SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
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 SEPTEMBER 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____TO____
----------
CAPITAL RE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 1-10995 52-1567009
(STATE OR OTHER JURISDICTION (COMMISSION FILE (IRS EMPLOYER
OF INCORPORATION OR NUMBER) IDENTIFICATION
ORGANIZATION) NUMBER)
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 13, 1999 THERE WERE 36,523,398 OUTSTANDING SHARES OF COMMON
STOCK, PAR VALUE $.01 PER SHARE, OF THE REGISTRANT
<PAGE>
<TABLE>
<CAPTION>
CAPITAL RE CORPORATION AND SUBSIDIARIES
INDEX
<S> <C> <C>
PART I FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) CAPITAL RE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -SEPTEMBER 30, 1999 (UNAUDITED) AND
DECEMBER 31, 1998 3
CONSOLIDATED STATEMENTS OF INCOME - THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED) AND SEPTEMBER 30, 1998
(UNAUDITED) 4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED) AND SEPTEMBER 30,
1998 (UNAUDITED) 5
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - NINE MONTHS
ENDED SEPTEMBER 30, 1999 (UNAUDITED) 6
CONSOLIDATED STATEMENTS OF CASH FLOWS - NINE MONTHS ENDED
SEPTEMBER 30, 1999 (UNAUDITED) AND SEPTEMBER 30, 1998 (UNAUDITED) 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 8-14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 15-31
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 32-33
SIGNATURES 34
EXHIBIT 11 35
</TABLE>
<PAGE>
CAPITAL RE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands except share amounts)
<TABLE>
<CAPTION>
September 30,
1999 December 31,
(Unaudited) 1998
------------- -----------
<S> <C> <C>
Assets
Fixed maturity securities available for sale, at market
(amortized cost: $936,795 in 1999 and $1,036,862 in 1998) $ 921,751 $ 1,086,891
Short-term investments, at cost, which approximates market 208,743 88,147
----------- -----------
Total Investments 1,130,494 1,175,038
Cash 6,780 9,893
Accrued investment income 14,572 15,371
Deferred acquisition costs 148,431 135,029
Prepaid reinsurance premiums 43,165 49,603
Reinsurance recoverable on ceded losses 8,516 3,292
Funds held under reinsurance agreements 4,914 5,033
Premiums receivable, net 17,465 16,997
Amounts receivable on ceded annuity reserves 0 53,869
Investment in affiliates 19,580 15,080
Net assets of discontinued operations 0 11,695
Other assets 24,477 17,873
----------- -----------
Total Assets $ 1,418,394 $ 1,508,773
=========== ===========
Liabilities
Deferred premium revenue $ 416,188 $ 405,866
Reserve for losses and loss adjustment expenses 107,383 87,960
Annuity benefit reserves 0 53,869
Accident and health reserves 18,872 17,843
Profit commission liability 66,786 57,389
Deferred federal income taxes payable 39,197 79,237
Bank note payable 25,000 25,000
Long-term debt 74,884 74,856
Net liabilities of discontinued operations 63,183 0
Other liabilities 30,188 20,927
----------- -----------
Total Liabilities $ 841,681 $ 822,947
----------- -----------
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 1999 and 1998 -- --
Common stock - $.01 par value per share; 75,000,000 shares
authorized, 36,523,398 and 31,929,119 shares issued and
outstanding in 1999 and 1998, respectively 370 324
Additional paid-in capital 302,539 227,280
Retained earnings 218,449 355,693
Treasury stock; 428,000 and 428,000 shares in 1999 and 1998, respectively (4,891) (4,891)
Other Comprehensive Income
Net unrealized (loss)/gain on fixed maturities securities available for sale,
net of reclassification adjustment (14,654) 32,520
Net unrealized loss on foreign exchange translation (100) (100)
----------- -----------
Accumulated Other Comprehensive Income (14,754) 32,420
----------- -----------
Total Stockholders' Equity 501,713 610,826
----------- -----------
Total Liabilities, Preferred Securities of Capital Re LLC and
Stockholders' Equity $ 1,418,394 $ 1,508,773
=========== ===========
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements
3
<PAGE>
CAPITAL RE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (dollars in
thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(Unaudited) (Unaudited)
---------------------- ----------------------
1999 1998 1999 1998
---------------------- ----------------------
<S> <C> <C> <C> <C>
Revenues:
Orgination premiums written $37,465 $41,435 $156,504 $159,367
Canceled Reinsurance 0 0 9,567 0
--------------------- ---------------------
Gross premiums written $37,465 $41,435 $146,937 $159,367
Ceded premiums 1,446 810 4,644 2,330
--------------------- ---------------------
Net premiums written 36,019 40,625 142,293 157,037
Increase in deferred premium revenue 6,887 5,590 (16,760) (27,866)
--------------------- ---------------------
Net premiums earned 42,906 46,215 125,533 129,171
Net investment income 17,590 16,413 52,440 48,465
Net realized gain (8,954) 1,848 (3,926) 4,309
Fee income 258 100 1,017 717
Other income 20 23 41 210
Equity income in affiliate 1,650 199 4,043 332
--------------------- ---------------------
Total Revenues 53,470 64,798 179,148 183,204
--------------------- ---------------------
Expenses:
Loss and loss adjustment expenses 12,234 21,085 200,161 33,677
Acquisition costs 10,982 12,893 52,579 47,511
Decrease/(increase) in deferred acquisition costs 1,130 774 (13,402) (8,474)
Profit commission expense 4,218 3,844 11,446 14,432
Other operating expenses 2,522 4,496 10,511 12,352
Interest expense 1,897 1,852 5,644 5,582
Foreign exchange loss (366) (163) 358 (127)
Minority interest in Capital Re LLC 1,434 1,434 4,303 4,303
--------------------- ---------------------
Total Expenses 34,051 46,215 271,600 109,256
--------------------- ---------------------
(Loss)/income before provision for federal income taxes 19,419 18,583 (92,452) 73,948
(Benefit from)/provision for federal income taxes
Current 5,281 (721) (12,778) 10,600
Deferred 1,068 4,969 (22,529) 9,056
--------------------- ---------------------
Total (benefit from)/provision for federal income taxes 6,349 4,248 (35,307) 19,656
--------------------- ---------------------
Net (loss)/income from continuing operations $13,070 $14,335 ($57,145) $54,292
Discontinued operations:
Income from operations 0 135 0 158
Loss on disposal (52,231) 0 (75,896) 0
