLC 7.65%
Cumulative Monthly Income Preferred Shares, Series A (Filed
as exhibit 4.2 to the Company's Registration Statement on
Form S-3 (Reg. No. 33-72090) and incorporated herein by
reference)
4.06 Form of Liability Assumption Agreement between Capital Re
LLC and Capital Re Corporation (Filed as exhibit 99.2 to the
Company's Registration Statement on Form S-3 (Reg. No. 33-
72090) and incorporated herein by reference)
4.07 Form of Loan Agreement between Capital Re LLC and Capital Re
Corporation (Filed as exhibit 99.1 to the Company's
Registration Statement on Form S-3 (Reg. No. 33-72090) and
incorporated herein by reference)
4.08 $25 Million Credit Facility between the Company, Various
Banks and Deutsche Bank AG, as Agent (Filed as Exhibit 4.08
to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994 (Comm. File No. 1-10995) and
incorporated herein by reference)
4.09 $75 Million Credit Facility between Capital Reinsurance,
Various Banks and Deutsche Bank AG, as Agent (Filed as
Exhibit 4.09 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994 (Comm. File No. 1-
10995) and incorporated herein by reference)
4.10 $25 Million Credit Facility between the Company, Various
Banks and The Chase Manhattan Bank, as Agent, dated August
20, 1996.
36
<PAGE>
9.01 Stockholders' Agreement dated as of January 17, 1992 by and
among the Registrant, its institutional stockholders and
certain of its management stockholders (Filed as exhibit
9.01 to the Company's Registration Statement on Form S-1
(Reg. No. 33-53618) and incorporated herein by reference)
9.02 First Amendment to Capital Re Corporation 1992 Stockholders
Agreement dated December 28, 1992 (Filed as exhibit 9.03 to
the Company's Annual Report on From 10-K for the fiscal year
ended December 31, 1992 and incorporated herein by
reference)
9.03 Modification of Credit Re Corporation Stockholders Agreement
dated August 20, 1993 (Filed as Exhibit 10.31 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993 (Comm. File No. 1-10995) and
incorporated herein by reference) *
10.01 Assumption Agreement dated as of February 3, 1988 between
Capital Reinsurance and USF&G (Filed as exhibit 10.01 to the
Company's Registration Statement on Form S-1 (Reg. No. 33-
45286) and incorporated herein by reference)
10.02 Credit Re Corporation Stockholders' Agreement dated February
23, 1990, as amended, by and among Credit Re Corporation and
its stockholders (Filed as exhibit 10.02 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-45286) and
incorporated herein by reference)
10.03 Lease Agreements for the Company's prior principal offices
at 787 Seventh Avenue, New York, New York (Filed as exhibit
10.03 to the Company's Registration Statement on Form S-1
(Reg. No. 33-45286) and incorporated herein by reference)
10.04 Capital Re Corporation 1988 Stock Incentive Plan, as amended
(the "1988 Plan") (Filed as exhibit 10.04 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-45286) and
incorporated herein by reference)
10.05 Form of 1988 Stock Incentive Plan Agreement (Filed as
exhibit 10.05 to the Company's Registration Statement on
Form S-1 (Reg. No. 33-45286) and incorporated herein by
reference)
10.06 Forms of Tax Equalization Loan Agreements related to 1988
Plan (Filed as exhibit 10.06 to the Company's Registration
Statement on Form S-1 (Reg. No. 33-45286) and incorporated
herein by reference)
10.07 Form of Indemnity Agreement related to 1988 Plan (Filed as
exhibit 10.07 to the Company's Registration Statement on
Form S-1 (Reg. No. 33-45286) and incorporated herein by
reference)
10.08 1992 Stock Option Plan and related form of Non-Qualified
Stock Option Agreement (Filed as exhibit 10.11 to the
Company's Registration Statement on Form S-1 (Reg. No. 33-
45286) and incorporated herein by reference)
37
<PAGE>
10.09 Facultative Reinsurance Agreement dated November 4, 1991,
between Financial Guaranty Insurance Company and Capital
Reinsurance Company (Filed as exhibit 10.13 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-45286) and
incorporated herein by reference)
10.10 Municipal Bond Investors Assurance Corporation Surplus Share
Reinsurance Placement Slip dated January 9, 1992 by Capital
Reinsurance Company (Filed as exhibit 10.14 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-45286) and
incorporated herein by reference)*
10.11 Agreement dated January 1, 1988 by and between Municipal
Bond Investors Assurance Corporation and United States
Fidelity and Guaranty Company (Filed as exhibit 10.15 to the
Company's Registration Statement on Form S-1 (Reg. No. 33-
45286) and incorporated herein by reference)*
10.12 Reinsurance Memorandum No. Pima/Heron-5 USF&G dated May 20,
1991 for a Facultative Risk Cession pursuant to the Terms
and Conditions of the Interests and Liabilities Contract and
Treaty Effective January 1, 1990 (No. QS-2(1/1/90)) between
Financial Security Assurance, Inc. and United States
Fidelity and Guaranty Company (Filed as exhibit 10.16 to the
Company's Registration Statement on Form S-1 (Reg. No. 33-
45286) and incorporated herein by reference)*
10.13 Facultative Reinsurance Agreement between Financial Security
Assurance, Inc. and United States Fidelity and Guaranty
Company dated as of May 4, 1988 (Filed as exhibit 10.17 to
the Company's Registration Statement on Form S-1 (Reg. No.
33-45286) and incorporated herein by reference)*
10.14 Interests and Liabilities Contract concerning the Quota
Share Treaty between Financial Security Assurance, Inc. and
Capital Reinsurance Company dated January 1, 1990, as
revised (Filed as exhibit 10.18 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-45286) and
incorporated herein by reference)*
10.15 Interests and Liabilities Contract, dated January 9, 1992,
concerning the Municipal Bond Insurance Quota Share Treaty
between Financial Security Assurance, Inc. and Capital
Reinsurance Company (Filed as exhibit 10.19 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-45286) and
incorporated herein by reference)*
10.16 1992 Municipal Quota Share Reinsurance Treaty, dated
December 6, 1991, between Financial Guaranty Insurance
Company and Capital Reinsurance Company (Filed as exhibit
10.20 to the Company's Registration Statement on Form S-1
(Reg. No. 33-45286) and incorporated herein by reference)*
10.17 1991-1992 Structured Finance Quota Share Reinsurance Treaty
dated November 4, 1991, between Financial Guaranty Insurance
Company and Capital Reinsurance Company (Filed as exhibit
10.21 to the Company's Registration Statement on Form S-1
(Reg. No. 33-45286) and incorporated herein by reference)*
38
<PAGE>
10.18 1992 Pro Rata Reinsurance Agreement, dated as of January 1,
1992 between AMBAC Indemnity Corporation and Capital
Reinsurance Company (Filed as exhibit 10.22 to the Company's
Registration Statement on Form S-1 (Reg. No. 33-45286) and
incorporated herein by reference)*
10.19 Facultative Reinsurance Agreement, dated as of October 1,
1991, with Financial Guaranty Insurance Company (Filed as
exhibit 10.22 to the Company's Registration Statement on
Form S-1 (Reg. No. 33-53618) and incorporated herein by
reference)*
10.20 1993 Municipal Quota Share Reinsurance Treaty dated January
20, 1993 with Financial Guaranty Insurance Company (Filed as
Exhibit 10.24 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1992 (Comm. File No.
1-10995) and incorporated herein by reference) *
10.21 Structured Finance Quota Share Treaty and Interest and
Liabilities Contract dated February 10, 1993 with Financial
Guaranty Insurance Company (Filed as Exhibit 10.25 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992 (Comm. File No. 1-10995) and
incorporated herein by reference) *
10.22 First Amendment to the Interests and Liabilities Contract
dated November 1, 1990 and the Municipal Bond Insurance
Quota Share Treaty Attached thereto effective January 1,
1993 with Financial Security Assurance Inc. (Filed as
Exhibit 10.26 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1992 (Comm. File No.
1-10995) and incorporated herein by reference)*
10.23 First Amendment to the Interests and Liabilities Contract
dated December 1, 1991 and the Quota Share Treaty Attached
thereto effective January 1, 1992 with Financial Security
Assurance Inc. (Filed as Exhibit 10.27 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1992 (Comm. File No. 1-10995) and incorporated
herein by reference) *
10.24 Placement Slip regarding Taxable Structured Finance Treaty
effective January 1, 1993 with Municipal Bond Investors
Assurance Corporation (Filed as Exhibit 10.28 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1992 (Comm. File No. 1-10995) and
incorporated herein by reference) *
10.25 Lease Agreement for the Company's principal office between
Capital Reinsurance Company and 1325 Limited Partnership
(Filed as Exhibit 10.29 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1992 (Comm.
File No. 1-10995) and incorporated herein by reference) *
39
<PAGE>
10.26 Capital Re Corporation Directors' Stock Option Plan (Filed
as Exhibit 10.26 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993 (Comm. File No.
1-10995) and incorporated herein by reference) *
10.27 1994 Pro Rata Reinsurance Placement Memorandum (including
Endorsement No. 2) dated January 1, 1994, between Capital
Reinsurance and AMBAC Indemnity Corporation (Filed as
Exhibit 10.27 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993 (Comm. File No.
1-10995) and incorporated herein by reference) *
10.28 First Amendment to Interest and Liabilities Contract and
Municipal Bond Quota Share Reinsurance Treaty dated January
1, 1993 between Capital Reinsurance Company and Financial
Security Assurance Inc. (Filed as Exhibit 10.28 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993 (Comm. File No. 1-10995) and
incorporated herein by reference) *
10.29 Municipal Bond Surplus Share Reinsurance Agreement
(Endorsement No. 2) dated January 1, 1993 between Capital
Reinsurance Company and Municipal Bond Investors Assurance
Corporation (Filed as Exhibit 10.29 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1993 (Comm. File No. 1-10995) and incorporated herein by
reference) *
10.30 Taxable Structured Finance Securities Quota Share
Reinsurance Placement Slip dated January 1, 1994 between
Capital Reinsurance Company and Municipal Bond Investors
Assurance Corporation. (Filed as Exhibit 10.30 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993 (Comm. File No. 1-10995) and
incorporated herein by reference)
10.31 Municipal Variable Quota Share Treaty effective January 1,
1994, between Capital Reinsurance Company and Financial
Guaranty Insurance Company (Filed as Exhibit 10.32 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 (Comm. File No. 1-10995) and
incorporated herein by reference) *
10.32 Amended and Restated Interests and Liabilities Contract and
Quota Share Reinsurance Treaty, amended and restated January
1, 1994, by and between Capital reinsurance Company and
Financial Security Assurance Inc. (Filed as Exhibit 10.33 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 (Comm. File No. 1-10995) and
incorporated herein by reference) *
10.33 First amendment Dated January 1, 1995 to Interests and
Liabilities Contract and Quota Share Reinsurance Treaty as
Amended and Restated January 1, 1994, by and between Capital
Reinsurance Company and Financial Security Assurance Inc.
(Filed as Exhibit 10.34 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994 (Comm.
File No. 1-10995) and incorporated herein by reference) *
40
<PAGE>
10.34 Municipal Bond Surplus Share Reinsurance Agreement
(Endorsement Nos. 3 and 4) between Capital Reinsurance
Company and Municipal Bond Investors Assurance Corporation
(Filed as Exhibit 10.35 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994 (Comm.
File No. 1-10995) and incorporated herein by reference) *
10.35 Taxable Structured Finance Securities Quota Share
Reinsurance Agreement (Endorsements Nos. 1 and 2) between
Capital Reinsurance Company and Municipal Bond Investors
Assurance Corporate (Filed as Exhibit 10.36 to the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 (Comm. File No. 1-10995) and incorporated
herein by reference) *
10:36 Municipal Bond Surplus Share Reinsurance Placement Slip
(1995 underwriting year) between Capital Reinsurance Company
and Municipal Bond Investors Assurance Corporation. (Filed
as Exhibit 10.37 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1994 (Comm. File No.
1-10995) and incorporated herein by reference) *
10.37 Capital Re Corporation Deferred Compensation Plan. (Filed as
Exhibit 10.37 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995 (Comm. File No.
1-10995) and incorporated herein by reference).
10.38 Capital Re Corporation Non-Qualified Profit Sharing Plan.
(Filed as Exhibit 10.38 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995 (Comm.
File No. 1-10995) and incorporated herein by reference).
10.39 Capital Re Corporation Performance Share Plan
11.01 Statement Re: Computation of Per Share Earnings
13.01 1996 Annual Report to Shareholders of Capital Re
Corporation. Such report is furnished for the information
of the Commission only and, except for those portions
thereof which are expressly incorporated by reference in the
Annual Report on Form 10-K, is not to be deemed filed as
part of this Report.
22.01 Subsidiaries of Registrant
24.01 Consent of Ernst & Young LLP, Independent Auditors
25.01 Power of Attorney of the Board of Directors
27.01 Financial Data Schedule as of December 31, 1996
___________
*Confidential treatment was afforded, or has been requested, for certain
portions of these agreements
(b) Reports on Form 8-K
On October 9, 1996, the Company filed a Form 8-K announcing an agreement to
acquire Tower Street Holdings Limited and its subsidiaries.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Dated: March 30, 1997 CAPITAL RE CORPORATION
(Registrant)
By:___________________
Name: Alan S. Roseman
Title: Senior Vice President,
General Counsel and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- ---------------------- ------------------------------- ---------------
<S> <C> <C>
Michael E. Satz* Chairman of the Board, March 30, 1997
Chief Executive Officer and
President (Principal Executive
Officer)
David A. Buzen* Executive Vice President and March 30, 1997
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Harrison Conrad* Director March 30, 1997
Richard L. Huber* Director March 30, 1997
Steven D. Kesler* Director March 30, 1997
Steven Newman* Director March 30, 1997
Philip Robinson* Director March 30, 1997
Edwin Russell* Director March 30, 1997
Michael E. Satz* Director March 30, 1997
Dan R. Skowronski* Director March 30, 1997
Barbara Stewart* Director March 30, 1997
Jeffrey F. Stuermer* Director March 30, 1997
</TABLE>
__________________________
*Alan S. Roseman, by signing his name hereto, does hereby sign this Annual
Report on Form 10-K on behalf of each of the Directors and Officers of the
Company named above pursuant to powers of attorney duly executed by such
Directors and Officers and filed with the Securities and Exchange Commission as
an exhibit to this report.
By: ___________________________________
Alan S. Roseman, Attorney-in-fact
42
<PAGE>
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - CONTINUED
CAPITAL RE CORPORATION
DECEMBER 31, 1996
NOTES TO CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements should be read in conjunction
with the consolidated financial statements and notes thereto of Capital Re
Corporation and Subsidiaries.
The Long-term debt of $74.8 million is senior unsecured debentures. See Note 7
to the consolidated financial statements of Capital Re Corporation and
Subsidiaries for a description of Capital Re Corporation's debt.
Of the $89.7 million intercompany balance with subsidiary, $94.9 million is a
loan between the Corporation and its subsidiary, Capital Re LLC, a limited life
company organized under the laws of the Turks and Caicos Islands. The $94.9
million loan consists of $75.0 million of proceeds received from the issuance of
Company obligated mandatorily redeemable preferred securities of Capital Re LLC
as well as the Corporation's $19.9 million common stock investment in Capital Re
LLC. See Note 13 to the consolidated financial statements of Capital Re
Corporation and Subsidiaries for an explanation of the loan. Also, $5.2 million
is a loan between the Corporation and its subsidiary, Capital Re (UK) Holdings,
whereby the Corporation loaned Capital Re (UK) Holdings $5.2 million to
facilitate the purchase of RGB Holdings Ltd. See Note 1 to the consolidated
financial statements of Capital Re Corporation and Subsidiaries for an
explanation of the loan.
The Corporation is obligated to invest under certain circumstances up to $15
million of additional capital into each of its subsidiaries, Capital Credit
Reinsurance Company, Ltd. and KRE Reinsurance Ltd.
<PAGE>
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Capital Re Corporation
December 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
Condensed Balance Sheets As of As of
- ------------------------ December 31, December 31,
ASSETS 1996 1995
- ------------------------ ------------ ------------
<S> <C> <C>
Investment in affiliates $669,721 $593,284
Other assets 9,080 4,438
-------- --------
Total Assets $678,801 $597,722
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Long-term debt $74,781 $74,744
Subordinated notes payable 0 16,000
Bank note payable 25,000 0
Intercompany balance with affiliates 89,673 95,035
Stockholders' Equity 489,347 411,943
-------- --------
Total Liabilities and Stockholders'
Equity $678,801 $597,722
======== ========
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
CONDENSED STATEMENTS OF INCOME 1996 1995 1994
- ------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Revenues $183 $217 $311
Expenses 14,354 13,867 12,731
------------ ------------ ------------
Total Operating (Loss) (14,171) (13,650) (12,420)
Equity in net income of affiliates 66,086 54,132 47,002
------------ ------------ ------------
Income before income tax (benefit) 51,915 40,482 34,582
Income tax (benefit) (4,610) (5,045) (5,224)
------------ ------------ ------------
Net Income $56,525 $45,527 $39,806
============ ============ ============
</TABLE>
See accompanying notes to Condensed Financial Statements
2
<PAGE>
CAPITAL RE CORPORATION
SCHEDULE IV - REINSURANCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Premiums Percentage
Property Ceded to Assumed of Amount
and Gross Other from Other Net Assumed to
Liability Amount Companies Companies Amount Net
- --------- ------ --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
1996 $0 $24,630 $129,818 $105,188 123.4%
1995 $0 $18,091 $107,599 $89,508 120.2%
1994 $0 $12,056 $94,851 $82,795 114.6%
</TABLE>
3
<PAGE>
Exhibit 4.10
===============================================================
CAPITAL RE CORPORATION
_____________________________
CREDIT AGREEMENT
Dated as of August 20, 1996
______________________________
$25,000,000
______________________________
THE CHASE MANHATTAN BANK,
as Administrative Agent
CHASE SECURITIES INC., as Arranger
===============================================================
[Exhibits B-1, B-2, and C are photocopies of the opinions as delivered.]
<PAGE>
TABLE OF CONTENTS
This Table of Contents is not part of the Agreement to which it is attached
but is inserted for convenience of reference only.
Page
----
<TABLE>
<CAPTION>
<S> <C>
Section 1. Definitions and Accounting Matters................ 1
1.01 Certain Defined Terms............................. 1
1.02 Accounting Terms and Determinations............... 15
1.03 Classes; Series; Types............................ 16
Section 2. Commitments, Loans, Notes and Prepayments......... 16
2.01 Loans............................................. 16
2.02 Borrowings........................................ 17
2.03 Changes in Aggregate Amount of Commitments........ 18
2.04 Commitment Fee.................................... 18
2.05 Several Obligations; Remedies Independent......... 18
2.06 Notes............................................. 18
2.07 Optional Prepayments of Loans..................... 19
2.08 Extension of Commitment Termination Date.......... 20
Section 3. Payments of Principal and Interest................ 21
3.01 Repayment of Loans................................ 21
3.02 Interest.......................................... 21
Section 4. Payments; Pro Rata Treatment; Computations; Etc... 22
4.01 Payments.......................................... 22
4.02 Pro Rata Treatment................................ 23
4.03 Computations...................................... 24
4.04 Minimum Amounts................................... 24
4.05 Certain Notices................................... 24
4.06 Non-Receipt of Funds by the Administrative Agent.. 25
4.07 Sharing of Payments, Etc.......................... 26
Section 5. Yield Protection, Etc............................. 27
5.01 Additional Costs.................................. 27
5.02 Limitation on Loans............................... 29
5.03 Illegality........................................ 30
5.04 Compensation...................................... 30
5.05 U.S. Taxes........................................ 31
5.06 Fair Allocation; Substitution of Banks............ 32
Section 6. Conditions Precedent.............................. 33
6.01 Initial Loan...................................... 33
6.02 Term Loans........................................ 35
6.03 Initial and Subsequent Loans...................... 35
</TABLE>
Credit Agreement
----------------
<PAGE>
Page
----
<TABLE>
<S> <C>
Section 7. Representations and Warranties.................... 36
7.01 Corporate Existence............................... 36
7.02 Financial Condition............................... 36
7.03 Litigation........................................ 37
7.04 No Breach......................................... 37
7.05 Action............................................ 38
7.06 Approvals......................................... 38
7.07 Margin Stock...................................... 38
7.08 ERISA............................................. 38
7.09 Taxes............................................. 38
7.10 Investment Company Act............................ 39
7.11 Public Utility Holding Company Act................ 39
7.12 Material Agreements and Liens..................... 39
7.13 Environmental Matters............................. 39
7.14 Capitalization.................................... 40
7.15 Subsidiaries, Etc................................. 40
7.16 True and Complete Disclosure...................... 41
Section 8. Covenants of the Company.......................... 41
8.01 Financial Statements; Information; Etc............ 41
8.02 Litigation........................................ 45
8.03 Existence, Etc.................................... 45
8.04 Insurance......................................... 46
8.05 Prohibition of Fundamental Changes................ 46
8.06 Limitation on Liens............................... 47
8.07 Indebtedness...................................... 49
8.08 Investments....................................... 50
8.09 Restricted Payments............................... 50
8.10 Financial Covenants............................... 51
8.11 Lines of Business................................. 51
8.12 Transactions with Affiliates...................... 51
8.13 Use of Proceeds................................... 52
8.14 Certain Obligations Respecting Subsidiaries....... 52
8.15 Modifications of Certain Documents................ 53
8.16 Ratings........................................... 53
8.17. Dividends to or Investments in the Company by
Subsidiaries..................................... 53
Section 9. Events of Default................................. 53
Section 10. The Administrative Agent......................... 56
10.01 Appointment, Powers and Immunities............... 56
10.02 Reliance by Administrative Agent................. 57
10.03 Defaults......................................... 57
10.04 Rights as a Bank................................. 58
10.05 Indemnification.................................. 58
10.06 Non-Reliance on Administrative Agent and Other
Banks........................................... 59
</TABLE>
Credit Agreement
----------------
ii
<PAGE>
<TABLE>
Page
----
<S> <C>
10.07 Failure to Act................................... 59
10.08 Resignation or Removal of Administrative Agent... 59
10.09 Arranger......................................... 60
Section 11. Miscellaneous.................................... 60
11.01 Waiver........................................... 60
11.02 Notices.......................................... 60
11.03 Expenses, Etc.................................... 61
11.04 Amendments, Etc.................................. 62
11.05 Successors and Assigns........................... 62
11.06 Assignments and Participations................... 62
11.07 Survival......................................... 64
11.08 Captions......................................... 64
11.09 Counterparts..................................... 65
11.10 Governing Law; Submission to Jurisdiction........ 65
11.11 Waiver of Jury Trial............................. 65
11.12 Treatment of Certain Information;
Confidentiality................................. 65
</TABLE>
SCHEDULE I - Material Agreements and Liens
SCHEDULE II - Subsidiaries
SCHEDULE III - Litigation
EXHIBIT A-1 - Form of Revolving Credit Note
EXHIBIT A-2 - Form of Term Loan Note
EXHIBIT B-1 - Form of Opinion of General Counsel to the Company
EXHIBIT B-2 - Form of Opinion of Special Counsel to the Company
EXHIBIT C - Form of Opinion of Special New York Counsel to
Chase
EXHIBIT D - Form of Confidentiality Agreement
EXHIBIT E - Form of Assignment and Acceptance
Credit Agreement
----------------
iii
<PAGE>
CREDIT AGREEMENT dated as of August 20, 1996 among: CAPITAL RE
CORPORATION, a corporation duly organized and validly existing under the laws of
the State of Delaware (together with its successors and assigns, the "Company");
-------
each of the lenders named under the caption "BANKS" on the signature pages
hereof (together with its successors and assigns, individually, a "Bank",
----
together, the "Banks"); and THE CHASE MANHATTAN BANK, a New York state chartered
-----
banking corporation, as administrative agent for the Banks (in such capacity,
together with its successors in such capacity, the "Administrative Agent").
--------------------
The Company has requested that the Banks make loans to it in an
aggregate principal amount not exceeding $25,000,000 at any one time
outstanding, and the Banks are prepared to make such loans upon the terms and
conditions hereof. Accordingly, the parties hereto agree as follows:
Section 1. Definitions and Accounting Matters.
----------------------------------
1.01 Certain Defined Terms. As used herein, the following terms
---------------------
shall have the following meanings (all terms defined in this Section 1.01 or in
other provisions of this Agreement in the singular to have the same meanings
when used in the plural and vice versa):
---- -----
"Affiliate" shall mean, as to any specified Person, any other Person
---------
that directly or indirectly controls, or is under common control with, or is
controlled by, such specified Person. As used in this definition, "control"
-------
(including, with its correlative meanings, "controlled by" and "under common
------------- ------------
control with") shall mean possession, directly or indirectly, of power to direct
- ------------
or cause the direction of management or policies (whether through ownership of
securities or partnership or other ownership interests, by contract or
otherwise), provided that, in any event, any Person that owns directly or
--------
indirectly securities having 10% or more of the voting power for the election of
directors or other governing body of a corporation or 10% or more of the
partnership or other ownership interests of any other Person will be deemed to
control such corporation or other Person. Notwithstanding the foregoing, (a) no
individual shall be an Affiliate of any Person or any of its Subsidiaries solely
by reason of such individual being a director, officer or employee of such
Person or any of its Subsidiaries, (b) a Person and its Subsidiaries shall not
be Affiliates of each other and (c) neither the Administrative Agent nor any
Bank shall be an Affiliate of the Company or any of its Subsidiaries.
Credit Agreement
----------------
<PAGE>
"Applicable Insurance Regulatory Authority" shall mean, with respect
-----------------------------------------
to any Insurance Subsidiary, the insurance department or similar insurance
regulatory or administrative authority or agency of the jurisdiction in which
such Insurance Subsidiary is domiciled.
"Applicable Lending Office" shall mean, for each Bank, the "Lending
-------------------------
Office" of such Bank (or of an affiliate of such Bank) designated on the
signature pages hereof or such other office of such Bank (or of an affiliate of
such Bank) as such Bank may from time to time specify to the Administrative
Agent and the Company as the office by which its Loans are to be made and
maintained.
"Applicable Margin" shall mean: (a) with respect to Base Rate Loans
-----------------
of any Class, 0.0%; (b) with respect to Eurodollar Loans that are Revolving
Credit Loans, 0.40% per annum; and (c) with respect to Eurodollar Loans that are
Term Loans, 0.50% per annum.
"Bankruptcy Code" shall mean the Federal Bankruptcy Code of 1978, as
---------------
amended from time to time.
"Base Rate" shall mean, for any day, a rate per annum equal to the
---------
higher of (a) the Federal Funds Rate for such day plus 1/2 of 1% and (b) the
----
Prime Rate for such day. Each change in any interest rate provided for herein
based upon the Base Rate resulting from a change in the Base Rate shall take
effect at the time of such change in the Base Rate.
"Base Rate Loans" shall mean Loans that bear interest at rates based
---------------
upon the Base Rate.
"Basic Documents" shall mean, collectively, this Agreement and the
---------------
Notes.
"Business Day" shall mean any day (a) on which commercial banks are
------------
not authorized or required to close in New York City and (b) if such day relates
to a borrowing of, a payment or prepayment of principal of or interest on, a
Conversion of or into, or an Interest Period for, a Eurodollar Loan or a notice
by the Company with respect to any such borrowing, payment, prepayment,
Conversion or Interest Period, also on which dealings in Dollar deposits are
carried out in the London interbank market.
"Capital Credit" shall mean Capital Credit Reinsurance Company, Ltd.,
--------------
a Bermuda domiciled insurance company and, on the date hereof, Wholly-Owned
Subsidiary of the Company.
Credit Agreement
----------------
-2-
<PAGE>
"Capital Expenditures" shall mean, for any period, expenditures
--------------------
(including, without limitation, the aggregate amount of Capital Lease
Obligations incurred during such period) made by the Company or any of its
Subsidiaries to acquire or construct fixed assets, plant and equipment
(including renewals, improvements and replacements, but excluding repairs)
during such period computed in accordance with GAAP.
"Capital Lease Obligations" shall mean, for any Person, all
-------------------------
obligations of such Person to pay rent or other amounts under a lease of (or
other agreement conveying the right to use) Property to the extent such
obligations are required to be classified and accounted for as a capital lease
on a balance sheet of such Person under GAAP (including Statement of Financial
Accounting Standards No. 13 of the Financial Accounting Standards Board), and,
for purposes of this Agreement, the amount of such obligations shall be the
capitalized amount thereof, determined in accordance with GAAP (including such
Statement No. 13).
"Capital Mortgage" shall mean Capital Mortgage Reinsurance Company, a
----------------
New York domiciled reinsurance company and, on the date hereof, Wholly-Owned
Subsidiary of the Company.
"Capital Mortgage Bermuda" shall mean Capital Mortgage Reinsurance
------------------------
Company (Bermuda), Ltd., a Bermuda domiciled reinsurance company and, on the
date hereof, Wholly-Owned Subsidiary of the Company.
"Change in Control" shall mean, with respect to the Company, the
-----------------
occurrence of a state of facts where (a) any one Person, together with its
Subsidiaries and Affiliates, or any "group" (within the meaning of Sections
13(d) or 14(d) of the Securities Exchange Act of 1934, as amended) acting
together as a group (whether pursuant to a shareholders agreement, partnership
or joint venture agreement or otherwise), other than the Existing Institutional
Holders, shall own (beneficially or otherwise) 20% or more of the Voting Stock
of the Company or (b) the Company is or would be required to register itself as
a member of an insurance holding company system under Section 495 of the
Maryland Insurance Code, or (c) the Company is or would be required under
Section 494A of the Maryland Insurance Code to notify the Maryland Insurance
Commissioner of a Person that controls or has acquired control of the Company,
or (d) a Person has filed under Section 494 or 494A of the Maryland Insurance
Code to obtain the prior approval of the Maryland Insurance Commissioner to
acquire control of the Company and such approval has been obtained; provided
--------
that a Change in Control shall not exist as a result of any action or state of
facts referred to in clauses (b), (c) or (d) above occurring or existing prior
to the date hereof.
Credit Agreement
----------------
-3-
<PAGE>
"Chase" shall mean The Chase Manhattan Bank, a New York state
-----
chartered banking corporation.
"Class" shall have the meaning assigned to such term in Section 1.03
-----
hereof.
"Closing Date" shall mean the date upon which the initial Loans
------------
hereunder are made.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
----
time to time.
"Commitment" shall mean, as to each Bank, the obligation of such Bank
----------
to make Loans in an aggregate amount not exceeding the amount set opposite such
Bank's name on the signature pages hereof under the caption "Commitment" (as the
same may be reduced at any time or from time to time pursuant to Section 2.03
hereof).
"Commitment Termination Date" shall mean August 19, 1997, as extended
---------------------------
pursuant to Section 2.08 hereof.
"Computation Date" shall have the meaning in Section 8.09 hereof.
----------------
"Consent Date" shall have the meaning assigned to such term in Section
------------
2.08 hereof.
"Continue", "Continuation" and "Continued" shall refer, in the case of
-------- ------------ ---------
a Term Loan, to the continuation pursuant to Section 2.09 hereof of such Term
Loan as a Eurodollar Loan from one Interest Period to another.
"Convert", "Conversion" and "Converted" shall refer, in the case of
------- ---------- ---------
any Loan, to the conversion pursuant to Section 2.09 hereof of one Type of such
Loan into another Type.
"CRC" shall mean Capital Reinsurance Company, a Maryland domiciled
---
reinsurance company and, on the date hereof, a Wholly-Owned Subsidiary of the
Company.
"CRLLC Preferred Securities" shall mean the Company obligated
--------------------------
mandatorily redeemable preferred securities of Capital Re LLC, a limited life
company organized under the laws of the Turks and Caicos Islands, outstanding on
the date hereof.
"Debentures" shall mean the 7.75% Debentures due 2002 issued by the
----------
Company pursuant to the Indenture in the aggregate principal amount of
$75,000,000.
Credit Agreement
----------------
-4-
<PAGE>
"Default" shall mean an Event of Default or an event that with notice
-------
or lapse of time or both would become an Event of Default.
"Dollars" and "$" shall mean lawful money of the United States of
------- -
America.
"EBIT" shall mean, for any period, for the Company and its
----
Subsidiaries (determined on a consolidated basis without duplication in
accordance with GAAP), the sum of income before provision for income taxes for
such period plus Interest Expense for such period minus net realized gains (or,
---- -----
in the case of net realized losses, plus the amount of such losses) for such
----
period.
"Equity Rights" shall mean, with respect to any Person, any
-------------
outstanding subscriptions, options, warrants, commitments, preemptive rights or
agreements of any kind (including, without limitation, any stockholders' or
voting trust agreements) for the issuance, sale, registration or voting of, or
outstanding securities convertible into, any additional shares of capital stock
of any class, or partnership or other ownership interests of any type in, such
Person.
"ERISA" shall mean the Employee Retirement Income Security Act of
-----
1974, as amended from time to time.
"ERISA Affiliate" shall mean any corporation or trade or business that
---------------
is a member of any group of organizations (a) described in Section 414(b) or (c)
of the Code of which the Company is a member and (b) solely for purposes of
potential liability under Section 302(c)(11) of ERISA and Section 412(c)(11) of
the Code and the lien created under Section 302(f) of ERISA and Section 412(n)
of the Code, described in Section 414(m) or (o) of the Code of which the Company
is a member.
"Eurodollar Base Rate" shall mean, with respect to any Eurodollar Loan
--------------------
for any Interest Period therefor, the rate per annum (rounded upwards, if
necessary, to the nearest 1/16 of 1%), as determined by the Administrative Agent
to be equal to the rate per annum reported on display screen designated Page
3750 on Telerate Access Service (or such other display screen as may replace
Page 3750 on Telerate Access Service) at approximately 11:00 a.m. (London time)
(or as soon thereafter as practicable) on the date two Business Days prior to
the first day of such Interest Period for Dollar deposits in the London
interbank market having a term comparable to such Interest Period. If Telerate
Access Service is not available on such second Business Day prior to the
commencement of an Interest Period, the Eurodollar Base Rate for such Interest
Period shall equal the
Credit Agreement
----------------
-5-
<PAGE>
rate per annum (rounded upwards, if necessary, to the nearest 1/16 of 1%) quoted
by Chase at approximately 11:00 a.m. (London time) (or as soon thereafter as
practicable) on the date that two Business Days prior to the first day of such
Interest Period for the offering by Chase to leading banks in the London
interbank market of Dollar deposits having a term comparable to such Interest
Period and in an amount comparable to the principal amount of the Eurodollar
Loan to be made by Chase for such Interest Period.
"Eurodollar Loans" shall mean Loans that bear interest at rates based
----------------
upon the Eurodollar Rate.
"Eurodollar Rate" shall mean, for any Eurodollar Loan for any Interest
---------------
Period therefor, a rate per annum (rounded upwards, if necessary, to the nearest
1/100 of 1%) determined by the Administrative Agent to be equal to the quotient
of (a) the Eurodollar Base Rate for such Eurodollar Loan for such Interest
Period divided by (b) the sum of (i) 1 minus (ii) the Reserve Requirement for
---------- -----
such Eurodollar Loan for such Interest Period.
"Event of Default" shall have the meaning assigned to such term in
----------------
Section 9 hereof.
"Existing Commitment Termination Date" shall have the meaning assigned
------------------------------------
to such term in Section 2.08 hereof.
"Existing Institutional Holder" shall mean Minnesota Power & Light
-----------------------------
Company, Constellation Investments, Inc., J.P. Morgan & Co., and their
respective Subsidiaries and Affiliates.
"Federal Funds Rate" shall mean, for any day, the rate per annum
------------------
(rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the
weighted average of the rates on overnight Federal funds transactions with
members of the Federal Reserve System arranged by Federal funds brokers on such
day, as published by the Federal Reserve Bank of New York on the Business Day
next succeeding such day, provided that (a) if the day for which such rate is to
--------
be determined is not a Business Day, the Federal Funds Rate for such day shall
be such rate on such transactions on the next preceding Business Day as so
published on the next succeeding Business Day and (b) if such rate is not so
published for any Business Day, the Federal Funds Rate for such Business Day
shall be the average rate charged to Chase on such Business Day on such
transactions as reasonably determined by the Administrative Agent.
"Fitch" shall mean Fitch Investors Service, L.P., or any successor
-----
thereto.
Credit Agreement
----------------
-6-
<PAGE>
"Funded Debt" shall mean Indebtedness of the Company and its
-----------
Subsidiaries which by its terms becomes payable more than one year from the date
of origination thereof or which is renewable at the option of the Company or any
of its Subsidiaries beyond one year from the date of such origination.
"GAAP" shall mean the generally accepted accounting principles which,
----
in accordance with Section 1.02(a) hereof, are to be used in preparing financial
statements on the basis of which are to be made the calculations for purposes of
determining compliance with the financial covenants in this Agreement.
"Guarantee" shall mean a guarantee, an endorsement, a contingent
---------
agreement to purchase or to furnish funds for the payment or maintenance of, or
otherwise to be or become contingently liable under or with respect to, the
Indebtedness, other obligations, net worth, working capital or earnings of any
Person, or a guarantee of the payment of dividends or other distributions upon
the stock or equity interests of any Person, or an agreement to purchase, sell
or lease (as lessee or lessor) Property, products, materials, supplies or
services primarily for the purpose of enabling a debtor to make payment of such
debtor's obligations or an agreement to assure a creditor against loss, and
including, without limitation, causing a bank or other financial institution to
issue a letter of credit or other similar instrument for the benefit of another
Person, but excluding endorsements for collection or deposit in the ordinary
course of business; provided that the term Guarantee shall not include (i) any
--------
financial guaranty insurance, credit insurance, mortgage insurance or residual
value insurance (or any reinsurance of the same), or similar or related
products, issued by any Insurance Subsidiary in the ordinary course of its
business or (ii) guarantees issued by the Company to support insurance products
referred to in clause (i) above. The terms "Guarantee" and "Guaranteed" used as
--------- ----------
a verb shall have a correlative meaning.
