SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 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)
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DELAWARE 1-10995 52-1567009
(STATE OR OTHER (COMMISSION FILE NUMBER) (IRS EMPLOYER
JURISDICTION OF IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
1325 AVENUE OF THE AMERICAS
18TH FLOOR
NEW YORK, NEW YORK 10019
(212) 974-0100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD
THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
(REGISTRANT BECAME SUBJECT TO THE FILING REQUIREMENTS ON APRIL 8, 1992.)
AS OF MAY 12, 1997, THERE WERE OUTSTANDING 15,854,262 SHARES OF COMMON
STOCK, PAR VALUE $.01 PER SHARE, OF THE REGISTRANT.
CAPITAL RE CORPORATION AND SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CAPITAL RE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET -MARCH 31, 1997
(UNAUDITED) AND DECEMBER 31, 1996 3
CONSOLIDATED STATEMENT OF INCOME - THREE MONTHS
ENDED MARCH 31,1997(UNAUDITED)AND
MARCH 31, 1996 (UNAUDITED) 4
CONSOLIDATED STATEMENT OF STOCKHOLDERS'
EQUITY - THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED) 5
CONSOLIDATED STATEMENTS OF CASH FLOWS - THREE
MONTHS ENDED MARCH 31, 1997 (UNAUDITED) AND
MARCH 31 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 9-16
PART II OTHER INFORMATION
ITEM 3 EXHIBITS AND REPORTS ON FORM 8-K 17-19
SIGNATURES 20
<TABLE>
CAPITAL RE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands except per share amounts)
March 31, December 31,
1997 1996
---------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Fixed maturity securities
available for sale, at market
amortized cost: $812,846 in
1997 and $800,137 in 1996) $818,468 $825,678
Short-term investments, at cost,
which approximates market 119,390 75,424
------- -------
Total Investments 937,858 901,102
Cash 20,775 15,285
Accrued investment income 11,461 12,287
Deferred acquisition costs 118,482 111,364
Prepaid reinsurance premiums 76,528 72,034
Reinsurance recoverable on
ceded losses 2,158 1,833
Funds held under reinsurance
agreements 3,861 3,861
Premiums receivable, net 16,527 5,745
Other assets 9,467 9,273
Investment in subsidiary 10,233 10,000
Goodwill 13,043 13,567
---------- ----------
Total Assets $1,220,393 $1,156,351
========== ==========
LIABILITIES
Deferred premium revenue $367,424 $337,104
Reserve for losses and loss
adjustment expenses 19,924 19,902
Profit commission liability 15,989 13,329
Deferred federal income taxes payable 54,349 58,474
Bank note payable 25,000 25,000
Long-term debt 74,791 74,781
Liability for securities purchased 71,145 42,749
Other liabilities 24,574 20,666
-------- --------
Total Liabilities $653,196 $592,005
-------- --------
COMPANY OBLIGATED MANDATORILY
REDEEMABLE PREFERRED SECURITIES
OF CAPITAL RE LLC 75,000 75,000
STOCKHOLDERS' EQUITY
Preferred stock - $.01 par value
per share; 25,000,000 shares
authorized; no shares issued
and outstanding in 1997 and 1996 --- ---
Common stock - $.01 par value per
share; 75,000,000 shares
authorized, 15,871,762 and
15,856,762 shares issued and
outstanding in 1997 and
1996, respectively 161 160
Additional paid-in capital 222,817 222,525
Retained earnings 269,833 253,807
Foreign exchange translation (347) 122
Treasury stock; 189,700 and 189,700
shares in 1997 and 1996, respectively (3,870) (3,870)
Net unrealized gain on fixed
maturities securities available
for sale, net of tax 3,603 16,602
------- -------
Total Stockholders' Equity 492,197 489,346
------- -------
Total Liabilities, Preferred
Securities of Capital Re LLC
and Stockholders' Equity $1,220,393 $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
March 31,
(Unaudited)
--------------------
1997 1996
--------------------
<S> <C> <C>
REVENUES:
Gross premiums written $64,525 $34,255
Ceded premiums 8,255 16,195
------- -------
Net premiums written 56,270 18,060
Increase in deferred
premium revenue (25,721) 2,044
------- -------
Net premiums earned 30,549 20,104
Net investment income 13,815 12,286
Net realized gain/(loss) 2,785 (95)
Fee Income 445 0
Other income 25 244
Equity income in subsidiary 233 0
------ ------
Total Revenues 47,852 32,539
------ ------
EXPENSES:
Loss and loss adjustment
expenses 4,818 1,409
Acquisition costs 17,325 8,857
Increase in deferred
acquisition costs (7,085) (2,221)
Profit commission expense 1,996 953
Other operating expenses 3,047 3,147
Amortization of goodwill 167 0
Interest expense 1,878 1,741
