SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
----------------------
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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CAPITAL RE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-----------------------------------------------------
DELAWARE 1-10995 52-1567009
(STATE OR OTHER (COMMISSION FILE NUMBER) (IRS EMPLOYER
JURISDICTION OF IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
1325 AVENUE OF THE AMERICAS
18TH FLOOR
NEW YORK, NEW YORK 10019
(212) 974-0100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD
THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
(REGISTRANT BECAME SUBJECT TO THE FILING REQUIREMENTS ON APRIL 8, 1992.)
AS OF NOVEMBER 10, 1997 THERE WERE OUTSTANDING 15,881,437 SHARES OF COMMON
STOCK, PAR VALUE $.01 PER SHARE, OF THE REGISTRANT.
CAPITAL RE CORPORATION AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CAPITAL RE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -SEPTEMBER 30, 1997
(UNAUDITED) AND DECEMBER 31, 1996 3
CONSOLIDATED STATEMENTS OF INCOME - THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED) AND
SEPTEMBER 30, 1996 (UNAUDITED) 4
CONSOLIDATED STATEMENT OF STOCKHOLDERS'
EQUITY - NINE MONTHS ENDED SEPTEMBER 30,
1997 (UNAUDITED) 5
CONSOLIDATED STATEMENTS OF CASH FLOWS - NINE MONTHS
ENDED SEPTEMBER 30, 1997 (UNAUDITED) AND
SEPTEMBER 30 1996 (UNAUDITED) 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9-18
PART II OTHER INFORMATION
ITEM 3 EXHIBITS AND REPORTS ON FORM 8-K 19-21
SIGNATURES 22
<TABLE>
CAPITAL RE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands except per share amounts)
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Fixed maturity securities
available for sale, at market
(amortized cost: $839,812 in
1997 and $800,137 in 1996) $874,371 $825,678
Short-term investments, at cost,
which approximates market 154,871 75,424
------- -------
Total Investments 1,029,242 901,102
Cash 8,169 15,285
Accrued investment income 12,343 12,287
Deferred acquisition costs 126,974 111,364
Prepaid reinsurance premiums 68,891 72,034
Reinsurance recoverable on
ceded losses 4,081 1,833
Funds held under reinsurance
agreements 3,861 3,861
Premiums receivable, net 28,294 5,745
Amounts receivable on ceded
annuity reserves 58,497 0
Investment in affiliates 21,772 10,000
Goodwill 12,466 13,567
Other assets 12,576 9,273
-------- ----------
Total Assets $1,387,166 $1,156,351
========== ==========
LIABILITIES
Deferred premium revenue $395,026 $337,104
Reserve for losses and loss
adjustment expenses 27,420 19,902
Annuity benefit reserves 58,497 0
Profit commission liability 20,073 13,329
Deferred federal income taxes payable 69,299 58,474
Bank note payable 25,000 25,000
Long-term debt 74,809 74,781
Liabilities for securities purchased 76,505 42,749
Other liabilities 22,873 20,666
-------- --------
Total Liabilities $769,502 $592,005
-------- --------
COMPANY OBLIGATED MANDATORILY
REDEEMABLE PREFERRED SECURITIES
OF CAPITAL RE LLC 75,000 75,000
STOCKHOLDERS' EQUITY
Preferred stock - $.01 par value
per share; 25,000,000 shares
authorized; no shares issued
and outstanding in 1997 and 1996 --- ---
Common stock - $.01 par value per
share; 75,000,000 shares
authorized, 15,880,587 and
15,856,762 shares issued and
outstanding in 1997 and
1996, respectively 161 160
Additional paid-in capital 223,569 222,525
Retained earnings 301,975 253,807
Foreign exchange translation (613) 122
Treasury stock; 214,000 and
189,700 shares in 1997 and
1996, respectively (4,891) (3,870)
Net unrealized gain on fixed
maturities securities available
for sale, net of tax 22,463 16,602
------- -------
Total Stockholders' Equity 542,664 489,346
------- -------
Total Liabilities, Preferred
Securities of Capital Re LLC
and Stockholders' Equity $1,387,166 $1,156,351
========== ==========
See Accompanying Notes to Unaudited Consolidated Financial Statements
</TABLE>
<TABLE>
CAPITAL RE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
(Unaudited) (Unaudited)
--------------- ----------------
1997 1996 1997 1996
--------------- ----------------
<S> <C> <C> <C> <C>
REVENUES:
Gross premiums written $48,206 $43,221 $173,162 $108,433
Ceded premiums 3,589 2,721 13,305 22,971
------- ------- ------- --------
Net premiums written 44,617 40,500 159,857 85,462
(Increase)/decrease in
deferred premium revenue (8,532) (18,495) (61,349) (18,004)
------- ------- ------- -------
Net premiums earned 36,085 22,005 98,508 64,431
Net investment income 13,969 13,010 41,774 37,792
Net realized gain/(loss) 2,949 (228) 5,543 (1,039)
Fee Income 601 0 1,920 494
Other income 25 25 158 294
Equity income in affiliate 302 0 772 0
------ ------ ------- -------
Total Revenues 53,931 34,812 148,675 101,972