"Indebtedness" shall mean, for any Person: (a) obligations created,
------------
issued or incurred by such Person for borrowed money (whether by loan, the
issuance and sale of debt securities or the sale of Property to another Person
subject to an understanding or agreement, contingent or otherwise, to repurchase
such Property from such Person); (b) all Redeemable Preferred Stock issued by
such Person; (c) obligations of such Person to pay the deferred purchase or
acquisition price of Property or services, other than trade accounts payable
(other than for borrowed money) arising, and accrued expenses incurred, in the
ordinary course of business so long as such trade accounts payable are payable
within 90 days of the date the respective goods are delivered or the respective
services are rendered;
Credit Agreement
----------------
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<PAGE>
(d) Indebtedness of others secured by a Lien on the Property of such Person,
whether or not the respective Indebtedness so secured has been assumed by such
Person; (e) obligations (contingent or otherwise) of such Person in respect of
letters of credit, bankers' acceptances or similar instruments issued or
accepted by banks and other financial institutions for account of such Person;
(f) Capital Lease Obligations of such Person; and (g) Guarantees by such Person
of Indebtedness of others; provided that the term Indebtedness shall not include
--------
(i) insurance policies, guarantees and other instruments issued or sold in the
ordinary course of the insurance business of any Insurance Subsidiary, (ii)
liabilities or obligations arising in the ordinary course of the investment
activities of any Insurance Subsidiary that have a maturity of 90 days or less,
(iii) obligations in respect of letters of credit issued for account of any
Insurance Subsidiary as part of a reinsurance arrangement consistent with
industry practices and in the ordinary course of business and (iv) accrued
profit commissions.
"Indenture" shall mean the Indenture dated as of November 1, 1992,
---------
between the Company and Morgan Guaranty Trust Company of New York, as in effect
on the date hereof providing for the issuance of the Debentures.
"Insurance Subsidiaries" shall mean CRC, Capital Mortgage, Capital
----------------------
Mortgage Bermuda and Capital Credit and any other Subsidiary of the Company that
is licensed to do an insurance business by an Applicable Insurance Regulatory
Authority.
"Interest Coverage Ratio" shall mean, for any period, the ratio of (a)
-----------------------
EBIT for such period to (b) Interest Expense for such period.
"Interest Expense" shall mean, for any period, the sum, for the
----------------
Company and its Subsidiaries (determined on a consolidated basis without
duplication in accordance with GAAP), of the following: (a) all interest in
respect of Indebtedness accrued or capitalized during such period (whether or
not actually paid during such period) plus (b) the net amounts payable (or minus
---- -----
the net amounts receivable) under Interest Rate Protection Agreements accrued
during such period (whether or not actually paid or received during such
period).
"Interest Period" shall mean (a) with respect to any Eurodollar Loan,
---------------
each period commencing on the date such Loan is made or Converted from a Base
Rate Loan or, in the case of a Term Loan, the last day of the next preceding
Interest Period for such Loan and ending on the numerically corresponding day in
the first, second or third calendar month thereafter, as the Company
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----------------
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<PAGE>
may select as provided in Section 4.05 hereof, except that each Interest Period
that commences on the last Business Day of a calendar month (or on any day for
which there is no numerically corresponding day in the appropriate subsequent
calendar month) shall end on the last Business Day of the appropriate subsequent
calendar month; and (b) with respect to any Base Rate Loan, the period
commencing on the date such Base Rate Loan is made or Converted from a
Eurodollar Loan or, in the case of a Term Loan, the last day of the next
preceding Interest Period for such Base Rate Loan and ending on (i) the earlier
of the first Quarterly Date thereafter or the Commitment Termination Date (in
the case of a Revolving Credit Loan) or (ii) the next Principal Payment Date (in
the case of a Term Loan). Notwithstanding the foregoing: (i) the Company may
not select any Interest Period for any Revolving Credit Loan that ends after the
Commitment Termination Date; (ii) no Interest Period for any Series of Term
Loans may commence before and end after any Principal Payment Date for such
Series of Term Loans unless, after giving effect thereto, the aggregate
principal amount of Term Loans of such Series having Interest Periods that end
after such Principal Payment Date shall be equal to or less than the aggregate
principal amount of such Term Loans scheduled to be outstanding after giving
effect to the payments of principal required to be made on such Principal
Payment Date; and (iii) each Interest Period that would otherwise end on a day
which is not a Business Day shall end on the next succeeding Business Day (or,
if such next succeeding Business Day falls in the next succeeding calendar
month, on the next preceding Business Day).
"Interest Rate Protection Agreement" shall mean, for any Person, an
----------------------------------
interest rate swap, cap or collar agreement or similar arrangement between such
Person and one or more financial institutions providing for the transfer or
mitigation of interest risks either generally or under specific contingencies.
"Investment" shall mean, for any Person: (a) the acquisition (whether
----------
for cash, Property, services or securities or otherwise) of capital stock,
bonds, notes, debentures, partnership or other ownership interests or other
securities of any other Person or any agreement to make any such acquisition
(including, without limitation, any "short sale" or any sale of any securities
at a time when such securities are not owned by the Person entering into such
short sale); (b) the making of any deposit with, or advance, loan or other
extension of credit to, any other Person (including the purchase of Property
from another Person subject to an understanding or agreement, contingent or
otherwise, to resell such Property to such Person, but excluding any such
advance, loan or extension of credit having a term not exceeding 90 days
representing the purchase price of inventory or supplies sold by such Person in
the ordinary course of business)
Credit Agreement
----------------
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<PAGE>
and (without duplication) the entering into of any commitment to deposit funds
with, advance or lend funds to or otherwise extend credit to such Person; (c)
the entering into of any Guarantee of Indebtedness of any other Person; or (d)
the entering into of any Interest Rate Protection Agreement; provided that the
term "Investment" shall not include (i) the ownership interest of the Company
and its Subsidiaries in the equity of any Subsidiary of the Company or (ii) any
capital contribution or loan by the Company or by any Wholly Owned Subsidiary of
the Company to the Company or to any Wholly Owned Subsidiary of the Company.
"Lien" shall mean, with respect to any Property, any mortgage, lien,
----
pledge, charge, security interest or encumbrance of any kind in respect of such
Property. For purposes of this Agreement and the other Basic Documents, a
Person shall be deemed to own subject to a Lien any Property that it has
acquired or holds subject to the interest of a vendor or lessor under any
conditional sale agreement, capital lease or other title retention agreement
(other than an operating lease) relating to such Property.
"Loans" shall mean the Revolving Credit Loans and the Term Loans.
-----
"Majority Banks" shall mean Banks having more than 50% of the
--------------
aggregate amount of the Commitments or, if the Commitments shall have
terminated, Banks holding more than 50% of the aggregate unpaid principal amount
of the Loans.
"Margin Stock" shall mean "margin stock" within the meaning of
------------
Regulations U and X.
"Material Adverse Effect" shall mean a material adverse effect on (a)
-----------------------
the Property, business, operations, financial condition, liabilities or
capitalization of the Company and its Subsidiaries taken as a whole, (b) the
ability of the Company to perform its obligations under any of the Basic
Documents, (c) the validity or enforceability of any of the Basic Documents, (d)
the rights and remedies of the Banks and the Administrative Agent under any of
the Basic Documents or (e) the timely payment of the principal of or interest on
the Loans or other amounts payable in connection therewith.
"Material Subsidiary" shall mean all Subsidiaries of the Company other
-------------------
than Credit Re Corporation, Capital Credit, Capital Re Management Corporation
and Capital Title Reinsurance Company.
"Moody's" shall mean Moody's Investors Service, Inc., or any successor
-------
thereto.
Credit Agreement
----------------
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<PAGE>
"Multiemployer Plan" shall mean a multiemployer plan defined as such
------------------
in Section 3(37) of ERISA to which contributions have been made by the Company
or any ERISA Affiliate and which is covered by Title IV of ERISA.
"Net Worth" shall mean, as at any date, the sum, for the Company and
---------
its Subsidiaries (determined on a consolidated basis without duplication in
accordance with GAAP), of the following:
(a) the amount of capital stock (other than any Redeemable Preferred
Stock), plus
----
(b) the amount of additional paid-in capital and retained earnings
(or, in the case of a retained earnings deficit, minus the amount of such
-----
deficit), minus
-----
(c) the amount of net unrealized gain on fixed maturity securities
available for sale (or, in the case of a net unrealized loss, plus the
----
amount of such loss).
"Notes" shall mean the Revolving Credit Notes and the Term Loan Notes.
-----
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
----
entity succeeding to any or all of its functions under ERISA.
"Person" shall mean any individual, corporation, company, voluntary
------
association, partnership, joint venture, trust, unincorporated organization or
government (or any agency, instrumentality or political subdivision thereof).
"Plan" shall mean an employee benefit or other plan established or
----
maintained by the Company or any ERISA Affiliate and that is covered by Title IV
of ERISA, other than a Multiemployer Plan.
"Post-Default Rate" shall mean, in respect of any principal of any
-----------------
Loan or any other amount under this Agreement, any Note or any other Basic
Document that is not paid when due (whether at stated maturity, by acceleration,
by optional or mandatory prepayment or otherwise), a rate per annum during the
period from and including the due date to but excluding the date on which such
amount is paid in full equal to 2% plus the Base Rate as in effect from time to
----
time (provided that, if the amount so in default is principal of a Loan and the
--------
due date thereof is a day other than the last day of the Interest Period
therefor, the "Post-Default Rate" for such principal shall be, for the period
from and including such due date to but excluding the last
Credit Agreement
----------------
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<PAGE>
day of such Interest Period, the greater of (i) 2% plus the interest rate for
----
such Loan as provided in Section 3.02(b) hereof or (ii) 2% plus the Base Rate as
----
in effect from time to time and, thereafter, the rate provided for above in this
definition).
"Prime Rate" shall mean the rate of interest from time to time
----------
announced by Chase at the Principal Office as its prime commercial lending rate.
"Principal Office" shall mean the principal office of Chase, located
----------------
on the date hereof at 270 Park Avenue, New York, New York 10017.
"Principal Payment Date" shall have the meaning assigned to such term
----------------------
in Section 3.01(b) hereof.
"Property" shall mean any right or interest in or to property of any
--------
kind whatsoever, whether real, personal or mixed and whether tangible or
intangible.
"Quarterly Dates" shall mean the last Business Day of each March,
---------------
June, September and December in each year, the first of which shall be the first
such day after the date of this Agreement.
"Rating" shall mean, with respect to any Insurance Subsidiary, the
------
claims-paying rating for such Insurance Subsidiary assigned by Moody's or S&P.
"Redeemable Preferred Stock" shall mean, for any Person, all preferred
--------------------------
or preference stock issued by such Person that is by its terms mandatorily
redeemable, or is redeemable at the option of the holder, within 20 years of its
date of issuance.
"Regulation A", "Regulation D", "Regulation U" and "Regulation X"
------------ ------------ ------------ ------------
shall mean, respectively, Regulation A, Regulation D, Regulation U and
Regulation X of the Board of Governors of the Federal Reserve System (or any
successor), as the same may be modified and supplemented and in effect from time
to time.
"Regulatory Change" shall mean, with respect to any Bank, any change
-----------------
after the date of this Agreement in Federal, state or foreign law or regulations
(including, without limitation, Regulation D) or the adoption or making after
such date of any interpretation, directive or request applying to a class of
banks including such Bank of or under any Federal, state or foreign law or
regulations (whether or not having the force of
Credit Agreement
----------------
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<PAGE>
law and whether or not failure to comply therewith would be unlawful) by any
court or governmental or monetary authority charged with the interpretation or
administration thereof.
"Reserve Requirement" shall mean, for any Interest Period for any
-------------------
Loan, the average maximum rate at which reserves (including, without limitation,
any marginal, supplemental or emergency reserves) are required to be maintained
during such Interest Period under Regulation D by member banks of the Federal
Reserve System in New York City with deposits exceeding one billion Dollars
against "Eurocurrency liabilities" (as such term is used in Regulation D).
Without limiting the effect of the foregoing, the Reserve Requirement shall
include any other reserves required to be maintained by such member banks by
reason of any Regulatory Change with respect to (i) any category of liabilities
that includes deposits by reference to which the Eurodollar Base Rate is to be
determined as provided in the definition of "Eurodollar Base Rate" in this
Section 1.01 or (ii) any category of extensions of credit or other assets that
includes the Loans.
"Restricted Payment" shall mean dividends (in cash, Property or
------------------
obligations) on, or other payments or distributions on account of, or the
setting apart of money for a sinking or other analogous fund for, or the
purchase, redemption, retirement or other acquisition of, any shares of any
class of stock of the Company or of any warrants, options or other rights to
acquire the same (or to make any payments to any Person, such as "phantom stock"
payments, where the amount thereof is calculated with reference to the fair
market or equity value of the Company or any of its Subsidiaries), but excluding
(i) dividends payable solely in shares of common stock of the Company and (ii)
cash payments made pursuant to the Company's Performance Share Plan (Effective
July 1, 1996), as amended from time to time, or any similar employee
compensation plan.
"Revolving Credit Loans" shall mean the loans provided for by Section
----------------------
2.01(a) hereof.
"Revolving Credit Notes" shall mean the promissory notes provided for
----------------------
by Section 2.06(a) hereof and all promissory notes delivered in substitution or
exchange therefor, in each case as the same shall be modified and supplemented
and in effect from time to time.
"SEC ICA Regulations" shall mean the Regulations issued by the
-------------------
Securities and Exchange Commission under the Investment Company Act of 1940, as
amended, as in effect on the date hereof.
Credit Agreement
----------------
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<PAGE>
"Series" shall have the meaning assigned to such term in Section 1.03
------
hereof.
"S&P" shall mean Standard & Poor's Ratings Services, a division of The
---
McGraw Hill Companies, Inc., or any successor thereto.
"Statutory Statement" shall mean, as to any Insurance Subsidiary, a
-------------------
statement of the condition and affairs of such Insurance Subsidiary, prepared in
accordance with statutory accounting practices required or permitted by the
Applicable Insurance Regulatory Authority, and filed with the Applicable
Insurance Regulatory Authority.
"Subsidiary" shall mean, with respect to any Person, any corporation,
----------
partnership or other entity of which at least a majority of the securities or
other ownership interests having by the terms thereof ordinary voting power to
elect a majority of the board of directors or other persons performing similar
functions of such corporation, partnership or other entity (irrespective of
whether or not at the time securities or other ownership interests of any other
class or classes of such corporation, partnership or other entity shall have or
might have voting power by reason of the happening of any contingency) is at the
particular time in question directly or indirectly owned or controlled by such
Person or one or more Subsidiaries of such Person or by such Person and one or
more Subsidiaries of such Person.
"Tangible Net Worth" shall mean, as at any date, the sum for the
------------------
Company and its Subsidiaries (determined on a consolidated basis without
duplication in accordance with GAAP), of the following:
(a) Net Worth, minus
-----
(b) the sum of the following (without duplication of deductions in
respect of items already deducted in arriving at Net Worth): cost of
treasury shares and the book value of all assets which should be classified
as intangibles but in any event including goodwill, minority interests,
trademarks, trade names, copyrights, patents and franchises, unamortized
debt discount and expense, deferred acquisition costs and any write-up in
the book value of assets resulting from a revaluation thereof subsequent to
December 31, 1995.
"Term Loan Notes" shall mean the promissory notes provided for by
---------------
Section 2.06(b) hereof and all promissory notes delivered in substitution or
exchange therefor, in each case as
Credit Agreement
----------------
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<PAGE>
the same shall be modified and supplemented and in effect from time to time.
"Term Loans" shall mean the loans provided for by Section 2.01(b)
----------
hereof.
"Total Capitalization" shall mean the sum of (a) Funded Debt, (b) the
--------------------
CRLLC Preferred Securities and (c) Net Worth.
"Type" shall have the meaning assigned to such term in Section 1.03
----
hereof.
"Voting Stock" shall mean, at any date, the capital stock of any class
------------
or classes of a corporation having general voting power under ordinary
circumstances to elect the board of directors of such corporation, or persons
performing similar functions (irrespective of whether or not at the time stock
or other securities of any other class or classes shall have or might have
special voting power or rights by reason of the happening of any contingency).
"Wholly-Owned Subsidiary" shall mean, with respect to any Person, any
-----------------------
Subsidiary of such Person all of the equity securities or other ownership
interests (other than, in the case of a corporation, directors' qualifying
shares) of which are owned or controlled by such Person or one or more Wholly-
Owned Subsidiaries of such Person.
1.02 Accounting Terms and Determinations.
-----------------------------------
(a) Except as otherwise expressly provided herein, (i) all accounting
terms used herein shall be interpreted, (ii) all financial statements and all
certificates and reports as to financial matters required to be delivered to the
Banks hereunder shall (unless otherwise disclosed to the Banks in writing at the
time of delivery thereof in the manner described in subsection (b) below) be
prepared and (iii) all calculations made for the purposes of determining
compliance with this Agreement shall (except as otherwise expressly provided
herein) be made in accordance with or by application of generally accepted
accounting principles or statutory accounting practices, as the case may be,
applied on a basis consistent with those used in the preparation of the most
recent financial statements furnished to the Banks hereunder (or, prior to the
delivery of the first financial statements under Section 8.01 hereof, the
financial statements as at December 31, 1995 referred to in Section 7.02 hereof)
unless (x) the Company shall notify the Banks of its objection thereto at the
time of delivery of any financial statements pursuant to Section 8.01 hereof or
(y) the Majority Banks shall notify the Company (through the
Credit Agreement
----------------
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<PAGE>
Administrative Agent) of their objection within 30 days after the delivery of
any such financial statements, in either of which events such interpretations,
statements, certificates, reports and calculations shall be made in accordance
with, or by application of, generally accepted accounting principles or
statutory accounting practices, as the case may be, on a basis consistent with
those used in the preparation of the most recent financial statements as to
which no such objection shall have been made (or, prior to the delivery of the
first financial statements under Section 8.01 hereof, the financial statements
as at December 31, 1995 referred to in Section 7.02 hereof).
(b) The Company shall deliver to the Banks at the same time as the
delivery of any annual or quarterly financial statement under Section 8.01
hereof (i) an identification of any material variation between the application
of accounting principles employed in the preparation of such statement and the
application of accounting principles employed in the preparation of the next
preceding annual or quarterly financial statements as to which no objection has
been made in accordance with the last sentence of paragraph (a) above and (ii)
within five Business Days of the request of the Administrative Agent, reasonable
estimates of the difference between such statements arising as a consequence
thereof.
(c) The Company will not, and will not permit any of its Subsidiaries
to, change the last day of its fiscal year from December 31 of each year, or the
last days of the first three fiscal quarters in each of its fiscal years from
March 31, June 30 and September 30 of each year, respectively.
1.03 Classes; Series; Types. Loans hereunder are distinguished by
----------------------
"Class" and by "Type". The "Class" of a Loan refers to whether such Loan is a
Revolving Credit Loan or a Term Loan, each of which constitutes, respectively, a
"Class" of Loan. The "Type" of a Loan refers to whether such Loan is a Base
Rate Loan or a Eurodollar Loan, each of which constitutes a "Type" of Loan.
Loans are also distinguished by "Series". The Loans of any one Class made on
the occasion of any borrowing constitute a "Series" of Loans.
Section 2. Commitments, Loans, Notes and Prepayments.
-----------------------------------------
2.01 Loans.
-----
(a) Revolving Credit Loans. Each Bank severally agrees, on the terms
----------------------
and conditions of this Agreement, at the request of the Company, to make
revolving credit loans to the Company in Dollars during the period from and
including the date hereof to but not including the Commitment Termination Date
in an
Credit Agreement
----------------
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<PAGE>
aggregate principal amount at any one time outstanding up to but not exceeding
the amount of the Commitment of such Bank as in effect from time to time (each
such revolving credit loan being herein called a "Revolving Credit Loan" and
---------------------
collectively the "Revolving Credit Loans"); provided that in no event shall the
----------------------
aggregate unpaid principal amount of all Revolving Credit Loans, together with
the aggregate unpaid principal amount of all Term Loans, exceed the aggregate
amount of the Commitments as in effect from time to time. Subject to the terms
and conditions of this Agreement, during such period the Company may borrow,
repay and reborrow the amount of the Commitments.
(b) Term Loans. Each Bank severally agrees, on the terms and
----------
conditions of this Agreement, at the request of the Company, to make, on the
maturity of any Revolving Credit Loan made by such Bank, a term loan (each such
term loan being herein called a "Term Loan" and collectively the "Term Loans")
--------- ----------
to the Company in Dollars in a principal amount up to but not exceeding the
unpaid principal balance of such Revolving Credit Loan, the proceeds of which
Term Loan shall be applied (and the Company hereby authorizes and instructs such
Bank to apply such proceeds) to refinance, in whole or in part, the unpaid
principal balance of such Revolving Credit Loan; provided that the Banks shall
not be obligated to make any Series of Term Loans unless the aggregate principal
amount of such Term Loans is equal to $5,000,000 or an integral multiple of
$500,000 in excess thereof.
(c) Limit on Revolving Credit Loans. No more than five separate
-------------------------------
Revolving Credit Loans from each Bank may be outstanding at any one time.
2.02 Borrowings. The Company shall give the Administrative Agent
----------
(which shall promptly notify the Banks) notice of each borrowing hereunder as
provided in Section 4.05 hereof. Not later than 2:00 p.m. New York time on the
date specified for each borrowing of Revolving Credit Loans hereunder, each Bank
shall make available the amount of the Revolving Credit Loan to be made by it on
such date to the Administrative Agent, at an account designated by the
Administrative Agent, in Dollars and immediately available funds, for account of
the Company. The amount so received by the Administrative Agent shall, subject
to the terms and conditions of this Agreement, be made available by the
Administrative Agent to the Company by depositing the same, in immediately
available funds, in an account of the Company maintained with Chase at the
Principal Office designated by the Company.
Credit Agreement
----------------
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<PAGE>
2.03 Changes in Aggregate Amount of Commitments.
------------------------------------------
(a) The aggregate amount of the Commitments shall be automatically
reduced to zero on the Commitment Termination Date.
(b) The Company shall have the right at any time or from time to time
to terminate in whole, or to reduce in part, the aggregate unused amount of the
Commitments; provided that (x) the Company shall give notice of each such
--------
termination or reduction as provided in Section 4.05 hereof and (y) each partial
reduction shall be in an integral multiple of $1,000,000.
(c) The Commitments, once terminated or reduced, may not be
reinstated.
2.04 Commitment Fee. The Company shall pay to the Administrative
--------------
Agent for account of each Bank a commitment fee on the daily average unused
amount of such Bank's Commitment (for which purpose the aggregate unpaid
principal amount of the Revolving Credit Loans and Term Loans outstanding shall
be deemed to constitute a use of the Commitments), for the period from and
including the date of this Agreement to but not including the earlier of the
Commitment Termination Date and the date such Commitment is otherwise
terminated, at a rate per annum equal to 1/8 of 1%. Accrued commitment fee
shall be payable on each Quarterly Date and on the earlier of the Commitment
Termination Date and the date the Commitment is otherwise terminated, as the
case may be.
2.05 Several Obligations; Remedies Independent. The failure of any
-----------------------------------------
Bank to make any Loan to be made by it on the date specified therefor shall not
relieve any other Bank of its obligation to make its Loan on such date, but
neither any Bank nor the Administrative Agent shall be responsible for the
failure of any other Bank to make a Loan to be made by such other Bank, and no
Bank shall have any obligation to the Administrative Agent or any other Bank for
the failure by such Bank to make any Loan required to be made by such Bank. The
amounts payable by the Company at any time hereunder and under the Notes to each
Bank shall be a separate and independent debt and each Bank shall be entitled to
protect and enforce its rights arising out of this Agreement and the Notes, and
it shall not be necessary for any other Bank or the Administrative Agent to
consent to, or be joined as an additional party in, any proceedings for such
purposes.
2.06 Notes.
-----
(a) The Revolving Credit Loans made by each Bank shall be evidenced
by a single promissory note of the Company
Credit Agreement
----------------
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<PAGE>
substantially in the form of Exhibit A-1 hereto, dated the date hereof, payable
to such Bank in a principal amount equal to the amount of its Commitment as
originally in effect and otherwise duly completed.
(b) Each Term Loan made by each Bank shall be evidenced by a separate
promissory note of the Company substantially in the form of Exhibit A-2 hereto,
dated the date of such Term Loan, payable to such Bank in a principal amount
equal to the amount of such Term Loan and otherwise duly completed.
(c) The date, amount, interest rate and duration of Interest Period
of each Revolving Credit Loan made by each Bank to the Company, and each payment
made on account of the principal thereof, shall be recorded by such Bank on its
books and, prior to any transfer of the Revolving Credit Note evidencing the
Revolving Credit Loans held by it, endorsed by such Bank on the schedule
attached to such Revolving Credit Note or any continuation thereof; provided
--------
that the failure of such Bank to make any such recordation or endorsement shall
not affect the obligations of the Company to make a payment when due of any
amount owing hereunder or under such Revolving Credit Note in respect of the
Revolving Credit Loans evidenced by such Revolving Credit Note.
(d) No Bank shall be entitled to have its Notes subdivided, by
exchange for promissory notes of lesser denominations or otherwise, except in
connection with a permitted assignment of all or any portion of such Bank's
relevant Commitment, Loans and Notes pursuant to Section 11.06(b) hereof.
2.07 Optional Prepayments of Loans. Subject to Section 4.04 hereof,
-----------------------------
the Company shall have the right to prepay any Series of Revolving Credit Loans
or any Series of Term Loans, in whole at any time or in part from time to time,
provided that:
- --------
(a) the Company shall give the Administrative Agent notice of each
such prepayment as provided in Section 4.05 hereof (and, upon the
prepayment date specified in any such notice of prepayment, the amount to
be prepaid shall become due and payable hereunder);
(b) the Company shall simultaneously pay interest on any principal so
prepaid accrued to the date of such prepayment;
(c) if any Eurodollar Loan is prepaid on any day other than the last
day of the Interest Period therefor, the
Credit Agreement
----------------
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<PAGE>
Company shall simultaneously pay any amounts required by Section 5.04
hereof in respect of such prepayment; and
(d) prepayments of any Series of Term Loans shall be in minimum
amounts of $1,000,000 and shall be applied ratably to the outstanding
installments of such Series of Term Loans.
2.08 Extension of Commitment Termination Date. The Company may, by
----------------------------------------
notice to the Administrative Agent (which shall promptly deliver a copy thereof
to each of the Banks) not more than 90 days, nor fewer than 60 days, prior to
the Commitment Termination Date then in effect hereunder (the "Existing
--------
Commitment Termination Date"), request that the Banks extend the Commitment
- ---------------------------
Termination Date for an additional 360 day period. If each Bank, acting in its
sole discretion, by notice to the Company and Administrative Agent given on the
date (and only on the date) 30 days prior to the Existing Commitment Termination
Date (provided, if such date is not a Business Day, then such notice date shall
by the next succeeding Business Day) (the "Consent Date"), agrees to such
------------
request, then effective as of the Existing Commitment Termination Date, the
Commitment Termination Date shall be extended to the date falling 360 days after
the Consent Date (provided, if such date is not a Business Day, then such
Commitment Termination Date as so extended shall be the next preceding Business
Day); provided that such extension shall not be effective unless (i) no Default
shall have occurred and be continuing on the date of the notice requesting such
extension or on the Existing Commitment Termination Date and (ii) each of the
representations and warranties of the Company in Section 7 hereof shall be true
and correct on and as of each of the date of such notice and the Existing
Commitment Termination Date with the same force and effect as if made on and as
of each such date (or, if any such representation or warranty is expressly
stated to have been made as of a specific date, as of such specific date).
2.09 Conversion or Continuations of Loans. Subject to Section 4.04
------------------------------------
hereof, the Company shall have the right to Convert Loans of one Type into Loans
of another Type or to Continue Term Loans of one Type as Term Loans of the same
Type at any time or from time to time; provided that (a) the Company shall give
--------
the Administrative Agent notice of each such Conversion or Continuation as
provided in Section 4.05 hereof; (b) if Eurodollar Loans are Converted into Base
Rate Loans on any day other than the last day of the Interest Period therefor,
the Company shall simultaneously pay any amounts required by Section 5.04 hereof
in respect of such Conversion; and (c) the Company shall simultaneously pay
interest on the principal of any Loan Converted from a Loan of one Type to a
Loan of another Type accrued to the date of such Conversion.
Credit Agreement
----------------
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<PAGE>
Section 3. Payments of Principal and Interest.
----------------------------------
3.01 Repayment of Loans.
------------------
(a) The Company hereby promises to pay to the Administrative Agent
for account of each Bank the outstanding principal amount of each of such Bank's
Revolving Credit Loans, and each Revolving Credit Loan shall mature, on the last
day of the Interest Period therefor.
(b) The Company hereby promises to pay to the Administrative Agent
for account of the Banks the aggregate principal amount of each Series of Term
Loans in sixteen equal consecutive quarterly installments commencing on the date
three months after the date of the making of such Series of Term Loans and
thereafter on the quarterly anniversary dates of the date of the making of such
Series of Term Loans (each a "Principal Payment Date"); provided that, if the
----------------------
date of the making of such Series of Term Loans is the last Business Day of a
calendar month (or on any day for which there is no numerically corresponding
date in the appropriate subsequent calendar month) the payment date shall be the
last Business Day of the appropriate subsequent calendar month; and provided
that, if any Principal Payment Date would fall on a day other than a Business
Day, such Principal Payment Date shall be the next succeeding Business Day (or,
if such next succeeding Business Day falls in the next succeeding calendar
month, on the next preceding Business Day).
3.02 Interest. The Company hereby promises to pay to the
--------
Administrative Agent for account of each Bank interest on the unpaid principal
amount of each Loan made by such Bank for the period from and including the date
of such Loan to but excluding the date such Loan shall be paid in full, at the
following rates per annum:
(a) during such periods as such Loan is a Base Rate Loan, for each
Interest Period relating thereto, the Base Rate for such Loan; and
(b) during such periods as such Loan is a Eurodollar Loan, for each
Interest Period relating thereto, the Eurodollar Rate for such Loan for
such Interest Period plus the Applicable Margin;
----
Notwithstanding the foregoing, the Company hereby promises to pay to the
Administrative Agent for account of each Bank interest at the applicable Post-
Default Rate on any principal of any Loan made by such Bank and on any other
amount payable by the Company hereunder or under the Notes held by such Bank to
or for account of such Bank, which shall not be paid in full when due (whether
Credit Agreement
----------------
-21-
<PAGE>
at stated maturity, by acceleration, by mandatory prepayment or otherwise), for
the period from and including the due date thereof to but excluding the date the
same is paid in full. Accrued interest on each Loan shall be payable (i) on the
last day of each Interest Period therefor and, if such Interest Period is longer
than three months, at three-month intervals following the first day of such
Interest Period, and (ii) upon the payment or prepayment or Conversion thereof
(but only on the principal amount so paid or prepaid or Converted), except that
interest payable at the Post-Default Rate shall be payable from time to time on
demand of the Banks for whose account such interest is payable. Promptly after
the determination of any interest rate provided for herein or any change
therein, the Administrative Agent shall give notice thereof to the Banks to
which such interest is payable and to the Company.
Section 4. Payments; Pro Rata Treatment; Computations; Etc.
------------------------------------------------
4.01 Payments.
--------
(a) Except to the extent otherwise provided herein, all payments of
principal, interest and other amounts to be made by the Company under this
Agreement and the Notes, and, except to the extent otherwise provided therein,
all payments to be made by the Company under any other Basic Document, shall be
made in Dollars, in immediately available funds, without deduction, set-off or
counterclaim, to the Administrative Agent at an account designated by the
Administrative Agent with Chase at the Principal Office, not later than 2:00
p.m. New York time on the date on which such payment shall become due (each such
payment made after such time on such due date to be deemed to have been made on
the next succeeding Business Day).
(b) Any Bank for whose account any such payment is to be made may
(but shall not be obligated to) debit the amount of any such payment that is not
made by such time to any ordinary deposit account of the Company with such Bank
(with notice to the Company and the Administrative Agent).
(c) The Company shall, at the time of making each payment under this
Agreement or any Note for account of any Bank, specify to the Administrative
Agent (which shall notify the intended recipient(s) thereof) the Loans or other
amounts payable by the Company hereunder to which such payment is to be applied,
in which case such payment shall be, subject to Section 4.02 hereof, so applied
(and in the event that the Company fails to so specify, or if an Event of
Default has occurred and is continuing, such payment shall be, subject to said
Section 4.02, applied in payment of amounts due under this Agreement or any
Credit Agreement
----------------
-22-
<PAGE>
Note in such manner as is determined to be appropriate by the Majority Banks or,
if the Majority Banks fail to advise the Administrative Agent of their
determination promptly following a request from the Administrative Agent for
such a determination, by the Administrative Agent).
(d) Each payment received by the Administrative Agent under this
Agreement or any Note for account of any Bank shall be paid by the
Administrative Agent promptly to such Bank, in immediately available funds, for
account of such Bank's Applicable Lending Office for the Loan or other
obligation in respect of which such payment is made.
(e) If the due date of any payment under this Agreement or any Note
would otherwise fall on a day that is not a Business Day, such date shall be
extended to the next succeeding Business Day, and interest shall be payable on
any principal so extended for the period of such extension.
4.02 Pro Rata Treatment. Except to the extent otherwise provided
------------------
herein:
(a) the making, Conversion and Continuation of Loans of a particular
Class, Series and Type shall be made pro rata among the Banks according to
the amounts of their respective Commitments (in the case of making of
Loans) or their respective Loans of such Class, Series and Type (in the
case of Conversions and Continuations); and the then current Interest
Period of Loans of a particular Class, Series and Type shall be
coterminous;
(b) each payment or prepayment of principal of Loans of a particular
Class, Series and Type shall be made for account of the Banks pro rata in
accordance with the respective unpaid principal amounts of the Loans of
such Class, Series and Type held by the Banks;
(c) each payment of interest on Loans of a particular Class, Series
and Type shall be made for account of the Banks pro rata in accordance with
the amounts of interest on Loans of such Class and Series then due and
payable to the respective Banks; and
(d) each payment of commitment fee under Section 2.04 hereof shall be
made, and each termination or reduction of the amount of the Commitments
shall be applied to the Commitments of the Banks, pro rata according to the
respective amounts of the Commitments of the Banks.
Credit Agreement
----------------
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<PAGE>
4.03 Computations. Interest on Eurodollar Loans, Base Rate Loans for
------------
which the Base Rate is being calculated by reference to the Federal Funds Rate
and commitment fees shall be computed on the basis of a year of 360 days and
actual days elapsed (including the first day but excluding the last day)
occurring in the period for which payable; and interest on Base Rate Loans
(other than Base Rate Loans for which the Base Rate is being calculated by
reference to the Federal Funds Rate) shall be computed on the basis of a year of
365 or 366 days, as the case may be, and actual days elapsed (including the
first day but excluding the last day) occurring in the period for which payable.
4.04 Minimum Amounts. Each borrowing, Conversion and partial
---------------
prepayment of principal of Revolving Credit Loans shall be in an aggregate
amount equal to $2,500,000 or any integral multiple of $500,000 in excess
thereof. Each borrowing, or Conversion of Term Loans shall be in an aggregate
amount equal to $5,000,000 or any integral multiple of $500,000 in excess
thereof, and each partial prepayment of the principal of any Series of Term
Loans shall be in an aggregate amount at least equal to $1,000,000.
4.05 Certain Notices. Notices by the Company to the Administrative
---------------
Agent of terminations or reductions of Commitments, of borrowings, Conversions,
Continuations and optional prepayments of Loans and of the duration of Interest
Periods shall be irrevocable and shall be effective only if received by the
Administrative Agent not later than 1:00 New York time on (in the case of Base
Rate Loans), the same day as, and on (in the case of Eurodollar Loans and
termination or reduction of Commitments) the date that is three Business Days
prior to, the date of the relevant termination, reduction, borrowing,
Conversion, Continuation or prepayment or the first day of such Interest Period.
Each such notice of termination or reduction shall specify the amount
of the Commitments to be terminated or reduced. Each such notice of borrowing,
Conversion, Continuation or optional prepayment shall specify the Class, Series
and Type of Loans to be borrowed or prepaid, the amount (subject to Section 4.04
hereof) of each Loan to be borrowed, Converted, Continued or prepaid, the date
of borrowing Conversion, Continuation or optional prepayment (which shall be a
Business Day), and the duration of the Interest Period for such Loan. The
Administrative Agent shall promptly notify the Banks of the contents of each
such notice. In the event that the Company fails to select the duration of any
Interest Period for any Term Loan that is a Eurodollar Loan, within the time
period and
Credit Agreement
----------------
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<PAGE>
otherwise as provided in this Section 4.05, such Eurodollar Loan shall
automatically convert to a Base Rate Loan.