Foreign exchange loss 394 26
Minority interest in
Capital Re LLC 1,434 1,434
------ ------
Total Expenses 23,974 15,346
------ ------
Income before provision
for federal income taxes 23,878 17,193
Provision for federal income taxes
Current 3,490 2,062
Deferred 3,252 2,364
----- -----
Total provision for federal income taxes 6,742 4,426
----- -----
Net Income $17,136 $12,767
======= =======
Earnings per common share $1.08 $0.84
======= =======
Cash dividends per common share $0.07 $0.06
======= =======
Weighted average number of common
shares outstanding 15,861 15,268
======= =======
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 ($3,870)
Net Income - - 17,136 -
Exercise of stock options,
including tax benefit
(15,000 shares) 1 292 - -
Fixed maturities securities
available for sale
adjustments - - - -
Foreign exchange translation - - - -
Dividend ($.07 per
common share) - - (1,110) -
------------------------------------------
Balance, March 31, 1997 $161 $222,817 $269,833 ($3,870)
==========================================
NET UNREALIZED
GAIN ON
FIXED MATURITIES
FOREIGN SECURITIES TOTAL
EXCHANGE AVAILABLE FOR STOCKHOLDERS'
TRANSLATION SALE EQUITY
------------------------------------------
<S> <C> <C> <C>
Balance, January 1, 1997 $122 $16,602 $489,346
Net Income - - 17,136
Excercise of stock options,
including tax benefit
(15,000 shares) - - 293
Fixed maturities securities
available for sale adjustments - (12,999) (12,999)
Foreign exchange translation (469) - (469)
Dividend ($.07 per
common share) - - (1,110)
--------- -------- --------
Balance, March 31, 1997 $(347) $3,603 $492,197
========= ======== ========
See accompanying Notes to Unaudited Consolidated Financial Statements.
</TABLE>
<TABLE>
CAPITAL RE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
Three Months Ended
March 31,
-------------------------
1997 1996
-------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $17,136 $12,767
Adjustments to reconcile net
income to net cash provided
by operating activities:
Amortization of bond discount
on long-term debt 9 10
Net amortization of security
premiums (225) 335
Provision for deferred federal
income taxes 2,875 2,364
Acquisition costs deferred (17,326) (8,857)
Amortization of deferred
acquisition costs 10,241 6,637
Equity income in affiliate (233) 0
Change in accrued investment income 826 297
Change in premiums receivable, net (13,468) 5,732
Change in deferred premium revenue, net 25,721 (2,045)
Change in outstanding loss reserves, net (311) 1,724
Net realized loss (gain) on investments (2,785) 95
Change in ceded balances payable 2,794 0
Other 6,428 5,929
-------- -------
Net Cash Provided by Operating Activities 31,682 24,989
INVESTING ACTIVITIES:
Securities available-for-sale:
Purchases - fixed maturities (294,870) (19,764)
Sales-fixed maturites 285,202 26,698
Maturities- fixed maturities 0 2,400
Securities held-to-maturity:
Maturities- fixed maturities 0 0
(Purchases) Maturities of short-term
investments, net (43,966) (58,415)
Investment in Subsidiaries 0 0
Other investing activities 28,260 (219)
-------- --------
Net Cash Used in Investing Activities (25,374) (49,301)
FINANCING ACTIVITIES:
Net proceeds from sale of stock 292 25,731
Purchase of treasury stock at cost 0 0
Issuance/(Repayment) of notes payable 0 0
Dividends paid (1,110) (940)
--------- --------
Net Cash Provided (Used) by
Financing Activities (817) 24,791
--------- --------
(Decrease)Increase in Cash 5,490 480
Cash at Beginning of Period 15,285 4,537
--------- --------
Cash at End of Period $20,775 $5,017
========= ========
See Accompanying Notes to Unaudited Consolidated Financial Statements.
</TABLE>
CAPITAL RE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 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 months
ended March 31, 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 months ended March 31, 1997
and 1996 was $3.8 million and $3.0 million, respectively. Ceded
losses for the same periods were $0.9 million and $1.9 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 other liabilities. As of March 31,
1997, the repurchase commitment related to mortgage dollar roll
transactions amounted to $71.1 million.
4. INCOME TAXES
The effective tax rate for the three months ended March 31, 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 three months ended
March 31, 1997 and 1996 were $0.0 million and $0.5 million,
respectively.