--------------------- ---------------------
(Loss)/income from discontinued operations, net of tax (52,231) 135 (75,896) 158
Net (Loss)/Income ($39,161) $14,470 ($133,041) $54,450
===================== =====================
Net (Loss)/Income from Continuing Operations
Per Common Share:
Basic $0.36 $0.45 ($1.69) $1.70
Diluted $0.36 $0.44 ($1.68) $1.66
Net (Loss)/Income Per Common Share:
Basic ($1.07) $0.45 ($3.94) $1.71
Diluted ($1.07) $0.44 ($3.91) $1.66
Weighted Average Number of Shares Outstanding
Basic 36,523 31,912 33,792 31,871
Diluted 36,670 32,732 34,058 32,730
Cash dividends per common share $0.04 $0.04 $0.12 $0.12
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements
4
<PAGE>
CAPITAL RE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(Unaudited) (Unaudited)
--------------------- ---------------------
1999 1998 1999 1998
--------------------- ---------------------
<S> <C> <C> <C> <C>
Net (Loss)/Income ($39,161) $14,470 ($133,041) $54,450
Other Comprehensive Income, net of tax:
Unrealized holding losses arising during period (21,388) 12,810 (51,100) 14,851
Reclassification adjustment for (losses)/gains included in net income 8,954 (1,848) 3,926 (4,309)
--------------------- ---------------------
Change in net unrealized gain on fixed maturities securities
available for sale (12,434) 10,962 (47,174) 10,542
Change in foreign exchange translation 0 241 0 264
--------------------- ---------------------
Other Comprehensive (Loss)/Income (12,434) 11,203 (47,174) 10,806
--------------------- ---------------------
Comprehensive (Loss)/Income ($51,595) $25,673 ($180,215) $65,256
===================== =====================
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements
5
<PAGE>
CAPITAL RE CORPORATION AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
(Unaudited)
(dollars in thousands except share amounts)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Paid-In Retained Treasury Comprehensive Stockholders'
Stock Capital Earnings Stock Income Equity
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 $324 $227,280 $355,693 ($4,891) $32,420 $610,826
Net Loss -- -- (133,041) -- -- (133,041)
Exercise of stock options, including tax benefit (169,500 shares) 2 2,178 -- -- -- 2,180
Fixed maturities securities available for sale adjustments -- -- -- -- (47,174) (47,174)
Issuance of common stock (4,424,779 shares) (additional paid
in capital is net of capital issuance costs of $1,875) 44 73,081 -- -- -- 73,125
Dividend ($.12 per common share) -- -- (4,204) -- -- (4,204)
----------------------------------------------------------------
Balance, September 30, 1999 $370 $302,539 $218,449 ($4,891) ($14,754) $501,713
================================================================
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements.
6
<PAGE>
CAPITAL RE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
(Unaudited)
----------------------
1999 1998
----------------------
<S> <C> <C>
Operating Activities:
Net (loss)/income ($133,041) $54,450
--------- ---------
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 (1,233) (706)
(Benefit from)/provision for deferred federal income taxes (22,529) 9,127
Acquisition costs deferred 52,579 (47,511)
Amortization of deferred acquisition costs (65,981) 39,037
Equity Income in affiliates (4,043) (332)
Change in accrued investment income 799 (737)
Change in premiums receivable, net (1,129) (11,513)
Change in deferred premium revenue, net 16,760 27,866
Change in outstanding loss reserves, net 15,229 16,916
Net realized gain/(loss) on investments 3,926 (4,309)
Change in ceded balances payable 661 9,401
Discontinued Operations, net 74,879 5,759
Other 13,746 7,690
--------- ---------
Net Cash (Used in)/Provided by Operating Activities (49,349) 105,166
Investing Activities:
Securities available for sale:
Purchases - fixed maturities (852,800) (591,931)
Sales-fixed maturites 950,554 482,031
(Purchases)/maturities of short-term
investments, net (120,588) 2,537
Other investing activities (2,032) (448)
--------- ---------
Net Cash Used in Investing Activities (24,866) (107,811)
Financing Activities:
Net proceeds from exercise of stock options 2,180 1,692
Net proceeds from issuance of stock 73,125 0
Dividends paid (4,204) (3,826)
--------- ---------
Net Cash Provided/(Used) by Financing Activities 71,101 (2,134)
Decrease in Cash (3,114) (4,779)
Cash at Beginning of Period 9,893 14,103
--------- ---------
Cash at End of Period $6,780 $9,324
========= =========
</TABLE>
See Accompanying Notes to Unaudited Consolidated Financial Statements.
7
<PAGE>
CAPITAL RE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 1999
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 1998 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 nine months ended September 30, 1999 may not
be indicative of the results that may be expected for the year ending December
31, 1999.
As of January 1, 1998, the Corporation adopted Statement of Financial Accounting
Standard 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes
new rules for the reporting and display of comprehensive income and its
components; however, the adoption of FAS 130 had no impact on the Corporation
income or shareholders' equity. FAS 130 requires unrealized gains or losses on
the Corporation's available-for-sale securities and foreign currency translation
adjustments, which prior to adoption were reported separately in shareholders'
equity to be included in other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of FAS 130. For
the three months and nine months ended September 30, 1999 and 1998, total
comprehensive (loss)/income amounted to ($51.6) million and ($180.2) million,
and $25.7 million and $65.3 million, respectively.
8
<PAGE>
2. REINSURANCE
Ceded earned premium for both the three months and nine months ended September
30, 1999 and 1998 were $3.6 million and $11.1 million, and $3.0 million and
$10.4 million, respectively. Ceded losses for the same periods were $5.1 million
and ($45.3) million, and ($1.5) million and $1.3 million, respectively. The
($45.3) million relates to non recoverable reinsurance from International
Financial Service Life Insurance Company ("IFS") on reinsurance ceded of certain
blocks of single premium and flexible premium in deferred annuities.