------ ------ ------- -------
EXPENSES:
Loss and loss adjustment
expenses 7,582 1,854 17,431 5,621
Acquisition costs 14,393 13,838 47,787 31,621
Increase in deferred
acquisition costs (3,214) (5,958) (15,696) (10,357)
Profit commission expense 1,295 1,851 5,262 4,191
Other operating expenses 5,363 1,347 11,279 7,253
Amortization of goodwill 166 0 500 0
Interest expense 1,820 1,676 5,542 5,156
Foreign exchange (gain)/loss 284 (40) 526 (24)
Minority interest in
Capital Re LLC 1,434 1,434 4,303 4,303
------ ------ ------ ------
Total Expenses 29,124 16,002 76,934 47,764
------ ------ ------ ------
Income before provision
for federal income taxes 24,807 18,810 71,741 54,208
Provision for federal income taxes
Current 3,707 2,392 12,571 5,397
Deferred 2,844 2,462 7,669 8,804
------ ------ ------ ------
Total Provision for federal
income taxes 6,551 4,854 20,240 14,201
------ ------ ------ ------
Net Income $18,256 $13,956 $51,501 $40,007
======= ======= ======= =======
Earnings per common share $1.15 $0.88 $3.25 $2.57
======= ======= ======= =======
Cash dividends per common share $0.07 $0.06 $0.21 $0.18
======= ======= ======= =======
Weighted average number of common
shares outstanding 15,877 15,798 15,867 15,589
======= ======= ======= =======
See Accompanying Notes to Unaudited Consolidated Financial Statements
</TABLE>
<TABLE>
CAPITAL RE CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
(Dollars in thousands except share amounts)
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK
-----------------------------------------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 $160 $222,525 $253,807 ($3,870)
Net Income - - 51,501 -
Exercise of stock options,
including tax benefit
(48,125 shares) 1 1,044 - -
Purchase of treasury stock
at cost (24,300 shares) - - - (1,021)
Fixed maturities securities
available for sale
adjustments - - - -
Foreign exchange translation - - - -
Dividend ($.21 per
common share) - - (3,333) -
------------------------------------------
Balance, September 30, 1997 $161 $223,569 $301,975 ($4,891)
==========================================
NET UNREALIZED
GAIN ON
FIXED
MATURITIES
FOREIGN SECURITIES TOTAL
EXCH. AVAILABLE STOCKHOLDERS'
TRANSLATION FOR SALE EQUITY
-----------------------------------------
<S> <C> <C> <C>
Balance, January 1, 1997 $122 $16,602 $489,346
Net Income - - 51,501
Exercise of stock options,
including tax benefit
(48,125 shares) - - 1,045
Purchase of treasury stock
at cost (24,300 shares) - - (1,021)
Fixed maturities securities
available for sale
adjustments - 5,861 5,861
Foreign exchange translation (735) - (735)
Dividend ($.21 per
common share) - - (3,333)
-------- -------- --------
Balance, September 30, 1997 ($613) $22,463 $542,664
======== ======== ========
See accompanying Notes to Unaudited Consolidated Financial Statements.
</TABLE>
<TABLE>
CAPITAL RE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
Nine Months Ended
September 30,
-------------------------
1997 1996
-------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $51,501 $40,007
Adjustments to reconcile net
income to net cash provided
by operating activities:
Amortization of bond discount
on long-term debt 28 28
Net amortization of security
premiums 327 477
Provision for deferred federal
income taxes 7,669 8,804
Acquisition costs deferred (47,787) (31,621)
Amortization of deferred
acquisition costs 32,228 21,264
Equity Income in affiliate (772) 0
Change in accrued investment income (56) (629)
Change in premiums receivable, net (25,435) (46)
Change in deferred premium revenue, net 60,903 21,031
Change in outstanding loss reserves, net 5,235 2,751
Net realized loss (gain) on investments (5,543) 1,039
Change in ceded balances payable 3,016 0
Other 6,192 13,850
-------- -------
Net Cash Provided by Operating Activities 87,506 76,956
INVESTING ACTIVITIES:
Securities available-for-sale:
Purchases - fixed maturities (1,478,783) (492,547)
Sales-fixed maturities 1,444,280 395,675
Maturities- fixed maturities 0 6,280
Maturities (purchases) of short-term
investments, net (79,447) (35,904)
Investment in Affiliates (11,000) 0
Other investing activities 33,637 20,599
-------- --------
Net Cash Used in Investing Activities (91,312) (105,898)
FINANCING ACTIVITIES:
Net proceeds from sale of stock 1,045 29,466
Purchase of treasury stock at cost (1,021) (232)
Dividends paid (3,333) (2,836)
--------- --------
Net Cash Provided (Used) by
Financing Activities (3,309) 26,398
--------- --------
(Decrease)Increase in Cash (7,115) (2,545)
Cash at Beginning of Period 15,285 4,537
--------- --------
Cash at End of Period $8,169 $1,992
========= ========
See Accompanying Notes to Unaudited Consolidated Financial Statements.