4.06 Non-Receipt of Funds by the Administrative Agent. Unless the
------------------------------------------------
Administrative Agent shall have been notified by a Bank or the Company (the
"Payor") prior to the date on which the Payor is to make payment to the
- ------
Administrative Agent of (in the case of a Bank) the proceeds of a Loan to be
made by such Bank hereunder or (in the case of the Company) a payment to the
Administrative Agent for account of one or more of the Banks hereunder (such
payment being herein called the "Required Payment"), which notice shall be
----------------
effective upon receipt, that the Payor does not intend to make the Required
Payment to the Administrative Agent, the Administrative Agent may assume that
the Required Payment has been made and may, in reliance upon such assumption
(but shall not be required to), make the amount thereof available to the
intended recipient(s) on such date; and, if the Payor has not in fact made the
Required Payment to the Administrative Agent, the recipient(s) of such payment
shall, on demand, repay to the Administrative Agent the amount so made available
together with interest thereon in respect of each day during the period
commencing on the date (the "Advance Date") such amount was so made available by
------------
the Administrative Agent until the date the Administrative Agent recovers such
amount at a rate per annum equal to the Federal Funds Rate for such day and, if
such recipient(s) shall fail promptly to make such payment, the Administrative
Agent shall be entitled to recover such amount, on demand, from the Payor,
together with interest as aforesaid, provided that if the recipient(s) shall
--------
fail to return, and the Payor shall fail to make, the Required Payment to the
Administrative Agent within three Business Days of the Advance Date, then the
Payor and the recipient(s) shall each be obligated to pay interest on the
Required Payment (but without duplication) as follows:
(a) if the Required Payment shall represent a payment to be made by
the Company to the Banks, the Company and the recipient(s) shall each be
obligated retroactively to the Advance Date to pay interest in respect of
the Required Payment at the Post-Default Rate (and, in case the
recipient(s) shall return the Required Payment to the Administrative Agent,
without limiting the obligation of the Company under Section 3.02 hereof to
pay interest to such recipient(s) at the Post-Default Rate in respect of
the Required Payment); and
(b) if the Required Payment shall represent proceeds of a Loan to be
made by the Banks to the Company, the Payor and the Company shall each be
obligated retroactively to the Advance Date to pay interest in respect of
the Required
Credit Agreement
----------------
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<PAGE>
Payment at the rate of interest provided for such Required Payment pursuant
to Section 3.02 hereof (and, in case the Company shall return the Required
Payment to the Administrative Agent, without limiting any claim the Company
may have against the Payor in respect of the Required Payment).
4.07 Sharing of Payments, Etc.
-------------------------
(a) The Company agrees that, in addition to (and without limitation
of) any right of set-off, banker's lien or counterclaim a Bank may otherwise
have, each Bank shall be entitled, at its option, to offset balances held by it
for account of the Company at any of its offices, in Dollars or in any other
currency, against any principal of or interest on any of such Bank's Loans or
any other amount payable to such Bank hereunder, that is not paid when due
(regardless of whether such balances are then due to the Company), in which case
it shall promptly thereafter notify the Company and the Administrative Agent
thereof, provided that such Bank's failure to give such notice shall not affect
--------
the validity thereof.
(b) If any Bank shall obtain payment of any principal of or interest
on any Loan of a particular Class and Series owing to it or payment of any other
amount under this Agreement or any other Basic Document through the exercise of
any right of set-off, banker's lien or counterclaim or similar right or
otherwise (other than through the Administrative Agent as provided herein), and,
as a result of such payment, such Bank shall have received a greater percentage
of the principal of or interest on the Loans of such Class and Series or such
other amounts then due hereunder or thereunder by the Company to such Bank than
the percentage received by any other Bank, it shall promptly purchase from such
other Banks participations in (or, if and to the extent specified by such Bank,
direct interests in) the Loans of such Class and Series or such other amounts,
respectively, owing to such other Banks (or in interest due thereon, as the case
may be) in such amounts, and make such other adjustments from time to time as
shall be equitable, to the end that all the Banks shall share the benefit of
such excess payment (net of any expenses that may be incurred by such Bank in
obtaining or preserving such excess payment) pro rata in accordance with the
unpaid principal of and/or interest on the Loans of such Class and Series or
such other amounts, respectively, owing to each of the Banks. To such end all
the Banks shall make appropriate adjustments among themselves (by the resale of
participations sold or otherwise) if such payment is rescinded or must otherwise
be restored.
Credit Agreement
----------------
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<PAGE>
(c) The Company agrees that any Bank so purchasing such a
participation (or direct interest) may exercise all rights of set-off, banker's
lien, counterclaim or similar rights with respect to such participation as fully
as if such Bank were a direct holder of Loans or other amounts (as the case may
be) owing to such Bank in the amount of such participation.
(d) Nothing contained herein shall require any Bank to exercise any
such right or shall affect the right of any Bank to exercise, and retain the
benefits of exercising, any such right with respect to any other indebtedness or
obligation of the Company. If, under any applicable bankruptcy, insolvency or
other similar law, any Bank receives a secured claim in lieu of a set-off to
which this Section 4.07 applies, such Bank shall, to the extent practicable,
exercise its rights in respect of such secured claim in a manner consistent with
the rights of the Banks entitled under this Section 4.07 to share in the
benefits of any recovery on such secured claim.
Section 5. Yield Protection, Etc.
----------------------
5.01 Additional Costs.
----------------
(a) The Company shall pay directly to each Bank from time to time
such amounts as such Bank may determine to be necessary to compensate such Bank
for any costs that such Bank determines are attributable to its making or
maintaining of any Eurodollar Loans or its obligation to make any Eurodollar
Loans hereunder, or any reduction in any amount receivable by such Bank
hereunder in respect of any Eurodollar Loans or such obligation (such increases
in costs and reductions in amounts receivable being herein called "Additional
----------
Costs"), resulting from any Regulatory Change that:
- -----
(i) changes the basis of taxation of any amounts payable to such Bank
under this Agreement or its Notes (other than taxes imposed on or measured
by the overall net income of such Bank or of its Applicable Lending Office
by the jurisdiction in which such Bank has its principal office or such
Applicable Lending Office); or
(ii) imposes or modifies any reserve, special deposit or similar
requirements (other than the Reserve Requirement utilized in the
determination of the Eurodollar Rate for such Loan) relating to any
extensions of credit or other assets of, or any deposits with or other
liabilities of, such Bank (including, without limitation, any of such Loans
or any deposits referred to in the definition of "Eurodollar Base Rate" in
Section 1.01 hereof), or any commitment of
Credit Agreement
----------------
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<PAGE>
such Bank hereunder (including, without limitation, the Commitment of such
Bank); or
(iii) imposes any other condition affecting this Agreement or its Notes
or its Commitment.
(b) Without limiting the effect of the provisions of paragraph (a) of
this Section 5.01, in the event that, by reason of any Regulatory Change, any
Bank either (i) incurs Additional Costs based on or measured by the excess above
a specified level of the amount of a category of deposits or other liabilities
of such Bank that includes deposits by reference to which the interest rate on
Eurodollar Loans is determined as provided in this Agreement or a category of
extensions of credit or other assets of such Bank that includes Eurodollar Loans
or (ii) becomes subject to restrictions on the amount of such a category of
liabilities or assets that it may hold, then, if such Bank so elects by notice
to the Company (with a copy to the Administrative Agent), the obligation of such
Bank to make or Continue, or to Convert Base Rate Loans into, Eurodollar Loans
hereunder shall be suspended until such Regulatory Change ceases to be in effect
(in which case the Loans theretofore made by such Bank shall bear interest at
the Base Rate from the last day of the then current Interest Period for such
Loans).
(c) Without limiting the effect of the foregoing provisions of this
Section 5.01 (but without duplication), the Company shall pay directly to each
Bank from time to time on request such amounts as such Bank may determine to be
necessary to compensate such Bank (or, without duplication, the bank holding
company of which such Bank is a subsidiary) for any costs that it determines are
attributable to the maintenance by such Bank (or any Applicable Lending Office
or such bank holding company), pursuant to any law or regulation or any
interpretation, directive or request (whether or not having the force of law and
whether or not failure to comply therewith would be unlawful) of any court or
governmental or monetary authority (i) following any Regulatory Change or (ii)
implementing any risk-based capital guideline or other requirement (whether or
not having the force of law and whether or not the failure to comply therewith
would be unlawful) hereafter issued by any government or governmental or
supervisory authority implementing at the national level the Basel Accord
(including, without limitation, the Final Risk-Based Capital Guidelines of the
Board of Governors of the Federal Reserve System (12 C.F.R. Part 208, Appendix
A; 12 C.F.R. Part 225, Appendix A) and the Final Risk-Based Capital Guidelines
of the Office of the Comptroller of the Currency (12 C.F.R. Part 3, Appendix
A)), of capital in respect of its Commitment(s) or Loans (such compensation to
include, without limitation, an amount equal to any reduction of the rate of
Credit Agreement
----------------
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<PAGE>
return on assets or equity of such Bank (or any Applicable Lending Office or
such bank holding company) to a level below that which such Bank (or any
Applicable Lending Office or such bank holding company) could have achieved but
for such law, regulation, interpretation, directive or request). For purposes
of this Section 5.01(c), "Basel Accord" shall mean the proposals for risk-based
------------
capital framework described by the Basel Committee on Banking Regulations and
Supervisory Practices in its paper entitled "International Convergence of
Capital Measurement and Capital Standards" dated July 1988, as amended, modified
and supplemented and in effect from time to time or any replacement thereof.
(d) Each Bank shall notify the Company of any event occurring after
the date of this Agreement entitling such Bank to compensation under paragraph
(a) or (c) of this Section 5.01 as promptly as practicable; provided that the
Company shall not be required to pay any amounts under this Section 5.01 to the
extent the amount requested to be paid is allocable to a period or date prior to
the date which is 45 days before the date of such notice by such Bank to the
Company. Each Bank will designate a different Applicable Lending Office for the
Loans of such Bank affected by such event if such designation will avoid the
need for, or reduce the amount of, such compensation and will not, in the sole
good faith opinion of such Bank, be disadvantageous to such Bank. Each Bank
will furnish to the Company a certificate setting forth in reasonable detail the
basis and amount of each request by such Bank for compensation under paragraph
(a) or (c) of this Section 5.01. Determinations and allocations by any Bank for
purposes of this Section 5.01 of the effect of any Regulatory Change pursuant to
paragraph (a) or (b) of this Section 5.01, or of the effect of capital
maintained pursuant to paragraph (c) of this Section 5.01, on its costs or rate
of return of maintaining Loans or its obligation to make Loans, or on amounts
receivable by it in respect of Loans, and of the amounts required to compensate
such Bank under this Section 5.01, shall be conclusive, provided that such
--------
determinations and allocations are made on a reasonable basis and are not
manifestly in error.
5.02 Limitation on Loans. Anything herein to the contrary
-------------------
notwithstanding, if, on or prior to the determination of any Eurodollar Base
Rate for any Interest Period:
(a) the Administrative Agent determines, which determination shall be
conclusive, that quotations of interest rates for the relevant Dollar
deposits referred to in the definition of "Eurodollar Base Rate" in Section
1.01 hereof are not being provided in the relevant amounts or for the
relevant maturities for purposes of determining rates of interest for
Eurodollar Loans as provided herein; or
Credit Agreement
----------------
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<PAGE>
(b) if the Majority Banks in good faith determine, which determination
shall otherwise be conclusive, and notify the Administrative Agent that the
relevant rates of interest referred to in the definition of "Eurodollar
Base Rate" in Section 1.01 hereof upon the basis of which the rate of
interest for Eurodollar Loans for such Interest Period is to be determined
are not likely adequately to cover the cost to such Banks of making or
maintaining Eurodollar Loans for such Interest Period;
then the Administrative Agent shall give the Company and each Bank prompt notice
thereof and, so long as such condition remains in effect, the Banks shall be
under no obligation to make additional Eurodollar Loans, to Continue Eurodollar
Loans or to Convert Base Rate Loans into Eurodollar Loans and, on the last
day(s) of the then current Interest Period(s) for the outstanding Term Loans,
such Term Loans will bear interest at the Base Rate until such condition no
longer remains in effect.
5.03 Illegality. Notwithstanding any other provision of this
----------
Agreement, in the event that it becomes unlawful for any Bank or its Applicable
Lending Office to honor its obligation to make or maintain or Continue, or to
Convert Base Rate Loans into, Eurodollar Loans hereunder, then such Bank shall
promptly notify the Company thereof (with a copy to the Administrative Agent)
and, in the case that it has become unlawful for such Bank to make Loans, such
Bank's obligation to make or Continue, or to Convert Base Rate Loans into,
Eurodollar Loans shall be suspended until such time as such Bank may again make
or Continue, or to Convert Base Rate Loans into, Eurodollar Loans and, in the
case that it has become unlawful for such Bank to maintain Loans, its
outstanding Eurodollar Loans shall bear interest at the Base Rate from the date
such Bank may specify to the Company with a copy to the Administrative Agent
until it shall no longer be unlawful for such Bank to maintain its Eurodollar
Loans hereunder.
5.04 Compensation. The Company shall pay to the Administrative Agent
------------
for account of each Bank, upon the request of such Bank through the
Administrative Agent, such amount or amounts as shall be sufficient (in the
reasonable opinion of such Bank) to compensate it for any loss, cost or expense
that such Bank determines is attributable to:
(a) any payment, mandatory or optional prepayment or Conversion of a
Eurodollar Loan made by such Bank for any reason (including, without
limitation, the acceleration of the Loans pursuant to Section 9 hereof) on
a date other than the last day of an Interest Period for such Eurodollar
Loan;
Credit Agreement
----------------
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<PAGE>
(b) any failure by the Company (whether by reason of the Company's
election not to proceed or the failure of any of the conditions precedent
specified in Section 6 hereof to be satisfied) to borrow a Eurodollar Loan
from such Bank on the date for such borrowing specified in the relevant
notice of borrowing given under Section 2.02 hereof.
Without limiting the effect of the preceding sentence, such
compensation shall include an amount equal to the excess (if any) of (i) the
amount of interest that otherwise would have accrued on the principal amount so
paid, prepaid or not borrowed, for the period from the date of such payment,
prepayment, or failure to borrow, to the last day of the then current Interest
Period for such Loan (or, in the case of a failure to borrow, the Interest
Period for such Loan that would have commenced on the date specified for such
borrowing) at the applicable rate of interest for such Loan provided for herein,
less the Applicable Margin for such Loan, over (ii) the amount of interest that
----
otherwise would have accrued on such principal amount at a rate per annum equal
to the interest component of the amount such Bank would have bid on the date of
such payment, prepayment or failure to borrow in the London interbank market for
Dollar deposits of leading banks in amounts comparable to such principal amount
and with maturities comparable to such period (as reasonably determined by such
Bank).
5.05 U.S. Taxes.
----------
(a) The Company agrees to pay to each Bank that is not a U.S. Person
such additional amounts as are necessary in order that the net payment of any
amount due to such non-U.S. Person hereunder after deduction for or withholding
in respect of any U.S. Taxes imposed with respect to such payment (or in lieu
thereof, payment of such U.S. Taxes by such non-U.S. Person), will not be less
than the amount stated herein to be then due and payable, provided that the
--------
foregoing obligation to pay such additional amounts shall not apply:
(i) to any payment to a Bank hereunder unless such Bank is, on the
date hereof (or on the date it becomes a Bank as provided in Section
11.06(b) hereof) and on the date of any change in the Applicable Lending
Office of such Bank, either entitled to submit a Form 1001 (relating to
such Bank and entitling it to a complete exemption from withholding on all
interest to be received by it hereunder in respect of the Loans) or Form
4224 (relating to all interest to be received by such Bank hereunder in
respect of the Loans), or
(ii) to any U.S. Taxes imposed solely by reason of the failure by such
non-U.S. Person to comply with applicable
Credit Agreement
----------------
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<PAGE>
certification, information, documentation or other reporting requirements
if such compliance is required by statute or regulation of the United
States of America as a precondition to relief or exemption from such U.S.
Taxes.
For the purposes of this Section 5.05(a), (w) "Form 1001" shall mean Form 1001
---------
(Ownership, Exemption, or Reduced Rate Certificate) of the Department of the
Treasury of the United States of America, (x) "Form 4224" shall mean Form 4224
---------
(Exemption from Withholding of Tax on Income Effectively Connected with the
Conduct of a Trade or Business in the United States) of the Department of the
Treasury of the United States of America (or in relation to either such Form
such successor and related forms as may from time to time be adopted by the
relevant taxing authorities of the United States of America to document a claim
to which such Form relates), (y) "U.S. Person" shall mean a citizen, national or
-----------
resident of the United States of America, a corporation, partnership or other
entity created or organized in or under any laws of the United States of
America, or any estate or trust that is subject to Federal income taxation
regardless of the source of its income and (z) "U.S. Taxes" shall mean any
----------
present or future tax, assessment or other charge or levy imposed by or on
behalf of the United States of America or any taxing authority thereof or
therein.
(b) Within 30 days after paying any amount to the Administrative
Agent or any Bank from which it is required by law to make any deduction or
withholding, and within 30 days after it is required by law to remit such
deduction or withholding to any relevant taxing or other authority, the Company
shall deliver to the Administrative Agent for delivery to such non-U.S. Person
evidence satisfactory to such Person of such deduction, withholding or payment
(as the case may be).
5.06 Fair Allocation; Substitution of Banks.
--------------------------------------
(a) Anything herein to the contrary notwithstanding, any
determination by any Bank of any amounts payable by the Company under Section
5.01 shall be based upon a fair and equitable allocation by such Bank of the
particular overall cost or loss among all its similarly situated borrowers
relative to such Bank, and the Company shall not be obligated to compensate any
Bank for any costs that would not have been incurred by such Bank but for its
gross negligence or wilful misconduct.
(b) Provided that no Default shall have occurred and be continuing,
the Company may, at any time, replace any Bank that has requested compensation
from the Company pursuant to Section 5.01 hereof or whose obligation to make
additional Loans has been suspended pursuant to Section 5.03 hereof or that is
Credit Agreement
----------------
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<PAGE>
entitled to payment of additional amounts under Section 5.05 hereof (any such
Bank being herein called an "Affected Bank"), by giving not less than ten
-------------
Business Days' prior notice to the Administrative Agent (which shall promptly
notify such Affected Bank and each other Bank), that it intends to replace such
Affected Bank with one or more banks (including, but not limited to, any other
Bank under this Agreement) selected by the Company and acceptable to the
Administrative Agent (which shall not unreasonably withhold its consent). The
method (whether by assignment or otherwise) of and documentation for such
replacement shall be acceptable to the Affected Bank, the other Banks and the
Administrative Agent (which shall not unreasonably withhold their consent and
shall cooperate with the Company in effecting such replacement). Upon the
effective date of any replacement under this Section 5.06 (and as a condition
thereto), the Company shall, or shall cause the replacement bank(s) to, pay to
the Affected Bank being replaced any amounts owing to such Affected Bank
hereunder (including, without limitation, interest, commitment fees,
compensation and additional amounts under this Section 5, in each case accrued
to the effective date of such replacement), whereupon each replacement bank
shall become a "Bank" for all purposes of this Agreement having a Commitment in
the amount of such Affected Bank's Commitment assumed by it, and such Commitment
of the Affected Bank being replaced shall be terminated upon such effective date
and all of such Affected Bank's rights and obligations under this Agreement
shall terminate (provided that the obligations of the Company under Sections
5.01, 5.04, 5.05 and 11.03 hereof to such Affected Bank shall survive such
replacement as provided in Section 11.07 hereof).
Section 6. Conditions Precedent.
--------------------
6.01 Initial Loan. The obligation of any Bank to make its initial
------------
Loan hereunder is subject to the receipt by the Administrative Agent of the
following documents, each of which shall be satisfactory to the Administrative
Agent (and to the extent specified below, to each Bank) in form and substance:
(a) Corporate Documents. The following documents, each certified as
-------------------
indicated below:
(i) a copy of the charters, as amended and in effect, of the
Company and of each Subsidiary certified as of a recent date by the
Secretary of State of the State of its incorporation or by its
Applicable Insurance Regulatory Authority, as the case may be, and a
certificate from such respective State authorities dated as of a
recent date as to the good standing of
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<PAGE>
and charter documents filed by the Company and by such Subsidiary;
(ii) a certificate of the Secretary or an Assistant Secretary of
the Company, dated the Closing Date and certifying (A) that attached
thereto is a true and complete copy of the by-laws of the Company and
of each Subsidiary as amended and in effect at all times from the date
on which the resolutions referred to in clause (B) were adopted to and
including the date of such certificate, (B) that attached thereto is a
true and complete copy of resolutions duly adopted by the board of
directors of the Company authorizing the execution, delivery and
performance of the Basic Documents and the extensions of credit
hereunder, and that such resolutions have not been modified, rescinded
or amended and are in full force and effect, (C) that the charters of
the Company and the Subsidiaries have not been amended since the date
of the certification thereto furnished pursuant to subparagraph (i)
above, and (D) as to the incumbency and specimen signature of each
officer of the Company executing the Basic Documents and each other
document to be delivered by the Company from time to time in
connection therewith (and the Administrative Agent and each Bank may
conclusively rely on such certificate until it receives notice in
writing from the Company); and
(iii) a certificate of another officer of the Company as to the
incumbency and specimen signature of the Secretary or Assistant
Secretary, as the case may be, of the Company.
(b) Officer's Certificate. A certificate of a senior officer of the
---------------------
Company, dated the Closing Date, to the effect set forth in the first
sentence of Section 6.03 hereof.
(c) Opinions of Counsel to the Company. Opinions, dated the Closing
----------------------------------
Date, of Alan S. Roseman, General Counsel of the Company, substantially in
the form of Exhibit B-1 hereto and of Hogan & Hartson, special counsel to
the Company, substantially in the form of Exhibit B-2 hereto, and in each
case covering such other matters as the Administrative Agent or any Bank
may reasonably request (and the Company hereby instructs each such counsel
to deliver such opinions to the Banks and the Administrative Agent).
(d) Opinion of Special New York Counsel to Chase. An opinion, dated
--------------------------------------------
the Closing Date, of Milbank, Tweed, Hadley &
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----------------
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<PAGE>
McCloy, special New York counsel to Chase, substantially in the form of
Exhibit C hereto.
(e) Notes. The Revolving Credit Notes, duly completed and executed.
-----
(f) Tax Sharing Agreements. True, correct and complete copies of all
----------------------
tax sharing agreements (if any) to which the Company or any of its
Subsidiaries is a party, which agreements must be in form and substance
satisfactory to the Banks.
(g) Capital Contribution Agreements. A true, correct and complete
-------------------------------
copy of all agreements (if any) of the Company under which the Company is
obligated to make capital contributions to any of its Insurance
Subsidiaries, which agreements must be in form and substance satisfactory
to the Banks.
(h) Indenture. A true, correct and complete copy of the Indenture,
---------
which shall be in form and substance satisfactory to the Banks.
(i) Ratings. Evidence that the Rating of CRC by S&P shall be at least
-------
AA+ and of Capital Mortgage shall be at least AA-.
(j) Other Documents. Such other documents as the Administrative
---------------
Agent or any Bank or special New York counsel to Chase may reasonably
request.
6.02 Term Loans.
----------
The obligation of the Banks to make any Term Loans to the Company
hereunder on the occasion of the borrowing of any Series of Term Loans is
subject to the further condition precedent that the Company shall have delivered
to the Administrative Agent the Term Loan Notes evidencing such Series of Term
Loans.
6.03 Initial and Subsequent Loans.
----------------------------
The obligation of any Bank to make any Loan to the Company upon the
occasion of any borrowing hereunder (including the initial borrowing) is subject
to the further conditions precedent that, both immediately prior to the making
of such Loan and also after giving effect thereto and to the intended use
thereof:
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<PAGE>
(a) no Default shall have occurred and be continuing; and
(b) the representations and warranties made by the Company in Section
7 hereof, and in each of the other Basic Documents, shall be true and
complete on and as of the date of the making of such Loan with the same
force and effect as if made on and as of such date (or, if any such
representation or warranty is expressly stated to have been made as of a
specific date, as of such specific date).
Each notice of borrowing by the Company hereunder shall constitute a
certification by the Company to the effect set forth in the preceding sentence
(both as of the date of such notice and, unless the Company otherwise notifies
the Administrative Agent prior to the date of such borrowing, as of the date of
such borrowing).
Section 7. Representations and Warranties. The Company represents
------------------------------
and warrants to the Administrative Agent and the Banks that:
7.01 Corporate Existence. Each of the Company and its Subsidiaries:
-------------------
(a) is a corporation, partnership or other entity duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization; (b) has all requisite corporate or other power, and has all
material governmental licenses, authorizations, consents and approvals,
necessary to own its assets and carry on its business as now being or as
proposed to be conducted; and (c) is qualified to do business and is in good
standing in all jurisdictions in which the nature of the business conducted by
it makes such qualification necessary and where failure so to qualify could,
either individually or in the aggregate, have a Material Adverse Effect.
7.02 Financial Condition.
-------------------
(a) The Company has heretofore furnished to each of the Banks
consolidated and consolidating balance sheets of the Company and its
Subsidiaries as at December 31, 1995 and the related consolidated and
consolidating statements of income, shareholders' equity and cash flows of the
Company and its Subsidiaries for the fiscal year ended on said date, with the
opinion thereon (in the case of said consolidated balance sheet and statements)
of Ernst & Young L.L.P, and the unaudited consolidated and consolidating balance
sheets of the Company and its Subsidiaries as at March 31, 1996 and the related
consolidated and consolidating statements of income, shareholders' equity and
cash flows of the Company and its
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----------------
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<PAGE>
Subsidiaries for the three-month period ended on such date. All such financial
statements present fairly, in all material respects, the consolidated financial
condition of the Company and its Subsidiaries, and (in the case of said
consolidating financial statements) the respective unconsolidated financial
condition of the Company and of each of its Subsidiaries, as at said dates and
the consolidated results of their operations, and (in the case of said
consolidating statements) the respective unconsolidated results of operations of
the Company and of each of its Subsidiaries, for the fiscal year and three-month
period ended on said dates (subject, in the case of such financial statements as
at March 31, 1996, to normal year-end audit adjustments), all in accordance with
generally accepted accounting principles and practices applied on a consistent
basis. None of the Company nor any of its Subsidiaries has on the date hereof
any material contingent liabilities, liabilities for taxes, unusual forward or
long-term commitments or unrealized or anticipated losses from any unfavorable
commitments, except as referred to or reflected or provided for in said
financial statements (or in the notes thereto) as at said dates. Since December
31, 1995, there has been no material adverse change in the consolidated
financial condition, operations or business of the Company and its Subsidiaries
taken as a whole from that set forth in said financial statements as at said
date.
(b) The Company has heretofore furnished to each of the Banks the
annual and quarterly Statutory Statements of each of its Insurance Subsidiaries
for the fiscal year ended December 31, 1995 and for the quarterly fiscal period
ended March 31, 1996 as filed with the Applicable Insurance Regulatory
Authority. All such Statutory Statements present fairly, in all material
respects, the financial condition of each Insurance Subsidiary, respectively, as
at the respective dates thereof and its results of operations through fiscal
year ended on December 31, 1995 and the quarterly fiscal period ended March 31,
1996, in accordance with statutory accounting practices prescribed or permitted
by the Applicable Insurance Regulatory Authority.
7.03 Litigation. Except as disclosed in Schedule III hereto, there
----------
are no legal or arbitration proceedings, or any proceedings by or before any
governmental or regulatory authority or agency, now pending or (to the knowledge
of the Company) threatened against the Company or any of its Subsidiaries that,
if adversely determined, could reasonably be expected, either individually or in
the aggregate, to have a Material Adverse Effect.
7.04 No Breach. None of the execution and delivery of this Agreement
---------
and the Notes and the other Basic Documents, the
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----------------
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<PAGE>
consummation of the transactions herein and therein contemplated or compliance
with the terms and provisions hereof and thereof will conflict with or result in
a breach of, or require any consent under, the charter or by-laws of the
Company, or any applicable law or regulation, or any order, writ, injunction or
decree of any court or governmental authority or agency, or any agreement or
instrument to which the Company or any of its Subsidiaries is a party or by
which any of them or any of their Property is bound or to which any of them is
subject, or constitute a default under any such agreement or instrument.
7.05 Action. The Company has all necessary corporate power,
------
authority and legal right to execute, deliver and perform its obligations under
each of the Basic Documents; the execution, delivery and performance by the
Company of each of the Basic Documents have been duly authorized by all
necessary corporate action on its part (including, without limitation, any
required shareholder approvals); and this Agreement has been duly and validly
executed and delivered by the Company and constitutes, and each of the Notes and
the other Basic Documents when executed and delivered (in the case of the Notes,
for value) will constitute, the legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms.
7.06 Approvals. No authorizations, approvals or consents of, and no
---------
filings or registrations with, any governmental or regulatory authority or
agency, or any securities exchange, are necessary for the execution, delivery or
performance by the Company of the Basic Documents or for the legality, validity
or enforceability hereof or thereof.
7.07 Margin Stock. Not more than 25% of the value (as determined by
------------
any reasonable method) of the Properties of the Company and its Subsidiaries
(including, without limitation, common stock of the Company held in treasury)
subject to the provisions of Section 8.05 or 8.06 hereof is represented by
Margin Stock.
7.08 ERISA. Each Plan, and, to the knowledge of the Company, each
-----
Multiemployer Plan, is in compliance in all material respects with, and has been
administered in all material respects in compliance with, the applicable
provisions of ERISA, the Code and any other Federal or State law, and no event
or condition has occurred and is continuing as to which the Company would be
under an obligation to furnish a report to the Banks under Section 8.01(g)
hereof.
7.09 Taxes. The Company and its Subsidiaries are members of an
-----
affiliated group of corporations filing
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----------------
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<PAGE>
consolidated returns for Federal income tax purposes, of which the Company is
the "common parent" (within the meaning of Section 1504 of the Code) of such
group. The Company and its Subsidiaries have filed all Federal income tax
returns and all other material tax returns that are required to be filed by them
and have paid all taxes due pursuant to such returns or pursuant to any
assessment received by the Company or any of its Subsidiaries. The charges,
accruals and reserves on the books of the Company and its Subsidiaries in
respect of taxes and other governmental charges are, in the opinion of the
Company, adequate. The Company has not given or been requested to give a waiver
of the statute of limitations relating to the payment of Federal, state, local
and foreign taxes or other impositions.
7.10 Investment Company Act. Neither the Company nor any of its
----------------------
Subsidiaries is an "investment company", or a company "controlled" by an
"investment company", within the meaning of the Investment Company Act of 1940,
as amended.
7.11 Public Utility Holding Company Act. Neither the Company nor any
----------------------------------
of its Subsidiaries is a "holding company", or an "affiliate" of a "holding
company" or a "subsidiary company" of a "holding company", within the meaning of
the Public Utility Holding Company Act of 1935, as amended.
7.12 Material Agreements and Liens.
-----------------------------
(a) Part A of Schedule I hereto is a complete and correct list, as of
the date of this Agreement, of each credit agreement, loan agreement, indenture,
securities purchase agreement, guarantee, letter of credit or other arrangement
providing for or otherwise relating to any Indebtedness of the Company or any of
its Subsidiaries the aggregate principal or face amount of which equals or
exceeds (or may equal or exceed) $10,000,000, and the aggregate principal or
face amount outstanding or that may become outstanding under each such
arrangement is correctly described in Part A of said Schedule I.
(b) Part B of Schedule I hereto is a complete and correct list, as of
the date of this Agreement, of each Lien securing Indebtedness of any Person the
aggregate principal or face amount of which equals or exceeds (or may equal or
exceed) $10,000,000 and covering any Property of the Company or any of its
Subsidiaries, and the aggregate Indebtedness secured (or which may be secured)
by each such Lien and the Property covered by each such Lien is correctly
described in Part B of said Schedule I.
7.13 Environmental Matters. There have been no environmental
---------------------
investigations, studies, audits, tests, reviews or
Credit Agreement
----------------
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<PAGE>
other analyses conducted by or that are in the possession of the Company or any
of its Subsidiaries in relation to any site or facility now or previously owned,
operated or leased by the Company or any of its Subsidiaries which have not been
made available to the Banks.
7.14 Capitalization. The authorized capital stock of the Company
--------------
consists, on the date hereof, of (a) an aggregate of 75,000,000 shares of
common stock, par value $0.01 per share, of which 15,728,480 shares were duly
and validly issued and outstanding as at June 30, 1996 (and 189,700 shares of
which were held in treasury), each of which shares is fully paid and
nonassessable, and (b) an aggregate of 25,000,000 shares of preferred stock, par
value $0.01 per share, none of which are outstanding or issued. As of the date
hereof, except for the Company's compensation plans referred to in Note 15 to
its consolidated financial statements referred to in Section 7.02(a) hereof and
for the Company's Performance Share Plan (Effective July 1, 1996), (x) there are
no outstanding Equity Rights with respect to the Company and (y) there are no
outstanding obligations of the Company or any of its Subsidiaries to repurchase,
redeem, or otherwise acquire any shares of capital stock of the Company nor are
there any outstanding obligations of the Company or any of its Subsidiaries to
make payments to any Person, such as "phantom stock" payments, where the amount
thereof is calculated with reference to the fair market value or equity value of
the Company or any of its Subsidiaries.
7.15 Subsidiaries, Etc.
------------------
(a) Set forth in Schedule II hereto is a complete and correct list,
as of the date of this Agreement, of all of the Subsidiaries of the Company,
together with, for each such Subsidiary, (i) the jurisdiction of organization of
such Subsidiary, (ii) each Person holding ownership interests in such Subsidiary
and (iii) the nature of the ownership interests held by each such Person and the
percentage of ownership of such Subsidiary represented by such ownership
interests. Except as disclosed in Schedule II hereto, as of the date of this
Agreement (x) each of the Company and its Subsidiaries owns, free and clear of
Liens, and has the unencumbered right to vote, all outstanding ownership
interests in each Person shown to be held by it in Schedule II hereto, (y) all
of the issued and outstanding capital stock of each such Person organized as a
corporation is validly issued, fully paid and nonassessable and (z) there are no
outstanding Equity Rights with respect to such Person.
(b) None of the Subsidiaries of the Company is, on the date of this
Agreement, subject to any indenture, agreement,
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----------------
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<PAGE>
instrument or other arrangement of the type described in Section 8.18 hereof.
7.16 True and Complete Disclosure. The information, reports,
----------------------------
financial statements, exhibits and schedules furnished in writing by or on
behalf of the Company or any of its Subsidiaries to the Administrative Agent or
any Bank in connection with the negotiation, preparation or delivery of this
Agreement and the other Basic Documents or included herein or therein or
delivered pursuant hereto or thereto, when taken as a whole, do not, as of the
date hereof, contain any untrue statement of material fact or omit to state any
material fact necessary to make the statements herein or therein, in light of
the circumstances under which they were made, not misleading. All written
information furnished after the date hereof by the Company and its Subsidiaries
to the Administrative Agent and the Banks in connection with this Agreement and
the other Basic Documents and the transactions contemplated hereby and thereby
will be true, complete and accurate in every material respect, or (in the case
of projections) based on reasonable estimates, on the date as of which such
information is stated or certified. To the Company's knowledge, there is no
fact peculiar to the Company or any of its Subsidiaries (in contrast to
information of a general economic or industry nature) that could reasonably be
expected to have a Material Adverse Effect that has not been disclosed herein,
in the other Basic Documents or in a report, financial statement, exhibit,
schedule, disclosure letter or other writing furnished to the Banks for use in
connection with the transactions contemplated hereby or thereby.
Section 8. Covenants of the Company. The Company covenants and
------------------------
agrees with the Banks and the Administrative Agent that, so long as any
Commitment or Loan is outstanding and until payment in full of all amounts
payable by the Company hereunder:
8.01 Financial Statements; Information; Etc. The Company shall
--------------------------------------
deliver to each of the Banks:
(a) as soon as available and in any event within 60 days after the
end of each quarterly fiscal period of each fiscal year of the Company,
consolidated statements of income, shareholders' equity and cash flows of
the Company and its Subsidiaries for such period and for the period from
the beginning of the respective fiscal year to the end of such period, and
the related consolidated balance sheet of the Company and its Subsidiaries
as at the end of such period, setting forth in each case in comparative
form the corresponding consolidated and consolidating figures for the
corresponding period (except, in the case of the balance sheets, to the
last day of) in the preceding fiscal year (it
Credit Agreement
----------------
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<PAGE>
being understood that delivery to the Banks of the Company's Report on Form
10-Q filed with the Securities and Exchange Commission shall satisfy the
financial statement delivery requirements of this Section 8.01(a) so long
as the financial information required to be contained in such Report is
substantially the same as the financial information required under this
Section 8.01(a)), accompanied by a certificate of a senior financial
officer of the Company, which certificate shall state that said
consolidated financial statements present fairly, in all material respects,
the consolidated financial condition and results of operations of the
Company and its Subsidiaries in accordance with generally accepted
accounting principles, consistently applied, as at the end of, and for,
such period (subject to normal year-end audit adjustments);
(b) as soon as available and in any event within 100 days after the
end of each fiscal year of the Company, consolidated statements of income,
stockholders' equity and cash flows of the Company and its Subsidiaries for
such fiscal year and the related consolidated balance sheet of the Company
and its Subsidiaries as at the end of such fiscal year, setting forth in
each case in comparative form the corresponding consolidated figures for
the preceding fiscal year (it being understood that delivery to the Banks
of the Company's Report on Form 10-K filed with the Securities and Exchange
Commission shall satisfy the financial statement delivery requirements of
this Section 8.01(b) so long as the financial information required to be
contained in such Report is substantially the same as the financial
information required under this Section 8.01(b)), and accompanied by an
opinion thereon of independent certified public accountants of recognized
national standing, which opinion shall state that said consolidated
financial statements present fairly, in all material respects, the
consolidated financial condition and results of operations of the Company
and its Subsidiaries as at the end of, and for, such fiscal year in
accordance with generally accepted accounting principles, and a certificate
of such accountants addressed to the Banks stating that, in making the
examination necessary for their opinion, nothing came to their attention
that caused them to believe that the Company had failed to comply with any
of its obligations under Sections 8.05 to 8.10 (inclusive) or that any
Default specified in paragraph (b) or (e) to (j), inclusive, of Section 9
hereof had occurred, except as specifically stated;
(c) within 5 days after filing with the Applicable Insurance
Regulatory Authority and in any event within
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----------------
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<PAGE>
55 days after the end of each of the first three quarterly fiscal periods
of each fiscal year of the Company the quarterly Statutory Statement of
each Insurance Subsidiary for such fiscal period, together with a
certificate of a senior financial officer of the Company stating that such
Statutory Statement fairly presents, in all material respects, the
financial condition of each Insurance Subsidiary, respectively, for such
quarterly fiscal period in accordance with statutory accounting practices
required or permitted by the Applicable Insurance Regulatory Authority.