3. INCOME TAXES
The effective tax rate for the nine months ended September 30, 1999 and 1998 is
lower than the federal corporate tax rate on ordinary income of 35% due
principally to the effect of tax-exempt interest income. No income taxes were
paid as of September 30, 1999 and $16.1 million of income taxes were paid as of
September 30, 1998.
4. SEGMENT REPORTING
The Corporation provides reinsurance to primary insurers in various specialty
insurance markets. For segment reporting purposes, the Corporation's reinsurance
lines of business are organized into four discrete segments - municipal
financial guaranty, nonmunicipal financial guaranty (which includes credit
default swap transactions), mortgage guaranty and trade credit. Two additional
lines, financial solutions and title reinsurance are combined into "Other" for
segment reporting purposes. Operating procedures and corporate resources are
tailored to the business and regulatory needs of each line of business or
segment as necessary. In cases where practical, the same procedures and or
resources may be utilized for more than one line of business.
Financial guaranty insurance of municipal and nonmunicipal debt obligations, is
a form of credit enhancement which, as a specialized class of surety, provides
for the unconditional and irrevocable guarantee of the obligor's scheduled
payment of principal and interest on investment grade municipal and
non-municipal debt obligations. The premiums related to reinsurance of municipal
bond insurance are generally paid in full at the time of policy issuance,
credited to a deferred premium account and then recognized as revenues over the
life of the reinsured obligation. As a result, only a small portion of annual
premium revenue is derived from premiums written in any one year. Given the zero
expected loss underwriting standard, this multi-year revenue translates into an
annuity of earned premiums, which is itself supplemented by the investment
income derived from the deferred premiums account. Non-municipal financial
guaranty premiums are generally paid in installments over the life of the
underlying obligation, also providing an annuity of earned premiums.
9
<PAGE>
Mortgage guaranty insurance is a specialized class of credit insurance,
providing protection to mortgage lenders against default by borrowers on low
down-payment residential mortgage loans. For the Corporation's proportional
mortgage guaranty business, reinsurance premiums are paid on a monthly basis and
fully recognized when written. Losses are expected in the proportional business.
For the non-proportional mortgage guaranty business, premiums are generally paid
in full at contract inception and earned over the life, usually ten years.
Generally, losses are not expected in the non-proportional mortgage guaranty
business.
Credit insurance protects suppliers of goods and services from the risk of
non-payment by their customers. Losses are also expected in this business. The
business strategy is based on blending participation in excess of loss
reinsurance programs with traditional proportional treaty lines. These contracts
are generally of a one year duration and premiums are typically received in
installments throughout the coverage period.
For purposes of financial planning, resource allocation and performance
evaluation, segments are measured based on net underwriting profits and other
income directly attributable to them. For segment reporting purposes, investment
income, net realized gains/losses, operating expenses (i.e., salaries, rent,
etc.), interest expense and income taxes are allocated to each segment. The
mortgage segment includes equity income from an investment in a subsidiary
engaged in mortgage related products. Management does not allocate assets to the
Corporation's segments. Rather, assets are managed as a consolidated pool.
For marketing purposes, the Corporation aggregates its reinsurance lines of
business into two divisions, Financial Guaranty and Financial Risks. The
municipal and non-municipal lines (including credit default swaps) comprise the
Financial Guaranty Division while the Financial Risks Division includes mortgage
guaranty, trade credit, title and financial solutions.
The following tables summarize the operating results of the Corporation's
segments:
<TABLE>
<CAPTION>
Three Months Ended September 30, 1999
Reportable Segments
-----------------------------------------------------------------------------------
Municipal Non-Municipal Mortgage Credit Other Consolidated
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Origination Written Premiums $7,022 $9,448 $8,836 $7,530 $4,629 $37,465
Canceled Reinsurance 0 0 0 0 0 0
----------------------------------------------------------------------------------
Gross Written Premiums 7,022 9,448 8,836 7,530 4,629 37,465
Net Premiums Written 6,164 9,315 8,729 7,363 4,448 36,019
Net Premiums Earned 9,638 10,007 13,409 5,294 4,558 42,906
Net Underwriting (Loss)/Profit and Other
Segment Related (Loss)/Income $5,030 $5,581 $6,298 $1,132 $0 $18,042
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
Reportable Segments
----------------------------------------------------------------------------------
Municipal Non-Municipal Mortgage Credit Other Consolidated
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Origination Written Premiums $40,306 $32,154 $45,477 $24,725 $13,842 $156,504
Canceled Reinsurance 0 9,567 0 0 0 9,567
----------------------------------------------------------------------------------
Gross Written Premiums 40,306 22,587 45,477 24,725 13,842 146,937
Net Premiums Written 37,471 21,461 45,370 24,347 13,644 142,293
Net Premiums Earned 24,663 25,066 39,046 22,831 13,927 125,533
Net Underwriting (Loss)/Profit and Other
Segment Related (Loss)/Income $2,034) ($45,598) $11,813 ($198) ($81,158) ($117,175)
<CAPTION>
Three Months Ended September 30, 1998
Reportable Segments
----------------------------------------------------------------------------------
Municipal Non-Municipal Mortgage Credit Other Consolidated
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Origination Written Premiums $7,828 $6,234 $13,091 $10,011 $4,271 $41,435
Canceled Reinsurance 0 0 0 0 0 0
----------------------------------------------------------------------------------
Gross Written Premiums 7,828 6,234 13,091 10,011 4,271 41,435
Net Premiums Written 7,139 6,164 13,092 9,959 4,271 40,625
Net Premiums Earned 12,756 6,834 13,712 8,544 4,369 46,215
Net Underwriting Profit and Other
Segment Related Income ($390) $5,399 $4,986 ($377) $1,063 $10,681
<CAPTION>
Nine Months Ended September 30, 1998
Reportable Segments
----------------------------------------------------------------------------------
Municipal Non-Municipal Mortgage Credit Other Consolidated
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Origination Written Premiums $46,522 $18,420 $54,329 $28,295 $11,801 $159,367
Canceled Reinsurance 0 0 0 0 0 0
----------------------------------------------------------------------------------
Gross Written Premiums 46,522 18,420 54,329 28,295 11,801 159,367
Net Premiums Written 44,493 18,350 54,253 28,139 11,801 157,036
Net Premiums Earned 31,954 15,597 46,345 23,139 12,136 129,171
Net Underwriting Profit and Other
Segment Related Income $12,148 $12,122 $20,143 $2,352 $3,015 $49,780
</TABLE>
11
<PAGE>
Three Months Ended
September 30,
Reconciliation to Consolidated Results 1999 1998
------------------------
Net Segment Income $18,042 $10,681
Investment Income and Net Realized
Gains 8,636 18,261
Other Income 1,928 322
Operating Expense, net (5,856) (7,395)
Interest Expense & Minority Int in Subs (3,331) (3,286)
------------------------
Consolidated Income Before Taxes $19,419 $18,583
------------------------
Nine Months Ended
September 30,
Reconciliation to Consolidated Results 1999 1998
------------------------
Net Segment Income ($117,175) $49,780
Investment Income and Net Realized
Gains 48,514 52,774
Other Income 5,101 1,259
Operating Expense, net (18,945) (19,980)
Interest Expense & Minority Int in Subs (9,947) (9,885)
------------------------
Consolidated Income Before Taxes ($92,452) $73,948
------------------------
12
<PAGE>
5. CAPITAL INVESTMENT
On June 15, 1999, ACE Bermuda Insurance Ltd., a subsidiary of ACE Limited,
invested $75 million in the Corporation through a purchase of common stock. The
proceeds were used to augment the surplus of the Corporation's operating
subsidiaries. Under the stock purchase agreement, as amended, the purchase price
was $16.95 common per share.