</TABLE>
CAPITAL RE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 1997
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements and
footnotes have been prepared in accordance with the instructions to Form
10-Q and the preparation of unaudited interim financial statements under
the Rules and Regulations of the Securities and Exchange Commission and
do not include all the information and disclosures required by generally
accepted accounting principles. These statements should be read in
conjunction with the audited consolidated financial statements of
Capital Re Corporation and Subsidiaries (the "Corporation") included in
the Corporation's 1996 Annual Report on Form 10-K. The accompanying
unaudited consolidated financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary to present
fairly the Corporation's financial position and results of operations.
The results of operations for the three and nine months ended September
30, 1997 may not be indicative of the results that may be expected for
the year ending December 31, 1997.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Standards No. 128, "Earnings per Share" ("FAS
128"), effective for years after December 15, 1997. FAS 128 requires
the calculation and presentation on the face of the income statement of
"basic" earnings per share and, if applicable, "diluted" earnings per
share. Basic earnings per share is calculated based on the weighted
average common shares outstanding. In calculating dilutive earnings per
share, the number of shares is increased to include all potentially
dilutive common shares, including stock options. The adoption of FAS
128 is not expected to have a material effect on reported earnings per
share.
2. REINSURANCE
Ceded earned premium for the three and nine months ended September 30,
1997 and 1996 were $8.0 million and $24.9 million, and $4.2 million and
$11.0 million, respectively. Ceded losses for the same periods were
$1.4 million and $3.3 million, and $1.8 million and $5.7 million,
respectively.
3. INVESTMENTS
The Corporation enters into mortgage dollar roll transactions. A
mortgage dollar roll is a combined sell and purchase agreement, whereby
mortgage-backed securities are sold to a counterparty with a repurchase
agreement of similar securities at some future date. The Corporation
treats these agreements as financing transactions, and, as such, the
obligation under the repurchase agreement is included in liabilities for
securities purchased. As of September 30, 1997, the repurchase
commitment related to mortgage dollar roll transactions amounted to
$76.5 million.
4. INCOME TAXES
The effective tax rate for the nine months ended September 30, 1997 and
1996 is lower than the federal corporate tax rate on ordinary income of
35% due principally to the effect of tax-exempt interest income. Income
taxes paid for the nine months ended September 30, 1997 and 1996 were
$13.2 million and $5.9 million, respectively.
5. OTHER
Interest paid for the nine months ended September 30, 1997 and 1996 was
$4.0 million and $3.9 million, respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Capital Re Corporation (the "Corporation") was incorporated in the State
of Delaware in December 1991, and is the successor by merger to a
Maryland corporation incorporated in 1986. The Corporation is an
insurance holding company and has six wholly owned operating
subsidiaries. Capital Reinsurance Company ("Capital Reinsurance"),
domiciled in the State of Maryland, commenced operations in January
1988. Capital Reinsurance is engaged in the business of financial
guaranty reinsurance, primarily the reinsurance of municipal and non-
municipal bond insurance obligations. Capital Mortgage Reinsurance
Company ("Capital Mortgage"), a New York domiciled company, commenced
operations in February 1994. Capital Mortgage reinsures only
residential mortgage guaranty insurance obligations. KRE Reinsurance
Ltd. (formerly Capital Mortgage Reinsurance Company (Bermuda) Ltd.)
("KRE"), a Bermuda domiciled company, commenced operations in March
1994. KRE is engaged in the business of reinsuring financial guaranty,
mortgage guaranty, trade credit and other specialty lines of insurance,
both as a direct reinsurer of third party primary insurers and as a
retrocessionaire of Capital Reinsurance, Capital Mortgage and Capital
Credit Reinsurance Company, Ltd. ("Capital Credit"). Capital Credit,
also a Bermuda domiciled insurance company, commenced operations in
February 1990. Capital Credit reinsures trade credit, political risk,
and other specialty insurance lines concentrated in Western Europe and
the United States and is a retrocessionaire of Capital Reinsurance and
Capital Mortgage. Capital Title Reinsurance Company ("Capital Title"),
a New York domiciled insurance company, commenced operations in March
1996. Capital Title is engaged in the business of reinsuring title
insurance policies.
In November 1996, the Corporation acquired, through its newly formed
United Kingdom holding company, Capital Re (UK) Holdings, 100% of the
issued shares of Tower Street Holdings Limited (now known as RGB
Holdings, Ltd.), the holding company for RGB Underwriting Agencies Ltd.
("RGB"). RGB is a managing agency and presently manages four syndicates
operating in the Lloyd's of London ("Lloyd's") insurance market. In
connection with this acquisition, the Corporation established a
corporate name at Lloyd's, CRC Capital, Ltd. ("CRC"), to support
underwriting on certain of the managed syndicates. CRC participates in
a non-marine and a life syndicate. At September 30, 1997, the results
of RGB and CRC are consolidated in the Corporation's financial
statements.