(d) within 5 days after filing with the Applicable Insurance
Regulatory Authority and in any event within 55 days after the end of each
fiscal year of the Company the annual Statutory Statement of each Insurance
Subsidiary for such year, together with a certificate of a senior financial
officer of the Company stating that such annual Statutory Statement fairly
presents, in all material respects, the financial condition of each
Insurance Subsidiary, respectively, for such fiscal year in accordance with
statutory accounting practices required or permitted by the Applicable
Insurance Regulatory Authority.
(e) promptly upon their becoming available, copies of all
registration statements (other than those on Form S-8) and regular periodic
reports, if any, which the Company shall have filed with the Securities and
Exchange Commission (or any governmental agency substituted therefor) or
any national securities exchange;
(f) promptly upon the mailing thereof to the shareholders of the
Company generally, copies of all financial statements, reports and proxy
statements so mailed;
(g) as soon as possible, and in any event within ten days after the
Company knows or has reason to believe that any of the events or conditions
specified below with respect to any Plan or Multiemployer Plan has occurred
or exists, a statement signed by a senior financial officer of the Company
setting forth details respecting such event or condition and the action, if
any, that the Company or its ERISA Affiliate proposes to take with respect
thereto (and a copy of any report or notice required to be filed with or
given to PBGC by the Company or an ERISA Affiliate with respect to such
event or condition):
(i) any reportable event, as defined in Section 4043(b) of ERISA
and the regulations issued
Credit Agreement
----------------
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<PAGE>
thereunder, with respect to a Plan, as to which PBGC has not by
regulation waived the requirement of Section 4043(a) of ERISA that it
be notified within 30 days of the occurrence of such event (provided
--------
that a failure to meet the minimum funding standard of Section 412 of
the Code or Section 302 of ERISA, including, without limitation, the
failure to make on or before its due date a required installment under
Section 412(m) of the Code or Section 302(e) of ERISA, shall be a
reportable event regardless of the issuance of any waivers in
accordance with Section 412(d) of the Code); and any request for a
waiver under Section 412(d) of the Code for any Plan;
(ii) the distribution under Section 4041 of ERISA of a notice of
intent to terminate any Plan or any action taken by the Company or an
ERISA Affiliate to terminate any Plan;
(iii) the institution by PBGC of proceedings under Section 4042 of
ERISA for the termination of, or the appointment of a trustee to
administer, any Plan, or the receipt by the Company or any ERISA
Affiliate of a notice from a Multiemployer Plan that such action has
been taken by PBGC with respect to such Multiemployer Plan;
(iv) the complete or partial withdrawal from a Multiemployer Plan
by the Company or any ERISA Affiliate that results in liability under
Section 4201 or 4204 of ERISA (including the obligation to satisfy
secondary liability as a result of a purchaser default) or the receipt
by the Company or any ERISA Affiliate of notice from a Multiemployer
Plan that it is in reorganization or insolvency pursuant to Section
4241 or 4245 of ERISA or that it intends to terminate or has
terminated under Section 4041A of ERISA;
(v) the institution of a proceeding by a fiduciary of any
Multiemployer Plan against the Company or any ERISA Affiliate to
enforce Section 515 of ERISA, which proceeding is not dismissed within
30 days; and
(vi) the adoption of an amendment to any Plan that, pursuant to
Section 401(a)(29) of the Code or Section 307 of ERISA, would result
in the loss of tax-exempt status of the trust of which such Plan is a
part if the Company or an ERISA Affiliate fails to timely provide
security to the Plan in accordance with the provisions of said
Sections;
Credit Agreement
----------------
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<PAGE>
(h) promptly after the Company knows or has reason to believe that any
Default has occurred, a notice of such Default specifying that such notice
is a "Notice of Default" and describing the same in reasonable detail and,
together with such notice or as soon thereafter as possible, a description
of the action that the Company has taken or proposes to take with respect
thereto; and
(i) from time to time such other information regarding the financial
condition, operations, business or prospects of the Company or any of its
Subsidiaries (including, without limitation, consolidating financial
statements, any Plan or Multiemployer Plan and any reports or other
information required to be filed under ERISA) as any Bank or the
Administrative Agent may reasonably request.
The Company will furnish to each Bank, at the time it furnishes each set of
financial statements pursuant to paragraph (a) or (b) above, a certificate of a
senior financial officer of the Company (i) to the effect that no Default has
occurred and is continuing (or, if any Default has occurred and is continuing,
describing the same in reasonable detail and describing the action that the
Company has taken or proposes to take with respect thereto) and (ii) setting
forth in reasonable detail the computations necessary to determine whether the
Company is in compliance with Sections 8.05(vii), 8.06(h), 8.06(i), 8.07(f),
8.09, 8.10 and 8.12(a) hereof as of the end of the respective quarterly fiscal
period or fiscal year.
8.02 Litigation. The Company will promptly give to each Bank notice
----------
of all legal or arbitration proceedings, and of all proceedings by or before any
governmental or regulatory authority or agency, and any material development in
respect of such legal or other proceedings, affecting the Company or any of its
Subsidiaries, except proceedings which, if adversely determined, could not
reasonably be expected either individually or in the aggregate, to have a
Material Adverse Effect.
8.03 Existence, Etc. The Company will, and will cause each of its
---------------
Subsidiaries to:
(a) preserve and maintain its legal existence and all of its material
rights, privileges, licenses and franchises (provided that nothing in this
--------
Section 8.03 shall prohibit any transaction expressly permitted by Section
8.05 hereof);
(b) comply with the requirements of all applicable laws, rules,
regulations and orders of governmental or regulatory authorities if failure
to comply with such requirements could reasonably be expected, either
Credit Agreement
----------------
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<PAGE>
individually or in the aggregate, to have a Material Adverse Effect;
(c) pay and discharge all taxes, assessments and governmental charges
or levies imposed on it or on its income or profits or on any of its
Property prior to the date on which penalties attach thereto, except for
any such tax, assessment, charge or levy the payment of which is being
contested in good faith and by proper proceedings and against which
adequate reserves are being maintained in accordance with GAAP;
(d) maintain all of its Properties material to its business in
reasonably adequate working order and condition, ordinary wear and tear
excepted;
(e) keep adequate records and books of account, in which complete
entries will be made in accordance with generally accepted accounting
principles consistently applied; and
(f) permit representatives of any Bank or the Administrative Agent,
during normal business hours, to examine, copy and make extracts from its
books and records, to inspect any of its Properties, and to discuss its
business and affairs with its officers, all to the extent reasonably
requested by such Bank or the Administrative Agent (as the case may be).
8.04 Insurance. The Company will, and will cause each of its
---------
Subsidiaries to, (a) keep insured by financially sound and reputable insurers
all Property of a character usually insured by corporations engaged in the same
or similar business similarly situated against loss or damage of the kinds and
in the amounts customarily insured against by such corporations and carry such
other insurance as is usually carried by such corporations and (b) furnish to
each Bank, upon written request, full information as to the insurance carried.
8.05 Prohibition of Fundamental Changes. The Company will not, and
----------------------------------
will not permit any of its Subsidiaries to, wind up, liquidate or dissolve its
affairs or enter into any transaction of merger or consolidation, or convey,
sell, lease or otherwise dispose of (or agree to do any of the foregoing at any
future time) all or any part of its Property, or purchase or otherwise acquire
(in one or a series of related transactions) any part of the Property (other
than purchases or other acquisitions of inventory, materials and equipment in
the ordinary course of business) of any Person, or permit any of its
Subsidiaries so to do any of the foregoing, except that (i) the
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<PAGE>
Company and its Subsidiaries may make sales of personal Property in the ordinary
course of business, (ii) the Company and its Subsidiaries may, in the ordinary
course of business, sell equipment which is uneconomic or obsolete, (iii)
Capital Expenditures may be made to the extent permitted by Section 8.11 hereof,
(iv) each of the Company and its Subsidiaries may in the ordinary course of
business purchase, dispose of, transfer and otherwise manage Property in its
investment portfolio, (v) the Company or any of its Subsidiaries may purchase or
otherwise acquire all or any portion of the Property of any Person (other than
the Company) or acquire such Person by merger so long as (x) no Default has
occurred and is continuing or would occur after giving effect thereto, (y) such
purchase, acquisition or merger shall not result in any downgrading of CRC's
Rating assigned by Moody's or S&P from that in effect immediately prior to such
purchase, acquisition or merger and (z) the Company shall deliver to the
Administrative Agent such documents, certificates or other information as the
Administrative Agent may reasonably request to establish that such purchase,
acquisition or merger complied with the conditions contained in this clause (v),
(vi) the Company or any Subsidiary may merge into another Person so long as (x)
such merger is solely for the purpose of changing domicile, (y) in the case of
the Company, the surviving Person assumes all obligations of the Company under
the Basic Documents and (z) no Default has occurred and is continuing or would
occur after giving effect thereto, (vii) the Company or any Subsidiary may take
any action not otherwise permitted hereunder so long as no Default has occurred
and is continuing to the extent such action is not in any manner materially
adverse to the Company or the Banks, provided, that the Company may not merge or
--------
consolidate with or into, or sell or otherwise transfer all or any substantial
part of its Property to, any other Person if the consideration therefor is equal
to or in excess of $75,000,000, and (viii) intercompany transactions shall be
permitted in accordance with Section 8.13 hereof.
8.06 Limitation on Liens. The Company will not create, incur, assume
-------------------
or suffer to exist any Lien upon any of its Property, whether now owned or
hereafter acquired, except:
(a) Liens in existence on the date hereof and listed in Part B of
Schedule I hereto;
(b) Liens imposed by any governmental authority for taxes,
assessments or charges not yet due or which are being contested in good
faith and by appropriate proceedings, unless the amount thereof is material
with respect to it or its financial condition, if adequate reserves with
respect thereto are maintained on the books of the Company in accordance
with GAAP;
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<PAGE>
(c) carriers', warehousemen's, mechanics', materialmen's, repairmen's
or other like Liens arising in the ordinary course of business which are
not overdue for a period of more than 30 days or which are being contested
in good faith and by appropriate proceedings and Liens securing judgments
but only to the extent for an amount and for a period not resulting in an
Event of Default under Section 9(h) hereof;
(d) pledges or deposits under worker's compensation, unemployment
insurance and other social security legislation;
(e) deposits to secure the performance of bids, trade contracts
(other than for borrowed money), leases, statutory obligations, surety and
appeal bonds, performance bonds and other obligations of a like nature
incurred in the ordinary course of business;
(f) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business and encumbrances
consisting of zoning restrictions, easements, licenses, restrictions on the
use of Property or minor imperfections in title thereto which, in the
aggregate, are not material in amount, and which do not in any case
materially detract from the value of the Property subject thereto or
interfere with the ordinary conduct of the business of the Company;
(g) Liens on any Property acquired by the Company after the date
hereof from any Subsidiary of the Company, for consideration not in excess
of the fair market value thereof, which Lien was not created in
anticipation of such acquisition;
(h) Liens upon real and/or tangible personal Property acquired after
the date hereof (by purchase, construction or otherwise) by the Company,
each of which Liens either existed on such Property before the time of its
acquisition and was not created in anticipation thereof or was created
solely for the purpose of securing Indebtedness incurred to finance,
refinance, or refund the cost (including the cost of construction) of such
Property; provided that (i) no such Lien shall extend to or cover any
--------
Property of the Company or such Subsidiary other than the Property so
acquired and improvements thereon and (ii) the principal amount of
Indebtedness secured by any such Lien shall not exceed 80% of the fair
market value (as determined) in good faith by a senior financial officer of
the Company) of such Property at
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----------------
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<PAGE>
the time it was acquired (by purchase, construction or otherwise);
(i) additional Liens created after the date hereof so long as the
Indebtedness secured thereby and incurred after the date hereof does not
exceed $10,000,000 in the aggregate at any one time outstanding; and
(j) any extension, renewal or replacement of the foregoing; provided
--------
that the Liens permitted by this paragraph shall not extend to or cover any
additional Indebtedness or Property (other than a substitution of like
Property).
8.07 Indebtedness. The Company will not, and will not permit any of
------------
its Subsidiaries to, create, incur or suffer to exist any Indebtedness except:
(a) Indebtedness to the Banks hereunder;
(b) Indebtedness outstanding on the date hereof and, to the extent
required under Section 7.12(a) hereof, listed in Part A of Schedule I
hereto;
(c) Indebtedness of the Company up to but not exceeding $25,000,000 in
the aggregate principal amount at any one time outstanding under the Credit
Agreement dated as of January 27, 1994, among the Company, the banks party
thereto and Deutsche Bank AG, New York Branch, as agent, as the same may be
modified or supplemented.
(d) Indebtedness of any Wholly-Owned Subsidiary to the Company or to
any other Wholly-Owned Subsidiary of the Company;
(e) Indebtedness of the Company to any Subsidiary of the Company so
long as such Indebtedness is subordinated in right of payment to the prior
payment in full of the principal of and interest on and all other amounts
owing to the Banks hereunder pursuant to documentation in form and
substance satisfactory to the Majority Banks;
(f) additional Indebtedness of the Company provided that on the date
such Indebtedness is incurred and after giving effect thereto and to the
concurrent retirement of any other Indebtedness of the Company, total
consolidated Indebtedness of the Company and its Subsidiaries does not
exceed 30% of Total Capitalization.
Credit Agreement
----------------
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<PAGE>
8.08 Investments. The Company will not permit any of its Insurance
-----------
Subsidiaries to make or permit to remain outstanding any Investments in its
investment portfolio except:
(a) Investments in securities meeting the requirements of clauses (i)
and (ii) of paragraph (a)(6) of Section 270.2a-7 of the SEC ICA Regulations
and in money market funds at least 95% of whose assets consist of First
Tier Securities (as defined in paragraph (a)(6) of Section 270.2a-7 of the
SEC ICA Regulations); provided that the Insurance Subsidiaries may make
--------
Investments in short-term debt instruments (or in money market funds at
least 95% of whose assets consist of short-term debt instruments) that are
rated at least A-2 by S&P or P-2 by Moody's or a comparable rating category
by any other NRSRO (as defined in paragraph (a)(10) of Section 270.2a-7 of
the SEC ICA Regulations);
(b) Investments constituting fixed income debt securities if, after
giving effect to any such Investment:
(i) the weighted average credit quality of the fixed income debt
securities in the consolidated Investment portfolio of the
Insurance Subsidiaries, as determined by the rating system of
S&P, is [A] or higher; and
(ii) the aggregate amount invested by the Insurance Subsidiaries in
fixed income debt securities that are rated lower than BBB- by
S&P or Baa3 by Moody's or BBB- by Fitch, or that are unrated,
does not exceed 10% of the aggregate amount of the consolidated
portfolio Investments of the Insurance Subsidiaries; and
(c) equity Investments if, after giving effect to any such Investment,
the aggregate amount of equity Investments of the Insurance Subsidiaries
does not exceed 20% of the aggregate amount of the consolidated portfolio
Investments of the Insurance Subsidiaries;
provided that, the aggregate amount invested by the Insurance Subsidiaries in
fixed income securities that are rated lower than BBB- by S&P or Baa3 by Moody's
or BBB- by Fitch, or that are unrated, together with the aggregate amount of
equity Investments, may not exceed 25% of the aggregate amount of the
consolidated portfolio Investments of the Insurance Subsidiaries.
8.09 Restricted Payments. The Company will not declare or make any
-------------------
Restricted Payment unless, on the date of
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<PAGE>
declaration and on the date of making such Restricted Payment (the "Computation
-----------
Date"), and after giving effect thereto:
- ----
(i) the aggregate amount of all Restricted Payments made during
the period commencing on January 1, 1996 and ending on and including
the Computation Date shall not exceed an amount equal to 25% of
consolidated net income of the Company and its Subsidiaries for the
period (treated as a single accounting period) commencing on January
1, 1995 and ending in the last day of the fiscal quarter of the
Company ending on or most recently ended prior to the Computation
Date;
(ii) the Interest Expense for the most recently ended fiscal
quarter for which the Company has or is required to have delivered
financial statements to the Banks shall not exceed 3-1/3% of the
statutory surplus of CRC as at the end of the most recent quarter for
which statutory financial statements have been filed by CRC with the
Maryland Insurance Commissioner; and
(ii) no Default shall have occurred and be continuing.
8.10 Financial Covenants.
-------------------
(a) Tangible Net Worth. The Company will not, on any date, permit
------------------
Tangible Net Worth to be less than $250,000,000.
(b) Interest Coverage Ratio. The Company will not, at any date,
-----------------------
permit the Interest Coverage Ratio for the period of the four consecutive fiscal
quarters of the Company ending on, or most recently ended prior to, such date to
be less than 2.5:1.
8.11 Lines of Business. The Company will not permit any of its
-----------------
Insurance Subsidiaries to engage to any substantial extent in any line or lines
of business activity other than the business of issuing financial guaranty
insurance, credit insurance, mortgage insurance and residual value insurance
(and reinsurance of the same) and similar or related products, unless such other
line or lines of business or activity does not result in the downgrading of the
Rating of CRC assigned by S&P.
8.12 Transactions with Affiliates. The Company will not, and will
----------------------------
not permit any of its Subsidiaries to, directly or indirectly:
(a) make any Investment in any Affiliate of the Company; provided
--------
that the Company and its Subsidiaries may
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----------------
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<PAGE>
make advances and loans to its directors, officers and employees in an
aggregate principal amount up to but not exceeding $5,000,000 at any one
time outstanding; and provided that, any Insurance Subsidiary may, subject
--------
to Section 8.08, make Investments in the ordinary course of its investment
activities in securities of any Existing Institutional Holder.
(b) transfer, sell, lease, assign or otherwise dispose of any
Property to any Affiliate of the Company;
(c) purchase or acquire Property from any Affiliate of the Company;
or
(d) enter into any other transaction directly or indirectly with or
for the benefit of any Affiliate of the Company (including, without
limitation, Guarantees and assumptions of obligations of any Affiliate of
the Company);
provided that the Company and its Subsidiaries may enter into transactions
- --------
(other than Investments by the Company or any of its Subsidiaries in any
Affiliate of the Company unless expressly permitted under clause (a) above)
providing for the leasing of Property, the rendering or receipt of services or
the purchase or sale of Property in the ordinary course of business if the
monetary or business consideration arising therefrom would be substantially as
advantageous to the Company and its Subsidiaries as the monetary or business
consideration which would obtain in a comparable transaction with a Person not
an Affiliate of the Company; and provided further that any Insurance Subsidiary
--------
may issue or sell insurance policies, guarantees and other instruments for the
benefit of any Affiliate of the Company in the ordinary course of the insurance
business of such Insurance Subsidiary.
8.13 Use of Proceeds. The Company will use the proceeds of the Loans
---------------
hereunder to refinance up to $16,000,000 aggregate principal amount of the
Company's floating rate subordinated notes due August 20, 1996 and for general
corporate purposes (in compliance with all applicable legal and regulatory
requirements); provided that neither the Administrative Agent nor any Bank shall
--------
have any responsibility as to the use of any of such proceeds.
8.14 Certain Obligations Respecting Subsidiaries.
-------------------------------------------
(a) Subject to Section 8.05 hereof, the Company will, and will cause
each of CRC, Capital Mortgage, Capital Mortgage Bermuda and Capital Credit to,
take such action from time to time as shall be necessary to ensure that each of
CRC and Capital
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<PAGE>
Mortgage, Capital Mortgage Bermuda and Capital Credit is a Wholly-Owned
Subsidiary of the Company.
(b) The Company will not permit any of CRC, Capital Mortgage, Capital
Mortgage Bermuda and Capital Credit to issue any shares of stock of any class
whatsoever to any Person (other than to the Company).
8.15 Modifications of Certain Documents. The Company will not
----------------------------------
consent to any modification, supplement or waiver of any of the provisions of
the Indenture that would materially increase the obligations, or materially
reduce the rights, of the Company or any of its Subsidiaries thereunder.
8.16 Ratings. The Company will not allow the Rating by S&P of CRC to
-------
be less than AA+ (or to be withdrawn) at any time or the Rating of Capital
Mortgage to be less than AA- (or to be withdrawn) at any time.
8.17. Dividends to or Investments in the Company by Subsidiaries.
----------------------------------------------------------
The Company will not, nor will it permit any of its Subsidiaries, to issue any
securities or enter into any agreements (other than with or as required by
applicable regulatory authorities) that will either (i) limit the ability of any
of the Subsidiaries of the Company to declare or pay or set apart any funds for
the payment of any dividend or make any distribution to or Investment in the
Company or (ii) prevent such Subsidiary from paying to the Company the entire
amount available to be paid as dividends or distributions by such Subsidiary;
provided, that nothing herein shall be deemed to require any Subsidiary of the
- --------
Company to pay any dividend to, or make any Investment in, the Company in excess
of the amount necessary to enable the Company to make all payments required
hereunder and under the Notes.
Section 9. Events of Default. If one or more of the following events
-----------------
(herein called "Events of Default") shall occur and be continuing:
-----------------
(a) The Company shall: (i) default in the payment of any principal
of any Loan when due (whether at stated maturity or upon mandatory or
optional prepayment); or (ii) default in the payment of any interest on any
Loan or any commitment fee hereunder when due and such default shall have
continued unremedied for two or more Business Days; or
(b) The Company or any of its Subsidiaries shall default in the
payment when due of any principal of or interest on any of its Indebtedness
aggregating $10,000,000 or more (other than (i) the Indebtedness referred
to in
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<PAGE>
paragraph (a) above or (ii) Indebtedness under the $75,000,000 Credit
Agreement dated as of January 24, 1994 among CRC, the banks party thereto
and Deutsche Bank AG, New York Branch, as agent, as amended); or any event
specified in any note, agreement, indenture or other document evidencing or
relating to any such Indebtedness shall occur if the effect of such event
is to cause, or (with the giving of any notice or the lapse of time or
both) to permit the holder or holders of such Indebtedness (or a trustee or
agent on behalf of such holder or holders) to cause, such Indebtedness to
become due, or to be prepaid in full (whether by redemption, purchase,
offer to purchase or otherwise), prior to its stated maturity or to have
the interest rate thereon reset to a level so that securities evidencing
such Indebtedness trade at a level specified in relation to the par value
thereof; or
(c) Any representation, warranty or certification made or deemed made
herein or in any other Basic Document (or in any modification or supplement
hereto or thereto) by the Company, or any certificate furnished to any Bank
or the Administrative Agent pursuant to the provisions hereof or thereof,
shall prove to have been false or misleading as of the time made, deemed
made or furnished in any material respect; or
(d) The Company shall default in the performance of any of its
obligations under any of Sections 8.01(h), 8.05 to 8.10 (inclusive) and
8.12 to 8.17 (inclusive) hereof; or the Company shall default in the
performance of any of its other obligations in this Agreement or any other
Basic Document and such default shall continue unremedied for a period of
15 Business Days after notice thereof to the Company by the Administrative
Agent or any Bank (through the Administrative Agent); or
(e) The Company or any of its Material Subsidiaries shall admit in
writing its inability to, or be generally unable to, pay its debts as such
debts become due; or
(f) The Company or any of its Material Subsidiaries shall (i) apply
for or consent to the appointment of, or the taking of possession by, a
receiver, custodian, trustee, examiner, rehabilitator, conservator or
liquidator of itself or of all or a substantial part of its Property, (ii)
make a general assignment for the benefit of its creditors, (iii) commence
a voluntary case under the Bankruptcy Code, (iv) file a petition seeking to
take advantage of any other law relating to bankruptcy, insolvency,
reorganization, liquidation, dissolution, arrangement or winding-up, or
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<PAGE>
composition or readjustment of debts, (v) fail to controvert in a timely
and appropriate manner, or acquiesce in writing to, any petition filed
against it in an involuntary case under the Bankruptcy Code or (vi) take
any corporate action for the purpose of effecting any of the foregoing; or
(g) A proceeding or case shall be commenced, without the application
or consent of the Company or any of its Material Subsidiaries, in any court
of competent jurisdiction, seeking (i) its reorganization, rehabilitation,
conservation, liquidation, dissolution, arrangement or winding-up, or the
composition or readjustment of its debts, (ii) the appointment of a
receiver, custodian, trustee, examiner, rehabilitator, conservator,
liquidator or the like of the Company or such Subsidiary or of all or any
substantial part of its Property, or (iii) similar relief in respect of the
Company or such Subsidiary under any law relating to bankruptcy,
insolvency, reorganization, rehabilitation, conservation, liquidation,
winding-up, or composition or adjustment of debts, and such proceeding or
case shall continue undismissed, or an order, judgment or decree approving
or ordering any of the foregoing (other than an order for relief in an
involuntary case under the Bankruptcy Code) shall be entered and continue
unstayed and in effect, for a period of 60 or more days; or an order for
relief against the Company or such Subsidiary shall be entered in an
involuntary case under the Bankruptcy Code; or
(h) A judgment or judgments for the payment of money in excess of
$10,000,000 in the aggregate (exclusive of judgment amounts fully covered
by insurance where the insurer has admitted liability in respect of such
judgment) shall be rendered by one or more courts, administrative tribunals
or other bodies having jurisdiction against the Company or any of its
Subsidiaries and the same shall not be discharged (or provision shall not
be made for such discharge), or a stay of execution thereof shall not be
procured, within 60 days from the date of entry thereof and the Company or
the relevant Subsidiary shall not, within said period of 60 days, or such
longer period during which execution of the same shall have been stayed,
appeal therefrom and cause the execution thereof to be stayed during such
appeal; or
(i) An event or condition specified in Section 8.01(g) hereof shall
occur or exist with respect to any Plan or Multiemployer Plan and, as a
result of such event or condition, together with all other such events or
conditions, the Company or any ERISA Affiliate shall incur
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----------------
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<PAGE>
or in the opinion of the Majority Banks shall be reasonably likely to incur
a liability to a Plan, a Multiemployer Plan or PBGC (or any combination of
the foregoing) which, in the determination of the Majority Banks, could
have a Material Adverse Effect; or
(j) A Change in Control shall occur;
THEREUPON: (1) in the case of an Event of Default other than one referred to in
paragraph (f) or (g) of this Section 9 with respect to the Company, the
Administrative Agent may and, upon request of the Majority Banks, shall, by
notice to the Company, terminate the Commitments and/or declare the principal
amount then outstanding of, and the accrued interest on, the Loans and all other
amounts payable by the Company hereunder and under the Notes (including, without
limitation, any amounts payable under Section 5.04 hereof) to be forthwith due
and payable, whereupon such amounts shall be immediately due and payable without
presentment, demand, protest or other formalities of any kind, all of which are
hereby expressly waived by the Company; and (2) in the case of the occurrence of
an Event of Default referred to in paragraph (f) or (g) of this Section 9 with
respect to the Company, the Commitments shall automatically be terminated and
the principal amount then outstanding of, and the accrued interest on, the Loans
and all other amounts payable by the Company hereunder and under the Notes
(including, without limitation, any amounts payable under Section 5.04 hereof)
shall automatically become immediately due and payable without presentment,
demand, protest or other formalities of any kind, all of which are hereby
expressly waived by the Company.
Section 10. The Administrative Agent.
------------------------
10.01 Appointment, Powers and Immunities. Each Bank hereby
----------------------------------
irrevocably (subject to Section 10.08 hereof) appoints and authorizes the
Administrative Agent to act as its agent hereunder and under the other Basic
Documents with such powers as are specifically delegated to the Administrative
Agent by the terms of this Agreement and of the other Basic Documents, together
with such other powers as are reasonably incidental thereto. The Administrative
Agent (which term as used in this sentence and in Section 10.05 and the first
sentence of Section 10.06 hereof shall include reference to its affiliates and
its own and its affiliates' officers, directors, employees and agents): (a)
shall have no duties or responsibilities except those expressly set forth in
this Agreement and in the other Basic Documents, and shall not by reason of this
Agreement or any other Basic Document be a trustee for any Bank; (b) shall not
be responsible to the Banks for any recitals, statements, representations or
warranties contained in this Agreement or in
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<PAGE>
any other Basic Document, or in any certificate or other document referred to or
provided for in, or received by any of them under, this Agreement or any other
Basic Document, or for the value, validity, effectiveness, genuineness,
enforceability or sufficiency of this Agreement, any Note or any other Basic
Document or any other document referred to or provided for herein or therein or
for any failure by the Company or any other Person to perform any of its
obligations hereunder or thereunder; (c) shall not be required to initiate or
conduct any litigation or collection proceedings hereunder or under any other
Basic Document; and (d) shall not be responsible for any action taken or omitted
to be taken by it hereunder or under any other Basic Document or under any other
document or instrument referred to or provided for herein or therein or in
connection herewith or therewith, except for its own gross negligence or willful
misconduct. The Administrative Agent may employ agents and attorneys-in-fact
and shall not be responsible for the negligence or misconduct of any such agents
or attorneys-in-fact selected by it in good faith. The Administrative Agent may
deem and treat the payee of any Note as the holder thereof for all purposes
hereof unless and until a notice of the assignment or transfer thereof shall
have been filed with the Administrative Agent, together with the consent of the
Company to such assignment or transfer (to the extent provided in Section
11.06(b) hereof).
10.02 Reliance by Administrative Agent. The Administrative Agent
--------------------------------
shall be entitled to rely upon any certification, notice or other communication
(including, without limitation, any thereof by telephone, telecopy, telex,
telegram or cable) believed by it to be genuine and correct and to have been
signed or sent by or on behalf of the proper Person or Persons, and upon advice
and statements of legal counsel, independent accountants and other experts
selected by the Administrative Agent. As to any matters not expressly provided
for by this Agreement or any other Basic Document, the Administrative Agent
shall in all cases be fully protected in acting, or in refraining from acting,
hereunder or thereunder in accordance with instructions given by the Majority
Banks or, if provided herein, in accordance with the instructions given by the
Majority Banks or all of the Banks as is required in such circumstance, and such
instructions of such Banks and any action taken or failure to act pursuant
thereto shall be binding on all of the Banks.
10.03 Defaults. The Administrative Agent shall not be deemed to have
--------
knowledge or notice of the occurrence of a Default unless the Administrative
Agent has received notice from a Bank or the Company specifying such Default and
stating that such notice is a "Notice of Default". In the event that the
Administrative Agent receives such a notice of the occurrence of
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<PAGE>
a Default, the Administrative Agent shall give prompt notice thereof to the
Banks (and shall give each Bank prompt notice of each such non-payment). The
Administrative Agent shall (subject to Sections 10.01, 10.07 and 11.04 hereof)
take such action with respect to such Default as shall be directed by the
Majority Banks, provided that, unless and until the Administrative Agent shall
--------
have received such directions, the Administrative Agent may (but shall not be
obligated to) take such action, or refrain from taking such action, with respect
to such Default as it shall deem advisable in the best interest of the Banks
except to the extent that this Agreement expressly requires that such action be
taken, or not be taken, only with the consent or upon the authorization of the
Majority Banks or all of the Banks.
10.04 Rights as a Bank. With respect to its Commitments and the
----------------
Loans made by it, Chase (and any successor acting as Administrative Agent) in
its capacity as a Bank hereunder shall have the same rights and powers hereunder
as any other Bank and may exercise the same as though it were not acting as the
Administrative Agent, and the term "Bank" or "Banks" shall, unless the context
otherwise indicates, include the Administrative Agent in its individual
capacity. Chase (and any successor acting as Administrative Agent) and its
affiliates may (without having to account therefor to any Bank) accept deposits
from, lend money to, make investments in and generally engage in any kind of
banking, trust or other business with the Company (and any of its Subsidiaries
or Affiliates) as if it were not acting as the Administrative Agent, and Chase
and its affiliates may accept fees and other consideration from the Company for
services in connection with this Agreement or otherwise without having to
account for the same to the Banks.
10.05 Indemnification. The Banks agree to indemnify the
---------------
Administrative Agent (to the extent not reimbursed under Section 11.03 hereof,
but without limiting the obligations of the Company under said Section 11.03)
ratably in accordance with the aggregate principal amount of the Loans held by
the Banks (or, if no Loans are at the time outstanding, ratably in accordance
with their respective Commitments), for any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind and nature whatsoever that may be imposed on, incurred
by or asserted against the Administrative Agent (including by any Bank) arising
out of or by reason of any investigation in or in any way relating to or arising
out of this Agreement or any other Basic Document or any other documents
contemplated by or referred to herein or therein or the transactions
contemplated hereby or thereby (including, without limitation, the costs and
expenses that the Company is obligated to pay under Section 11.03 hereof, but
excluding, unless a Default has occurred and is continuing,
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<PAGE>
normal administrative costs and expenses incident to the performance of its
agency duties hereunder) or the enforcement of any of the terms hereof or
thereof or of any such other documents, provided that no Bank shall be liable
--------
for any of the foregoing to the extent they arise from the gross negligence or
willful misconduct of the party to be indemnified.
10.06 Non-Reliance on Administrative Agent and Other Banks. Each
----------------------------------------------------
Bank agrees that it has, independently and without reliance on the
Administrative Agent or any other Bank, and based on such documents and
information as it has deemed appropriate, made its own credit analysis of the
Company and its Subsidiaries and decision to enter into this Agreement and that
it will, independently and without reliance upon the Administrative Agent or any
other Bank, and based on such documents and information as it shall deem
appropriate at the time, continue to make its own analysis and decisions in
taking or not taking action under this Agreement. The Administrative Agent
shall not be required to keep itself informed as to the performance or
observance by the Company of this Agreement or any of the other Basic Documents
or any other document referred to or provided for herein or therein or to
inspect the Properties or books of the Company or any of its Subsidiaries.
Except for notices, reports and other documents and information expressly
required to be furnished to the Banks by the Administrative Agent hereunder, the
Administrative Agent shall not have any duty or responsibility to provide any
Bank with any credit or other information concerning the affairs, financial
condition or business of the Company or any of its Subsidiaries (or any of their
affiliates) that may come into the possession of the Administrative Agent or any
of its affiliates.
10.07 Failure to Act. Except for action expressly required of the
--------------
Administrative Agent hereunder and under the other Basic Documents, the
Administrative Agent shall in all cases be fully justified in failing or
refusing to act hereunder and thereunder unless it shall receive further
assurances to its satisfaction from the Banks of their indemnification
obligations under Section 10.05 hereof against any and all liability and expense
that may be incurred by it by reason of taking or continuing to take any such
action.
10.08 Resignation or Removal of Administrative Agent. Subject to the
----------------------------------------------
appointment and acceptance of a successor Administrative Agent as provided
below, the Administrative Agent may resign at any time by giving notice thereof
to the Banks and the Company, and the Administrative Agent may be removed at any
time with or without cause by the Majority Banks. Upon any such resignation or
removal, the Majority Banks shall have the right to appoint a successor
Administrative Agent. If no successor
Credit Agreement
----------------
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<PAGE>
Administrative Agent shall have been so appointed by the Majority Banks and
shall have accepted such appointment within 30 days after the retiring
Administrative Agent's giving of notice of resignation or the Majority Banks'
removal of the retiring Administrative Agent, then the retiring Administrative
Agent may, on behalf of the Banks, after consultation with the Company, appoint
a successor Administrative Agent, that shall be a bank which has an office in
New York, New York and which has a combined capital and surplus of at least
$500,000,000. Upon the acceptance of any appointment as Administrative Agent
hereunder by a successor Administrative Agent, such successor Administrative
Agent shall thereupon succeed to and become vested with all the rights, powers,
privileges and duties of the retiring Administrative Agent, and the retiring
Administrative Agent shall be discharged from its duties and obligations
hereunder. After any retiring Administrative Agent's resignation or removal
hereunder as Administrative Agent, the provisions of this Section 10 shall
continue in effect for its benefit in respect of any actions taken or omitted to
be taken by it while it was acting as the Administrative Agent.
10.09 Arranger. The Arranger named on the cover page of this
--------
Agreement is not a party thereto and shall not have any duties or
responsibilities hereunder.
Section 11. Miscellaneous.
-------------
11.01 Waiver. No failure on the part of the Administrative Agent or
------
any Bank to exercise and no delay in exercising, and no course of dealing with
respect to, any right, power or privilege under this Agreement or any Note shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, power or privilege under this Agreement or any Note preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
The remedies provided herein are cumulative and not exclusive of any remedies
provided by law.
11.02 Notices. All notices, requests and other communications
-------
provided for herein and under the Pledge Agreement (including, without
limitation, any modifications of, or waivers, requests or consents under, this
Agreement) shall be given or made in writing (including, without limitation, by
telecopy) delivered to the intended recipient at the "Address for Notices"
specified below its name on the signature pages hereof); or, as to any party, at
such other address as shall be designated by such party in a notice to each
other party. Except as otherwise provided in this Agreement, all such
communications shall be deemed to have been duly given when transmitted by
telecopier or
Credit Agreement
----------------
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<PAGE>
personally delivered or, in the case of a mailed notice, upon receipt, in each
case given or addressed as aforesaid.
11.03 Expenses, Etc. The Company agrees to pay or reimburse each of
--------------
the Banks and the Administrative Agent for paying: (a) all reasonable out-of-
pocket costs and expenses of the Administrative Agent (including, without
limitation, the reasonable fees and expenses of Milbank, Tweed, Hadley & McCloy,
special New York counsel to Chase), in connection with (i) the negotiation,
preparation, execution and delivery of this Agreement and the other Basic
Documents and the making of the Loans hereunder and (ii) any modification,
supplement or waiver of any of the terms of this Agreement or any of the other
Basic Documents; (b) all costs and expenses of the Banks and the Administrative
Agent (including, without limitation, reasonable counsels' fees) in connection
with (i) any Default and any enforcement or collection proceedings resulting
therefrom or in connection with the negotiation of any restructuring or "work-
out" (whether or not consummated) of the obligations of the Company hereunder or
under any of the other Basic Documents and (ii) the enforcement of this Section
11.03; and (c) all transfer, stamp, documentary or other similar taxes,
assessments or charges levied by any governmental or revenue authority in
respect of this Agreement or any of the other Basic Documents or any other
document referred to herein or therein and all costs, expenses, taxes,
assessments and other charges incurred in connection with any filing,
registration, recording or perfection of any security interest contemplated by
any Basic Document or any other document referred to therein.