6. MERGER
On October 6, 1999, the Corporation announced the postponement of its
shareholder meeting scheduled for October 7, 1999 for consideration of the
proposed merger with ACE Ltd. ("ACE") in accordance with an Agreement and Plan
of Meger dated as of June 10, 1999. The postponement was the result of an
unsolicited bid received by the Corporation from XL Capital Ltd. on October 6,
1999. The Corporation's Board of Directors considered and responded to competing
bids from ACE and XL during the first three weeks of October. As announced by
the Corporation on October 26, 1999, the Corporation signed a revised merger
agreement with ACE, which increased the merger consideration payable to the
Corporation's shareholders from the 0.6 ACE ordinary shares for each share of
the Corporation's Common Stock provided for in the June 10, 1999 Merger
Agreement, to 0.65 ACE ordinary shares for each share of the Corporation's
Common Stock plus cash in an amount equal to the greater of $1.30 per share or
an amount necessary to deliver $14.00 in value to the Corporation's
shareholders, up to a maximum cash amount of $4.68 per share, but in no event
less than $1.30 per share. The Corporation's shareholders would receive value of
$14.00 per share at closing if the price of ACE's ordinary shares is between
$14.34 and $19.54 per ordinary share. If the price of ACE's ordinary shares is
below $14.34 per share or above $19.54 per share, the Corporation's shareholders
would receive less value or more value, respectively. Closing is conditioned on
the Corporation's shareholders' approval. The Corporation intends to call a
special meeting of its shareholders to vote on the revised merger agreement as
soon as practicable following filling and processing of a revised proxy
statement/ prospectus materials.
7. LOSSES
Loss and loss adjustment expenses increased to $200.2 million from $33.7 million
for the nine months ended September 30, 1999 and 1998, respectively. The $200.2
million is principally comprised of (i) an addition of $48.3 million to incurred
losses for reinsurance exposure to certain asset-backed securities issued by or
on behalf of Commercial Financial Services (the "CFS Securities"). In 1998, the
Corporation established a loss reserve in the amount of $44.1 million for
expected losses and loss adjustment expenses on this non-municipal financial
guaranty transaction. The increase in losses incurred in 1999 is based on
revised collection estimates on the assets underlying the CFS Securities
following a recently completed transfer of all servicing to the back-up servicer
under the transaction documents. On an ever to date basis, total incurred losses
for the CFS Securities total $92.4 million; (ii) $75.2 million for incurred
losses in the financial solutions line of business related to three reinsurance
transactions with International Financial Services Life Insurance Company
("IFS"). This loss represents probable non-recoverable reinsurance from IFS
relating to reinsurance ceded on certain blocks of single premium and flexible
premium deferred
13
<PAGE>
annuities. In the second quarter of 1999, IFS was placed under an order of
rehabilitation by the Missouri insurance authorities. The order of
rehabilitation indicated that a substantial portion of the invested asset
portfolio of IFS, and its affiliates, could not be located and IFS's ability to
pay claims was severely compromised; (iii) $28.5 million of losses in the
financial guaranty line of business of which approximately $14.6 million was for
certain reinsured municipal obligations and approximately $13.9 million for
certain reinsured non-municipal obligations. These financial guaranty loss
reserves were recorded following various events occurring during the second
quarter and evaluated as part of the Corporation's ongoing portfolio
surveillance efforts, (iv) $16.1 million of incurred losses related to the
credit line of business. The addition to the incurred losses was based on an
actuarial review of the trade credit line of business conducted in the second
quarter, which revealed a deficiency in such reserves associated with certain
underwriting years and (v) $10.2 million of incurred losses for the mortgage
line of business. Of that amount, $3.6 million was recorded after a review of
the emerging loss frequency for several underwriting years covered under a
specific excess of loss reinsurance contract. The balance of the mortgage
reserves are associated with paid and incurred losses consistent with the
Corporation's second quarter actuarial review and analysis of the reinsured
mortgage portfolio.