In December 1996, the Corporation entered into a joint venture with GCR
Holdings Limited to form a Bermuda based insurer, Capital Global
Underwriters Limited ("CGUL"), which will specialize in financial
reinsurance, including financial guaranty, mortgage guaranty and finite
risk reinsurance. The Corporation, through its subsidiary, KRE, owns a
fifty-percent interest in CGUL and controls 9.9% of its voting stock.
The Corporation accounts for its investment in CGUL under the equity
method.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS THREE MONTHS ENDED
SEPTEMBER 30, 1996
Net income for the three months ended September 30, 1997 increased 30.7%
to $18.3 million from $14.0 million for the same period of 1996. On a
per share basis, net income increased to $1.15 for the three months
ended September 30, 1997 from $0.88 for the same period of 1996, or
30.7%. In addition, net operating income (net income excluding realized
gains and losses) increased 17.0% to $16.5 million for the three months
ended September 30, 1997 from $14.1 million for the same period in 1996.
On a per share basis, net operating income increased to $1.04 for the
three months ended September 30, 1997 from $0.89 for the same period of
1996, or 16.9%. Growth in net premiums earned to $36.1 million from
$22.0 million, or 64.1%, was the principal cause of the increase in net
income. Growth in net premiums earned is a result of the Corporation's
Lloyd's participation through CRC as well as growth in the financial
guaranty, mortgage, trade credit and other specialty reinsurance lines
of business.
Gross premiums written increased 11.6% to $48.2 million for the three
months ended September 30, 1997 from $43.2 million for the same period
of 1996. This increase was primarily due to the consolidation of the
Lloyd's premiums written from CRC as well as premiums written from the
addition of a life line of business. The life line of business consists
of two transactions whereby KRE facilitated the reinsurance of annuity
contracts by assuming and subsequently retroceding the associated
benefit reserves. These reserves are recorded on the balance sheet as a
liability and are directly offset by an asset of equal value. KRE
recorded fee income of approximately $0.1 million on these transactions.
Capital Reinsurance experienced a decrease in municipal gross premiums
written for the three months ended September 30, 1997 as compared with
the same period in 1996 due primarily to a large structured reinsurance
transaction which was recorded in the third quarter of 1996. The
following table shows gross premiums written by line of business for the
three months ended September 30, 1997 and September 30, 1996.
Gross Premiums Written
Three Months Ended
September 30,
1997 1996
---- ----
(dollars in millions)
Municipal $13.6 $17.8
Mortgage 16.5 17.9
Non-Municipal 3.4 2.4
Credit and Specialty 5.8 4.3
Title 1.0 0.8
Life 2.6 0.0
Lloyd's 5.3 0.0
----- -----
$48.2 $43.2
Net premiums written increased by 10.1% to $44.6 million for the three
months ended September 30, 1997 from $40.5 million for the same period
in 1996. This increase is commensurate with the increase in gross
premiums written explained above. The following table shows net premiums
written by line of business for the three months ended September 30,
1997 and September 30, 1996.
Net Premiums Written
Three Months Ended
September 30,
1997 1996
------ ----
(dollars in millions)
Municipal $13.5 $15.1
Mortgage 16.3 18.1
Non-Municipal 3.4 2.5
Credit and Specialty 5.8 4.0
Title 1.0 0.8
Life 0.0 0.0
Lloyd's 4.6 0.0
----- -----
$44.6 $40.5
For the three months ended September 30, 1997, net premiums earned
increased 64.1% to $36.1 million from $22.0 million for the comparable
1996 period. This increase was primarily due to growth in net premiums
earned in the municipal, non-municipal, mortgage, and credit and
specialty reinsurance lines of business as well as the addition of the
Lloyd's line of business. For the three months ended September 30,
1997, net refunded earned premium increased to $1.9 from $1.0 million
for the comparable period in 1996. Excluding the effects of net refunded
earned premium, net premiums earned increased 62.9% to $34.2 million
from $21.0 million for the three months ended September 30, 1997 and
1996, respectively. A refunding extinguishes the Corporation's
reinsurance liability for the refunded obligation and the Corporation
then recognizes revenue equal to the remaining related deferred premium
revenue. The following table shows net premiums earned by line of
business for the three months ended September 30, 1997 and September 30,
1996. For the three months ended September 30, 1997 and 1996, ceded
earned premium was $8.0 million and $4.2 million, respectively.
Net Premiums Earned
Three Months Ended
September 30,
1997 1996
----- -----
(dollars in millions)
Municipal $8.0 $5.9
Mortgage 14.0 10.0
Non-Municipal 3.5 1.8
Credit and Specialty 5.1 3.5
Title 1.0 0.8
Life 0.0 0.0
Lloyd's 4.5 0.0
----- -----
$36.1 $22.0
For the three months ended September 30, 1997, net investment income
increased 7.7% to $14.0 million from $13.0 million for the comparable
period in 1996. Growth in investment income was primarily attributable
to a larger investment portfolio caused by an increase in invested
assets from positive operating cash flows during the twelve months ended
September 30, 1997. In addition, the Corporation recognized net
realized gains of $2.9 million for the three months ended September 30,
1997 compared to net realized losses of $0.2 million for same period in
1996. Realized gains and losses are expected in connection with the
Corporation's new emphasis on a total return investment strategy
implemented during 1996.