The Company hereby agrees to indemnify the Administrative Agent and
each Bank and their respective directors, officers, employees, attorneys and
agents from, and hold each of them harmless against, any and all losses,
liabilities, claims, damages or expenses incurred by any of them (other than
liability of the Administrative Agent to any Bank) arising out of or by reason
of any investigation or litigation or other proceedings (including any
threatened investigation or litigation or other proceedings and whether or not
the Administrative Agent or such Bank or other Person is a party thereto)
relating to the extensions of credit hereunder or any actual or proposed use by
the Company or any of its Subsidiaries of the proceeds of any of the extensions
of credit hereunder, including, without limitation, the reasonable fees and
disbursements of counsel incurred in connection with any such investigation or
litigation or other proceedings (but excluding any such losses, liabilities,
claims, damages or expenses incurred by reason of the gross negligence or
willful misconduct of the Person to be indemnified).
Credit Agreement
----------------
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<PAGE>
11.04 Amendments, Etc. Except as otherwise expressly provided in
----------------
this Agreement, any provision of this Agreement may be modified or supplemented
only by an instrument in writing signed by the Company, the Administrative Agent
and the Majority Banks, or by the Company and the Administrative Agent acting
with the consent of the Majority Banks, and any provision of this Agreement may
be waived by the Majority Banks or by the Administrative Agent acting with the
consent of the Majority Banks; provided that: (a) no modification, supplement
--------
or waiver shall, unless by an instrument signed by all of the Banks or by the
Administrative Agent acting with the consent of all of the Banks (i) increase or
extend the term of any of the Commitments, or extend the time or waive any
requirement for the reduction or termination of any of the Commitments, (ii)
extend any date fixed for the payment of principal of or interest on any Loan or
any fee hereunder (other than any fee payable solely for account of the
Administrative Agent), (iii) reduce the amount of any such payment of principal,
(iv) reduce the rate at which interest is payable thereon or any fee is payable
hereunder (other than any fee payable solely for account of the Administrative
Agent), (v) reduce the obligations of the Company to prepay Loans, (vi) alter
the terms of any of Sections 2.08, 4.02 or 4.07 hereof or this Section 11.04,
(vii) modify the definition of the term "Majority Banks" or modify in any other
manner the number or percentage of the Banks required to make any determinations
or waive any rights hereunder or to modify any provision hereof, or (viii) waive
any of the conditions precedent set forth in Section 6 hereof; and (b) any
modification of any of the rights or obligations of the Administrative Agent
hereunder shall require the consent of the Administrative Agent.
11.05 Successors and Assigns. This Agreement shall be binding upon
----------------------
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns.
11.06 Assignments and Participations.
------------------------------
(a) The Company may not assign any of its rights or obligations
hereunder or under the Notes without the prior consent of all of the Banks and
the Administrative Agent.
(b) Each Bank may, at any time or from time to time, assign to one or
more other Persons all or any portion of its Loans, its Notes, and its
Commitment (but only with the consent of the Company and the Administrative
Agent, which consent shall not be unreasonably withheld); provided that (i) no
--------
such consent by the Company or the Administrative Agent shall be required in the
case of any assignment to another Bank; (ii) any such partial assignment shall
be in an amount at least equal to $5,000,000 or any integral multiple of
$1,000,000 in excess thereof unless the
Credit Agreement
----------------
-62-
<PAGE>
Company and the Administrative Agent shall otherwise agree; (iii) each such
assignment by a Bank of its Revolving Credit Loans, Revolving Credit Note, Term
Loans, Term Loan Notes or Commitment shall be made in such manner so that the
same portion of its Revolving Credit Loans, Revolving Credit Note, Term Loans,
Term Loan Notes and Commitment is assigned to the respective assignee; and (iv)
upon each such assignment the assignor and assignee shall deliver to the Company
and the Administrative Agent an Assignment and Acceptance substantially in the
form of Exhibit E hereto. Upon execution and delivery by the assignor and the
assignee to the Company and the Administrative Agent of such Assignment and
Acceptance, and upon consent thereto by the Company and the Administrative
Agent, to the extent required above, the assignee shall have, to the extent of
such assignment (unless otherwise provided in such assignment with the consent
of the Company and the Administrative Agent), the obligations, rights and
benefits of a Bank hereunder holding the Commitment and Loans (or portions
thereof) assigned to it (in addition to the Commitment and Loans, if any,
theretofore held by such assignee) and the assigning Bank shall, to the extent
of such assignment, be released from the Commitment (or portion thereof) so
assigned. Upon each such assignment the assigning Bank shall pay the
Administrative Agent an assignment fee of $3,000.
(c) A Bank may, at any time or from time to time, sell or agree to
sell to one or more other Persons a participation in all or any part of any
Loans held by it, or in its Commitment, but no purchaser of a participation (a
"Participant") shall, except as otherwise provided in Section 4.07(c) hereof,
- ------------
have any rights or benefits under this Agreement or any Note or any other Basic
Document (the Participant's rights against such Bank in respect of such
participation to be those set forth in the agreements executed by such Bank in
favor of the Participant). All amounts payable by the Company to any Bank under
Section 5 hereof in respect of the Loans held by it, and its Commitment, shall
be determined as if such Bank had not sold or agreed to sell any participations
in such Loans and Commitment, and as if such Bank were funding each of such Loan
and Commitment in the same way that it is funding the portion of such Loan and
Commitment in which no participations have been sold. In no event shall a Bank
that sells a participation agree with the Participant to take or refrain from
taking any action hereunder or under any other Basic Document except that such
Bank may agree with the Participant that it will not, without the consent of the
Participant, agree to (i) increase or extend the term, or extend the time or
waive any requirement for the reduction or termination, of such Bank's related
Commitment, (ii) extend any date fixed for the payment of principal of or
interest on the related Loan or Loans or any portion of any fee hereunder
payable to the Participant, (iii) reduce the amount of any such payment
Credit Agreement
----------------
-63-
<PAGE>
of principal, (iv) reduce the rate at which interest is payable thereon, or any
fee hereunder payable to the Participant, to a level below the rate at which the
Participant is entitled to receive such interest or fee, (v) increase the rights
or reduce the obligations of the Company to prepay the related Loans or (vi)
consent to any modification, supplement or waiver hereof or of any of the other
Basic Documents to the extent that the same, under Section 10.09 or 11.04
hereof, requires the consent of each Bank.
(d) In addition to the assignments and participations permitted by
the foregoing provisions of this Section 11.06, any Bank may assign and pledge
all or any portion of its Loans and its Notes to any Federal Reserve Bank as
collateral security pursuant to Regulation A and any Operating Circular issued
by such Federal Reserve Bank. No such assignment shall release the assigning
Bank from its obligations hereunder.
(e) A Bank may furnish any information concerning the Company or any
of its Subsidiaries in the possession of such Bank from time to time to
assignees and participants (including prospective assignees and participants),
subject, however, to the provisions of Section 11.12(b) hereof.
(f) Anything in this Section 11.06 to the contrary notwithstanding,
neither the Company nor any of its Subsidiaries or Affiliates may acquire
(whether by assignment, participation or otherwise), and no Bank shall assign or
participate to the Company or any of its Subsidiaries or Affiliates, any
interest in any Commitment or Loan without the prior consent of each Bank.
11.07 Survival. The obligations of the Company under Sections 5.01,
--------
5.04, 5.05 and 11.03 hereof and the obligations of the Banks under Section 10.05
hereof shall survive the repayment of the Loans and the termination of the
Commitments. In addition, each representation and warranty made, or deemed to
be made by a notice of any Loan, herein or pursuant hereto shall survive the
making of such representation and warranty, and no Bank shall be deemed to have
waived, by reason of making any Loan, any Default which may arise by reason of
such representation or warranty proving to have been false or misleading,
notwithstanding that such Bank or the Administrative Agent may have had notice
or knowledge or reason to believe that such representation or warranty was false
or misleading at the time such Loan was made.
11.08 Captions. The table of contents and captions and section
--------
headings appearing herein are included solely for convenience of reference and
are not intended to affect the interpretation of any provision of this
Agreement.
Credit Agreement
----------------
-64-
<PAGE>
11.09 Counterparts. This Agreement may be executed in any number of
------------
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Agreement by signing
any such counterpart.
11.10 Governing Law; Submission to Jurisdiction. This Agreement and
-----------------------------------------
the Notes shall be governed by, and construed in accordance with, the law of the
State of New York. The Company hereby submits to the nonexclusive jurisdiction
of the United States District Court for the Southern District of New York and of
any New York State court sitting in New York County, and any appellate court
therefrom, for the purposes of all legal proceedings arising out of or relating
to this Agreement or the transactions contemplated hereby. The Company
irrevocably waives, to the fullest extent permitted by applicable law, any
objection which it may now or hereafter have to the laying of the venue of any
such proceeding brought in such a court and any claim that any such proceeding
brought in such a court has been brought in an inconvenient forum.
11.11 Waiver of Jury Trial. EACH OF THE COMPANY, THE ADMINISTRATIVE
--------------------
AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED
BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY.
11.12 Treatment of Certain Information; Confidentiality.
-------------------------------------------------
(a) The Company acknowledges that from time to time financial
advisory, investment banking and other services may be offered or provided to
the Company or one or more of its Subsidiaries (in connection with this
Agreement or otherwise) by any Bank or by one or more Subsidiaries or Affiliates
of such Bank and the Company hereby authorizes each Bank to share any
information delivered to such Bank by the Company and its Subsidiaries pursuant
to this Agreement, or in connection with the decision of such Bank to enter into
this Agreement, to any such Subsidiary or Affiliate, it being understood that
any such Subsidiary or Affiliate receiving such information shall be bound by
the provisions of paragraph (b) below as if it were a Bank hereunder.
(b) Each Bank and the Administrative Agent agrees (on behalf of
itself and each of its affiliates, directors, officers, employees and
representatives) to use reasonable precautions to keep confidential, in
accordance with their customary procedures for handling confidential information
of this nature and in
Credit Agreement
----------------
-65-
<PAGE>
accordance with safe and sound banking practices, any non-public information
supplied to it by the Company pursuant to this Agreement which is identified by
the Company as being confidential at the time the same is delivered to the Banks
or the Administrative Agent, provided that nothing herein shall limit the
--------
disclosure of any such information (i) to the extent required by statute, rule,
regulation or judicial process (with, unless prohibited by applicable law, prior
notice thereof to the Company giving sufficient time, if practicable, to afford
the Company an opportunity to seek a protective order), (ii) to counsel,
auditors or accountants for any of the Banks or the Administrative Agent (so
long as they are advised of the non-public nature of the information), (iii) to
bank examiners, (iv) to the Administrative Agent or any other Bank (or to Chase
Securities, Inc.), (v) in connection with any litigation to which any one or
more of the Banks or the Administrative Agent is a party (with, except in the
case of any litigation to which the Company or any of its Subsidiaries is also a
party, or unless prohibited by applicable law, prior notice to the Company
giving sufficient time, if practicable, to afford the Company an opportunity to
seek a protective order), (vi) to a Subsidiary or Affiliate of such Bank as
provided in paragraph (a) above or (vii) to any assignee or participant (or
prospective assignee or participant) so long as such assignee or participant (or
prospective assignee or participant) first executes and delivers to the
respective Bank and the Company a Confidentiality Agreement substantially in the
form of Exhibit D hereto; provided, further, that in no event shall any Bank or
-------- -------
the Administrative Agent be obligated or required to return any materials
furnished by the Company. The obligations of each Bank under this Section 11.12
shall supersede and replace the obligations of such Bank under the
confidentiality letter in respect of this financing signed and delivered by such
Bank to the Company prior to the date hereof.
Credit Agreement
----------------
-66-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered as of the day and year first above written.
CAPITAL RE CORPORATION
By: /s/ David A. Buzen
-------------------------
Name: David A. Buzen
Title: EVP & CFO
By: /s/ Howard S. Yaruss
-------------------------
Name: Howard S. Yaruss
Title: Vice President
Address for Notices:
1325 Avenue of the Americas
New York, New York 10019
Attention: Chief Financial Officer
Telecopier No.: (212) 581-3268
Telephone No.: (212) 974-0100
Credit Agreement
----------------
-67-
<PAGE>
BANKS
-----
Commitment THE CHASE MANHATTAN BANK
- ----------
$25,000,000
By /s/ J. David Parker, Jr.
---------------------------
Title: Vice President
Lending Office for all Loans:
The Chase Manhattan Bank
270 Park Avenue
New York, New York 10017
Address for Notices:
The Chase Manhattan Bank
1 Chase Manhattan Plaza
4th Floor
New York, NY 10081
Attention: J. David Parker, Jr.
Vice President
Telecopier No.: (212) 552-3651
Telephone No.: (212) 552-7631
Credit Agreement
----------------
-68-
<PAGE>
THE CHASE MANHATTAN BANK
as Administrative Agent
By /s/ J. David Parker, Jr.
------------------------------
Title: Vice President
Address for Notices to
the Administrative Agent:
The Chase Manhattan Bank
140 East 45th Street, 29th Floor
New York, New York 10017
Attention: Agent Bank Services
Telecopier No.: (212) 662-0122
Telephone No.: (212) 662-0004
With a copy to:
The Chase Manhattan Bank
1 Chase Manhattan Plaza
4th Floor
New York, NY 10081
Attention: J. David Parker, Jr.
Vice President
Telecopier No.: (212) 552-3651
Telephone No.: (212) 552-7631
Credit Agreement
----------------
-69-
<PAGE>
SCHEDULE I
Material Agreements and Liens
-----------------------------
[See Sections 7.12 and 8.07(b)]
Part A - Material Agreements
-------------------
Part B - Liens
-----
None
AMENDED AND RESTATED
AGREEMENT CONCERNING FILING OF
CONSOLIDATED FEDERAL INCOME TAX RETURNS
In consideration of the mutual undertakings and agreements contained herein, it
is agreed by and among the undersigned companies that:
1. Each company agrees to its inclusion in a consolidated federal income tax
return for calendar year 1988 and succeeding taxable years during which it
remains a member of the affiliated group and each company agrees to pay its
proportionate share of the consolidated federal tax burden that would have
been paid if said company had filed on a separate return basis. Under no
circumstances shall the tax charged to each company under this Agreement be
more than it would have paid if it had filed on a separate return basis. If
tax losses or other tax benefits of one member of the group are utilized by
another member of the group, it is agreed that reimbursement will be made
under paragraph three (3) for such tax benefits utilized.
2. The amount of any payment of federal income taxes under this Agreement shall
be calculated by Capital Re Corporation (the "Corporation"). The companies
agree that the Corporation shall make any necessary adjustments to equalize
the effect of the alternative minimum tax.
3. All intercompany balances will be settled by the necessary payments to and
from the various companies at the same time as payments would have been made
to the Internal Revenue Service if separate returns had been filed by all
members of the affiliated group on the date the consolidated return is filed
or within ten days after such date. If the amount paid by any company to the
Corporation for federal income taxes under this Agreement is greater than
the actual payment made by the Corporation to the Internal Revenue Service,
then the difference shall be placed in escrow. Escrow assets may be released
to the Corporation from the escrow account at such time as the permissible
loss carryback has elapsed. Once a company is "paid" for its credits, it
cannot use such credits in the calculation of its tax liability under the
separate return basis. Any of the company's credits which are not used in
the consolidated return and for which it has not been paid shall be retained
by such company for possible future use.
4. This Agreement will terminate upon the occurrence of any of the following
events:
(a) the parties agree in writing to such termination,
(b) the Corporation does not file a consolidated federal income tax return
for any taxable year, or
(c) as to any company, if membership of such company in the affiliated
group or consolidated group ceases or is terminated for any reason
whatsoever.
5. Notwithstanding the termination of this Agreement, its provisions will
remain in effect with respect to any period of time for which the taxable
income of any company was included in any consolidated federal income tax
return of the Corporation.
6. Upon termination of this Agreement, all material including, but not limited
to, returns, supporting schedules, workpapers, correspondence and other
documents relating to the consolidated federal income tax returns shall be
made available to any of the parties to this Agreement during regular
business hours.
7. This Agreement shall become a binding agreement among the undersigned
companies upon execution hereof by each and an entity hereafter becoming a
member of the affiliated group shall become a participant in this Agreement
simply by executing an appropriate instrument evidencing its wish to
participate (provided that any necessary regulatory clearances shall have
first been obtained).
8. This Agreement shall not be assignable by any party hereto, without the
prior written consent of each of the other undersigned companies.
9. This Agreement may be executed in any number of counterparts each of which
will be deemed an original, but all of which together shall constitute one
of the same instrument.
10. As a condition precedent to any right of action hereunder, if any dispute
shall arise between any two parties hereto with reference to the
interpretation of this Agreement or their rights with respect to any
transaction involved, such dispute, upon the written request of either
party, shall be submitted to three arbitrators, one to be chosen by each
party, and the third by the two arbitrators so chosen. If either party
refuses or neglects to appoint an arbitrator within thirty (30) days after
the receipt of written notice from the other party requesting it to do so,
the requesting party may appoint two arbitrators. If the two arbitrators
fail to agree in the selection of a third arbitrator within thirty (30) days
of their appointment, each of them shall name two, of whom the other
shall decline one and the decision shall be made by drawing lots. All
arbitrators shall be active or retired disinterested officers of insurance
or reinsurance companies not under the control of any party hereto.
Except as may be otherwise provided herein, the arbitrators shall promulgate
rules to interpret this Agreement based upon the Commercial Arbitration
Rules of the American Arbitration Association. The arbitrators shall
interpret this Agreement as an honorable engagement rather than as a legal
obligation and will make their award with the view to effecting the general
purpose and intent of this Agreement, rather than in accordance with the
literal interpretation of this Agreement.
The party requesting the arbitration shall submit its case to the
arbitrators within forty-five (45) days of the appointment of the third
arbitrator. The party responding to the request for arbitration shall submit
its case to the arbitrators within forty-five (45) days of the receipt of
the petitioner's case. A hearing shall be held within thirty (30) days after
receipt of the parties cases in writing. The arbitrators shall render their
decision within thirty (30) days after completion of the hearing. The
decision in writing of any two arbitrators, when filed with the two
disputing parties hereto, shall be final and binding on both parties.
Judgment may be entered upon the final decision the arbitrators in any court
having jurisdiction. Each disputing party shall bear the expense of its own
arbitrator and shall jointly and equally bear with the other party the
expense of the third arbitrator and arbitration. Said arbitration shall take
place in New York City unless some other place is mutually agreed upon by
the two disputing parties hereto.
11. This Agreement shall be interpreted in accordance with the laws of the
State of New York.
IN WITNESS WHEREOF, the undersigned companies as of the 13th day of Nov., 1995,
have by their duly authorized officers executed this Agreement.
ATTEST: CAPITAL RE CORPORATION
/s/ (SIGNATURE APPEARS HERE) By: /s/ (SIGNATURE APPEARS HERE)
- ----------------------------- -------------------------------
President
SUBSIDIARIES
- ------------
ATTEST: CAPITAL REINSURANCE CORPORATION
/s/ (SIGNATURE APPEARS HERE) By: /s/ (SIGNATURE APPEARS HERE)
- ----------------------------- -------------------------------
President
ATTEST: CAPITAL RE CORPORATION
/s/ (SIGNATURE APPEARS HERE) By: /s/ (SIGNATURE APPEARS HERE)
- ----------------------------- -------------------------------
President
ATTEST: CAPITAL CREDIT REINSURANCE COMPANY
(BERMUDA) LTD.
/s/ (SIGNATURE APPEARS HERE) By: /s/ (SIGNATURE APPEARS HERE)
- ----------------------------- -------------------------------
President
ATTEST: CAPITAL RE MANAGEMENT CORPORATION
/s/ (SIGNATURE APPEARS HERE) By: /s/ (SIGNATURE APPEARS HERE)
- ----------------------------- -------------------------------
President
ATTEST: CAPITAL MORTGAGE REINSURANCE COMPANY
/s/ (SIGNATURE APPEARS HERE) By: /s/ (SIGNATURE APPEARS HERE)
- ----------------------------- -------------------------------
President
ATTEST: CAPITAL TITLE REINSURANCE COMPANY
/s/ (SIGNATURE APPEARS HERE) By: /s/ (SIGNATURE APPEARS HERE)
- ----------------------------- -------------------------------
President
-70-
<PAGE>
SCHEDULE II
Capital Re Corporation
Organization Chart
Appears here
-71-
<PAGE>
SCHEDULE III
Litigation:
None
-72-
<PAGE>
EXHIBIT A-1
[Form of Revolving Credit Note]
PROMISSORY NOTE
$_______________ August __, 1996
New York, New York
FOR VALUE RECEIVED, CAPITAL RE CORPORATION, a Delaware corporation
(the "Company"), hereby promises to pay to __________________ (the "Payee"), for
------- -----
account of its Applicable Lending Office provided for by the Credit Agreement
referred to below, at the principal office of The Chase Manhattan Bank in New
York, New York, the principal sum of _______________ Dollars (or such lesser
amount as shall equal the aggregate unpaid principal amount of the Revolving
Credit Loans made by the Payee to the Company under the Credit Agreement), in
lawful money of the United States of America and in immediately available funds,
on the dates and in the principal amounts provided in the Credit Agreement, and
to pay interest on the unpaid principal amount of each such Revolving Credit
Loan, at such office, in like money and funds, for the period commencing on the
date of such Revolving Credit Loan until such Revolving Credit Loan shall be
paid in full, at the rates per annum and on the dates provided in the Credit
Agreement.
The date, amount, interest rate and duration of Interest Period of
each Revolving Credit Loan made by the Payee to the Company, and each payment
made on account of the principal thereof, shall be recorded by the Payee on its
books and, prior to any transfer of this Note, endorsed by the Payee on the
schedule attached hereto or any continuation thereof, provided that the failure
--------
of the Payee to make any such recordation or endorsement shall not affect the
obligations of the Company to make a payment when due of any amount owing under
the Credit Agreement or hereunder in respect of the Revolving Credit Loans made
by the Payee.
This Note is one of the Revolving Credit Notes referred to in the
Credit Agreement dated as of August 20, 1996 (as modified and supplemented and
in effect from time to time, the "Credit Agreement") among the Company, the
----------------
Banks and The Chase Manhattan Bank, as Administrative Agent, and evidences
Revolving Credit Loans made by the Payee thereunder. Terms used but not defined
in this Note have the respective meanings assigned to them in the Credit
Agreement.
The Credit Agreement provides for the acceleration of the maturity of
this Note upon the occurrence of certain events specified therein.
Revolving Credit Note
---------------------
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<PAGE>
Except as permitted by Sections 11.06(b) and 11.06(d) of the Credit
Agreement, this Note may not be assigned by the Payee to any other Person.
This Note shall be governed by, and construed in accordance with, the
law of the State of New York.
CAPITAL RE CORPORATION
By:____________________________
Name:
Title:
By:____________________________
Name:
Title:
Revolving Credit Note
---------------------
-74-
<PAGE>
SCHEDULE OF REVOLVING CREDIT LOANS
This Note evidences Revolving Credit Loans made, under the within-
described Credit Agreement to the Company, on the dates, in the principal
amounts, bearing interest at the rates and having Interest Periods (if
applicable) of the durations set forth below, subject to the payments and
prepayments of principal set forth below:
<TABLE>
<CAPTION>
Prin-
cipal Duration Unpaid
Amount of Amount Prin-
Date of Interest Interest Paid or cipal Notation
Made Loan Rate Period Prepaid Amount Made by
- ------- ---------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
Revolving Credit Note
---------------------
-75-
<PAGE>
EXHIBIT A-2
[Form of Term Loan Note]
PROMISSORY NOTE
$_____________________ $____________, 199_
New York, New York
FOR VALUE RECEIVED, CAPITAL RE CORPORATION, a Delaware corporation
(the "Company"), hereby promises to pay to __________________ (the "Payee"), for
------- -----
account of its Applicable Lending Office provided for by the Credit Agreement
referred to below, at the principal office of The Chase Manhattan Bank in New
York, New York, the principal sum of _______________ Dollars, in lawful money of
the United States of America and in immediately available funds, on the dates
and in the principal amounts provided in the Credit Agreement, and to pay
interest on the unpaid principal amount hereof, at such office, in like money
and funds, for the period commencing on the date hereof until this Note shall be
paid in full, at the rates per annum and on the dates provided in the Credit
Agreement.
This Note is one of the Term Loan Notes referred to in the Credit
Agreement dated as of August 20, 1996 (as modified and supplemented and in
effect from time to time, the "Credit Agreement") among the Company, the Banks
----------------
and The Chase Manhattan Bank, as Administrative Agent, and evidences a Term Loan
made by the Payee thereunder. Terms used but not defined in this Note have the
respective meanings assigned to them in the Credit Agreement.
The Credit Agreement provides for the acceleration of the maturity of
this Note upon the occurrence of certain events specified therein.
Except as permitted by Sections 11.06(b) and 11.06(d) and of the
Credit Agreement, this Note may not be assigned by the Payee to any other
Person.
Term Loan Note
--------------
-76-
<PAGE>
This Note shall be governed by, and construed in accordance with, the
law of the State of New York.
CAPITAL RE CORPORATION
By:____________________________
Name:
Title:
By:____________________________
Name:
Title:
Term Loan Note
--------------
-77-
<PAGE>
EXHIBIT B-1
[Form of Opinion of General Counsel to the Company]
August __, 1996
Each of the Banks party
to the Credit Agreement
referred to below
The Chase Manhattan Bank,
as Administrative Agent
for said Banks
29th Floor
140 East 45th Street
New York, New York 10017
Ladies and Gentlemen:
I am the General Counsel of Capital Re Corporation, a corporation
organized under the law of the State of Delaware (the "Company") and am
-------
rendering this opinion in connection with the Credit Agreement dated as of
August 20, 1996 (the "Credit Agreement") between the Company, the lenders party
----------------
thereto (the "Banks") and The Chase Manhattan Bank, in its capacity as
-----
administrative agent for said Banks (the "Agent"), providing for, among other
-----
things, extensions of credit to be made by the Banks to the Company in an
aggregate principal or stated amount not exceeding $25,000,000. All capitalized
terms used but not defined herein have the respective meanings given to such
terms in the Credit Agreement. This opinion letter is delivered to you pursuant
to Section 6.01(c) of the Credit Agreement.
In rendering the opinions expressed below, I have examined the
following agreements, instruments and other documents:
(a) the Credit Agreement;
(b) the Notes delivered on the date hereof (together with the Credit
Agreement, the "Credit Documents");
----------------
(c) such records of the Company and such other documents as I have deemed
necessary as a basis for the opinions expressed below.
-78-
<PAGE>
In my examination, I have assumed the genuineness of all signatures,
the authenticity of all documents submitted to me as originals and the
conformity with authentic original documents of all documents submitted to me as
copies. When relevant facts were not independently established, I have relied
upon certificates of governmental officials and appropriate representatives of
the Company and upon representations made in or pursuant to the Credit
Agreement.
In rendering the opinions expressed below, I have assumed, with
respect to the Credit Documents, that (except, to the extent expressly set forth
in the opinions below, as to the Company):
(i) the Credit Documents have been duly authorized by, have been duly
executed and delivered by, and constitute legal, valid, binding and
enforceable obligations of, all of the parties to the Credit
Documents;
(ii) all signatories to the Credit Documents have been duly authorized;
and
(iii) all of the parties to the Credit Documents are duly organized and
validly existing and have the power and authority (corporate or other)
to execute, deliver and perform the Credit Documents.
Based upon and subject to the foregoing and subject also to the
comments and qualifications set forth below, and having considered such
questions of law as I have deemed necessary as a basis for the opinions
expressed below, I am of the opinion that:
1. The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware. Each of the
Company's Subsidiaries is a corporation, partnership or other entity duly
organized, validly existing and in good standing under the laws of the
jurisdiction listed opposite its name in Schedule II to the Credit
Agreement.
2. The Company has all requisite corporate power, authority and legal
right to execute, deliver and perform its obligations under each of the
Credit Documents, and the execution, delivery and performance by the
Company of each of the Credit Documents have been duly authorized by all
necessary corporate action on its part (including, without limitation, any
required shareholder approvals).
3. Each of the Credit Documents has been duly and validly executed and
delivered by the Company.
4. The execution, delivery and performance by the Company of, and the
consummation by the Company of the transactions contemplated by, the
-79-
<PAGE>
Credit Documents do not and will not (a) violate any provision of the
Amended and Restated Certificate of Incorporation or the Amended and
Restated By-laws of the Company, (b) violate any provision of the General
Corporation Law of the State of Delaware, (c) violate any applicable law,
rule or regulation of the United States of America or the State of New
York, (d) violate any order, writ, injunction or decree of any court or
governmental authority or agency, or any agreement or any arbitral award
applicable to the Company or any of its Subsidiaries or (e) result in a
breach of, constitute a default under, require any consent under, or result
in the acceleration or required prepayment of any Indebtedness pursuant to
the terms of, any agreement or instrument to which the Company or any of
its Subsidiaries is a party or by which any of them or any of their
Property is bound or to which any of them is subject.
5. Except as disclosed in Schedule III to the Credit Agreement, I
have no knowledge (after due inquiry) of any legal or arbitral proceedings,
or any proceedings by or before any governmental or regulatory authority or
agency, now pending or threatened against the Company or any of its
Subsidiaries that, if adversely determined, could reasonably be expected to
have a Material Adverse Effect.
6. No authorization, approval or consent of, and no filing or
registration with, any governmental or regulatory authority or agent of the
United States of America or the State of New York is necessary for the
execution, delivery or performance by the Company of the Credit Documents,
or for the legality, validity or enforceability thereof. The Company is
not operating under any specific Federal or New York State regulatory
framework under which the Company receives licenses or other authorizations
or is making filings or registrations with regulatory authorities, other
than tax filings, securities filings, corporate filings or New York
insurance filings.
The foregoing opinions are limited to matters involving the Federal
laws of the United States of America, the General Corporation Law of the State
of Delaware and the law of the State of New York, and I do not express any
opinion as to the laws of any other jurisdiction.
-80-
<PAGE>
At the request of my client, this opinion letter is provided to you by
me in my capacity as General Counsel to the Company, and this opinion letter may
not be relied upon by any Person for any purpose other than in connection with
the transactions contemplated by the Credit Documents without, in each instance,
my prior written consent.
Very truly yours,
Alan S. Roseman
General Counsel
-81-
<PAGE>
EXHIBIT B-2
[Form of Opinion of Special Counsel to the Company]
August __, 1996
Each of the Banks listed on Schedule A hereto
The Chase Manhattan Bank,
as Administrative Agent for
said Banks
140 East 45th Street, 29th Floor
New York, New York 10017
Ladies and Gentlemen:
This firm has acted as special counsel to Capital Re Corporation, a
corporation organized under the law of the State of Delaware (the "Company"), in
--------
connection with the Credit Agreement dated as of August 20, 1996 (the "Credit
--------
Agreement") between the Company, the lenders party thereto (the "Banks") and The
-------
Chase Manhattan Bank, in its capacity as administrative agent for said Banks
(the "Agent"). All capitalized terms used but not defined herein have the
-----
respective meanings given to such terms in the Credit Agreement. This opinion
letter is delivered to you pursuant to Section 6.01(c) of the Credit Agreement
in connection with the closing thereunder on the date hereof (the "Closing").
--------
For purposes of this opinion letter, we have examined the following
documents:
(a) Executed copy of the Credit Agreement.
(b) Executed copy of the Notes delivered on the date hereof (together with
the Credit Agreement, the "Credit Documents").
----------------
(c) Certain resolutions of the Board of Directors of the Company adopted
at a meeting held on August ___, 1996, as certified by the Secretary
of the Company on the date hereof as being complete, accurate and in
-82-
<PAGE>
effect, relating to, among other things, authorization of the Credit
Documents and arrangements in connection therewith.
(d) A certificate of the Chief Financial Officer of the Company, dated
August ___, 1996, as to the incumbency and signatures of certain officers
of the Company.
(e) A certificate, dated as of the date hereof, of the Assistant Secretary
of the Company as to certain facts relating to the Company.
We have not, except as specifically identified above, made any
independent review or investigation of factual or other matters, including the
organization, existence, good standing, assets, business or affairs of the
Company or any of its Subsidiaries. In our examination of the Credit Documents
and the aforesaid certificates, records and documents, we have assumed the
genuineness of all signatures (other than those on behalf of the Company on the
Credit Documents), the legal capacity of all natural person, the accuracy and
completeness of all documents submitted to us, the authenticity of all original
documents and the conformity to authentic original documents of all documents
submitted to us as copies (including telecopies). We also have assumed the
accuracy, completeness and authenticity of the foregoing certifications of
corporate officers and statements of fact, on which we are relying, and have
made no independent investigations thereof. In rendering the following
opinions, we have relied as to factual matters, without independent
investigation, upon the representations, warranties and certifications made by
the Company in or pursuant to the Credit Documents and upon the officers'
certificates identified in Paragraphs (d) and (e) above. This opinion letter is
given, and all statements herein are made in the context of the foregoing.
For purposes of this opinion letter, we have assumed that (i) each
party to the Credit Documents has all requisite power and authority under all
applicable laws, regulations and governing documents to execute, deliver and
perform its obligations under the Credit Documents, (ii) each such party has
duly authorized, executed and delivered the Credit Documents to which it is a
party, (iii) each party is validly existing and in good standing in all
necessary jurisdictions, (iv) the Credit Documents to which the Agent and each
other party to the Credit Documents (other than the Company) is a party
constitute valid and binding obligations enforceable against each of them in
accordance with their
-83-
<PAGE>
respective terms, and (v) there has been no material mutual mistake of fact or
misunderstanding or fraud, duress or undue influence, in connection with the
negotiation, execution or delivery of the Credit Documents.
This opinion letter is based as to matters of law solely on applicable
provisions of (i) New York law customarily applicable between borrowers and
creditors to transactions of the type contemplated by the Credit Documents (but
not including any statutes, ordinances, administrative decisions, rules or
regulations of any political subdivision of the State of New York) (hereinafter
"New York Law"), (ii) the Investment Company Act of 1940, as amended, and (iii)
the Public Utility Holding Company Act of 1935, as amended. We express no
opinion as to any other laws, statutes, ordinances, rules or regulations (such
as federal or state securities laws or regulations (other than the opinion
expressed in paragraph (d) below as to the Investment Company Act of 1970, as
amended), antitrust or unfair competition laws or regulations or tax laws or
regulations, or New York insurance law).
For purposes of the opinions set forth in Paragraphs (2) and (3), we
have inquired of the Company whether the Company is, and we have received an
officers' certificate from the Company to the effect that it is not, operating
under any specific federal or New York state regulatory framework under which
the Company receives licenses or other authorizations or is making filings or
registrations with regulatory authorities, other than tax filings, securities
filings, corporate filings or New York insurance filings. On the basis of this
inquiry, and response, the opinions expressed in Paragraph (2) and (3) are
limited to New York Laws).
Based upon, subject to and limited by the foregoing, we are of the
opinion that:
1. Each of the Credit Documents constitutes a legal, valid and
binding obligation of the Company, enforceable against the Company in
accordance with its terms, except as may be limited by bankruptcy,
insolvency, reorganization, moratorium other laws affecting creditors'
rights (including, without limitation, the effect of statutory and other
law regarding fraudulent conveyances, fraudulent transfers and
preferential transfers) and as may be limited by the exercise of judicial
discretion and the applications of principles of equity, including,
without limitation, requirements of good faith, fair dealing,
conscionability and materiality (regardless of whether such agreements
are considered in a proceeding in equity or at law).
-84-
<PAGE>
2. The execution, delivery and performance as of the date hereof by
the Company of the Credit Documents do not violate New York Law.
3. No approval or consent of, or registration or filing with, any
State of New York governmental agency is required to be obtained or made
by the Company in connection with the execution, delivery and performance
as of the date hereof by the Company of the Credit Documents.
4. Neither the Company nor any of its Subsidiaries is an "investment
company", or a company "controlled" by an "investment company", within
the meaning of the Investment Company Act of 1940, as amended.
5. Neither the Company nor any of its Subsidiaries is a "holding
company", or an "affiliate" of a "holding company" or a "subsidiary
company" of a "holding company", within the meaning of the Public Utility
Holding Company Act of 1935, as amended.
The opinion expressed in Paragraph (1) above shall be understood to
mean only that if there is a default in performance of an obligation, (i) if a
failure to pay or other damage can be shown and (ii) if the defaulting party can
be brought into a court which will hear the case and apply the governing law,
then subject to the availability of defenses and to the exceptions set forth in
Paragraph (1) the court will provide a money damage (or perhaps injunctive or
specific performance) remedy.
We assume no obligation to advise you of any changes in the foregoing
subsequent to the delivery of this opinion letter. This opinion letter has been
prepared solely for your use in connection with the Closing under the Credit
Documents on the date hereof, and should not be quoted in whole or in part or
otherwise be referred to, nor be filed with or furnished to any governmental
agency or other person or entity, without the prior written consent of this
firm.
Very truly yours,
HOGAN & HARTSON, L.L.P.
-85-
<PAGE>
HOGAN & HARTSON L.L.P.
August 21, 1996
Page 5
SCHEDULE A
THE CHASE MANHATTAN BANK
-86-
<PAGE>
EXHIBIT C
[Form of Opinion of Special New York Counsel to Chase]
August __, 1996
Each of the Banks party
to the Credit Agreement
referred to below and
The Chase Manhattan Bank,
as Administrative Agent
for said Banks
140 East 45th Street
29th Floor
New York, New York 10017
Ladies and Gentlemen:
We have acted as your special New York counsel in connection with the
Credit Agreement dated as of August 20, 1996 (the "Credit Agreement") between
----------------
Capital Re Corporation (the "Company"), the Banks party thereto and The Chase
-------
Manhattan Bank, as Administrative Agent for said Banks, providing for, among
other things, extensions of credit to be made by the Banks to the Company in an
aggregate principal or stated amount not exceeding $25,000,000. Terms defined
in the Credit Agreement are used herein as defined therein. This opinion is
being delivered pursuant to Section 6.01(d) of the Credit Agreement.