5. OTHER
Interest paid for the three months ended March 31, 1997 and 1996
was $0.4 million and $0.5 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 as operating
subsidiaries 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. (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
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 three syndicates operating in the Lloyd's of
London insurance market. In connection with this acquisition,
the Corporation established a corporate name at Lloyd's, CRC
Capital, Ltd. ("CRC"), to support underwriting on the managed
syndicates. CRC participates in a non-marine and a life
syndicate. At March 31, 1996, 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 March 31, 1997 versus Three Months Ended March
31, 1996
Net income for the three months ended March 31, 1997 increased
33.6% to $17.1 million from $12.8 million for the same period of
1996. On a per share basis, net income increased to $1.08 for
the three months ended March 31, 1996 from $0.84 for the same
period of 1996, or 28.6%. In addition, net operating income (net
income excluding realized gains and losses) increased 21.9% to
$15.6 million for the three months ended March 31, 1997 from
$12.8 million for the same period in 1996. On a per share basis,
net operating income increased to $0.98 for the three months
ended March 31, 1997 from $0.84 for the same period of 1996, or
16.6%. Growth in net premiums earned to $30.5 million from $20.1
million, or 51.7%, was the principal cause of the increase in net
income. Growth in net premiums earned is a result of the
Corporation's further diversification into the mortgage, trade
credit and other specialty reinsurance lines of business.
Gross premiums written increased 88.0% to $64.5 million for the
three months ended March 31, 1997 from $34.3 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 and credit lines of business. Growth in municipal
gross premiums written to $17.9 million in the first quarter of
1997 from $9.1 million in the first quarter of 1996 was due to
two large structured facultative transactions. The following
table shows gross premiums written by line of business for the
three months ended March 31, 1997 and March 31, 1996.
<TABLE>
Gross Premiums Written
Three Months Ended
March 31,
1997 1996
----- -----
(dollars in millions)
<S> <C> <C>
Municipal $17.9 $9.1
Mortgage 15.7 7.6
Non-Municipal 3.3 4.2
Credit and Specialty 6.4 3.4
Title 0.8 0.0
Lloyd's 20.4 0.0
------ ------
$64.5 $34.3
</TABLE>
Net premiums written increased by 211.0% to $56.3 million for the
three months ended March 31, 1997 from $18.1 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 three months ended March 31, 1997 and March 31, 1996.
<TABLE>
Net Premiums Written
Three Months Ended
March 31,
1997 1996
------ ------
(dollars in millions)
<S> <C> <C>
Municipal $15.6 $6.5
Mortgage 15.7 4.0
Non-Municipal 3.3 4.2
Credit and Specialty 6.4 3.4
Title 0.8 0.0
Lloyd's 14.5 0.0
----- -----
$56.3 $18.1
</TABLE>
For the three months ended March 31, 1997, net premiums earned
increased 51.7% to $30.5 million from $20.1 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 three months ended
March 31, 1997, net refunded earned premium decreased to $0.5
from $1.9 million for the comparable period in 1996. Excluding
the effects of net refunded earned premium, net premiums earned
increased 64.8% to $30.0 million from $18.2 million for the three
months ended March 31, 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 March 31, 1997 and March 31, 1996. For the
three months ended March 31, 1997 and 1996, ceded earned premium
was $3.8 million and $3.0 million, respectively.
<TABLE>
Net Premiums Earned
Three Months Ended
March 31,
1997 1996
------ ------
(dollars in millions)
<S> <C> <C>
Municipal $7.1 $8.1
Mortgage 13.5 8.6
Non-Municipal 3.0 1.2
Credit and Specialty 4.5 2.2
Title 0.7 0.0
Lloyd's 1.7 0.0
----- -----
$30.5 $20.1
</TABLE>
For the three months ended March 31, 1997, net investment income
increased 12.2% to $13.8 million from $12.3 million for the
comparable period in 1996. Growth in investment income was
primarily attributable to a larger investment portfolio caused by
(i) an increase in invested assets from positive operating cash
flows during the twelve months ended March 31, 1996 and (ii) a
public offering in the first quarter of 1996 of the Corporation's
common stock which generated $25.9 million in net proceeds to the
Corporation. In addition, the Corporation recognized net
realized gains of $2.8 million for the three months ended March
31, 1997 compared to net realized losses of $0.1 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 $4.8 million from
$1.4 million for the three months ended March 31, 1997 and 1996,
respectively. Losses recorded in the three months ended March
31, 1997 were primarily attributable to the expected loss
recognition associated with the addition of the Lloyd's line of
business as well as normal loss development in the mortgage
guaranty and credit reinsurance lines of business which
constitute an increasing portion of the Corporation's assumed
book of business. Ceded losses for the three months ended March
31, 1997 and 1996 were $0.9 million and $1.9 million,
respectively.