Loss and loss adjustment expenses increased to $7.6 million from $1.9
million for the three months ended September 30, 1997 and 1996,
respectively. Losses recorded in the three months ended September 30,
1997 were primarily attributable to the expected loss recognition
associated with the addition of the Lloyd's line of business as well as
normal loss development in the mortgage guaranty and credit reinsurance
lines of business. Ceded losses for the three months ended September
30, 1997 and 1996 were $1.4 million and $1.8 million, respectively.
Total expenses, including loss and loss adjustment expenses, increased
81.9% to $29.1 million for the three months ended September 30, 1997
from $16.0 million in the same period of 1996. This increase was
primarily attributable to commissions associated with the increased
level of premiums written and normal loss development from the mortgage
and credit lines of business. In addition, the increase in expenses was
attributable to operating and loss expenses associated with the
consolidation of RGB's and CRC's share of the RGB managed syndicates.
Furthermore, the combined ratio, excluding expenses associated with non-
insurance operations, increased to 70.3% for the three months ended
September 30, 1997 from 58.8% for the comparable 1996 period. This
increase is an expected result of the Corporation's diversification
strategy, which is producing more business from lines with relatively
higher combined ratios than the financial guaranty reinsurance business.
For the three months ended September 30, 1997, the total federal tax
provision increased to $6.6 million from $4.9 million for the same
period in 1996. In addition, the effective tax rate increased to 26.4%
in the third quarter of 1997 from 25.8% in the same period of 1996. The
increase in the effective tax rate resulted from the Corporation's
strategy of using a greater proportion of new cash flow to purchase
taxable securities during 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1997 VERSUS NINE MONTHS ENDED SEPTEMBER
30, 1996
Net income for the nine months ended September 30, 1997 increased 28.8%
to $51.5 million from $40.0 million for the same period of 1996. On a
per share basis, net income increased to $3.25 for the nine months ended
September 30, 1997 from $2.57 for the same period of 1996, or 26.5%. In
addition, net operating income (net income excluding realized gains and
losses) increased 18.4% to $48.2 million for the nine months ended
September 30, 1997 from $40.7 million for the same period in 1996. On a
per share basis, net operating income increased to $3.04 for the nine
months ended September 30, 1997 from $2.61 for the same period of 1996,
or 16.5%. Growth in net premiums earned to $98.5 million from $64.4
million, or 53.0%, was the principal cause of the increase in net
income. Growth in net premiums earned is a result of the Corporation's
Lloyd's participation through CRC as well as growth in the financial
guaranty, mortgage, trade credit and other specialty reinsurance lines
of business.
Gross premiums written increased 59.8% to $173.2 million for the nine
months ended September 30, 1997 from $108.4 million for the same period
of 1996. This large increase was due to the addition of the new Lloyd's
line of business from CRC as well as growth in the municipal, mortgage
and credit lines of business and the addition of a life line of
business. The life line of business consists of two transactions whereby
KRE facilitated the reinsurance of annuity contracts by assuming and
subsequently retroceding the associated benefit reserves. These
reserves are recorded on the balance sheet as a liability and are
directly offset by an asset of equal value. KRE recorded fee income of
approximately $0.1 million on these transactions. The following table
shows gross premiums written by line of business for the nine months
ended September 30, 1997 and September 30, 1996.
Gross Premiums Written
Nine Months Ended
September 30,
1997 1996
----- -----
(dollars in millions)
Municipal $43.2 $39.2
Mortgage 56.8 47.3
Non-Municipal 10.6 9.7
Credit and Specialty 16.8 11.1
Title 2.5 1.1
Life 2.6 0.0
Lloyd's 40.7 0.0
----- ------
$173.2 $108.4
Net premiums written increased by 87.0% to $159.9 million for the nine
months ended September 30, 1997 from $85.5 million for the same period
in 1996. This increase is commensurate with the increase in gross
premiums written explained above as well as due to a large increase in
mortgage premiums written, beneficially influenced by the timing of
assumed and ceded premiums related to a significant transaction in the
first quarter of 1996. The following table shows net premiums written by
line of business for the nine months ended September 30, 1997 and
September 30, 1996.
Net Premiums Written
Nine Months Ended
September 30,
1997 1996
------ -----
(dollars in millions)
Municipal $40.6 $30.0
Mortgage 56.5 33.8
Non-Municipal 10.5 9.7
Credit and Specialty 16.8 10.8
Title 2.5 1.2
Life 0.0 0.0
Lloyd's 33.0 0.0
------ -----
$159.9 $85.5
For the nine months ended September 30, 1997, net premiums earned
increased 53.0% to $98.5 million from $64.4 million for the comparable
1996 period. This increase was primarily due to growth in net premiums
earned in the mortgage and credit and specialty reinsurance lines of
business as well as the addition of the new Lloyd's line of business.