In rendering the opinion expressed below, we have examined the
following agreements, instruments and other documents:
(a) the Credit Agreement; and
(b) the Notes delivered on the date hereof (together with the Credit
Agreement, the "Credit Documents").
----------------
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<PAGE>
In our examination, we have assumed the authenticity of all documents
submitted to us as originals and the conformity with authentic original
documents of all documents submitted to us as copies.
In rendering the opinions expressed below, we have assumed, with
respect to the Credit Documents, that:
(i) the Credit Documents have been duly authorized by, have been
duly executed and delivered by, and (except to the extent
expressly set forth in the opinions below as to the Company)
constitute legal, valid, binding and enforceable obligations
of, all of the parties to the Credit Documents;
(ii) all signatories to the Credit Documents have been duly
authorized; and
(iii) all of the parties to the Credit Documents are duly
organized and validly existing and have the power and
authority (corporate or other) to execute, deliver and
perform the Credit Documents.
Based upon and subject to the foregoing and subject also to the
comments and qualifications set forth below, and having considered such
questions of law as we have deemed necessary as a basis for the opinions
expressed below, we are of the opinion that each of the Credit Documents
constitutes the legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, except as may be limited by
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or
transfer or other similar laws relating to or affecting the rights of creditors
generally and except as the enforceability of the Credit Documents is subject to
the application of general principles of equity (regardless of whether
considered in a proceeding in equity or at law), including, without limitation,
(a) the possible unavailability of specific performance, injunctive relief or
any other equitable remedy and (b) concepts of materiality, reasonableness, good
faith and fair dealing.
The foregoing opinions are subject to the following comments and
qualifications:
(A) The enforceability of Section 11.03 of the Credit Agreement may
be limited by laws rendering unenforceable the release of a party from,
or the indemnification of a party against, liability for its own wrongful
or negligent acts under certain circumstances.
-88-
<PAGE>
(B) The enforceability of provisions in the Credit Agreement to the
effect that terms may not be waived or modified except in writing may be
limited under certain circumstances.
(C) We express no opinion as to (i) the effect of the laws of any
jurisdiction in which any Bank is located (other than the State of New
York) that limit the interest, fees or other charges such Bank may
impose, (ii) Section 4.07(c) of the Credit Agreement, (iii) the second
sentence of Section 11.10 of the Credit Agreement, insofar as such
sentence relates to the subject matter jurisdiction of the United States
District Court for the Southern District of New York to adjudicate any
controversy related to the Credit Documents, and (iv) the waiver of
inconvenient forum set forth in Section 11.10 of the Credit Agreement
with respect to proceedings in the United States District Court for the
Southern District of New York.
The foregoing opinions are limited to matters involving the Federal
laws of the United States of America and the law of the State of New York, and
we do not express any opinion as to the laws of any other jurisdiction.
This opinion letter is, pursuant to Section 6.01(d) of the Credit
Agreement, provided to you by us in our capacity as your special New York
counsel and may not be relied upon by any Person for any purpose other than in
connection with the transactions contemplated by the Credit Documents without,
in each instance, our prior written consent.
Very truly yours,
/s/ Milbank, Tweed, Hadley & McCloy
-----------------------------------
CDP/___
-89-
<PAGE>
EXHIBIT D
[Form of Confidentiality Agreement]
CONFIDENTIALITY AGREEMENT
[Date]
[Insert Name and
Address of Prospective
Participant or Assignee]
Re: Credit Agreement dated as of August 20, 1996 (the "Credit
------
Agreement"), among Capital Re Corporation (the "Company"), the
--------- -------
lenders named therein and The Chase Manhattan Bank, as
Administrative Agent.
Ladies and Gentlemen:
As a Bank party to the Credit Agreement, we have agreed with the
Company pursuant to Section 11.12 of the Credit Agreement to use reasonable
precautions to keep confidential, except as otherwise provided therein, all non-
public information identified by the Company as being confidential at the time
the same is delivered to us pursuant to the Credit Agreement.
As provided in said Section 11.12, we are permitted to provide you, as
a prospective [holder of a participation in the Loans (as defined in the Credit
Agreement)][assignee Bank], with certain of such non-public information subject
to the execution and delivery by you, prior to receiving such non-public
information, of a Confidentiality Agreement in this form. Such information will
not be made available to you until your execution and return to us of this
Confidentiality Agreement.
Accordingly, in consideration of the foregoing, you agree (on behalf
of yourself and each of your affiliates, directors, officers, employees and
representatives) that (A) such information will not be used by you except in
connection with the proposed [participation][assignment] mentioned above and (B)
you shall use reasonable precautions, in accordance with your customary
procedures for handling confidential information and in accordance with safe and
sound banking practices, to keep such information confidential, provided that
--------
nothing herein shall limit the disclosure of any such information (i) to the
extent required by statute, rule, regulation or judicial process (with, unless
prohibited by applicable law, prior notice thereof to the Company giving
sufficient time, if practicable, to afford the Company an opportunity to seek a
protective order), (ii) to your counsel or to counsel for any of the Banks or
the Administrative
Confidentiality Agreement
-------------------------
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<PAGE>
Agent, (iii) to bank examiners, auditors or accountants, (iv) to the
Administrative Agent or any other Bank (or to Chase Securities, Inc.), (v) in
connection with any litigation to which you or any one or more of the Banks or
the Administrative Agent are a party (with, except in the case of any litigation
to which the Company or any of its Subsidiaries is also a party, or unless
prohibited by applicable law, prior notice to the Company giving sufficient
time, if practicable, to afford the Company an opportunity to seek a protective
order), (vi) to a subsidiary or affiliate of yours as provided in Section
11.12(a) of the Credit Agreement or (vii) to any assignee or participant (or
prospective assignee or participant) so long as such assignee or participant (or
prospective assignee or participant) first executes and delivers to you a
Confidentiality Agreement substantially in the form hereof; provided, further,
-------- -------
that in no event shall you be obligated to return any materials furnished to you
pursuant to this Confidentiality Agreement.
Please indicate your agreement to the foregoing by signing as provided
below the enclosed copy of this Confidentiality Agreement and returning the same
to us.
Very truly yours,
[INSERT NAME OF BANK]
By___________________________
Title:
AGREED AS AFORESAID:
[INSERT NAME OF PROSPECTIVE
PARTICIPANT OR ASSIGNEE]
By___________________________
Title:
Confidentiality Agreement
-------------------------
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<PAGE>
EXHIBIT E
[Form of Assignment and Acceptance]
ASSIGNMENT AND ACCEPTANCE
Reference is made to the Credit Agreement, dated as of August 20, 1996
(as modified and supplemented and in effect from time to time, the "Credit
------
Agreement"), among Capital Re Corporation, a Delaware Corporation (the
- ---------
"Company"), the lenders named therein, and The Chase Manhattan Bank, as
-------
administrative agent for such lenders (in such capacity, the "Administrative
--------------
Agent"). Terms defined in the Credit Agreement are used herein as defined
- -----
therein.
_________________ (the "Assignor") and _______________ (the
--------
"Assignee") agree as follows:
--------
1. The Assignor hereby irrevocably sells and assigns to the Assignee
without recourse to the Assignor, and the Assignee hereby irrevocably purchases
and assumes from the Assignor without recourse to the Assignor, as of the
Effective Date as set forth in Schedule 1 hereto (the "Effective Date"), an
--------------
interest (the "Assigned Interest") in and to the Assignor's rights and
-----------------
obligations under the Credit Agreement with respect to those credit facilities
contained in the Credit Agreement as are set forth on Schedule 1 (individually,
an "Assigned Facility"; collectively, the "Assigned Facilities"), in a principal
----------------- -------------------
amount and percentage for each Assigned Facility as set forth on Schedule 1.
2. The Assignor (i) makes no representation or warranty and assumes
no responsibility with respect to any statements, warranties or representations
made in or in connection with the Credit Agreement, any other Loan Document or
any other instrument or document furnished pursuant thereto, or the execution,
legality, validity, enforceability, genuineness, sufficiency or value of the
Credit Agreement, any other Loan Document or any other instrument or document
furnished pursuant thereto, other than that it has not created any adverse claim
upon the interest being assigned by it hereunder and that such interest is free
and clear of any such adverse claim; (ii) makes no representation or warranty
and assumes no responsibility with respect to the financial condition of the
Company, any of its Subsidiaries or any other obligation or the performance or
observance by the Company, any of its Subsidiaries or any other obligor of any
of their respective obligations under the Credit Agreement or any other Loan
Document or any other instrument or document furnished pursuant hereto or
thereto; and (iii) attaches the Note(s) held by it evidencing the Assigned
Facilities and requests that the Administrative Agent exchange such Note(s) for
a new Note or Notes payable to the Assignor (if the Assignor has
Assignment and Acceptance
-------------------------
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<PAGE>
retained any interest in the Assigned Facility) and a new Note or Notes payable
to the Assignee in the respective amounts which reflect the assignment being
made hereby (and after giving effect to any other assignments which have become
effective on the Effective Date).
3. The Assignee (i) represents and warrants that it is legally
authorized to enter into this Assignment and Acceptance; (ii) confirms that it
has received a copy of the Credit Agreement, together with copies of the
financial statements referred to in Section 7.02 thereof, the financial
statements delivered pursuant to Section 8.01 thereof, if any, and such other
documents and information as it has deemed appropriate to make its own credit
analysis and decision to enter into this Assignment and Acceptance; (iii) agrees
that it will, independently and without reliance upon the Assignor, the
Administrative Agent or any other Lender and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit decisions in taking or not taking action under the Credit Agreement, the
other Loan Documents or any other instrument or document furnished pursuant
hereto or thereto; (iv) appoints and authorizes the Administrative Agent to take
such action as administrative agent on its behalf and to exercise such powers
and discretion under the Credit Agreement, the other Loan Documents or any other
instrument or document furnished pursuant hereto or thereto as are delegated to
the Administrative Agent by the terms thereof, together with such powers as are
incidental thereto; and (v) agrees that it will be bound by the provisions of
the Credit Agreement and will perform in accordance with its terms all the
obligations which by the terms of the Credit Agreement are required to be
performed by it as a Lender including, if it is organized under the laws of a
jurisdiction outside the United States of America, its obligation pursuant to
Section 5.06 of the Credit Agreement to deliver the forms prescribed by the
Internal Revenue Service of the United States certifying as to the Assignee's
exemption from United States withholding taxes with respect to all payments to
be made to the Assignee under the Credit Agreement, or such other documents as
are necessary to indicate that all such payments are subject to such tax at a
rate reduced by an applicable tax treaty.
4. Following the execution of this Assignment and Acceptance, it will
be delivered to the Administrative Agent for acceptance by the Administrative
Agent pursuant to Section 11.06 of the Credit Agreement, effective as of the
Effective Date (which date shall not, unless otherwise agreed to by the
Administrative Agent, be earlier than five Business Days after the date of such
acceptance by the Administrative Agent).
Assignment and Acceptance
-------------------------
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<PAGE>
5. Upon such acceptance, from and after the Effective Date, the
Administrative Agent shall make all payments in respect of the Assigned Interest
(including payments of principal, interest, fees and other amounts) to the
Assignee which accrue subsequent to the Effective Date.
6. From and after the Effective Date, (i) the Assignee shall be a
party to the Credit Agreement and, to the extent provided in this Assignment and
Acceptance, have the rights and obligations of a Lender thereunder and under the
other Loan Documents and shall be bound by the provisions thereof and (ii) the
Assignor shall, to the extent provided in this Assignment and Acceptance,
relinquish its rights and be released from its obligations under the Credit
Agreement except as provided in Section 11.07 of the Credit Agreement.
7. This Assignment and Acceptance shall be governed by and construed
in accordance with the law of the State of New York.
8. This Assignment and Acceptance may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Assignment and
Acceptance by signing any such counterpart.
IN WITNESS WHEREOF, the parties hereto have caused this Assignment and
Acceptance to be executed as of the date first above written by their respective
duly authorized officers on Schedule 1 hereto.
Assignment and Acceptance
-------------------------
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<PAGE>
Schedule 1 to
Assignment and Acceptance
relating to the Credit Agreement,
dated as of August 20, 1996,
among Capital Re Corporation (the "Company")
-------
the lenders named therein and
The Chase Manhattan Bank, as administrative agent for the Lenders
(in such capacity, the "Administrative Agent")
--------------------
Name of Assignor:
Name of Assignee:
Effective Date of Assignment:
Credit Principal Percentage
Facility Assigned Amount Assigned Assigned
----------------- --------------- --------
[ASSIGNEE] [ASSIGNOR]
By:___________________________ By:__________________________
Title: Title:
Consented to and Accepted:
THE CHASE MANHATTAN BANK,
as Administrative Agent
By:__________________________
Name:
Title:
CAPITAL RE CORPORATION
By:__________________________
Name:
Title:
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EXHIBIT 10.39
CAPITAL RE CORPORATION
PERFORMANCE SHARE PLAN
(EFFECTIVE JULY 1, 1996)
<PAGE>
TABLE OF CONTENTS
Page
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<TABLE>
<CAPTION>
<S> <C>
I. GENERAL................................................... 1
1.1. Purpose.............................................. 1
1.2. Effective Date....................................... 1
II. DEFINITIONS.............................................. 1
III. ELIGIBILITY AND PARTICIPATION........................... 4
3.1. Eligibility.......................................... 4
3.2. Participation in Performance Share Awards............ 4
IV. PLAN DESIGN.............................................. 4
4.1. Eligibility Period................................... 4
4.2. Performance Period................................... 4
4.3. Performance Share Awards............................. 4
4.4. Performance Goals.................................... 5
4.5. Available Common Stock............................... 6
4.6. Adjustment to Shares................................. 6
4.7. Maximum Award........................................ 6
4.8. Committee Discretion to Adjust Awards................ 6
V. PAYMENT................................................... 7
5.1. Committee Determination of Common Stock Payable...... 7
5.2. Timing and Form of Payment........................... 7
5.3. Distribution upon Termination of Employment.......... 8
5.4. Beneficiary Designation.............................. 9
VI. ADMINISTRATION........................................... 9
6.1. Committee............................................ 9
6.2. General Rights, Powers, and Duties of Committee...... 9
6.3. Information to be Furnished to Committee............. 10
6.4. Responsibility and Indemnification................... 10
VII. AMENDMENT AND TERMINATION............................... 10
7.1. Amendment............................................ 10
7.2. Company's Right to Terminate......................... 10
VIII. MISCELLANEOUS.......................................... 10
8.1. No Implied Rights; Rights on Termination of Service.. 10
8.2. No Right to Company Assets........................... 11
8.3. No Employment Rights................................. 11
8.4. Other Benefits....................................... 11
8.5. Offset............................................... 11
8.6. Non-assignability.................................... 11
8.7. Notice............................................... 11
8.8. Governing Laws....................................... 12
8.9. Gender and Number.................................... 12
8.10. Severability........................................ 12
</TABLE>
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I. GENERAL
1.1. PURPOSE. The purposes of the Plan are to retain officers and other
key employees, to support the achievement of the Company's strategic business
objectives, and to encourage increased ownership of Company stock by officers
and other key employees by providing to such persons competitive long-term
incentive opportunities that are linked to the profitability of the Company's
business and increases in stockholder value.
1.2. EFFECTIVE DATE. The Plan shall become effective as of July 1, 1996,
subject to its approval by the Company's stockholders.
II. DEFINITIONS
2.1. "Beneficiary" means the person or persons so designated by a
Participant pursuant to Section 5.4.
2.2. "Board of Directors" means the Board of Directors of the Company.
2.3 "Cause" means (i) the Participant has been found guilty by a court of
having committed fraud or theft against the Company or having committed a felony
and such conviction is affirmed on appeal or the time for appeal has expired;
(ii) the Participant has been found guilty by a court of having committed a
crime involving moral turpitude and such conviction is affirmed on appeal or the
time for appeal has expired; (iii) in the reasonable judgment of the Board of
Directors, the Participant has compromised trade secrets or other proprietary
information of the Company; (iv) in the reasonable judgment of the Board of
Directors, the Participant has willfully failed or refused to perform material
assigned duties; or (v) in the reasonable judgment of the Board of Directors,
the Participant has engaged in gross or willful misconduct that causes
substantial and material harm to the business and operations of the Company or a
subsidiary, the continuation of which will continue to substantially and
materially harm the business and operations of the Company or a subsidiary in
the future.
2.4. "Change in Control" means (i) any "person" (as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), has become, after the date hereof, the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing forty percent (40%) or more of the
combined voting power of the Company's then outstanding securities; (ii) during
any two (2) year period, individuals who at the beginning of such period
constitute the Board of Directors, including for this purpose any new director
whose election (A) resulted from a vacancy on the Board of Directors caused by
the mandatory retirement, death, or disability of a director and was approved by
a vote of at least two-thirds (2/3rds) of the directors then still in office who
were directors at the beginning of the period, or (B) was approved by the
Participant affirmatively voting in his or her capacity as a stockholder, have
ceased for any reason to constitute a majority thereof; (iii) notwithstanding
clauses (i) or (v), the Company has consummated a merger or consolidation of the
Company with or into another corporation, the
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result of which is that the stockholders of the Company at the time of the
execution of the agreement to merge or consolidate own less than eighty percent
(80%) of the total equity of the corporation surviving or resulting from the
merger or consolidation or of a corporation owning, directly or indirectly, one
hundred percent (100%) of the total equity of such surviving or resulting
corporation; or (iv) there has been a sale in one or a series of transactions of
all or substantially all of the assets of the Company; (v) any person has
commenced a tender or exchange offer, or entered into an agreement or received
an option to acquire beneficial ownership of forty percent (40%) or more of the
total number of voting shares of the Company, unless the Board of Directors has
made a determination that such action does not constitute and will not
constitute a change in the persons in control of the Company or (vi) there has
been a change in control in the Company of a nature that would be required to be
reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated
under the Exchange Act other than in circumstances specifically covered by
clauses (i) - (v) above.
2.5 "Code" means the Internal Revenue Code of 1986, as amended from time
to time, and any successor thereto.
2.6. "Committee" means the committee referred to in Section 6.1.
2.7. "Common Stock" means common stock, par value $.01 per share, of the
Company.
2.8. "Company" means Capital Re Corporation, a Delaware corporation.
2.9. "Covered Employee" means any Participant who is or may be a "covered
employee," within the meaning of Section 162(m)(3) of the Code, in the year in
which the payment of any shares of Common Stock in satisfaction of a Performance
Share award will be taxable to such Participant.
2.10. "Disability" shall have the same meaning as under the Company-
sponsored long-term disability plan under which the applicable Participant is
then eligible to participate.
2.11. "Eligibility Period" means a period, as determined by the Committee
pursuant to Section 4.1.
2.12. "Fair Market Value" means as of any given date the last reported
sales price on such date of Common Stock on the New York Stock Exchange
Composite Tape or, if not listed on such exchange, on any other national
securities exchange on which such Common Stock is listed or on NASDAQ. If there
is no regular public trading market for such Common Stock, the Fair Market Value
of such Common Stock shall be determined by the Committee in good faith.
2.13. "Good Reason" shall mean (i) any proposed reduction in the
Participant's base salary, provided that base salary may be reduced (and such
reduction would not constitute "Good Reason") by up to 10% due to a reduction in
compensation generally applicable to Participants; (ii) the Participant has his
responsibilities or areas of supervision within the Company
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substantially reduced (in the Participant's reasonable judgment); or (iii) a
Change of Control has occurred within two years prior to the Participant's
termination of employment.
2.14. "Non-Employee Director" means a member of the Board of Directors who
qualifies as (i) a "non-employee director," as defined in Rule 16b-3, as
promulgated by the Securities Exchange Commission under the Securities Exchange
Act of 1934, or any successor definition adopted by the Securities Exchange
Commission, and as (ii) an "outside director," as defined in Section 1.162-
27(e)(3) of the Treasury Regulations issued under Section 162(m) of the Code, or
any successor definition adopted by the Department of the Treasury.
2.15. "Normal Retirement" means termination of employment after attainment
of age 65. However, the Committee, within its discretion, may determine that a
Participant who terminates employment prior to age 65 has terminated by virtue
of Normal Retirement.
2.16. "Participant" means a person who is designated, pursuant to Article
III, to be eligible to receive benefits under the Plan.
2.17. "Performance Goals" means the performance standards established by
the Committee pursuant to Section 4.4.
2.18. "Performance Period" means a period of service, as determined
pursuant to Section 4.2, over which the extent of achievement of established
Performance Goals will be measured. For purposes of applying to Covered
Employees the various rules of the performance-based compensation exemption
under Section 162(m)(4)(C) of the Code and the Treasury Regulations issued
thereunder, the Performance Period shall be the "period of service to which the
Performance Goals relate" (as defined in Treasury Regulation Section 1.162-27(e)
(2)).
2.19. "Performance Share" means an award, designated in terms of a share
of Common Stock, granted pursuant to the Plan.
2.20. "Plan" means this Capital Re Corporation Performance Share Plan, as
amended from time to time.
2.21. "Pro-rated" or "Pro-rata" means, for purposes of determining the
amount of Common Stock payable to a Participant whose eligibility to participate
in the Plan with respect to an Eligibility Period ceases prior to the end of
such Eligibility Period for any of the reasons described in Section 3.2 or
subsection (a), (b), (c) or (d) of Section 5.3, the percentage to be applied to
the Common Stock that would have been payable at the end of the Performance
Period to such Participant if he had been eligible to participate for the entire
Eligibility Period. Such percentage shall equal the number of months (rounded
to the nearest whole month) of the Eligibility Period during which the
Participant was designated by the Committee as eligible to participate in the
Plan divided by the number of months (rounded to the nearest whole month) in
such Eligibility Period. A Participant who, pursuant to Section 3.2 but subject
to the limitations of Section 4.3, is designated as eligible to participate in
the Plan after the applicable Eligibility Period has commenced, shall, for
purposes of this Section 2.21, be deemed to have been eligible as of the
beginning of such Eligibility Period; provided, however, that the Committee
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shall, in accordance with its authority under Section 4.8, have the discretion
to reduce the Prorated Common Stock award that is otherwise payable to such
Participant to account for such late commencement of participation.
III. ELIGIBILITY AND PARTICIPATION
3.1. ELIGIBILITY. Participation in the Plan shall be limited to officers
and other key employees of the Company or any of its subsidiaries or other
affiliates who are designated to be eligible by the Committee.
3.2. PARTICIPATION IN PERFORMANCE SHARE AWARDS. The Committee will
determine the persons who will participate for each Eligibility Period under the
Plan. Subject to Section 4.3, after an Eligibility Period has commenced,
persons may be designated as eligible to participate in the Plan with respect to
such Eligibility Period. The award of Performance Shares with respect to a
Performance Period contained in any Eligibility Period does not guarantee
participation in subsequent Eligibility Periods.
IV. PLAN DESIGN
4.1. ELIGIBILITY PERIOD. An Eligibility Period is a certain period of
time, as determined by the Committee, over which eligibility to receive benefits
under the Plan shall be measured. The initial Eligibility Period under the Plan
shall begin on July 1, 1996 and terminate on December 31, 1999. The second
Eligibility Period shall begin on January 1, 1998 and terminate on December 31,
2001. Subsequent Eligibility Periods under the Plans shall commence and
terminate as determined by the Committee in its sole discretion. The Committee
may esablish a separate Eligibility Period for persons determined to be eligible
for participation after the commencement of any Eligibility Period.
4.2. PERFORMANCE PERIOD. Each Eligibility Period under the Plan shall
include a Performance Period which shall be a specified period of service over
which the achievement of applicable Performance Goals will be measured. The
initial Performance Period under the Plan shall begin on July 1, 1996 and
terminate on December 31, 1999. The second Performance Period shall begin on
January 1, 1998 and terminate on December 31, 2001. Subsequent Performance
Periods shall commence and terminate as determined by the Committee; provided
that each such Performance Period shall commence coincident with or after the
commencement of the corresponding Eligibility Period and shall terminate
coincident with or prior to the termination of the corresponding Eligibility
Period. Nothwithstanding the foregoing, in the event of a Change of Control,
the Performance Period shall terminate. The Committee may also establish a
separate Performance Period for persons determined to be eligible for
participation after the commencement of any Peroformance Period.
4.3. PERFORMANCE SHARE AWARDS. On or about the commencement of each
Eligibility Period under the Plan, the Committee shall establish the minimum and
maximum Performance Shares that may be awarded to each Participant in the Plan
for such Eligibility Period and the
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basis for such awards. The Committee may also award Performance Shares to
persons determined to be eligible for participation after the commencement of
any Eligibility Period. Notwithstanding the foregoing, no Performance Shares
shall be awarded to Covered Employees on or after the 90th day of the
Performance Period contained within the applicable Eligibility Period or, if
earlier, after 25% of such Performance Period has elapsed. Performance Shares
must be awarded to Covered Employees at a time when the outcome of the
Performance Goals established or to be established for the applicable
Performance Period is substantially uncertain. The Performance Shares awarded to
any Covered Employee and the terms and conditions applicable to such Performance
Shares must be finalized in writing by the Committee on or prior to the
applicable adjustment deadline described in the preceding sentences. Each award
of Performance Shares under the Plan shall be evidenced by a written "Notice of
Award," which shall be signed by an authorized officer of the Company and by the
Participant and shall contain such terms and conditions as are approved by the
Committee. Such terms and conditions need not be the same in all cases.
4.4. PERFORMANCE GOALS.
(a) Performance Goals with respect to each Performance Period shall be
established by the Committee. The Committee may in its discretion adjust the
terms of such Performance Goals; provided that Performance Goals applied to
Covered Employees ("Covered Employees' Performance Goals") shall not be adjusted
on or after the 90th day of the applicable Performance Period or, if earlier,
after 25% of the applicable Performance Period has elapsed. No Covered
Employees' Performance Goals shall be adjusted at a time when the outcome of
such Performance Goals is no longer substantially uncertain. Covered Employees'
Performance Goals must be finalized in writing by the Committee on or prior to
the applicable adjustment deadline described in the preceding sentences.
(b) The Performance Goals set by the Committee shall be based on specified
criteria as determined by the Committee, which shall specify the manner in which
such Performance Goals shall be calculated. Covered Employees' Performance
Goals shall be based on objective business criteria, which shall include one or
more of the following: earnings per share, total shareholder return, operating
earnings, growth in assets, return on equity, return on capital, market share,
stock price, net income, cash flow, and retained earnings. Performance Goals
also may be based upon the attainment of specified levels of performance of the
Company under one or more of the measures described above relative to the
performance of other corporations.
(c) All of the provisions of this Section 4.4 are subject to the
requirement that all Covered Employees' Performance Goals shall be objective
performance goals satisfying the requirement for "performance-based
compensation" within the meaning of Section 162(m)(4) of the Code and the
Treasury Regulations issued thereunder.
(d) In the event of a Change of Control, instead of the Performance Goals
established pursuant to Sections 4.4(a) and (b) above, the sole Performance Goal
for the Performance Period that ends with the Change of Control shall be stock
price. If the Change of Control occurs during the first two years of the
Performance Period and if the stock price of Company Common Stock
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has increased by 100% as of the Change of Control, compared to the first day of
the Performance Period, the Participant shall be awarded for the Performance
Period the maximum Performance Shares that may be awarded to such Participant as
established by the Committee for such period. If the Change of Control occurs
after the end of the second year of the Performance Period and if the stock
price of Company Common Stock has increased by 150% as of the Change of Control,
compared to the first day of the Performance Period, the Participant shall be
awarded for the Performance Period the maximum Performance Shares that may be
awarded to such Participant as established by the Committee for such period. If
the stock price of Company Common Stock has increased by less than 100% (during
the first two years of the Performance Period) or 150% (after the end of the
second year of the Performance Period) as the case may be, the Participant shall
be awarded a pro-rated portion of the Performance Shares that would have
otherwise been payable to the Participant based on the ratio that the stock
price of Company Common Stock has increased as of the Change of Control from the
first day of such Performance Period compared to whichever of the foregoing
percentages is applicable.
4.5. AVAILABLE COMMON STOCK. The maximum number of shares of Common Stock
which shall be available for distribution in satisfaction of awards under the
Plan during its term shall not exceed 750,000, subject to adjustment as provided
in Section 4.6. The shares of Common Stock available for issuance under the
Plan may be authorized and unissued shares or treasury shares or may be
purchased in the open market.
4.6. ADJUSTMENT TO SHARES. In the event of any merger, reorganization,
consolidation, recapitalization, stock dividend, stock split, extraordinary
distribution with respect to Common Stock or other change in corporate structure
affecting such Common Stock, the Committee may make such substitution or
adjustments in the aggregate number and kind of shares reserved for issuance
under the Plan or in the number and kind of shares subject to outstanding
Performance Share awards under the Plan. The Committee shall make such
substitutions or adjustments as in its discretion it determines to be
appropriate and equitable to prevent dilution or enlargement of rights
hereunder; provided, however, that the number of shares of Common Stock subject
to any Performance Share award shall always be a whole number.
4.7. MAXIMUM AWARD. The maximum number of shares of Common Stock that may
be issued to any Covered Employee with respect to any Eligibility Period
pursuant to any Performance Share award is 250,000 (subject to adjustment as
provided in Section 4.6). This limit includes any portion or amount of Common
Stock that is withheld for taxes (as described in Section 5.2).
4.8. COMMITTEE DISCRETION TO ADJUST AWARDS. At any time prior to the time
the Committee determines, pursuant to Section 5.1, the amount of shares of
Common Stock that are to be paid to any Participant in satisfaction of a
Performance Share award hereunder, the Committee shall have the authority to
modify, amend, or adjust the terms and conditions of such Performance Share
award, the terms and conditions of the corresponding Performance Goals, and/or
the amount of Common Stock payable, provided, however, such authority to modify,
-----------------
amend or adjust the terms and conditions of such Performance Share award shall
be exercised to reduce an award only in unusual circumstances not anticipated in
the original design of the Plan.
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However, the Committee shall have no authority to increase directly or
indirectly or to otherwise adjust upwards the amount of Common Stock payable to
a Covered Employee with respect to a particular Performance Share award or to
take any other action to the extent that such action or the Committee's ability
to take such action would cause any payment under the Plan to any Covered
Employee to fail to qualify as "performance-based compensation" within the
meaning of Code Section 162(m)(4) and the Treasury Regulations issued
thereunder.
V. PAYMENT
5.1. COMMITTEE DETERMINATION OF COMMON STOCK PAYABLE. After a Performance
Period has ended, each Participant who has been awarded Performance Shares and
satisfied the Performance Goals with respect to such Performance Period shall be
entitled to receive a specified number of shares of Common Stock as determined
by the Committee. The Committee shall determine the extent to which the
Performance Goals set pursuant to Section 4.4 have been met, (as Pro-rated in
accordance with Sections 2.18, 3.2, and/or 5.3, if applicable). With respect to
Performance Shares awarded to Covered Employees, no payment of Common Stock
shall be made hereunder prior to written certification by the Committee that the
applicable Performance Goal or Goals have been satisfied to a particular extent
for the Performance Period, and no Common Stock shall be payable unless a
preestablished minimum level of achievement of the Performance Goals has been
met. The date on which the Committee determines the number of shares of Common
Stock payable to a Participant shall be the date on which such Participant will
become the owner of such shares, regardless of when the underlying stock
certificate or certificates are actually delivered to such Participant, and such
Participant will enjoy all rights of ownership of such shares of Common Stock as
of that date (the "Ownership Date").
5.2. TIMING AND FORM OF PAYMENT. Shares of Common Stock payable to
Participants pursuant to Section 5.1 shall be distributed as follows:
(a) Fifty percent (50%) of the number of shares of Common Stock payable to
a Participant shall be converted to a dollar amount based on the Fair Market
Value of Common Stock on the last day of the Performance Period and, subject to
Section 5.2(b) and Section 5.2(d), be distributable in a single, lump sum cash
payment.
(b) The Company shall have the right to deduct first from cash
distributions hereunder any federal, state, or local taxes required by law to be
withheld with respect to such distributions, and such additional amounts of
withholding as are reasonably requested by the Participant. Accordingly, the
amount of federal, state, and/or local taxes required, or agreed, to be withheld
by the Company with respect to the dollar amount determined pursuant to
subsection (a) above shall, for purposes of satisfying these withholding
obligations, be deducted from the dollar amount of the cash payment and paid by
the Company to the appropriate taxing authorities. If the entire cash
distribution is insufficient to satisfy the withholding obligations, the Company
shall have the right to deduct amounts from the Common Stock distributable to
satisfy such withholding obligations.
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(c) Fifty percent (50%) of the number of shares of Common Stock payable to
a Participant shall, subject to Section 5.2(b) and Section 5.2(d), be paid to
the Participant in shares of Common Stock as soon as practicable following the
end of the Performance Period.
(d) A Participant may elect by a written notice delivered to the Company,
prior to the last day of the Performance Period, to have greater than fifty
percent (50%) of the number of shares of Common Stock payable to a Participant
for such Performance Period distributed to the Participant in shares of Common
Stock, subject to the Participant's satisfaction of all withholding obligations
with respect to such distribution by the Company withholding from the cash
and/or shares of Common Stock distributable to the Participant or by the
Participant paying to the Company any amount that the Company may reasonably
determine to be necessary to satisfy such withholding obligations.
5.3. DISTRIBUTION UPON TERMINATION OF EMPLOYMENT.
(a) Death. If a Participant in the Plan dies before the end of an
Eligibility Period for which Performance Shares have been granted to him, such
Participant's Beneficiary will be eligible for a Pro-rated portion of the
Performance Shares that would have otherwise been payable to the Participant
after the end of the applicable Performance Period. This distribution, if any
is payable, will be made to the Beneficiary in the same form and at the same
time that all other Participants under the Plan receive their distributions with
respect to that Performance Period.
(b) Disability. If a Participant in the Plan, upon becoming Disabled,
terminates employment with the Company before the end of an Eligibility Period
for which Performance Shares have been granted to him, the Participant will be
eligible for a Pro-rated portion of the Performance Shares that would have
otherwise been payable to him after the end of the applicable Performance
Period. This distribution, if any is payable, will be made to the Participant
in the same form and at the same time that all other Participants under the Plan
receive their distributions with respect to that Performance Period.
(c) Normal Retirement. If a Participant in the Plan terminates employment
upon attaining Normal Retirement before the end of an Eligibility Period for
which Performance Shares have been granted to him, the Participant will be
eligible for a Pro-rated portion of the Performance Shares that would have
otherwise been payable to him after the end of the applicable Performance
Period. This distribution, if any is payable, will be made to the Participant
in the same form and at the same time that all other Participants under the Plan
receive their distributions with respect to that Performance Period.
(d) Termination of Employment Without Cause. If (i) the Company terminates
a Participant's employment other than for Cause or (ii) the Participant
terminates the Participant's employment at the request of the Company, before
the end of an Eligibility Period for which Performance Shares have been granted
to him, the Participant will be eligible for the Performance Shares that would
have otherwise been payable to him after the end of the applicable Performance
Period. This distribution, if any is payable, will be made to the
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Participant in the same form and at the same time that all other Participants
under the Plan receive their distributions with respect to that Performance
Period.
(e) Termination of Employment for Good Reason. If the Participant
terminates the Participant's employment for Good Reason, before the end of an
Eligibility Period for which Performance Shares have been granted to him, the
Participant will be eligible for a Pro-rated portion of the Performance Shares
that would have otherwise been payable to him after the end of the applicable
Performance Period. This distribution, if any is payable, will be made to the
Participant in the same form and at the same time that all other Participants
under the Plan receive their distributions with respect to that Performance
Period.
(f) Other Termination of Employment. If, before the end of an Eligibility
Period for which Performance Shares have been granted to him, a Participant in
the Plan incurs a termination of employment for any reason other than those
specified in subsections (a)-(e) of this Section 5.3, whether voluntary or
involuntary and a Change of Control has not occured, he shall forfeit all rights
to receive any payment of Performance Shares with respect to such Eligibility
Period.
5.4. BENEFICIARY DESIGNATION. A Participant may designate a Beneficiary
who is to receive, upon his death, the distributions that otherwise would have
been paid to him. All designations shall be in writing and shall be effective
only if and when delivered to the [Vice President--Human Resources] of the
Company during the lifetime of the Participant. If a Participant designates a
Beneficiary without providing in the designation that the Beneficiary must be
living at the time of each distribution, the designation shall vest in all of
the distribution whether payable before or after the Beneficiary's death, and
any distributions remaining upon the Beneficiary's death shall be made to the
Beneficiary's estate.
A Participant may from time to time during his lifetime change his
Beneficiary by a written instrument delivered to the [Vice President--Human
Resources] of the Company. In the event a Participant shall not designate a
Beneficiary as aforesaid, or if for any reasons such designation shall be
ineffective, in whole or in part, the distribution that otherwise would have
been paid to such Participant shall be paid to his estate, and in such event the
term "Beneficiary" shall include his estate.
VI. ADMINISTRATION
6.1. COMMITTEE. The Plan shall be administered by the Compensation
Committee of the Board of Directors, or such other Committee of the Board of
Directors, composed exclusively of not less than two Non-Employee Directors,
each of whom shall be appointed by and serve at the pleasure of the Board of
Directors. The Committee may designate person(s) who are Company employees to
oversee the day to day administration of the Plan.
6.2. GENERAL RIGHTS, POWERS, AND DUTIES OF COMMITTEE. The Committee shall
be responsible for the management, operation, and administration of the Plan.