8. DISCONTINUED OPERATIONS
The Corporation owns RGB Underwriting Agencies Ltd. ("RGB"), a Lloyd's of London
("Lloyd's") managing agency which manages four syndicates operating in the
Lloyd's insurance market, and CRC Capital Ltd. ("CRC Capital"), a corporate name
at Lloyd's, which provides underwriting capacity to the syndicates managed by
RGB. In the third quarter of 1998, the Corporation commenced a plan of
divestiture of its Lloyd's operation. Accordingly, commencing in the third
quarter of 1998, the Corporation began reflecting its participation in Lloyd's
as a discontinued operation. All 1999 and prior year figures presented herein
reflect Lloyd's as a discontinued operation. Unable to dispose of RGB on
acceptable terms the Corporation directed RGB to cease operations in the third
quarter of 1999 and initiated a run-off of the managed syndicates. For the nine
months ended September 30, 1999, the Corporation recorded a net loss from the
discontinued Lloyd's operations of ($75.9) million. Of the ($75.9) million,
($11.7) million relates to the write-offs ($6.4 million at March 31, 1999 and
$5.3 at June 30, 1999) of the estimated net realizable value of the Lloyd's
operations as reflected on the Corporation's balance sheet as of December 31,
1998, and an additional charge of ($12.0) million related to Corporation's
revised estimate of the net cost of disposal as of June 30, 1999, ($15.0)
million is associated with costs to run-off the operations, approximately
($35.0) million related to the Corporation's reevaluation of the Corporation's
best estimate loss costs arising from the increased emergence of claims in the
third quarter of 1999 and a ($2.2) million revision to estimate tax benefits. In
connection with CRC Capital's capital obligations to Lloyd's a payment will be
required on November 25, 1999 in the amount of approximately $21.0 million. This
payment will fund excepted losses and run-off expenses discussed above.
9. OTHER
Interest paid for the nine months ended September 30, 1999 and 1998 was $3.8
million and $4.1 million, respectively.
14
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
General
Capital Re Corporation (the "Company" or "Capital Re") is an insurance holding
company for a group of reinsurance companies that provide value-added
reinsurance products in several specialty insurance markets. The Company has two
principal divisions: financial guaranty and financial risks. The financial
guaranty division is composed of municipal and non-municipal financial guaranty
reinsurance and credit default swaps. The financial risks division is composed
of mortgage guaranty reinsurance, trade credit reinsurance, title reinsurance
and financial solutions. In both of its divisions, the Company seeks to provide
innovative reinsurance solutions to satisfy the diverse risk and financial
management demands of its clients. The Company believes that its future growth
will be generated through application of its core credit expertise to new
products and markets in its two existing divisions.
The Company participates in its business lines through five wholly-owned
insurance subsidiaries and two joint venture vehicles. Its wholly-owned
subsidiaries are: Capital Reinsurance Company ("Capital Reinsurance"), Capital
Credit Reinsurance Company Ltd. ("Capital Credit"), Capital Mortgage Reinsurance
Company ("Capital Mortgage"), KRE Reinsurance Ltd. ("KRE"), and Capital Title
Reinsurance Company ("Capital Title"). The Company owns a thirteen percent
economic interest in ACE Capital Re Ltd. ("ACRE"), a non-consolidated, Bermuda
domiciled, joint venture insurance company. The Company's joint venture partner
in ACRE is ACE Bermuda Insurance, Ltd. ("ACE Bermuda"), a subsidiary of ACE
Limited. In August 1999, ACE Bermuda contributed an additional $85 million in
equity to ACRE and the Company's economic interest in ACRE was thereby reduced
to 13.4 percent from 50 percent. The Company also owns a fifty percent interest
in Lenders Residential Asset Company LLC (formerly, Lenders Mortgage Alliance
Company LLC) ("LRAC"), a non-consolidated Delaware limited liability company.
During the Second Quarter of 1999, the Company completed a reorganization of its
operating subsidiaries. As part of the reorganization Capital Credit was merged
into KRE. KRE, the surviving company, is now a direct wholly-owned subsidiary of
the Company. Capital Mortgage and Capital Title are direct wholly-owned
subsidiaries of KRE and KRE also holds the Company's equity interest in ACRE.
The Company's financial guaranty division conducts its business primarily
through Capital Reinsurance. Capital Reinsurance is a professional reinsurance
company dedicated to serving the U.S. domestic and international financial
guaranty insurance markets and 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 applies
a "zero expected loss" standard to its underwriting process, which 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 reinsurance and credit default swap
portfolios. At the same time, consistent with its "zero expected loss"
underwriting policies, Capital Reinsurance has pursued the reinsurance of
investment grade non-municipal debt obligations and directed its capacity to the
reinsurance of financial guaranties of asset-backed securities. In addition,
Capital Reinsurance reinsures municipal and non-municipal credit risk protection
on a facultative basis to a wide variety of counterparties
15
<PAGE>
through credit default swap transactions executed by KRE. Credit default swaps
are underwritten in accordance with the same "zero expected loss" standard that
applies to Capital Reinsurance's municipal and non-municipal financial guaranty
business.
The Company's financial risks division conducts its business primarily through
KRE and its subsidiaries Capital Mortgage and Capital Title (collectively, "KRE
Financial Risks"). KRE Financial Risks is a leading reinsurer of mortgage
guaranty insurance. The mortgage guaranty reinsurance strategy of KRE Financial
Risks 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. Mortgage guaranty reinsurance is underwritten with
the expectation that losses will occur regularly.
KRE Financial Risks writes trade credit reinsurance in the U.S. and Europe.
Trade credit insurance protects those who sell goods and services on credit
terms against default by the purchaser on its payment obligations. Trade credit
reinsurance is an extension of the Company's underwriting focus, relying on
credit analysis and portfolio diversification techniques similar to those
employed in financial guaranty and mortgage guaranty reinsurance. Portfolio
losses will also be expected to occur regularly in the Company's trade credit
reinsurance business.
KRE Financial Risks provides title reinsurance designed to aid title insurers in
managing portfolio risk, meeting capital adequacy concerns and to achieve
desired claims-paying ability ratings from nationally recognized rating
agencies. Capital Title offers excess of loss and quota share reinsurance
products on both a treaty and facultative basis. Title reinsurance is
underwritten without the expectation of any significant loss; however, losses
can be expected to occur in the existing and future reinsured title insurance
portfolio.
The financial solutions business of KRE Financial Risks is focused on providing
highly structured solutions to problems of financial and risk management through
reinsurance, including credit enhancement, excess of loss and surplus management
covers. The principle target market is life, accident and health insurers and
reinsurers, although specialty property and casualty markets also provide
opportunities. The underwriting process places significant emphasis on actuarial
analysis. Transactions are underwritten to be risk remote or finite, standards
that are compatible with the Company's "zero expected loss" financial guaranty
underwriting standard. Losses can be expected to occur in the Company's existing
and future financial solutions portfolio.
KRE Financial Risks also assumes financial guaranty risk, both as a
retrocessionaire of Capital Reinsurance and directly from certain primary
financial guaranty insurers.