For the nine months ended September 30, 1997 and 1996, net refunded
earned premium was $4.3 million and $3.5 million, respectively.
Excluding the effects of net refunded earned premium, net premiums
earned increased 54.7% to $94.2 million from $60.9 million for the nine
months ended September 30, 1997 and 1996, respectively. A refunding
extinguishes the Corporation's reinsurance liability for the refunded
obligation and the Corporation then recognizes revenue equal to the
remaining related deferred premium revenue. The following table shows
net premiums earned by line of business for the nine months ended
September 30, 1997 and September 30, 1996. For the nine months ended
September 30, 1997 and 1996, ceded earned premium was $24.9 million and
$11.0 million, respectively.
Net Premiums Earned
Nine Months Ended
September 30,
1997 1996
---- ----
(dollars in millions)
Municipal $22.3 $19.2
Mortgage 41.4 31.0
Non-Municipal 8.8 5.1
Credit and Specialty 13.4 8.1
Title 2.4 1.0
Life 0.0 0.0
Lloyd's 10.2 0.0
------ -----
$98.5 $64.4
For the nine months ended September 30, 1997, net investment income
increased 10.6% to $41.8 million from $37.8 million for the comparable
period in 1996. Growth in investment income was primarily attributable
to a larger investment portfolio caused by (i) an increase in invested
assets from positive operating cash flows during the twelve months ended
September 30, 1997 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 $5.5 million for the nine months ended
September 30, 1997 compared to net realized losses of $1.0 million for
same period in 1996. Realized gains and losses are expected in
connection with the Corporation's new emphasis on a total return
investment strategy implemented during 1996.
Loss and loss adjustment expenses increased to $17.4 million from $5.6
million for the nine months ended September 30, 1997 and 1996,
respectively. Losses recorded in the nine months ended September 30,
1997 were primarily attributable to the expected loss recognition
associated with the addition of the Lloyd's line of business as well as
normal loss development in the mortgage guaranty and credit reinsurance
lines of business. Ceded losses for the nine months ended September 30,
1997 and 1996 were $3.3 million and $5.7 million, respectively.
Total expenses, including loss and loss adjustment expenses, increased
60.9% to $76.9 million for the nine months ended September 30, 1997 from
$47.8 million in the same period of 1996. This increase was primarily
attributable to commissions associated with the increased level of
premiums written, normal loss development from the mortgage and credit
lines of business and increased net profit commissions payable under
certain of the Corporation's reinsurance contracts. In addition, the
increase in expenses was attributable to operating and loss expenses
associated with the consolidation of RGB's and CRC's share of the
Lloyd's syndicates. Furthermore, the combined ratio, excluding expenses
associated with non-insurance operations, increased to 66.3% for the
nine months ended September 30, 1997 from 59.5% for the comparable 1996
period. This increase is an expected result of the Corporation's
diversification strategy, which is producing more business from lines
with relatively higher combined ratios than the financial guaranty
reinsurance business.
For the nine months ended September 30, 1997, the total federal tax
provision increased to $20.2 million from $14.2 million for the same
period in 1996. In addition, the effective tax rate increased to 28.2%
in the first nine months of 1997 from 26.2% in the same period of 1996.
This increase in the effective tax rate resulted from occurred in
response to the Corporation's strategy of using a greater proportion of
new cash flow to purchase taxable securities during 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation relies on dividends from Capital Reinsurance for funds
used in its operations. The major sources of liquidity for Capital
Reinsurance are funds generated from reinsurance premiums, net
investment income and maturing investments. Capital Reinsurance is
domiciled in the State of Maryland, and, under Maryland insurance law,
the amount of the surplus of Capital Reinsurance available for
distribution as dividends is subject to certain statutory restrictions.
The amount available for distribution from Capital Reinsurance during
1997 with notice to, but without prior approval of, the Maryland
Insurance Commissioner is limited to 10% of Capital Reinsurance's
policyholders' surplus as of December 31, 1996, or approximately $33.0
million. For the nine months ended September 30, 1997, Capital
Reinsurance paid $8.0 million in dividends to the Corporation.
Credit Re Corporation, a wholly owned subsidiary of the Corporation,
relies on dividends from its wholly owned subsidiary, Capital Credit,
for funds to be provided to the Corporation. Capital Credit's major
sources of liquidity are funds generated from reinsurance premiums, net
investment income and maturing investments. Capital Credit is a Bermuda
domiciled insurer whose distributions are governed by Bermuda law. Under
Bermuda law and the by-laws of Capital Credit, dividends may be paid out
of the profits of the company (defined as accumulated realized profits
less accumulated realized losses). Distributions to shareholders may
also be paid out of Capital Credit's surplus limited by requirements
that such company must at all times (i) maintain the minimum share
capital required under Bermuda law, and (ii) have relevant assets in an
amount equal to or greater than 75% of relevant liabilities, all as
defined under Bermuda law. Since its organization, Capital Credit has
not declared nor paid any dividends.