Subject to the limitations contained in Section 4.8 and to the remaining terms
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of the Plan, the Committee shall, in addition to those provided elsewhere in the
Plan, have the following powers, rights, and duties:
(a) To maintain records concerning the Plan sufficient to prepare reports,
returns and other information required by the Plan or by law;
(b) To direct the payment of benefits under the Plan, and to give such
other directions and instructions as may be necessary for the proper
administration of the Plan; and
(c) To be responsible for the preparation, filing and disclosure on behalf
of the Plan of such documents and reports as are required by any applicable
federal or state law.
The Committee shall also have the authority to adopt, alter, and repeal
such administrative rules, guidelines, and practices governing the Plan as it
shall, from time to time, deem advisable, to interpret the terms and provisions
of the Plan and any award issued under the Plan (and any Notice of Award or
other agreement relating thereto), and to otherwise supervise the administration
of the Plan.
Any determination made by the Committee pursuant to the provisions of the
Plan with respect to any grants, payments, or other transactions under the Plan
shall be made in the sole discretion of the Committee at the time of the grant,
payment, or other transaction or, unless in contravention of any express term of
the Plan, at any time thereafter. All decisions made by the Committee pursuant
to the provisions of the Plan shall be final and binding on all persons,
including the Company and Plan Participants.
6.3. INFORMATION TO BE FURNISHED TO COMMITTEE. Participants and their
Beneficiaries shall furnish to the Committee such evidence, data, or information
and execute such documents as the Committee requests.
6.4. RESPONSIBILITY AND INDEMNIFICATION. No member of the Committee or of
the Board of Directors or any person who is designated to oversee the day to day
administration of the Plan (as provided in Section 6.1) shall be liable to any
person for any action taken or omitted in connection with the administration of
this Plan unless attributable to his own fraud or willful misconduct; nor shall
the Company be liable to any person for any such action unless attributable to
fraud or willful misconduct on the part of a director, officer, or employee of
the Company within the scope of his Company duties. Each member of the
Committee shall be indemnified and held harmless by the Company for any
liability arising out of the administration of the Plan, to the maximum extent
permitted by law.
VII. AMENDMENT AND TERMINATION
7.1. AMENDMENT. The Plan may be amended in whole or in part by the
Company, by action of the Board of Directors, at any time. The Committee
reserves the unilateral right to change any rule under the Plan if it deems such
a change necessary to avoid the application of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), to the Plan.
-10-
<PAGE>
No amendment shall be made without the approval of the Company's stockholders to
the extent such approval is required by law or by agreement.
7.2. COMPANY'S RIGHT TO TERMINATE. The Company reserves the sole right
to terminate the Plan, by action of the Board of Directors, at any time.
VIII. MISCELLANEOUS
8.1. NO IMPLIED RIGHTS; RIGHTS ON TERMINATION OF SERVICE. Neither the
establishment of the Plan nor any amendment thereof shall be construed as giving
any Participant, Beneficiary, or any other person any legal or equitable right
unless such right shall be specifically provided for in the Plan or conferred by
specific action of the Committee in accordance with the terms and provisions of
the Plan. Except as expressly provided in this Plan, the Company shall not be
required or be liable to make any payment under the Plan.
8.2. NO RIGHT TO COMPANY ASSETS. Neither the Participant nor any other
person shall acquire, by reason of the Plan, any right in or title to any
assets, funds or property of the Company whatsoever including, without limiting
the generality of the foregoing, any specific funds, assets, or other property
which the Company, in its sole discretion, may set aside in anticipation of a
liability hereunder. Any benefits which become payable hereunder shall be paid
from the general assets of the Company. The Participant shall have only a
contractual right to the amounts, if any, payable hereunder unsecured by any
asset of the Company. Nothing contained in the Plan constitutes a guarantee by
the Company that the assets of the Company shall be sufficient to pay any
benefit to any person.
8.3. NO EMPLOYMENT RIGHTS. Nothing herein shall constitute a contract of
employment or of continuing service or in any manner obligate the Company to
continue the services of the Participant, shall obligate the Participant to
continue in the service of the Company, or shall serve as a limitation of the
right of the Company to discharge any of its employees, with or without cause.
Nothing herein shall be construed as fixing or regulating the compensation
payable to the Participant.
8.4. OTHER BENEFITS. No Common Stock paid under the Plan shall be
considered compensation for purposes of computing benefits under any "employee
benefit plan" (as defined in Section 3(3) of ERISA) of the Company nor affect
any benefits or compensation under any other benefit or compensation plan of the
Company now or subsequently in effect (except as provided to the contrary in
such Company plan).
8.5. OFFSET. If, at the time payments are to be made hereunder, the
Participant or the Beneficiary or both are indebted or obligated to the Company,
then the payments under the Plan remaining to be made to the Participant or the
Beneficiary or both may, at the discretion of the Company, be reduced by the
amount of such indebtedness or obligation, provided, however, that an election
by the Company not to reduce any such payment or payments shall not constitute a
waiver of its claim for such indebtedness or obligation.
-11-
<PAGE>
8.6. NON-ASSIGNABILITY. Neither the Participant nor any other person
shall have any voluntary or involuntary right to commute, sell, assign, pledge,
anticipate, mortgage, or otherwise encumber, transfer, hypothecate, or convey in
advance of actual receipt the amounts, if any payable hereunder or any part
thereof, which are expressly declared to be unassignable and non-transferable.
No part of the amounts payable prior to actual payment shall be subject to
seizure or sequestration for the payment of any debts, judgments, alimony, or
separate maintenance owed by the Participant or any other person, or be
transferable by operation of law in the event of the Participant's or any other
person's bankruptcy or insolvency.
8.7. NOTICE. Any notice required or permitted to be given under the Plan
shall be sufficient if in writing and hand delivered, sent by registered or
certified mail, or sent by facsimile to the Company at its principal office,
directed to the attention of the Committee c/o the Chief Financial Officer of
the Company. Such notice shall be deemed given as of the date of delivery or,
if delivery is made by mail or facsimile, as of the date shown on the postmark,
facsimile, or the receipt for registration or certification.
8.8. GOVERNING LAWS. The Plan and all awards made and actions taken under
the Plan shall be governed and construed according to the laws of the State of
Delaware.
8.9. GENDER AND NUMBER. Where appropriate, references in this Plan to the
masculine shall include the feminine, and references to the singular shall
include the plural.
8.10. SEVERABILITY. In the event any provision of the Plan shall be held
legally invalid for any reasons, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.
-12-
<PAGE>
Exhibit 11.01
CAPITAL RE CORPORATION AND SUBSIDIARIES
EXHIBIT 11 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------------------------------
1996 1995 1994
------------------------------------------
<S> <C> <C> <C>
Earnings per common share (Primary and Fully Diluted)
Average shares outstanding during the period 15,656 14,788 14,825
Net Income 56,524 45,527 39,806
Earnings per share amount $3.61 $3.08 $2.69
========= ========= =========
Notes: The per share data for 1996, 1995 and 1994 does not include the net effect of dilutive
stock options, since the dilution from the earnings per share amount is less than 3%.
</TABLE>
<PAGE>
Capital RE Corporation and Subsidiaries
Financial Highlights
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
(Dollars in thousands except per share amounts) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Gross Premiums Written $129,818 $107,599 $94,851 $85,367 $79,283
Net Premiums Written 105,188 89,508 82,795 73,946 53,153
Net Premiums Earned 92,436 60,097 58,850 44,936 27,799
Net Investment Income 51,558 46,654 40,113 32,131 23,760
Net Realized Gains 1,471 53 1,780 881 5,487
Total Revenues 146,416 107,085 101,462 79,477 58,443
Net Income 56,524 45,527 39,806 36,354 30,153
- ------------------------------------------------------------------------------------------------------------
BALANCE SHEET
Investment Portfolio 901,102 771,767 638,751 552,405 443,688
Total Assets 1,156,401 981,885 810,040 711,633 608,547
Net Deferred Premium Revenue 265,070 252,318 222,907 198,960 147,079
Stockholders' Equity 489,346 411,943 325,514 323,832 279,593
- ------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Earnings Per Share 3.61 3.08 2.69 2.43 2.16
Book Value Per Share 30.86 27.82 22.02 21.66 18.71
- ------------------------------------------------------------------------------------------------------------
STATUTORY SURPLUS AND RESERVES
Unearned Premium Reserve 307,236 278,980 242,574 218,095 163,812
Contingency Reserve 123,363 89,685 63,591 43,459 34,472
Policyholders' Surplus 443,451 412,884 401,743 304,222 250,720
Total Policyholders'Surplus and Reserves 874,051 781,549 707,908 565,776 449,004
- -------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
Capital Re Corporation and Subsidiaries
Audited Consolidated Financial Statements
Year ended December 31, 1996
<TABLE>
<CAPTION>
Contents
<S> <C>
Management's Discussion and Analysis ................................. 22
Report of Independent Auditors ....................................... 31
Consolidated Balance Sheets .......................................... 32
Consolidated Statements of Income .................................... 34
Consolidated Statements of Stockholders' Equity ...................... 35
Consolidated Statements of Cash Flows ................................ 36
Notes to Consolidated Financial Statements ........................... 37
Officers and Directors ............................................... 54
Shareholder Information .............................................. 55
</TABLE>
21
<PAGE>
Capital Re Corporation and Subsidiaries
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 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. KRE Reinsurance Ltd. ("KRE"), (formerly Capital Mortgage
Reinsurance Company (Bermuda) Ltd.), a Bermuda-domiciled company, commenced
operations in March 1994. KRE 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 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 five syndicates operating in the Lloyd's of London
insurance market. In connection with this acquisition, the Corporation
established a corporate name at Lloyd's to support underwriting on the managed
syndicates. The corporate name participates in a non-marine and a life
syndicate. At December 31, 1996, the results of RGB and the corporate name at
Lloyd's are consolidated in the Corporation's financial statements. The goodwill
associated with this acquisition will be amortized over twenty years. 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.
22
<PAGE>
Results of Operations
Year Ended December 31, 1996, versus
Year Ended December 31, 1995
Net income for the year ended December 31, 1996, increased 24.2% to $56.5
million from $45.5 million for the same period of 1995. On a per share basis,
net income increased to $3.61 for the year ended December 31, 1996, from $3.08
for the same period of 1995, or 17.2%. In addition, net operating income (net
income excluding realized gains and losses) increased 21.3% to $55.3 million for
the year ended December 31, 1996, from $45.6 million for the same period in
1995. On a per share basis, net operating income increased to $3.53 for the year
ended December 31, 1996, from $3.09 for the same period of 1995, or 14.2%.
Growth in net premiums earned to $92.4 million from $60.1 million, or 53.7%, 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 20.6% to $129.8 million for the year ended
December 31, 1996, from $107.6 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 1996, which contributed $1.8 million in
premiums written for the year ended December 31, 1996. Non-municipal premiums
written decreased to $10.9 million for the year ended December 31, 1996, from
$17.2 million for the same period last year because of the positive impact on
gross premiums written in the fourth quarter of 1995 of several large
reinsurance transactions, which had upfront premium payments. The following
table shows gross written premiums by line of business for the year ended
December 31, 1996 and December 31, 1995.
<TABLE>
<CAPTION>
Year ended
Gross Premiums Written December 31,
----------------
(Dollars in millions) 1996 1995
- ----------------------------------------------------
<S> <C> <C>
Municipal $ 48.3 $ 44.2
Mortgage 53.7 39.1
Non-Municipal 10.9 17.2
Credit and Specialty 15.1 7.1
Title 1.8 0.0
- ----------------------------------------------------
$129.8 $107.6
</TABLE>
Net premiums written increased by 17.5% to $105.2 million for the year ended
December 31, 1996, from $89.5 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 year
ended December 31, 1996, and December 31, 1995.
<TABLE>
<CAPTION>
Year ended
Net Premiums Written December 31,
----------------
(Dollars in millions) 1996 1995
- ----------------------------------------------------
<S> <C> <C>
Municipal $ 36.7 $38.1
Mortgage 40.9 27.6
Non-Municipal 10.9 17.2
Credit and Specialty 14.9 6.6
Title 1.8 0.0
- ----------------------------------------------------
$105.2 $89.5
</TABLE>
23
<PAGE>
Capital Re Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations continued
For the year ended December 31, 1996, net premiums earned increased 53.7% to
$92.4 million from $60.1 million for the comparable 1995 period. This increase
was primarily due to growth in net premiums earned in the mortgage, and credit
and specialty reinsurance lines of business. For the year ended December 31,
1996, net refunded earned premium increased to $5.8 million from $0.8 million
for the comparable period in 1995. Excluding the effects of net refunded earned
premium, net premiums earned increased 46.2% to $86.7 million from $59.3 million
for the year ended December 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 year ended December 31, 1996 and December 31, 1995. For the
year ended December 31, 1996 and 1995, ceded earned premium was $14.7 million
and $8.0 million, respectively.
<TABLE>
<CAPTION>
Year ended
Net Premiums Earned December 31,
----------------
(Dollars in millions) 1996 1995
- ----------------------------------------------------
<S> <C> <C>
Municipal $27.5 $25.6
Mortgage 43.9 22.1
Non-Municipal 7.2 6.4
Credit and Specialty 12.2 6.0
Title 1.6 0.0
- -----------------------------------------------------
$92.4 $60.1
</TABLE>
For the year ended December 31, 1996, net investment income increased 10.5% to
$51.6 million from $46.7 million for the comparable period in 1995. 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 year ended December 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 $1.5 million for the year ended December 31, 1996, compared to
net realized gains of $0.1 million 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 $9.5 million from $2.6 million
for the year ended December 31, 1996 and 1995, respectively. Losses recorded in
the year ended December 31, 1996, were primarily attributable to 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 year ended December 31, 1996 and 1995, were $6.5
million and $2.6 million, respectively.
Total expenses, including loss and loss adjustment expenses, increased 47.4% to
$69.3 million for the year ended December 31, 1996, from $47.0 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
24
<PAGE>
mortgage and credit lines of business and increased net profit commissions
payable under certain of the Corporation's reinsurance contracts. In addition,
the combined ratio increased to 61.7% for the year ended December 31, 1996, from
56.8% for the comparable 1995 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 year ended December 31, 1996, the total tax provision increased to $20.6
million from $14.5 million for the same period in 1995. In addition, the
effective tax rate increased to 26.7% in the third quarter of 1996, from 24.2%
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.
Year Ended December 31, 1995 versus
Year Ended December 31, 1994
Net income for the year ended December 31, 1995, increased 14.3% to $45.5
million from $39.8 million for the same period of 1994. On a per share basis,
net income increased to $3.08 for the year ended December 31, 1995, from $2.69
for the same period of 1994, or 14.5%. Growth in net investment income to $46.7
million from $40.1 million, or 16.5%, and a decrease in profit commission
expense to $0.9 million from $4.0 million, were the principal causes of the
increase in net income.
Gross premiums written increased 13.4% to $107.6 million for the year ended
December 31, 1995, from $94.9 million for the same period of 1994. This increase
was primarily due to an increase in gross premiums written from the
Corporation's expansion of its mortgage guaranty reinsurance and credit
reinsurance business lines. The following table shows gross written premiums by
line of business for the year ended December 31, 1995, and December 31, 1994.
<TABLE>
<CAPTION>
Year ended
Gross Premiums Written December 31,
----------------
(Dollars in millions) 1996 1995
- ----------------------------------------------------
<S> <C> <C>
Municipal $ 44.2 $56.9
Mortgage 39.1 30.1
Non-Municipal 17.2 5.3
Credit 7.1 2.6
- ----------------------------------------------------
$107.6 $94.9
</TABLE>
The decrease of $12.7 million of gross premiums written in the municipal bond
reinsurance line of business was primarily due to a decline in new municipal
bond issuance, a consequent decline in aggregate primary insurance premiums, and
reduced reinsurance ceded in the municipal bond segment of the financial
guaranty market. However, this decrease was offset by an increase of $12.0
million of gross premiums written in the non-municipal financial guaranty line
of business.
Net premiums written increased by 8.1% to $89.5 million for the year ended
December 31, 1995, from $82.8 million for the same period in 1994. This increase
followed from the causes described above for the increase in gross premiums
written. The following table shows net premiums written by line of business for
the year ended December 31, 1995, and December 31, 1994.
25
<PAGE>
Capital Re Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations continued
<TABLE>
<CAPTION>
Year ended
Net Premiums Written December 31,
----------------
(Dollars in millions) 1996 1995
- ----------------------------------------------------
<S> <C> <C>
Municipal $38.1 $50.1
Mortgage 27.6 23.8
Non-Municipal 17.2 6.3
Credit 6.6 2.6
- ----------------------------------------------------
$89.5 $82.8
</TABLE>
For the year ended December 31, 1995, net premiums earned increased 2.0% to
$60.1 million from $58.9 million for the comparable 1994 period. This slight
increase was primarily due to increases in net premiums earned in the mortgage,
credit and non-municipal reinsurance lines of business, partially offset by a
decline in net refunded earned premium. For the year ended December 31, 1995,
net refunded earned premium decreased to $0.8 million from $9.2 million for the
comparable period in 1994. Excluding the effects of net refunded earned premium,
net premiums earned increased 19.3% to $59.3 million from $49.7 million for the
year ended December 31, 1995 and 1994, 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 year ended December 31, 1995, and December 31, 1994.
<TABLE>
<CAPTION>
Year ended
Net Premiums Written December 31,
-----------------
(Dollars in millions) 1996 1995
- ----------------------------------------------------
<S> <C> <C>
Municipal $25.6 $34.5
Mortgage 22.1 16.8
Non-Municipal 6.4 5.3
Credit 6.0 2.3
- ----------------------------------------------------
$60.1 $58.9
</TABLE>
For the year ended December 31, 1995, net investment income increased 16.5% to
$46.7 million from $40.1 million for the comparable period in 1994. Growth in
investment income was primarily attributable to an increase in invested assets
from positive operating cash flows during the twelve months ended December 31,
1995.
The Corporation recognized net realized gains of $0.1 million for the year ended
December 31, 1995 compared to $1.8 million for the same period in 1994. The 1995
net realized gains included a write-down of $2.6 million on a planned
amortization class interest-only collateralized mortgage obligation ("CMO") in
accordance with the provisions of Emerging Issues Task Force ("EITF") Issue No.
93-18, which requires cash flows of volatile CMOs to be discounted to their fair
value below amortized cost to the extent that any portion of this difference is
considered to be other than temporary. Included in the 1994 net realized gains
was a $1.0 million write-down on the same security. The carrying value of this
security has been reduced to its currently expected discounted realizable
amount.
Loss and loss adjustment expenses increased to $2.6 million from $2.2 million
for the year ended December 31, 1995 and 1994, respectively. Losses recorded in
the year ended 1995 were primarily attributable to the mortgage guaranty and
credit
26
<PAGE>
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.
Total expenses decreased 2.9% to $47.0 million for the year ended December 31,
1995, from $48.4 million in the same period of 1994. Also, the expense ratio
decreased to 52.4% for the year ended December 31, 1995, from 58.2% for the
comparable 1994 period. This decrease was due to lower profit commission
expenses associated with favorable results under certain retrocessional
agreements.
For the year ended December 31, 1995, the total tax provision increased to $14.5
million from $13.3 million for the same period in 1994. However, the effective
tax rate decreased to 24.2% for the year ended December 31, 1995, from 25.0%.
This decrease occurred in response to the Corporation's strategy of using a
greater proportion of new cash flow to purchase tax-exempt 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 was limited to 10% of Capital Reinsurance's
policyholders' surplus as of December 31, 1995, or approximately $32.9 million.
For the year ended December 31, 1996, Capital Reinsurance paid $17.5 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
27
<PAGE>
Capital Re Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations continued
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. 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, KRE 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. 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 1996, the Corporation paid three quarterly common stock dividends at a
rate of $0.06 per share. In December of 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 year ended December 31, 1996, common
dividends were declared and paid in the amount of $3.9 million or $0.25 per
share.
Cash flows from operations for the year ended December 31, 1996 and 1995,
consisting of reinsurance premiums collected net of expenses, investment income
and income taxes, were $95.9 million and $73.7 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.
28
<PAGE>
At December 31, 1996, cash and investments approximated $916.4 million, an
increase of $140.1 million, or 18.0%, 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 December 31, 1996, the entire investment portfolio
was invested in highly-rated fixed income securities. At December 31, 1996,
approximately $200.8 million or 22.3% of the Corporation's investment portfolio
was comprised of mortgage-backed securities ("MBS"). Of the MBS portfolio,
approximately $142.8 million or 71.1% is backed by agencies or entities
sponsored by the U.S. government as to the full amount of principal and
interest. As of December 31, 1996, 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
December 31, 1996, $52.2 million or approximately 26.0% 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, $148.6 million, or 74.0%, 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 December 31, 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 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. 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, 2004.
29
<PAGE>
Capital Re Corporation and Subsidiaries
Management's Discussion and Analyses of Financial Condition
and Results of Operations continued
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 $16.0 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.
30
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
Capital Re Corporation
We have audited the accompanying consolidated balance sheets of Capital Re
Corporation and Subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Capital Re
Corporation and Subsidiaries at December 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
January 21, 1997
31
<PAGE>
Capital Re Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
----------------------------------
(Dollars in thousands except share amounts) 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Fixed maturity securities available for sale,
at market (amortized cost: $800,137 in 1996
and $652,966 in 1995) $ 825,678 $687,657
Short-term investments, at cost, which
approximates market 75,424 84,110
- -----------------------------------------------------------------------------------------------------
Total investments 901,102 771,767
Cash 15,285 4,537
Accrued investment income 12,287 9,481
Deferred acquisition costs 111,364 102,353
Prepaid reinsurance premiums 72,034 62,133
Reinsurance recoverable on ceded losses 1,833 2,524
Funds held under reinsurance contracts 3,861 3,832
Premiums receivable 5,794 17,907
Property and equipment, at cost (net of
accumulated depreciation and amortization
of $1,502 in 1996 and $1,014 in 1995) 2,291 1,702
Goodwill 13,567 --
Investment in CGUL 10,000 --
Other assets 6,983 5,649
- -----------------------------------------------------------------------------------------------------
Total assets $1,156,401 $981,885
=====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------
(Dollars in thousands except share amounts) 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities
Deferred premium revenue $ 337,104 $314,451
Reserve for losses and loss adjustment expenses 19,902 12,783
Profit commission liability 13,329 8,806
Ceded balances payable 50 8,000
Bank note payable 25,000 --
Subordinated notes payable -- 16,000
Long-term debt 74,782 74,744
Deferred federal income taxes payable 58,474 50,187
Other liabilities 20,665 9,971
Liability for securities purchased 42,749 --
- ------------------------------------------------------------------------------------------------------
Total liabilities 592,055 494,942
- ------------------------------------------------------------------------------------------------------
Company obligated mandatorily redeemable preferred
securities of Capital Re LLC 75,000 75,000
- ------------------------------------------------------------------------------------------------------
Stockholders' equity
Preferred stock--$.01 par value per share:
25,000,000 shares authorized; no shares
issued or outstanding -- --
Common stock--$.01 par value per share:
75,000,000 shares authorized; 15,856,762 and
14,805,055 shares issued and outstanding in
1996 and 1995 160 150
Additional paid-in capital 222,525 191,654
Retained earnings 253,807 201,228
Treasury stock--189,700 and 182,700 shares in 1996
and 1995, respectively (3,870) (3,638)
Net unrealized gain on fixed maturity securities available
for sale 16,602 22,549
Net unrealized gain on foreign currency translation 122 --
- ------------------------------------------------------------------------------------------------------
Total stockholders' equity 489,346 411,943
- ------------------------------------------------------------------------------------------------------
Total liabilities, preferred securities of Capital Re LLC and
stockholders' equity $1,156,401 $981,885
======================================================================================================
</TABLE>
33
<PAGE>
Capital Re Corporation and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------
(Dollars in thousands except per share amounts) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Gross written premiums $129,818 $107,599 $ 94,851
Ceded premiums (24,630) (18,091) (12,056)
- ------------------------------------------------------------------------------------------------------------
Net written premiums 105,188 89,508 82,795
Increase in deferred premium revenue (12,752) (29,411) (23,945)
- ------------------------------------------------------------------------------------------------------------
Earned premiums 92,436 60,097 58,850
Net investment income 51,558 46,654 40,113
Net realized gains 1,471 53 1,780
Other income 951 281 719
- ------------------------------------------------------------------------------------------------------------
Total revenues 146,416 107,085 101,462
- ------------------------------------------------------------------------------------------------------------
Expenses
Losses and loss adjustment expenses 9,483 2,637 2,167
Acquisition costs 39,725 32,607 34,099
Increase in deferred acquisition costs (9,011) (11,705) (12,628)
Profit commission expense 6,008 902 4,009
Other operating expenses 10,796 9,710 8,787
Foreign exchange gains (losses) (377) 228 --
Interest expense 6,895 6,893 6,539
Minority interest in Capital Re LLC 5,738 5,738 5,387
- ------------------------------------------------------------------------------------------------------------
Total expenses 69,257 47,010 48,360
- ------------------------------------------------------------------------------------------------------------
Income before provision for federal income taxes 77,159 60,075 53,102
Provision for federal income taxes:
Current 9,146 9,175 6,976
Deferred 11,489 5,373 6,320
- ------------------------------------------------------------------------------------------------------------
Total provision for federal income taxes 20,635 14,548 13,296
- ------------------------------------------------------------------------------------------------------------
Net income $ 56,524 $ 45,527 $ 39,806
============================================================================================================
Per share data
Weighted average common shares outstanding 15,656 14,788 14,825
Net income per share of common stock $ 3.61 $ 3.08 $ 2.69
Cash dividend per common share $ 0.25 $ 0.21 $ 0.20
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE>
Capital Re Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
(Dollars in thousands except per share amounts) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common stock
Balance at beginning of period 150 150 149
Common stock issued 8 -- 1
Exercise of stock options, including tax benefit 2 -- --
- ------------------------------------------------------------------------------------------------------------
Balance at end of period 160 150 150
- ------------------------------------------------------------------------------------------------------------
Additional paid-in capital
Balance at beginning of period 191,654 191,214 190,902
Issuance of common stock 25,485 440 312
Exercise of stock options, including tax benefit 5,386 -- --
- ------------------------------------------------------------------------------------------------------------
Balance at end of period 222,525 191,654 191,214
- ------------------------------------------------------------------------------------------------------------
Retained earnings
Balance at beginning of period 201,228 158,806 121,959
Net Income 56,524 45,527 39,806
Dividend (3,945) (3,015) (2,959)
- ------------------------------------------------------------------------------------------------------------
Balance at end of period 253,807 201,228 158,806
- ------------------------------------------------------------------------------------------------------------
Treasury stock
Balance at beginning of period (3,638) (3,638) --
Purchase of treasury stock at cost (232) -- (3,638)
- ------------------------------------------------------------------------------------------------------------
Balance at end of period (3,870) (3,638) (3,638)
- ------------------------------------------------------------------------------------------------------------
Foreign exchange translation
Balance at beginning of period 0 (20) (10)
Foreign exchange translation 122 20 (10)
- ------------------------------------------------------------------------------------------------------------
Balance at end of period 122 0 (20)
- ------------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on fixed
maturity securities available for sale
Balance at beginning of period 22,549 (20,998) 10,832
Fixed maturities available for sale adjustments (5,947) 43,547 (31,830)
- ------------------------------------------------------------------------------------------------------------
Balance at end of period 16,602 22,549 (20,998)
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 489,346 411,943 325,514
============================================================================================================
</TABLE>
35
<PAGE>
Capital Re Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------
(Dollars in thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 56,524 $ 45,527 $ 39,806
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of discount on long-term debt 38 38 38
Net amortization of investment security discounts 293 1,573 2,099
Provision for deferred federal income taxes 11,489 5,351 6,320
Acquisition costs deferred (39,725) (32,607) (34,099)
Amortization of deferred acquisition costs 30,714 20,902 21,471
Change in accrued investment income (2,806) 462 (2,547)
Change in premiums receivable 2,467 (13,864) (1,657)
Change in deferred premium revenue, net 12,752 29,411 23,947
Change in reserve for losses and loss adjustment expenses, net 7,810 2,557 5,926
Change in funds held under reinsurance contracts -- 16 6,194
Net realized gains on investments (1,471) (53) (1,780)
Change in ceded balances payable (7,950) 8,000 --
Other 25,795 6,371 2,518
- ------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 95,930 73,684 68,236
- ------------------------------------------------------------------------------------------------------------
Investing activities
Fixed maturity securities available-for-sale:
Purchases (741,415) (226,955) (202,516)
Sales 589,143 165,775 53,437
Maturities 6,280 7,100 36,170
Fixed maturity securities held-to-maturity:
Purchases -- -- (11,573)
Maturities -- 6,028 14,782
Purchases of short-term investments, net 8,686 (21,649) (23,774)
Investment in subsidiaries (25,791) (304) (273)
Other investing activities 42,211 -- --
- ------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (120,886) (70,005) (133,747)
- ------------------------------------------------------------------------------------------------------------
Financing activities
Net proceeds from sale of preferred shares of subsidiary -- -- 72,753
Net proceeds from sale of stock 25,493 440 313
Net proceeds from exercise of stock options 5,388 -- --
Net proceeds from issuance of notes payable 9,000 -- --
Purchase of treasury stock, at cost (232) -- (3,638)
Dividends paid (3,945) (3,105) (2,959)
- ------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities 35,704 (2,665) 66,469
- ------------------------------------------------------------------------------------------------------------
Increase in cash 10,748 1,014 958
Cash at beginning of year 4,537 3,523 2,565
- ------------------------------------------------------------------------------------------------------------
Cash at end of year $ 15,285 $ 4,537 $ 3,523
============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
Capital Re Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
1. Business and Organization
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 principally engaged in the
business of financial guaranty reinsurance, which includes the reinsurance of
municipal and non-municipal bond reinsurance 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 originating principally in
the United States and the United Kingdom. KRE Reinsurance Ltd. ("KRE"),
(formerly Capital Mortgage Reinsurance Company (Bermuda) Ltd.) a Bermuda-
domiciled company, commenced operations in March 1994. KRE 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, 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, through
its newly formed United Kingdom holding company, Capital Re (UK) Holdings,
acquired 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 five syndicates
operating in the Lloyd's of London insurance market. In connection with this
acquisition, the Corporation established a corporate name at Lloyd's to support
underwriting on the managed syndicates. The corporate name participates in a non
marine and a life syndicate. At December 31, 1996, the results of RGB and the
corporate name at Lloyd's are consolidated in the Corporation's financial
statements. The goodwill associated with this acquisition will be amortized over
twenty years.
Also 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.
2. Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts and
operations of the Corporation and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported
37
<PAGE>
Capital Re Corporation and Subsidiaries
Notes to Consolidated Financial Statements continued
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
The 1995 and 1994 financial statements have been reclassified to conform with
the 1996 presentation.
Significant accounting policies are as follows:
Investments in Securities
The Corporation accounts for its investments in fixed maturity securities in
accordance with FASB Statement No. 115 ("SFAS 115"), "Accounting for Certain
Investments in Debt and Equity Securities." Management determines the
appropriate classification of securities at the time of purchase. At December
31, 1996 and 1995, investments in fixed maturity securities were designated as
available-for-sale.
The Corporation invests in mortgage-backed securities, including collateralized
mortgage obligations. The Corporation recognizes income for these securities
using a constant effective yield based on anticipated prepayments and the
estimated economic life of the securities. When actual prepayments differ
significantly from anticipated prepayments, the effective yield is recalculated
to reflect actual payments to date and anticipated future payments. The net
investment in the security is adjusted to the amount that would have existed had
the new effective yield been applied since the acquisition of the security. That
adjustment is included in net investment income. Short-term investments are
carried at cost, which approximates market value. Realized gains and losses on
sale or maturity of investments and declines in value judged to be other-than-
temporary are determined by specific identification and included in net realized
gains.
The amortized cost of fixed maturity securities is adjusted for amortization of
premiums and accretion of discounts. That amortization or accretion is included
in net investment income.
Premium Revenue Recognition
Financial Guaranty: Generally, financial guaranty reinsurance premiums which
include municipal and non-municipal transactions are paid entirely at contract
inception. For purposes of earnings recognition, premiums are allocated to each
year in the term of the guaranty and are earned pro-rata over the period of
risk. Accordingly, the deferred premium revenue represents the portion of
premiums written that is applicable to the unexpired risk of reinsured bonds and
notes.
Mortgage Guaranty: Mortgage guaranty reinsurance premiums are collected on both
a single premium basis and annual payment basis. All premiums written are
initially deferred as deferred premium revenue and earned pro-rata over the
policy term. Premiums paid in lump sum on policies covering more than one year
are amortized over the policy life in accordance with the expiration of risk.
Premiums paid annually are earned on a monthly pro-rata basis over the annual
period.
Trade Credit: Trade credit reinsurance contracts are typically issued on an
annual basis with premiums payable quarterly or semi-annually. Premiums are
earned pro-rata over the covered period under the terms of each contract.
Title Insurance: Title reinsurance premiums are generally paid up front.
Premiums are earned as written.
Deferred Acquisition Costs
Acquisition costs include only those expenses that relate to, and vary with,
premium production, including commissions, brokerage and costs of underwriting
and marketing personnel. Acquisition costs are deferred and amortized over the
period in which the related premiums are
38
<PAGE>
earned. Ceding commission income on premiums ceded to other reinsurers reduces
acquisition costs. Anticipated losses, loss adjustment expenses and the
remaining costs of servicing the reinsured issues are considered in determining
the recoverability of acquisition costs.
Losses and Loss Adjustment Expenses
Financial Guaranty: Financial guaranty reserves for losses and loss adjustment
expenses are equal to the present value of the expected loss on any reinsured
risks having, in management's judgment, a probable payment default. At December
31, 1996 and 1995, reserves for losses and loss adjustment expenses were
discounted approximately $0.4 million using an average rate of 6.0% in 1996 and
6.75% in 1995.
Mortgage Guaranty: For the mortgage guaranty business, reserves are established
for reported insurance losses and loss adjustment expenses based on the receipt
of notices of default from ceding companies. Reserves are also established for
estimated losses incurred on notices of default not yet reported to ceding
companies. Reserves for ultimate losses are established by management using
estimated claim rates and claim amounts.
Trade Credit: For the trade credit reinsurance business, loss reserves are
established according to management's loss expectations which are based on
historical loss development patterns experienced by the ceding companies on
similar business as well as management's view of current macroeconomic
conditions in the countries in which the policies apply.
Title Insurance: For title reinsurance business, reserves are established for
reported insurance losses and loss adjustment expenses based upon receipt of
notices of a claim from the ceding companies. As of December 31, 1996, there
were no title insurance losses ceded to the Corporation.
Contingent Commissions
Under the terms of certain of the Corporation's reinsurance contracts, the
Corporation is obligated to pay the ceding company a contingent commission based
upon a specified percentage of the net underwriting profits. As of December 31,
1996 and 1995, the Corporation's liability for the present value of expected
future payments is shown on the balance sheet under the caption "Profit
commission liability."
Stock Based Compensation
The Corporation grants stock options to certain employees for a fixed number of
shares to employees with an exercise price equal to the fair value of the shares
at the date of grant. The Corporation accounts for stock option grants in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and, accordingly, recognizes no compensation expense for the stock option
grants.
Income Taxes
In accordance with FASB Statement No. 109, "Accounting for Income Taxes,"
deferred federal income taxes are provided on the temporary difference between
the tax basis of an asset or liability and its reported amount in the financial
statements that will result in deductible or taxable amounts in future years
when the reported amount of the asset or liability is recovered or settled. Such
temporary differences relate principally to premium revenue recognition,
deferred acquisition costs, and contingency reserve. The Internal Revenue Code
permits companies writing financial guaranty insurance and mortgage guaranty
insurance to deduct from taxable income amounts added to the statutory
contingency reserve, subject to certain limitations. The amounts deducted must
be included in taxable income in the tenth or twentieth year following the year
of deduction dependent on the type of business, or in the event that incurred
losses exceed certain statutorily established levels and the contingency reserve
is released to cover such excess losses.
39
<PAGE>
Capital Re Corporation and Subsidiaries
Notes to Consolidated Financial Statements continued
However, the tax benefits obtained from such deductions must be invested in
noninterest-bearing U.S. Government tax and loss bonds. The Corporation records
purchases of tax and loss bonds as payments of federal income taxes.
Earnings Per Share
Net income per share of common stock is computed by dividing net income by the
weighted average number of shares of common stock outstanding during each year.
The effect of outstanding stock options in 1996, 1995 and 1994 was not dilutive
in the computation of earnings per share.
3. Statutory Accounting Practices
The financial statements are prepared on the basis of GAAP, which differs in
certain respects from accounting practices prescribed or permitted by the
Maryland Insurance Administration and the Insurance Department of the State of
New York (the insurance departments in the states of domicile of Capital
Reinsurance and Capital Mortgage and Capital Title, respectively), as well as
the statutory requirements of the Minister of Finance of the Island of Bermuda
(place of domicile of Capital Credit and KRE). Statutory accounting practices
for the Corporation's insurance subsidiaries differ from GAAP as follows:
Acquisition costs are charged to current operations as incurred rather than as
related premiums are earned;
A contingency reserve is computed on the basis of statutory requirements
regardless of when loss contingencies actually exist;
A title statutory premium reserve is established based upon assumed exposure
regardless of when loss contingencies actually exist;
Federal income taxes are only provided on taxable income for which income
taxes are currently payable, while under GAAP, deferred income taxes are
provided with respect to temporary differences.
Purchases of tax and loss bonds are reflected as admitted assets, while under
GAAP they are recorded as federal income tax payments;
Financial guaranty premiums are earned in direct proportion to the payment of
debt service rather than pro-rata over the period of risk;
Investments in fixed maturity securities are reported at amortized cost or
market value based on the National Association of Insurance Commissioners
("NAIC") rating; under GAAP, these fixed maturity investments are carried in
accordance with SFAS 115 (see Note 2).
Certain assets designated as "non-admitted assets" are charged directly to
statutory capital and surplus, but are reflected as assets under GAAP.