Total expenses, including loss and loss adjustment expenses,
increased 56.8% to $24.0 million for the three months ended March
31, 1997 from $15.3 million in the same period of 1996. This
increase was primarily attributable to commissions associated
with the increased level of premiums written, normal loss
development from the mortgage and credit lines of business and
increased net profit commissions payable under certain of the
Corporation's reinsurance contracts. In addition, the increase in
expenses was attributable to operating and loss expenses
associated with the consolidations of RGB and CRC's share of the
Lloyd's syndicates. Furthermore, the combined ratio, excluding
expenses associated with non insurance operations, increased to
64.7% for the three months ended March 31, 1997 from 60.4% for
the comparable 1996 period. This increase is an expected result
of the Corporation's diversification strategy, which is producing
more business from lines with relatively higher combined ratios
than the financial guaranty reinsurance business.
For the three months ended March 31, 1997, the total tax
provision increased to $6.7 million from $4.4 million for the
same period in 1996. In addition, the effective tax rate
increased to 28.0% in the first quarter of 1997 from 25.6% in the
same period of 1996. This increase occurred in response to the
Corporation's strategy of using a greater proportion of new cash
flow to purchase taxable securities during 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation relies on dividends from Capital Reinsurance for
funds used in its operations. The major sources of liquidity for
Capital Reinsurance are funds generated from reinsurance
premiums, net investment income and maturing investments. Capital
Reinsurance is domiciled in the State of Maryland, and, under
Maryland insurance law, the amount of the surplus of Capital
Reinsurance available for distribution as dividends is subject to
certain statutory restrictions. The amount available for
distribution from Capital Reinsurance during 1997 with notice to,
but without prior approval of, the Maryland Insurance
Commissioner is limited to 10% of Capital Reinsurance's
policyholders' surplus as of December 31, 1996, or approximately
$33.0 million. For the three months ended March 31, 1997,
Capital Reinsurance paid $8.0 million in dividends to the
Corporation.
Credit Re Corporation, a wholly owned subsidiary of the
Corporation relies on dividends from its wholly owned subsidiary,
Capital Credit, for funds which it provides the Corporation.
Capital Credit's major sources of liquidity are also funds
generated from reinsurance premiums, net investment income and
maturing investments. Capital Credit is a Bermuda domiciled
insurer whose distributions are governed by Bermuda law. Under
Bermuda law and the by-laws of Capital Credit, dividends may be
paid out of the profits of the company (defined as accumulated
realized profits less accumulated realized losses). Distributions
to shareholders may also be paid out of Capital Credit's surplus
limited by requirements that such company must at all times (i)
maintain the minimum share capital required under Bermuda Law,
and (ii) have relevant assets in an amount equal to or greater
than 75% of relevant liabilities, all as defined under Bermuda
Law. Since its organization, Capital Credit has not declared nor
paid any dividends.
Capital Mortgage and Capital Title are subject to the dividend
restrictions imposed under New York Insurance Law. Accordingly,
dividends may only be declared and distributed out of earned
surplus (as defined under New York Insurance Law). Additionally,
no dividend may be declared or distributed by Capital Mortgage or
Capital Title in an amount which, together with all dividends
declared or distributed by Capital Mortgage or Capital Title, as
the case may be, during the preceding twelve months, exceeds the
lesser of 10% of such company's surplus to policyholders as shown
by its last Annual Statutory Statement on file with the New York
Insurance Department, or 100% of adjusted net investment income
(as defined under New York Insurance Law) during such period,
unless, upon prior application, the Superintendent of Insurance
approves a greater dividend distribution based upon his finding
that Capital Mortgage or Capital Title, as the case may be, will
retain sufficient surplus to support its obligations and
writings. KRE's dividends and distributions to its sole
shareholder, Capital Mortgage, are governed by Bermuda law, and
are subject to the same restrictions as those described in the
preceding paragraph for Capital Credit. To date, Capital
Mortgage, 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.
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 three months ended March
31, 1997, common dividends were declared and paid in the amount
of $1.1 million or $0.07 per share.