LRAC provides marketing and consulting services to mortgage lenders with regard
to the origination and closing of residential mortgages and the sale of such
mortgages into the capital markets. In addition, by providing direct access to
lenders, it generates markets for the sale of the Company's other products. The
Company also owns RGB Underwriting Agencies Ltd. ("RGB"), a Lloyd's of London
("Lloyd's") managing agency which manages four syndicates operating in the
Lloyd's insurance market, and CRC Capital Ltd. ("CRC Capital"), a corporate name
at Lloyd's, which provides underwriting capacity to the syndicates managed by
RGB. In the third quarter of
16
<PAGE>
1998, the Company commenced a plan of divestiture of its Lloyd's operation.
Accordingly, commencing in the third quarter of 1998, the Company began
reflecting its participation in Lloyd's as a discontinued operation. All 1999
and prior year figures presented herein reflect Lloyd's as a discontinued
operation. Unable to dispose of RGB on acceptable terms the Company directed RGB
to cease operations in the third quarter of 1999 and initiated a run-offs of the
managed syndicates.. For the nine months ended September 30, 1999, the Company
recorded a net loss from discontinued Lloyd's operations of ($75.9) million. Of
the ($75.9) million, ($11.7) million relates to the write-offs ($6.4million at
March 31, 1999 and $5.3 at June 30, 1999) of the estimated net realizable value
of the Lloyd's operations as reflected on the Company's balance sheet as of
December 31, 1998, and an additional charge of $12.0 million related to
Company's revised estimated of the net cost of disposal as of June 30, 1999
($15.0) million is associated with costs to run-off the operations,
approximately ($35.0) million related to the Company's reevaluation of the
Company's best estimate loss arising from the increased emergence of claims in
the third quarter of 1999 and a ($2.2) million revision to estimated tax
benefits. In connection with CRC Capital's capital obligations to Lloyd's a
payment will be required on November 25, 1999 in the amount of approximately
$21.0 million. This payment will fund excepted losses and run-off expenses
discussed above.
The Capital Re corporate group also includes Capital Re Solutions Incorporated
(formerly, Capital Re Management Company), a New York reinsurance intermediary,
ACE Capital Re Managers Ltd., a Bermuda based management company, and Capital Re
LLC, a Turks & Caicos Islands finance subsidiary organized in 1993 to issue $75
million of Company guaranteed mandatorily redeemable preferred stock, the
proceeds of which were loaned to Capital Re. Capital Re Financial Products
Company, a newly formed Delaware business Company, and Capital Risk Assurance
Company ("Capital Risk"), a Maryland surety insurer.
Results of Operations
Three Months Ended September 30, 1999 versus Three Months Ended September 30,
1998
Net income from continuing operations decreased to $13.1 million for the three
months ended September 30, 1999 from $14.3 million for the comparable period
last year. On a per share basis, the basic and diluted net income from
continuing operations were both $0.36 for the three months ended September 30,
1999. For the same period of 1998, on a per share basis, basic and diluted net
income from continuing operations were $0.45 and $0.44, respectively. The
decrease in net income from continuing operations was primarily due to realized
capital losses on sales of fixed maturity securities in the investment
portfolio.
The Company recorded a ($39.2) million net loss including loss from discontinued
operations for the three months ended September 30, 1999. For the same period of
1998, the Company recorded net income including income from discontinued
operations of $14.5 million. On a per share basis, both basic and diluted net
income including loss from discontinued operations were ($1.07). These losses
were primarily attributable to negative results from the Company's discontinued
Lloyd's operations.
17
<PAGE>
For the same period of 1998, on a per share basis, basic and diluted net income
including income from discontinued operations were $0.45 and $0.44,
respectively.
Origination premiums written (i.e., gross premiums written before canceled
reinsurance) decreased 9.6% to $37.5 million for the three months ended
September 30, 1999 from $41.4 million for the same period of 1998. Mortgage
guaranty reinsurance premium decreased to $8.8 million for the three months
ended September 30, 1999 compared to $13.1 million in the third quarter of 1998.
This decrease was due to an increase in mortgage prepayments caused by lower
interest rates as well as the Company's shift from assuming quota share mortgage
guaranty reinsurance business toward assuming structured excess of loss mortgage
guaranty reinsurance business. Credit reinsurance premium decreased to $7.5
million for the three months ended September 30, 1999 compared to $10.0 million
in the third quarter of 1998. This decrease was in response to the Company's
planned decrease in premiums written in this line of business. Non-municipal
origination premiums written increased to $9.5 million for the three months
ended September 30, 1999 from $6.2 million for the three months ended September
30, 1998 due to a significant increase in premiums written in the credit default
swaps sector of that business. A credit default swap is a transaction whereby
one counterparty pays a periodic fee in fixed basis points on a notional amount
in return for a contingent payment by the other counterparty in the event one or
more defined credit events occurs with respect to one or more third party
reference securities or loans. A credit event is generally defined as a failure
to pay, bankruptcy, cross acceleration (generally accompanied by a failure to
pay), repudiation, restructuring, or similar nonpayment event. Credit default
swap premium grew to $4.6 million for the three months ended September 30, 1999
from $2.2 million in the prior year. The following table shows origination
premiums written by line of business for the three months ended September 30,
1999 and September 30, 1998.
Origination Premiums Written
Three Months Ended
September 30,
(dollars in millions)
1999 1998
----- -----
Financial Guaranty Division:
Municipal $7.0 $7.8
Non-Municipal 9.5 6.2
Financial Risks Division:
Mortgage 8.8 13.1
Credit 7.6 10.0
Financial Solutions 1.7 1.5
Title 2.9 2.8
----- -----
Total Origination
Premiums Written $37.5 $41.4
Net premiums written decreased by 11.3% to $36.0 million for the three months
ended September 30, 1999 from $40.6 million for the same period of 1998. This
decrease is commensurate with the explanation described above for the decrease
in origination premium. The following table shows net premiums written by line
of business for the three months ended September 30, 1999 and September 30,
1998.