Holding company guarantees (approved by Bermuda's Minister of Finance) issued
for the benefit of Capital Credit and KRE under which the holding company is
obligated under certain circumstances to invest additional capital in each
company are admitted assets and included as part of statutory capital and
surplus.
The following is a reconciliation of the Corporation's consolidated GAAP net
income and stockholders' equity to the corresponding consolidated statutory
amounts for its insurance subsidiaries:
40
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
(Dollars in thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Consolidated GAAP net income $ 56,524 $ 45,527 $ 39,806
Premium revenue recognition (14,851) (6,995) (532)
Deferred acquisition costs (9,011) (11,705) (12,628)
Deferral of income taxes 11,489 5,373 6,320
Tax and loss bonds 4,848 4,116 1,964
Interest expense and minority interest in
Capital Re LLC 12,633 12,631 11,925
Other, including non-insurance subsidiaries (4,091) (3,160) (3,768)
- ----------------------------------------------------------------------------------------------------------------
Consolidated statutory net income $ 57,541 $ 45,787 $ 43,087
================================================================================================================
Year ended December 31,
-------------------------------
(Dollars in thousands) 1996 1995
- ----------------------------------------------------------------------------------------------------------------
GAAP stockholders' equity $ 489,346 $ 411,943
Premium revenue recognition (42,166) (26,662)
Deferred acquisition costs (111,364) (102,353)
Profit commission (8,067) (86)
Unrealized (gain) loss on fixed maturity securities available for sale (25,541) (34,691)
Deferral of income taxes 58,474 50,187
Tax and loss bonds 17,157 12,309
Contingency reserve (123,363) (89,685)
Long-term debt and Company obligated mandatorily redeemable
preferred securities of Capital Re LLC 174,782 165,744
Parental guarantee 30,000 30,000
Goodwill (13,567) --
Other, including noninsurance subsidiaries (2,240) (3,822)
- ----------------------------------------------------------------------------------------------------------------
Consolidated statutory policyholders' surplus $ 443,451 $ 412,884
================================================================================================================
</TABLE>
41
<PAGE>
Capital Re Corporation and Subsidiaries
Notes to Consolidated Financial Statements continued
4. Insurance in Force--Financial
Guaranty and Mortgage Guaranty
Financial Guaranty: At December 31, 1996, the Corporation's reinsured financial
guaranty portfolio included the reinsured portfolios of Capital Reinsurance,
Capital Credit and KRE, net of eliminations and was broadly diversified by bond
type, geographic location and maturity schedule, with no single risk
representing more than 1.9% of the Corporation's net par in force. The
Corporation limits its exposure to losses from reinsured financial guarantees by
underwriting primarily investment grade obligations and retroceding a portion of
its risks to other insurance companies.
Net financial guaranty par in force was approximately $39.4 billion at December
31, 1996. The composition at December 31, 1996, by type of issue and the range
of final maturities, was as follows:
<TABLE>
<CAPTION>
Range
Net Par of Final
(Dollars in billions) in Force Maturities
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Type of Issue
Tax-backed $11.7 1-40 years
Utility 11.1 1-40 years
Non-municipal 5.3 1-35 years
Health care 5.2 1-40 years
Special revenue 4.7 1-40 years
Housing 1.0 1-40 years
U.S. Government 0.4 1-40 years
- -------------------------------------------------------------------------------------------------
$39.4
=================================================================================================
</TABLE>
The reinsured portfolio contained exposures in each of the 50 states. Net par in
force at December 31, 1996, by state, was as follows:
<TABLE>
<CAPTION>
Net Par
(Dollars in billions) in Force
- -------------------------------------------------------------------------------------------------
<S> <C>
California $ 4.4
New York 4.2
Florida 2.6
Texas 2.0
Pennsylvania 1.9
Others (each less than 4%) 24.3
- -------------------------------------------------------------------------------------------------
$39.4
=================================================================================================
</TABLE>
42
<PAGE>
Mortgage Guaranty: At December 31, 1996, the Corporation's net mortgage guaranty
insurance in force (representing the current principal balance of all mortgage
loans that are currently reinsured) and direct primary net risk in force was
approximately $8.0 billion and $2.3 billion, respectively. California represents
the Corporation's largest U.S. risk concentration at approximately 22%, however,
its total U.S. distribution of mortgage guaranty risk in force parallels that of
the U.S. primary mortgage insurance industry.
5. Investments in Securities
The following summarizes the Corporation's aggregate investment portfolio at
December 31, 1996:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
(Dollars in thousands) Cost Gains Losses Fair Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities
available for sale:
U.S. Treasury securities and
obligations of U.S. government agencies $ 75,960 $ 1,525 $ (428) $ 77,057
Obligations of states and political subdivisions 398,006 21,058 (98) 418,966
Corporate securities 115,013 751 (231) 115,533
Mortgage-backed securities 197,928 3,147 (313) 200,762
Emerging markets 13,230 136 (6) 13,360
- -----------------------------------------------------------------------------------------------------------------
Total available-for-sale 800,137 26,617 (1,076) 825,678
Short-term investments 75,424 -- -- 75,424
- -----------------------------------------------------------------------------------------------------------------
Total investments $875,561 $26,617 $(1,076) $901,102
=================================================================================================================
</TABLE>
The following summarizes the Corporation's aggregate investment portfolio at
December 31, 1995:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
(Dollars in thousands) Cost Gains Losses Fair Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities
available for sale:
U.S. Treasury securities and
obligations of U.S. government agencies $ 30,219 $ 1,615 $ -- $ 31,834
Obligations of states and political subdivisions 332,229 26,871 (126) 358,974
Corporate securities 134,130 1,977 (126) 135,981
Mortgage-backed securities 156,388 4,778 (298) 160,868
- ----------------------------------------------------------------------------------------------------------------
Total available-for-sale 652,966 35,241 (550) 687,657
Short-term investments 84,110 -- -- 84,110
- ----------------------------------------------------------------------------------------------------------------
Total investments $737,076 $35,241 $(550) $771,767
================================================================================================================
</TABLE>
43
<PAGE>
Capital Re Corporation and Subsidiaries
Notes to Consolidated Financial Statements continued
The amortized cost and estimated fair value of fixed maturity securities
available-for-sale at December 31, 1996, by contractual maturity are shown
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
Amortized
(Dollars in thousands) Cost Fair Value
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Maturity:
Due in 1997-2001 $ 89,923 $ 90,581
Due in 2002-2006 85,694 87,058
Due after 2006 426,592 447,277
Mortgage-backed securities 197,928 200,762
- -----------------------------------------------------------------------------------------------------------
Total $800,137 $825,678
===========================================================================================================
</TABLE>
In 1996, the Corporation realized gross gains and losses of $8.5 million and
($7.0) million, respectively. In 1995, the Corporation realized gross gains and
losses of $3.5 million and ($3.4) million, respectively. Included in gross
losses in 1995 were ($2.6) million for other than temporary declines in value.
In 1994, the Corporation realized gross gains and losses of $3.2 million and
($1.4) million, respec tively. Included in gross losses in 1994 were ($1.1)
million for other than temporary declines in value. Approximately 22.3% of the
Corporation's total investment portfolio of $901.1 million at December 31, 1996
is comprised of mortgage-backed securities ("MBS"), including collateralized
mortgage obligations. Of the securities in the MBS portfolio, approximately
71.1% are backed by agencies or entities sponsored by the U.S. government. As of
December 31, 1996, the weighted average credit quality of the Corporation's
entire investment portfolio was triple A.
Net investment income is derived from the following sources:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
(Dollars in thousands) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income from fixed maturity securities $46,207 $42,730 $38,458
Income from short-term investments 6,351 4,406 2,156
- -------------------------------------------------------------------------------------------------------------
Total investment income 52,558 47,136 40,614
Less investment expenses (1,000) (482) (501)
- -------------------------------------------------------------------------------------------------------------
Net investment income $51,558 $46,654 $40,113
=============================================================================================================
</TABLE>
44
<PAGE>
Under agreements with its cedants and in accordance with statutory requirements,
certain of the Corporation's subsidiaries maintain fixed maturity securities in
trust accounts for the benefit of reinsured companies and for the protection of
policyholders in states in which they are not licensed. The carrying amount of
such restricted balances amounted to approximately $31.9 million and $30.5
million at December 31, 1996 and 1995, respectively. Additionally, at December
31, 1996 and 1995, $3.7 million and $5.1 million, respectively, was on deposit
with state insurance departments to satisfy regulatory requirements.
6. Reserves for Unpaid Losses and Loss
Adjustment Expenses
The following table provides a reconciliation of the beginning and ending
reserve balances for unpaid losses and loss adjustment expenses ("LAE").
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
(Dollars in thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reserve for losses and LAE, net of related reinsurance
recoverables, at beginning of year $10,245 $7,702 $1,776
Add:
Provision for unpaid losses and LAE for claims
occurring in the current year, net of reinsurance 8,370 1,660 1,296
Increase in estimated losses and LAE for claims
occurring in prior years, net of reinsurance 1,113 977 871
- ----------------------------------------------------------------------------------------------------------------
Incurred losses during the current year, net of reinsurance 9,483 2,637 2,167
- ----------------------------------------------------------------------------------------------------------------
Deduct:
Losses and LAE payments (net of recoverables) for claims
occurring in the current year 10 (474) (32)
Losses and LAE payments (net of recoverables) for claims
occurring in the prior year 1,959 568 (3,727)
- ----------------------------------------------------------------------------------------------------------------
1,969 94 (3,759)
- ----------------------------------------------------------------------------------------------------------------
Reserve for unpaid losses and LAE, net of related
reinsurance recoverables, at end of year 17,759 10,245 7,702
Unrealized foreign exchange loss on reserve revaluation 310 14 --
Reinsurance recoverables on unpaid losses
and LAE, at end of year 1,833 2,524 1,310
- ----------------------------------------------------------------------------------------------------------------
Reserve for unpaid losses and LAE, gross of reinsurance
recoverables on unpaid losses at end of year $19,902 $12,783 $9,012
================================================================================================================
</TABLE>
45
<PAGE>
Capital Re Corporation and Subsidiaries
Notes to Consolidated Financial Statements continued
Incurred losses in 1996 and 1995 were principally from the mortgage guaranty and
trade credit reinsurance lines of business. Incurred losses in 1994 were caused
primarily by increases in reserves estimated for mortgage guaranty losses. The
increases for 1996, 1995 and 1994 are consistent with the expected loss
development patterns for the mortgage guaranty and trade credit lines of
business.
7. Debt and Liquidity Facility
Debt consists of:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
(Dollars in thousands) 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
7.75% Debentures due 2002, net of unamortized
discount of $0.2 million in 1996 and $0.3 million in 1995
("Debentures") $74,782 $74,744
Subordinated Notes due August 1996 -- 16,000
Bank note payable 25,000 --
- ----------------------------------------------------------------------------------------------------------------
Total $99,782 $90,744
================================================================================================================
</TABLE>
The Debentures include certain covenants none of which significantly restrict
the Corporation's operating activities or dividend paying ability. During 1996,
the Corporation entered into a $25.0 million credit facility with Chase
Manhattan Bank, expiring August 20, 1997. Interest on the facility is payable
semi-annually at a rate equal to the then London Interbank offered rate plus 40
basis points. The Corpo-ration utilized $16.0 million, of this $25.0 million
facility to retire the subordinated notes and the remaining $9.0 million of the
credit facility for purposes of acquiring Tower Street Holdings.
On January 31, 1997, the Corporation renewed an agreement with Deutsche Bank AG
for the provision of a $25.0 million liquidity facility which will be available
for general corporate purposes expiring January 26, 1998. Capital Reinsurance
also renewed an agreement on January 31, 1997 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, 2004.
During 1996, 1995 and 1994, the Corporation paid total interest of approximately
$6.9 million, $6.9 million and $6.5 million, respectively.
8. Income Taxes
The Corporation and its subsidiaries file a consolidated federal income tax
return. The Corporation's effective federal corporate tax rate for 1996, 1995
and 1994 was 26.7%, 24.2% and 25.0%, respectively.
A reconciliation from the tax provision calculated at the federal statutory rate
of 35% in 1996, 1995 and 1994, to the total tax is as follows:
46
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
(Dollars in thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax provision at statutory rate $27,006 $21,026 $18,586
Tax-exempt interest (6,710) (5,940) (5,594)
Other, net 339 (538) 304
- ----------------------------------------------------------------------------------------------------------------
Total federal income tax provision $20,635 $14,548 $13,296
================================================================================================================
</TABLE>
The liability for deferred federal income taxes reflects the tax effect of the
following temporary differences:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
(Dollars in thousands) 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferral of acquisition costs $ 39,033 $ 35,824
Contingency reserve 30,670 22,186
Deferred premium revenue 3,198 (1,031)
Other than temporary declines in value of investments -- (2,293)
Unrealized gain on fixed maturity securities available for sale 8,940 12,142
Other 430 499
- ----------------------------------------------------------------------------------------------------------------
Effects of temporary differences 82,271 67,327
Credit for alternative minimum tax carryforwards (6,640) (4,831)
Tax and loss bonds (17,157) (12,309)
- ----------------------------------------------------------------------------------------------------------------
Liability for deferred federal income taxes $ 58,474 $ 50,187
================================================================================================================
</TABLE>
Income taxes paid during 1996, 1995 and 1994 were approximately $7.9 million,
$8.7 million and $6.2 million, respectively.
9. Reinsurance Ceded
To limit its exposure on assumed risks, the Corporation enters into certain
proportional and nonproportional retrocessional agreements that cede a portion
of risks underwritten to other insurance companies. In the event that any or all
of the reinsurers were unable to meet their obligations, the Corporation would
be liable for such defaulted amounts.
For the years ended December 31, 1996, 1995 and 1994, ceded earned premiums were
$14.7 million, $8.0 million and $11.5 million, respectively. Ceded losses for
the same periods were $6.5 million, $2.6 million and $3.7 million, respectively.
During 1993, Capital Reinsurance entered into a multi-year nonproportional
reinsurance contract which provides for aggregate loss protection of $80.0
million in exchange for $19.5 million of premium. Additional premiums may become
payable dependent upon the level of losses incurred. During 1993, Capital Credit
entered into similar multi-year reinsurance contracts which provide for
aggregate loss protection of $34.0 million in exchange for $4.3 million in
premiums. Additional premiums may also become payable dependent upon the level
of losses incurred.
47
<PAGE>
Capital Re Corporation and Subsidiaries
Notes to Consolidated Financial Statements continued
During 1994, Capital Reinsurance entered into a portfolio excess of loss
reinsurance contract which provides $100.0 million aggregate loss protection on
specified municipal obligations in excess of $82.0 million of losses. Capital
Mortgage entered into a similar portfolio excess of loss reinsurance contract
which provides $30.0 million aggregate loss protection in excess of a specified
loss ratio covering all reinsured obligations. Premiums due on both contracts
are not dependent upon the level of losses incurred.
During 1995, Capital Mortgage entered into an assumption agreement whereby it
provides excess of loss reinsurance on an existing portfolio of mortgage pool
insurance. In connection with this assumed transaction, Capital Mortgage is
required to cede a portion of the risks, thereby reducing its total net
retention. Total ceded premiums under the contract were approximately $21.6
million. Total expected assumed premiums of $56.0 million are payable in seven
annual installments of $8.0 million. Contingent commissions will be payable on
the assumed reinsurance and receivable on the ceded reinsurance, dependent upon
the level of losses incurred under the contract.
10. Fair Values of Financial Instruments
The following methods and assumptions were used by the Corporation in estimating
its fair value disclosure for financial instruments. These determinations were
made based on available market information and appropriate valuation
methodologies. Considerable judgment is required to interpret market data to
develop the estimates and therefore, they may not necessarily be indicative of
the amount the Corporation could realize in a current market exchange.
Cash and Short-term Investments
The carrying amount reported in the balance sheet for these instruments
approximates fair value.
Fixed Maturity Securities
The fair value for fixed maturity securities shown in Note 5 is based on quoted
market prices.
Deferred Premium Revenue
The fair value of the Corporation's deferred premium revenue is based on
entering into a cession of the entire portfolio with third party reinsurers
under market conditions. This figure was determined by using the statutory basis
unearned premium reserve, net of deferred acquisition costs, and the present
value of the estimated future cash flow stream from installment premiums. At
December 31, 1996, the fair value of the Corporation's net deferred premium
revenue was estimated to be $272.0 million.
Reserve for Losses and Loss Adjustment
Expenses, Net of Reinsurance Recoverable
on Ceded Losses
The carrying amount is composed of the present value of the expected cash flows
for case basis claims. Accordingly, the carrying amount is deemed the best
estimate of fair value as of December 31, 1996.
Debt
The fair value of the Corporation's $75.0 million of outstanding Debentures is
determined based on the projected cash flows discounted by the sum of the
seven-year U.S. treasury yield at December 31, 1996, and the appropriate credit
spread for similar debt instruments. At Decem-ber 31, 1996, the fair value of
the Corporation's Debentures was estimated to be $77.2 million.
48
<PAGE>
The carrying amount of the Corporation's bank notes payable of $25.0 million
approximates fair value due to their floating interest rate provision.
Preferred Securities of Capital Re LLC
The fair value of the Corporation's $75.0 million Company obligated mandatorily
redeemable preferred securities of Capital Re LLC at December 31, 1996, was
$72.4 million based on the closing price per share on the New York Stock
Exchange at that date.
11. Dividends
Under Maryland's insurance law, the amount of surplus available for distribution
as dividends is subject to certain statutory provisions, which generally
prohibit the payment of dividends in any twelve-month period without prior
approval of the Maryland Commissioner of Insurance in an amount exceeding 10% of
statutory capital and surplus at the preceding December 31. The amount available
for distribution from Capital Reinsurance during 1996 with notice to, but
without prior approval of, the Maryland Commissioner of Insurance under the
Maryland insurance law was approximately $32.9 million. During 1996, Capital
Reinsurance paid dividends in the amount of $17.5 million to the Corporation.
Credit Re has never paid a dividend to the Corporation. Were it to pay dividends
to the Corporation, it would rely on dividends from its wholly-owned subsidiary,
Capital Credit. Capital Credit's and KRE's dividend distributions are governed
by Bermuda law. Under Bermuda law and the By-Laws of Capital Credit and KRE,
dividends may be paid out of the profits of Capital Credit and KRE (defined as
accumulated realized profits less accumulated realized losses). Distributions to
shareholders may also be paid out of Capital Credit's and KRE's surplus limited
by requirements that Capital Credit and KRE 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 their organization, Capital Credit and KRE have
not declared or paid any dividends.
Under New York Insurance Law, neither Capital Mortgage nor Capital Title may pay
any dividend to shareholders which, together with all dividends declared or
distributed by it during the preceding twelve months, exceeds the lesser of 10%
of its surplus to policyholders as shown by its last statement on file with the
superintendent, or 100% of adjusted net investment income during such period
unless specifically allowed by the superintendent. To date, Capital Mortgage and
Capital Title have not declared or paid any dividends. The maximum dividend
payable during 1996 is approximately $6.1 million.
12. Commitments
At December 31, 1996, future minimum rental payments under the terms of the
Corporation's noncancellable operating leases for office space are $1.2 million
for the year 1997, $0.8 million for the years 1998, 1999, 2000 and 2001, and
$6.5 million in the aggregate thereafter. These future minimum rental payments
totaling $10.9 million have not been reduced by minimum sublease rentals of $0.8
million due in the future under noncancellable subleases. These payments are
subject to escalations in building operating costs and real estate taxes. Total
rent expense amounted to approximately $0.9 million in each of the years 1996,
1995 and 1994.
49
<PAGE>
Capital Re Corporation and Subsidiaries
Notes to Consolidated Financial Statements continued
13. Capital Re LLC
In January 1994, the Corporation formed and capitalized Capital Re LLC, a
limited liability company organized under the laws of the Turks and Caicos
Islands. Additionally, in January 1994, Capital Re LLC issued $75,000,000, 7.65%
of cumulative monthly income preferred shares, the proceeds of which were loaned
to the Corporation. The preferred shares were issued at $25 par value per share
and are shown on the balance sheet under the caption "Company obligated
mandatorily redeemable preferred securities of Capital Re LLC." The Corporation
guarantees the payment of the monthly dividend as well as any amounts upon
liquidation or redemption which cannot occur prior to January 31, 1999, at the
Corporation's discretion. Capital Re LLC exists solely for the purpose of
issuing preferred and common shares and lending the proceeds to the Corporation
to fund its business operations. The total amount paid to preferred shareholders
for the years ended 1996 and 1995 was approximately $5.7 million and is shown on
the income statement under the caption "Minority interest in Capital Re LLC."
14. Compensation Plans
Prior to its initial public offering, the Corporation had a stock incentive plan
wherein eligible employees were granted shares of restricted common stock.
Shares awarded under the Plan amounted to 696,000 at December 31, 1991. For
these awards, the difference between the price paid by the employees and the
market value of the award at the date of grant, if any, was recorded as deferred
compensation and was amortized ratably over the four-year vesting period. Upon
completion of the initial public offering in 1992, these shares became vested
and all restrictions lapsed.
To enable recipients of awards under the stock incentive plan to meet tax
obligations which may have resulted from such awards, the Corporation agreed to
make loans to recipients, payable upon ultimate disposition of their shares or
three years after their termination of employment. As of December 31, 1996 and
1995, total loans outstanding under all officer loan programs were approximately
$1.74 million and $1.78 million, respectively, at the end of the year, and are
included under the caption "Other assets."
On April 15, 1992, the Corporation adopted the 1992 Stock Option Plan (the
"Option Plan"). The Option Plan enables key employees to benefit from
appreciation in the price of the common stock of the Corporation. The Option
Plan provides for grants of incentive stock options ("ISO"), which are intended
to qualify under Section 422 of the Internal Revenue Code and of options which
are intended not to so qualify ("NQSO"). ISO's and NQSO's may be granted at a
price not less than 100% of the fair market value as determined on the date
granted. ISO's and NQSO's awarded are exercisable in four equal yearly
installments commencing one year after the date of grant and expire ten years
from the date of grant. According to the terms of the Option Plan, the aggregate
number of shares subject to option awards shall not exceed 1,450,000. Also, all
options granted have 10 year terms and vest 25% per annum over the term of
continued employment.
In 1993, the Corporation also adopted a stock option plan (the "Director's
Plan") for the benefit of its outside directors. The terms of the plan are
similar to those of the employee plan except that options become fully vested at
the time of grant. According to the terms of the Director's Plan, the aggregate
number of shares subject to option award shall not exceed 30,000.
The Corporation has elected to follow Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" (APB 25) and
50
<PAGE>
related interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Corporation's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
State-ment 123, and has been determined as if the Corporation had accounted for
its employee stock options under the fair value method of that statement. The
fair value for these options was estimated at the date of grant using a Black-
Schole's option pricing model with the following weighted-average assumptions
for 1996 and 1995, respectively: risk-free interest rates of 5.42% and 7.36%
dividend yields of 0.80% and 0.88%; volatility factors of the expected market
price of the Corporation's common stock of 19.10 and 29.94; and an expected life
of the options of 7 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Corporation's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' expected lives. The Corporation's pro
forma information follows (in thousands, except for per share information):
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Pro forma net income $56,030 $45,273
Pro forma earnings per common share $ 3.58 $ 3.06
- ----------------------------------------------------------------------------------------------------------------
A summary of the Corporation's stock option activity, and related information
for the years ended December 31 follows:
<CAPTION>
1996 1995
----------------------- -----------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 908,000 $20.77 686,400 $19.56
Granted 277,500 31.49 248,400 23.99
Exercised (205,587) 19.69 (22,575) 19.51
Forfeited (11,313) 26.50 (4,225) 19.62
- ----------------------------------------------------------------------------------------------------------------
Outstanding, end of year 968,600 $24.01 908,000 $20.77
================================================================================================================
Exercisable, end of year 422,447 $20.25 395,150 $19.63
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
51
<PAGE>
Capital Re Corporation and Subsidiaries
Notes to Consolidated Financial Statements continued
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Weighted-average fair value of options
granted during the year $10.92 $11.03
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Exercise prices for options outstanding as of December 31, 1996, ranged from
$19.50 to $39.88. The weighted-average remaining contractual life of those
options is approximately 7.5 years.
In 1996, the Corporation adopted a performance share plan for the benefit of
senior executives of the Corporation. The plan is intended to align senior
management with the interest of the shareholders. To achieve this objective, the
plan ties awards granted under the plan with earning per share growth and with
total shareholder return and share price. These shares will be awarded at
December 31, 1999. The Corporation recognized $1.0 million in deferred
compensation expense for the year ended December 31, 1996.
The Corporation maintains a savings incentive plan which is qualified under
Section 401 of the Internal Revenue Code. The savings incentive plan is
available to all full-time employees with a minimum of six months of service.
Eligible participants may contribute 9% of their base salary subject to a
maximum of $9,500 for 1996. Contributions are matched by the Corporation at a
rate of 100%, up to 6% of the participants' contribution subject to certain
limitations and vest at a rate of 25% per year starting with the second year of
service. The Corporation contributed approximately $0.3 million, $0.2 million,
and $0.1 million in 1996, 1995 and 1994, respectively.
The Corporation also maintains a profit sharing plan which is available to all
full-time employees with a minimum of six months of service. Annual
contributions to the plan are at the discretion of the Board of Directors. The
plan contains a qualified portion and a nonqualified portion. Total expense
incurred under the plan amounted to approximately $0.03 million in 1996 and
1995, and $0.5 million in 1994.
The Corporation does not provide health care or life insurance benefits to
retirees.
15. Major Customers
The Corporation derives the majority of its gross written premiums from a small
number of primary insurers. The primary insurers which accounted for 10% or more
of gross written premiums are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Primary Insurer
CMAC 15.9% 11.5% *
MBIA 14.9 17.8 19.4
FGIC 11.9 * 26.0
PMI 10.7 10.5 18.8
AMBAC * 12.1 *
FSA * 14.9 11.4
- -------------------------------------------------------------------------------------------------
* Less than 10%
</TABLE>
52
<PAGE>
This customer concentration results from the small number of primary insurance
companies which are dedicated to writing financial guaranty and mortgage
guaranty insurance. The loss of a major customer would have the effect of
reducing the Corporation's gross written premiums. However, on a year-to-year
basis the Corporation is not particularly vulnerable to the loss of any of its
major customers because prior to the end of each calendar year, its reinsurance
treaty agreements are renewed for the following year and are generally not
cancelable until the following year-end. Further, because written premium are
earned over many years, net income would not be materially impacted in any
single year.
16. Quarterly Financial Summary (Unaudited)
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
(Dollars in thousands except per share amounts) Quarter Quarter Quarter Quarter Year
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Gross written premiums $34,255 $30,957 $43,220 $21,386 $129,818
Net written premiums 18,060 26,902 40,500 19,726 105,188
Earned premiums 20,104 22,322 22,005 28,005 92,436
Net investment income and
net realized gains 12,191 11,781 12,781 16,276 53,029
Income before provision for
federal income tax 17,193 18,207 18,808 22,951 77,159
Net income 12,767 13,285 13,955 16,517 56,524
Net income per common share $ 0.84 $ 0.85 $ 0.88 $ 1.04 $ 3.61
- ----------------------------------------------------------------------------------------------------------------
1995
Gross written premiums $24,189 $21,202 $23,977 $38,231 $107,599
Net written premiums 21,748 19,302 20,789 27,669 89,508
Earned premiums 13,929 16,584 13,322 16,262 60,097
Net investment income and
net realized gains 11,530 11,493 11,546 12,138 46,707
Income before provision for
federal income tax 14,350 15,004 15,099 15,622 60,075
Net income 11,077 11,264 11,353 11,833 45,527
Net income per common share $ 0.75 $ 0.76 $ 0.77 $ 0.80 $ 3.08
- ----------------------------------------------------------------------------------------------------------------
1994
Gross written premiums $33,344 $23,743 $22,003 $15,761 $ 94,851
Net written premiums 20,732 24,439 21,128 16,496 82,795
Earned premiums 16,999 17,015 12,144 12,692 58,850
Net investment income and
net realized gains 10,390 9,913 10,540 11,050 41,893
Income before provision for
federal income tax 14,130 14,282 12,810 11,880 53,102
Net income 10,407 10,549 9,583 9,267 39,806
Net income per common share $ 0.70 $ 0.71 $ 0.65 $ 0.63 $ 2.69
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
53
<PAGE>
Capital Re Corporation and Subsidiaries
Officers and Directors
Executive Officers of Capital Re Corporation
Michael E. Satz
Chairman, President and
Chief Executive Officer
Executive Vice Presidents
David A. Buzen
Laurence C. D. Donnelly
Jerome F. Jurschak
Senior Vice Presidents
Stephen Donnarumma
Susan L. Hooker
Alan S. Roseman
Joseph W. Swain
- --------------------------------------------------------------------------------
RGB Underwriting Agencies Ltd.
Peter Brotherton Alan D. Satterford
Active Underwriter Active Underwriter
- --------------------------------------------------------------------------------
Board of Directors of Capital Re Corporation
Michael E. Satz/(3)/
Chairman, President and
Chief Executive Officer
Harrison W. Conrad, Jr./(2,3)/
Richard L. Huber/(1)/
Vice Chairman,
Strategy and Finance
Aetna Life & Casualty Co.
Steven D. Kesler/(2,3)/
President
Constellation
Investments, Inc.
Steven H. Newman/(2,3)/
Chairman and President
Underwriters Re Group, Inc.
Philip H. Robinson/(1)/
Edwin L. Russell/(2)/
President and
Chief Executive Officer
Minnesota Power & Light Company
Dan R. Skowronski, Esq./(1)/
General Counsel
Constellation Holdings, Inc.
Barbara D. Stewart/(1,2)/
President
Stewart Economics, Inc.
Jeffrey F. Stuermer/(1,3)/
Manager of Taxes
Minnesota Power & Light Company
Board Committees:
1. Audit Committee
2. Compensation Committee
3. Investment Committee
54
<PAGE>
Capital Re Corporation and Subsidiaries
Shareholder Information
Corporate Headquarters
Capital Re Corporation
1325 Avenue of the Americas
New York, New York 10019
Telephone: 212-974-0100
Fax: 212-581-3268
Annual Meeting
The annual meeting of shareholders of Capital
Re Corporation will be held on May 21, 1997, at
10:00 a.m. at The Equitable, 787 Seventh Avenue,
49th Floor, New York, New York 10019.
Form 10-K
A copy of the Corporation's annual report on Form-10K
to the Securities and Exchange Commission is available
on request, and without charge, by writing to the Director
of Communications, Capital Re Corporation, 1325 Avenue
of the Americas, New York, New York 10019.
Transfer Agent, Registrar and Dividend
Disbursing Agent
ChaseMellon Financial Shareholder Services
85 Challenger Road
Overpeck Center
Ridgefield Park, New Jersey 07660
1-800-526-0801
Shareholder Information
For further shareholder information,
please contact:
Capital Re Corporation
Director of Communications
1325 Avenue of the Americas
New York, New York 10019
212-974-0100
Investor Relations Contacts
David A. Buzen
Executive Vice President
Chief Financial Officer
212-974-0100
Catherine C. Bailey
Director of Communications
212-974-0100
<TABLE>
<CAPTION>
Market Price
Dividends ---------------------------------
COMMON STOCK DATA Paid Per share High Low Close
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
1st Quarter $0.06 $36 $28 7/8 $36
2nd Quarter $0.06 $38 $32 5/8 $36 3/4
3rd Quarter $0.06 $39 3/8 $33 1/4 $38
4th Quarter $0.07 $46 5/8 $38 3/8 $46 5/8
- ---------------------------------------------------------------------------
1995
1st Quarter $0.05 $27 1/8 $22 $23 1/8
2nd Quarter $0.05 $36 1/4 $22 5/8 $26
3rd Quarter $0.05 $30 $25 1/2 $30
4th Quarter $0.06 $31 5/8 $28 $30 3/4
- ---------------------------------------------------------------------------
</TABLE>
<PAGE>
Capital Re Corporation
1325 Avenue of the Americas
New York, New York 10019
Telephone: 212-974-0100
Fax: 212-581-3268
Capital Reinsurance Company
1325 Avenue of the Americas
New York, New York 10019
Telephone: 212-974-0100
Fax: 212-581-3268
Capital Mortgage Reinsurance Company
1325 Avenue of the Americas
New York, New York 10019
Telephone: 212-974-3703
Fax: 212-262-9391
KRE Reinsurance Ltd.
P. O. Box HM 1022
Clarendon House
Church Street West
Hamilton HM DX, Bermuda
Telephone: 809-292-4402
Capital Credit Reinsurance Company, Ltd.
P. O. Box HM 1022
Clarendon House
Church Street West
Hamilton HM DX, Bermuda
Telephone: 809-292-4402
Capital Title Reinsurance Company
1325 Avenue of the Americas
New York, New York 10019
Telephone: 212-974-0100
Fax: 212-581-3268
RGB Underwriting Agencies, Ltd.
2 Minster Court
Mincing Lane
London EC3 7FX
Telephone: 0171-283-0802
Fax: 0171-929-3413
Design: Donovan and Green Still-Life Photography: Reven T. C. Wurman Portrait
Photography: Bard Martin Printing: Tanagraphics
<PAGE>
Exhibit 22.01
SUBSIDIARIES OF REGISTRANT
Capital Re Corporation, a Delaware insurance holding company;
Credit Re Corporation, a Maryland corporation;
Capital Re LLC, a Turks and Caicos limited life company;
Capital Reinsurance Company, a Maryland domiciled insurance company;
Capital Credit Reinsurance Company Ltd., a Bermuda domiciled insurance company;
Capital Mortgage Reinsurance Company, a New York domiciled insurance company;
Capital Title Reinsurance Company, a New York domiciled insurance company;
KRE Reinsurance Ltd., a Bermuda domiciled insurance company
Capital Re Management Corporation, a New York reinsurance intermediary
Capital Re (UK) Holdings
CRC Capital, Ltd., a corporation established under the Laws of England
RGB Holdings, Ltd., a corporation established under the Laws of England
RGB Underwriting Services, Ltd., a corporation established under the Laws of
England
RGB Underwriting Agencies, Ltd., a corporation established under the Laws of
England
Capital Global Managers, Ltd., a Bermuda domiciled managing general agency
Capital Global Underwriters, Ltd., a Bermuda domiciled insurance company
<PAGE>
Exhibit 24.01
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Capital Re Corporation of our report dated January 21, 1997, included in the
1996 Annual Report to Stockholders of Capital Re Corporation.
Our audits also included the financial statement schedules of Capital Re
Corporation listed in Item 14(a). These schedules are the responsibility of the
Corporation's management. Our responsibility is to express an opinion based on
our audits. In our opinion, the financial statement schedules referred to
above, when considered in relation to the basic financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-47723) pertaining to the Capital Re Corporation 1992 Stock
Option Plan and in the Registration Statement (Form S-8 No. 33-73122) pertaining
to the Capital Re Corporation Directors' Stock Option Plan of our report dated
January 21, 1997, with respect to the consolidated financial statements
incorporated herein by reference, and our report included in the preceding
paragraph with respect to the financial statement schedules included in this
Annual Report (Form 10-K) of Capital Re Corporation.
/s/ Ernst & Young LLP
New York, New York
March 25, 1997
<PAGE>
Exhibit 25.01
CAPITAL RE CORPORATION
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that each of the Officers and Directors of
Capital Re Corporation, 1325 Avenue of the Americas, New York, New York 10019
whose signature appears below constitutes and appoints Michael E. Satz and Alan
S. Roseman, and each of them individually, as his true and lawful attorneys-in-
fact and agents as of March 31, 1997, with full power of substitution and
resubstitution, for him and his name, place and stead in any and all capacities,
to sign the Annual Report on Form 10-K of Capital Re Corporation and any and all
amendments to such Annual Report, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, granting unto said attorney's-in-fact and agents, full
power and authority to perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or their substitutes, may lawfully do or
cause to be done by virtue thereof.
____________________ President, Chief Executive March 31, 1997
Michael E. Satz Officer and Chairman of the Board
____________________ Executive Vice President March 31, 1997
David A. Buzen and Chief Financial Officer
____________________ Director March 31, 1997
Edwin Russell
____________________ Director March 31, 1997
Jeffery F. Stuermer
____________________ Director March 31, 1997
Dan Skowronski
____________________ Director March 31, 1997
Steven H. Newman
____________________ Director March 31, 1997
Steven D. Kesler
____________________ Director March 31, 1997
Richard L. Huber
____________________ Director March 31, 1997
Philip Robinson
____________________ Director March 31, 1997
Harrison Conrad
____________________ Director March 31, 1997
Barbara Stewart
<TABLE> <S> <C>
<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 901,102
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 901,102
<CASH> 15,285
<RECOVER-REINSURE> 691,415
<DEFERRED-ACQUISITION> 111,364
<TOTAL-ASSETS> 1,156,401
<POLICY-LOSSES> 19,902
<UNEARNED-PREMIUMS> 337,104
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<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 99,782
75,000
0
<COMMON> 160
<OTHER-SE> 489,186
<TOTAL-LIABILITY-AND-EQUITY> 1,156,401
92,436
<INVESTMENT-INCOME> 51,558
<INVESTMENT-GAINS> 1,471
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<UNDERWRITING-AMORTIZATION> 30,714
<UNDERWRITING-OTHER> 10,796
<INCOME-PRETAX> 77,159
<INCOME-TAX> 20,635
<INCOME-CONTINUING> 56,524
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 56,524
<EPS-PRIMARY> 3.61
<EPS-DILUTED> 3.61
<RESERVE-OPEN> 10,245
<PROVISION-CURRENT> 8,370
<PROVISION-PRIOR> 1,113
<PAYMENTS-CURRENT> 10
<PAYMENTS-PRIOR> 1,959
<RESERVE-CLOSE> 17,759
<CUMULATIVE-DEFICIENCY> 0<F1>
<FN>
<F1>*NOT APPLICABLE FOR MORTGAGE GUARANTY AND SPECIALTY REINSURER
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