Capital Mortgage and Capital Title are subject to the dividend
restrictions imposed under New York insurance law. Accordingly,
dividends may only be declared and distributed out of earned surplus (as
defined under New York insurance law). Additionally, no dividend may be
declared or distributed by Capital Mortgage or Capital Title in an
amount which, together with all dividends declared or distributed by
Capital Mortgage or Capital Title, as the case may be, during the
preceding twelve months, exceeds the lesser of 10% of such company's
surplus to policyholders as shown by its last Annual Statutory Statement
on file with the New York insurance department, or 100% of adjusted net
investment income (as defined under New York insurance law) during such
period, unless, upon prior application, the New York Superintendent of
Insurance approves a greater dividend distribution based upon his
finding that Capital Mortgage or Capital Title, as the case may be, will
retain sufficient surplus to support its obligations and writings. KRE's
dividends and distributions to its sole shareholder, Capital Mortgage,
are governed by Bermuda law, and are subject to the same restrictions as
those described in the preceding paragraph for Capital Credit. To date,
Capital Mortgage and KRE have not declared or paid any dividends. For
the nine months ended September 30, 1997, Capital Title paid $1.1
million in dividends to KRE.
In January 1994, the Corporation formed and capitalized, through the
purchase of common shares, Capital Re LLC. Capital Re LLC exists solely
for the purpose of issuing preferred and common shares and lending the
proceeds of such issuance to the Corporation to fund its business
operations. In January 1994, Capital Re LLC issued $75.0 million of
company obligated mandatorily redeemable preferred securities, the
proceeds of which were loaned to the Corporation. The Corporation has,
among other undertakings, unconditionally guaranteed all legally
declared and unpaid dividends of Capital Re LLC. The company obligated
mandatorily redeemable preferred securities were issued at $25 par value
per share and pay monthly dividends at a rate of 7.65% per annum. Also
in January 1994, Capital Reinsurance and Capital Credit invested an
aggregate of $120.0 million to capitalize Capital Mortgage. Of the total
original contribution of $120.0 million, Capital Reinsurance invested
$94.8 million and Capital Credit invested $25.2 million.
On February 12, 1996, the Corporation completed a public offering of
approximately 3.5 million shares of common stock. Of the 3.5 million
shares, an institutional shareholder sold 2.6 million shares and the
Corporation sold 853,120 shares in the public offering generating net
proceeds to the Corporation of approximately $25.9 million of which
$21.5 million was used to complete the $25 million capitalization of
Capital Title. The remaining $4.4 million was used for Corporation
expenses associated with the public offering and general corporate
purposes. The Corporation received no proceeds from the institutional
shareholder's sale of shares.
In June 1997, Capital Reinsurance invested approximately $10.9 million
in CGA Group Ltd. ("CGA"). CGA was formed to provide financial guaranty
insurance of structured securities, including commercial real estate and
asset backed transactions. Capital Reinsurance also has a commitment to
invest an additional $7.5 million in CGA to the extent that it would be
necessary to maintain a triple-A rating from Duff & Phelps for CGA's
operating subsidiary, Commercial Guaranty Assurance, Ltd. Also, Capital
Reinsurance invested $0.1 million in St. George Holdings Ltd. ("St.
George"). Through its operating subsidiary, St. George Investments
Ltd., St. George will purchase securities to be held to maturity,
selectively resold, or repackaged with CGA insurance and then resold.
In December 1996, the Corporation's Board of Directors authorized an
increase of the quarterly common stock dividend rate to $0.07 per share,
or $0.28 annually. For the nine months ended September 30, 1997, common
dividends were declared and paid in the amount of $3.3 million or $0.21
per share.
Cash flows from operations for the nine months ended September 30, 1997
and 1996, consisting of reinsurance premiums collected net of expenses,
investment income and income taxes, were $87.5 million and $77.0
million, respectively. The Corporation believes that current levels of
cash flow from operations provide the Corporation with sufficient
liquidity to meet its operating needs. The Corporation's non-operating
cash outflows are primarily dedicated to (i) fixed-income investment
activity, (ii) the payment of dividends on its common shares, (iii)
payments of interest on long-term debt and (iv) the payment of its loan
obligations to Capital Re LLC.
At September 30, 1997, cash and investments approximated $1.04 billion,
an increase of $123.6 million, or 13.5%, from $916.4 million at December
31, 1996. In managing its investment portfolio, the Corporation places
a high priority on quality and liquidity. As of September 30, 1997, the
entire investment portfolio was invested in highly rated fixed income
securities.
At September 30, 1997, approximately $177.4 million or 17.2% of the
Corporation's investment portfolio was comprised of mortgage-backed
securities ("MBS"). Of the MBS portfolio, approximately $148.4 million
or 83.7% is backed by agencies or entities sponsored by the U.S.
government as to the full amount of principal and interest. As of
September 30, 1997, the entire MBS portfolio was invested in triple A
rated securities.