18
<PAGE>
Net Premiums Written
Three Months Ended
September 30,
(dollars in millions)
1999 1998
----- -----
Financial Guaranty Division:
Municipal $6.1 $7.1
Non-Municipal 9.3 6.2
Financial Risks Division:
Mortgage 8.7 13.1
Credit 7.4 10.0
Financial Solutions 1.6 1.4
Title 2.9 2.8
----- -----
Total Net
Premiums Written $36.0 $40.6
For the three months ended September 30, 1999, net premiums earned decreased
7.1% to $42.9 million from $46.2 million for the comparable 1998 period.
Municipal premiums earned decreased $3.2 million. This decrease was attributable
to a decrease in refunded earned premium to $5.2 for the three months ended
September 30, 1999 from $6.6 million for the same period in the prior year. A
refunding extinguishes the Company's reinsurance liability for the refunded
obligation and the Company then recognizes revenue equal to the remaining
related deferred premium revenue. For the three months ended September 30, 1999
and September 30 1998, ceded earned premium was $3.6 million and $3.0 million,
respectively. The following table shows net premiums earned by line of business
for the three months ended September 30, 1999 and September 30, 1998.
Net Premiums Earned
Three Months Ended
September 30,
(dollars in millions)
1999 1998
----- -----
Financial Guaranty Division:
Municipal $9.6 $12.8
Non-Municipal 10.0 6.8
Financial Risks Division:
Mortgage 13.4 13.7
Credit 5.3 8.5
Financial Solutions 1.7 1.6
Title 2.9 2.8
----- -----
Total Net
Premiums Earned $42.9 $46.2
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<PAGE>
For the three months ended September 30, 1999, net investment income increased
7.3% to $17.6 million from $16.4 million for the comparable period of 1998. The
Company recognized net realized losses of ($9.0) million for the three months
ended June 30, 1999 compared to realized gains of $1.8 million for the same
period of 1998. The capital losses resulted from of the Corporation's decision
to shorten the duration of its investment portfolio.
Loss and loss adjustment expenses decreased to $12.2 million from $21.1 million
for the three months ended September 30, 1999 and 1998, respectively. The
decrease in loss and loss adjustment expenses in the third quarter of 1999 was
due to $9.3 million pre-tax increase in the Company's case basis loss reserve
recorded in the third quarter of 1998 for losses arising from the bankruptcy of
the Delaware Valley Obligated Group, a unit of Pittsburgh based Allegheny
Health, Education and Research Foundation ("Allegheny"). The Company assumed its
exposure to Allegheny in the ordinary course under a 1996 reinsurance treaty.
Ceded losses for the three months ended September 31, 1999 and 1998 were $5.1
and ($1.5) million, respectively.
Total expenses, excluding loss and loss adjustment expenses, decreased 13.1% to
$21.8 million for the three months ended September 30, 1999 from $25.1 million
for the same period of 1998. This decrease was primarily attributable to
incentive compensation related expenses accrued in the third quarter of 1998 in
the amount of $2.1 million that are no longer expected to be incurred. Net
expenses related to this incentive compensation were reversed in the fourth
quarter of 1998. As such, no additional expense has been accrued in 1999. The
expense ratios for the three months ended September 30, 1999 and 1998 were 43.9%
and 47.6%, respectively.
For the three months ended September 30, 1999, the Company recorded federal
taxes of of $6.3 million. For the three months ended September 30, 1998, the
Company recorded federal income taxes payable of $4.2 million.
Nine Months Ended September 30, 1999 versus Nine Months Ended September 30, 1998
The Company recorded a ($57.1) million net loss from continuing operations for
the nine months ended September 30, 1999. For the same period of 1998, the
Company recorded net income from continuing operations of $54.3. On a per share
basis, the basic and diluted net loss from continuing operations were ($1.69)
and ($1.68), respectively, for the nine months ended September 30, 1999. For the
same period of 1998, on a per share basis, basic and diluted net income from
continuing operations were $1.70 and $1.66, respectively. The losses for the
1999 period are primarily attributable to additions to loss reserves and paid
losses on specific reinsured transactions as well as portfolio exposures.
The Company recorded a ($133.0) million net loss, including loss from
discontinued operations for the nine months ended September 30, 1999. For the
same period of 1998, the Company recorded net income including income from
discontinued operations of $54.5 million. On a per share basis, basic and
diluted net income including loss from discontinued operations were ($3.94) and
($3.91), respectively for the nine months ends September 30, 1999. These losses
were primarily attributable to the additions to loss reserves described above as
well as negative results from the Company's
20
<PAGE>
discontinued Lloyd's operations. For the same period of 1998, on a per share
basis, both basic and diluted net income including income from discontinued
operations were $1.71 and $1.66, respectively.
Origination premiums written (i.e., gross premiums written before canceled
reinsurance) decreased 1.8% to $156.5 million for the nine months ended
September 30, 1999 from $159.4 million for the same period of 1998. Mortgage
guaranty reinsurance premium decreased to $45.5 million for the nine months
ended September 30, 1999 compared to $54.3 million in the comparable period of
1998. This decrease was due to an increase in mortgage prepayments caused by
lower interest rates as well as the Company's shift from assuming quota share
mortgage guaranty reinsurance business toward assuming structured excess of loss
mortgage guaranty reinsurance business. Credit reinsurance premium decreased to
$24.7 million for the nine months ended September 30, 1999 compared to $28.3
million in the comparable period of 1998. This decrease was in line with the
Company's planned decrease in premiums written in this line of business.
Non-municipal origination premiums written increased to $32.2 million for the
nine months ended September 30, 1999 from $18.4 million for the nine months
ended September 30, 1998 due to a significant increase in premiums written in
the credit default swaps sector of that business. A credit default swap is a
transaction whereby one counterparty pays a periodic fee in fixed basis points
on a notional amount in return for a contingent payment by the other
counterparty in the event one or more defined credit events occurs with respect
to one or more third party reference securities or loans. A credit event is
generally defined as a failure to pay, bankruptcy, cross acceleration (generally
accompanied by a failure to pay), repudiation, restructuring, or similar
nonpayment event. Credit default swap premium grew to $13.2 million for the
three months ended September 30, 1999 from $4.3 million in the prior year. The
following table shows origination premiums written by line of business for the
nine months ended September 30, 1999 and September 30, 1998.