Cash flows from operations for the three months ended March 31,
1997 and 1996, consisting of reinsurance premiums collected net
of expenses, investment income and income taxes, were $31.7
million and $25.0 million, respectively. The Corporation believes
that current levels of cash flow from operations provide the
Corporation with sufficient liquidity to meet its operating
needs. The Corporation's non-operating cash outflows are
primarily dedicated to (i) fixed-income investment activity, (ii)
the payment of dividends on its common shares, (iii) payments of
interest on long-term debt and (iv) the payment of its loan
obligations to Capital Re LLC.
At March 31, 1997, cash and investments approximated $958.6
million, an increase of $42.2 million, or 4.6%, 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 March 31, 1997, the entire investment portfolio
was invested in highly-rated fixed income securities.
At March 31, 1997, approximately $164.2 million or 17.5% of the
Corporation's investment portfolio was comprised of mortgage-
backed securities ("MBS"). Of the MBS portfolio, approximately
$141.0 million or 85.9% is backed by agencies or entities
sponsored by the U.S. government as to the full amount of
principal and interest. As of March 31, 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 March 31, 1997, $9.7 million
or approximately 5.9% of the MBS portfolio was invested in
collateralized mortgage obligations ("CMOs") which are
characterized as planned amortization class CMOs (''PACs'').
PACs are securities whose cash flows are designed to remain
constant over a variety of mortgage prepayment environments.
Other classes in the CMO security are structured to accept the
volatility of mortgage prepayment changes, thereby insulating the
PAC class. Of the remaining MBS portfolio, $154.5 million, or
94.1%, was invested in mortgage-backed pass-throughs or
sequential CMOs. Pass-throughs are securities in which the
monthly cash flows of principal and interest (both scheduled and
prepayments) generated by the underlying mortgages are
distributed on a pro-rata basis to the holders of securities. A
sequential MBS is structured to divide the CMO security into
sequentially ordered classes. Receipt of principal payments
within classes is contingent on the retirement of all previously
paying classes. Generally, interest payments are made currently
on all classes. While these securities are more sensitive to
prepayment risk than PACs, they are not considered highly
volatile securities. While the Corporation may consider investing
in any tranche of a sequential MBS, the individual security's
characteristics (duration, relative value, underlying collateral,
etc.) along with aggregate portfolio risk management determine
which tranche of sequential MBS will be purchased. At March 31,
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 3 - Exhibits and Reports on Form 8-K
(a) The following is annexed as an exhibit:
Exhibit
Number Description
------ -----------
11 Statement Re: Computation of Per
Share Earnings (Unaudited)
(b) Reports on Form 8-K
None
INDEX TO EXHIBITS
Exhibit
Number Description Page
- ----- ----------- ----
11 Statement Re: Computation of Per
Share Earnings (Unaudited) 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
CAPITAL RE CORPORATION
Date: May 12, 1997 By: /s/ David A. Buzen
------------------
David A. Buzen
Executive Vice President,
Chief Financial Officer
Date: May 12, 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
March 31,
---------------------
1997 1996
---------------------
<S> <C> <C>
Earnings per common share
(Primary and Fully Diluted)
Average shares outstanding
during the period 15,861 15,268
Net Income 17,136 12,767
Earnings Per common share $1.08 $0.84
====== ======
Notes: The per share data for 1997 and 1996 does not include the net
effect of dilutive stock options, since the dilution from the earnings
per share amount is less than 3%.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 937,858
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 937,858
<CASH> 20,775
<RECOVER-REINSURE> 269
<DEFERRED-ACQUISITION> 118,482
<TOTAL-ASSETS> 1,220
<POLICY-LOSSES> 19,924
<UNEARNED-PREMIUMS> 367,424
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 99,791
75,000
0
<COMMON> 161
<OTHER-SE> 492,036
<TOTAL-LIABILITY-AND-EQUITY> 1,220
30,549
<INVESTMENT-INCOME> 13,815
<INVESTMENT-GAINS> 2,785
<OTHER-INCOME> 703
<BENEFITS> 4,818
<UNDERWRITING-AMORTIZATION> 10,240
<UNDERWRITING-OTHER> 3,047
<INCOME-PRETAX> 23,878
<INCOME-TAX> 6,742
<INCOME-CONTINUING> 17,136
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,136
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.08
<RESERVE-OPEN> 17,759
<PROVISION-CURRENT> 1,743
<PROVISION-PRIOR> 3,075
<PAYMENTS-CURRENT> 16
<PAYMENTS-PRIOR> 5,022
<RESERVE-CLOSE> 17,538
<CUMULATIVE-DEFICIENCY> 0<F1>
<FN>
<F1>Not Applicable for mortgage guaranty and specialty reinsurer
</FN>
</TABLE>