Prepayment risk is an inherent risk of holding MBS. However, the degree
of prepayment risk is particular to the type of MBS held. The
Corporation limits its exposure to prepayments by purchasing less
volatile types of MBS. As of September 30, 1997, $3.7 million or
approximately 2.1% 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,
$173.7 million, or 97.9%, 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 September 30, 1997, the Corporation
has no securities such as interest only securities, principal only
securities, or MBS purchased at a substantial premium to par that have
the potential for loss of a significant portion of the original
investment due to changes in the prepayment rate of the underlying loans
supporting the security.
On January 31, 1997, the Corporation extended its existing agreement
with Deutsche Bank AG for the provision of a $25.0 million liquidity
facility (the ''DB Liquidity Facility'') which is available for general
corporate purposes. The DB Liquidity Facility was extended for one year
and is scheduled to expire on January 26, 1998. Capital Reinsurance also
entered into an agreement on January 31, 1994 with Deutsche Bank AG for
a credit facility (the "DB Credit Facility") of up to $75.0 million
specifically designed to provide rating agency qualified capital to
further support Capital Reinsurance's claims-paying resources. This
agreement expires January 27, 2003. The Corporation has not borrowed
under either the DB Liquidity Facility or the DB Credit Facility.
In addition, on August 20, 1996, the Corporation entered into a credit
agreement with Chase Manhattan Bank for the provision of a $25.0 million
credit facility (the "Chase Facility") which is available for general
corporate purposes. Furthermore, on August 26, 1996, the Corporation
utilized $16 million of the Chase Facility for purposes of paying
subordinated notes which came due. Interest on the bank note issued
under the Chase Facility is payable quarterly based upon the
Corporation's chosen interest rate option under the terms of the Chase
Facility. In November of 1996, the Corporation utilized the remaining
$9 million of the Chase Facility for purposes of acquiring RGB.
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(A) THE FOLLOWING IS ANNEXED AS AN EXHIBIT:
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
11 STATEMENT RE: COMPUTATION OF PER SHARE
EARNINGS (UNAUDITED)
(B) REPORTS ON FORM 8-K: NONE
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION PAGE
- -------- ----------- ----
11 STATEMENT RE: COMPUTATION OF
PER SHARE EARNINGS (UNAUDITED) 21
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
CAPITAL RE CORPORATION
DATE: NOVEMBER 10, 1997 BY /S/DAVID A. BUZEN
---------------
DAVID A. BUZEN
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
DATE: NOVEMBER 10, 1997 BY /S/ALAN S. ROSEMAN
-----------------
ALAN S. ROSEMAN
SENIOR VICE PRESIDENT,
GENERAL COUNSEL AND
SECRETARY
<TABLE>
CAPITAL RE CORPORATION AND SUBSIDIARIES
Exhibit 11 Statement Re: Computation of Per Share Earnings
(Unaudited)
(Dollars in thousands except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ----------------
1997 1996 1997 1996
------------------ ----------------
<S> <C> <C> <C> <C>
Earnings per common share
(Primary and Fully Diluted)
Average shares outstanding
during the period 15,877 15,798 15,867 15,589
Net Income 18,256 13,956 51,501 40,007
Earnings per common share $1.15 $0.88 $3.25 $2.57
====== ====== ====== ======
Notes: The per share data for 1997 and 1996 does not include the net
effect of dilutive stock options, since the dilution from the earnings
per share amount is less than 3%.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 1,029,242
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,029,242
<CASH> 8,169
<RECOVER-REINSURE> 1,074
<DEFERRED-ACQUISITION> 126,974
<TOTAL-ASSETS> 1,387,166
<POLICY-LOSSES> 27,420
<UNEARNED-PREMIUMS> 395,026
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 99,809
75,000
0
<COMMON> 161
<OTHER-SE> 542,503
<TOTAL-LIABILITY-AND-EQUITY> 1,387,166
98,508
<INVESTMENT-INCOME> 41,774
<INVESTMENT-GAINS> 5,543
<OTHER-INCOME> 2,850
<BENEFITS> 17,431
<UNDERWRITING-AMORTIZATION> 32,091
<UNDERWRITING-OTHER> 11,279
<INCOME-PRETAX> 71,741
<INCOME-TAX> 20,240
<INCOME-CONTINUING> 51,501
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,501
<EPS-PRIMARY> 3.25
<EPS-DILUTED> 3.25
<RESERVE-OPEN> 17,759
<PROVISION-CURRENT> 14,763
<PROVISION-PRIOR> 2,667
<PAYMENTS-CURRENT> 1,697
<PAYMENTS-PRIOR> 9,900
<RESERVE-CLOSE> 23,592
<CUMULATIVE-DEFICIENCY> 0<F1>
<FN>
<F1>Not Applicable for mortgage guaranty and specialty reinsurer
</FN>
</TABLE>