Origination Premiums Written
Nine Months Ended
September 30,
(dollars in millions)
1999 1998
------ ------
Financial Guaranty Division:
Municipal $40.3 $46.5
Non-Municipal 32.2 18.4
Financial Risks Division:
Mortgage 45.5 54.3
Credit 24.7 28.3
Financial Solutions 4.9 3.5
Title 8.9 8.4
------ ------
Total Origination
Premiums Written $156.5 $159.3
Net premiums written decreased by 9.4% to $142.3 million for the nine months
ended September 30, 1999 from $157.0 million for the same period of 1998. This
decrease is attributable to $9.6 million in canceled reinsurance resulting from
the cancellation of a large non-municipal financial guaranty transaction as well
as the above explanations for the decrease in origination premiums written. The
following table shows net premiums written by line of business for the nine
months ended September 30, 1999 and September 30, 1998.
21
<PAGE>
Net Premiums Written
Nine Months Ended
September 30,
(dollars in millions)
1999 1998
------ ------
Financial Guaranty Division:
Municipal $37.5 $44.5
Non-Municipal 21.5 18.4
Financial Risks Division:
Mortgage 45.4 54.3
Credit 24.3 28.1
Financial Solutions 4.7 3.3
Title 8.9 8.4
------ ------
Total Net
Premiums Written $142.3 $157.0
For the nine months ended September 30, 1999, net premiums earned decreased to
$125.5 million from $129.2 million for the comparable 1998 period. Municipal
premium earned decreased $6.3 million. This decrease was primarily attributable
to a decrease in refunded earned premium to $8.6 for the nine months ended
September 30, 1999 from $14.5 million for the same period in the prior year. A
refunding extinguishes the Company's reinsurance liability for the refunded
obligation and the Company then recognizes revenue equal to the remaining
related deferred premium revenue. For the nine months ended September 30, 1999
and September 30 1998, ceded earned premium was $11.1 million and $10.4 million,
respectively. The following table shows net premiums earned by line of business
for the nine months ended September 30, 1999 and September 30, 1998.
Net Premiums Earned
Nine Months Ended
September 30,
(dollars in millions)
1999 1998
------ ------
Financial Guaranty Division:
Municipal $24.7 $32.0
Non-Municipal 25.1 15.6
Financial Risks Division:
Mortgage 39.0 46.3
Credit 22.8 23.1
Financial Solutions 5.1 3.8
Title 8.8 8.4
------ ------
Total Net
Premiums Earned $125.5 $129.2
For the nine months ended September 30, 1999, net investment income increased
8.0% to $52.4 million from $48.5 million for the comparable period of 1998. The
Company recognized net realized
22
<PAGE>
losses of ($3.9) million for the nine months ended September 30, 1999 compared
to $4.3 million for the same period of 1998.
Loss and loss adjustment expenses increased to $200.2 million from $33.7 million
for the nine months ended September 30, 1999 and 1998, respectively. The $200.2
million is principally comprised of (i) an addition of $48.3 million to incurred
losses for reinsurance exposure to certain asset-backed securities issued by or
on behalf of Commercial Financial Services (the "CFS Securities"). In 1998, the
Company established a loss reserve in the amount of $44.1 million for expected
losses and loss adjustment expenses on this non-municpal financial guaranty
transaction. The increase in losses incurred in 1999 is based on revised
collection estimates on the assets underlying the CFS Securities following a
recently completed transfer of all servicing to the back-up servicer under the
transaction documents. On an ever to date basis, total incurred losses for the
CFS Securities total $92.4 million; (ii) $75.2 million for incurred losses in
the financial solutions line of business related to three reinsurance
transactions with International Financial Services Life Insurance Company
("IFS"). This loss represents probable non-recoverable reinsurance from IFS
relating to reinsurance ceded on certain blocks of single premium and flexible
premium deferred annuities. In the second quarter of 1999, IFS was placed under
an order of rehabilitation by the Missouri insurance authorities. The order of
rehabilitation indicated that a substantial portion of the invested asset
portfolio of IFS, and its affiliates, could not be located and IFS's ability to
pay claims was severely compromised; (iii) $28.5 million of losses in the
financial guaranty line of business of which approximately $14.6 million was for
certain reinsured municipal obligations and approximately $13.9 million for
certain reinsured non-municipal obligations. These financial guaranty loss
reserves were recorded following various events occurring during the second
quarter and evaluated as part of the Company's ongoing portfolio surveillance
efforts, (iv) $16.1 million of incurred losses related to the credit line of
business. The addition to the incurred losses was based on an actuarial review
of the trade credit line of business conducted in the second quarter, which
revealed a deficiency in such reserves associated with certain underwriting
years and (v) $10.2 million of incurred losses for the mortgage line of
business. Of that amount, $3.6 million was recorded after a review of the
emerging loss frequency for several underwriting years covered under a specific
excess of loss reinsurance contract. The balance of the mortgage reserves are
associated with paid and incurred losses consistent with the Company's second
quarter actuarial review and analysis of the reinsured mortgage portfolio. Ceded
losses for the nine months ended September 30, 1999 and 1998 were $(45.3)
million and $1.3 million, respectively.
Total expenses, excluding loss and loss adjustment expenses, decreased 5.5% to
$71.4 million for the nine months ended September 30, 1999 from $75.6 million
for the same period of 1998. This decrease was primarily attributable to
incentive compensation related expenses accrued through the third quarter of
1998 in the amount of $5.0 million that are no longer expected to be incurred.
Net expenses related to this incentive compensation were reversed in the fourth
quarter of 1998. As such, no additional expense has been accrued in 1999. The
decrease was also due to a one time adjustment recorded in the second quarter of
1998 in the amount of $5.8 million to reclassify expenses to profit commission
expense from losses incurred based on the terms of an inforce reinsurance
contract. The expense ratios for the nine months ended September 30, 1999 and
1998 were 48.7% and 51.0%, respectively.
23
<PAGE>
For the nine months ended September 30, 1999, the Company recorded federal taxes
recoverable of $35.3 million. This was as a result of the significant losses
incurred described above. For the nine months ended September 30, 1998, the
Company recorded federal income taxes payable of $19.7 million.
Liquidity and Capital Resources
The Company relies on dividends from Capital Reinsurance and KRE to fund its
payment of dividends on its capital stock and interest on its outstanding debt.
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 1999 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, 1998, or
approximately $32.3 million. For the nine months ended September 30, 1999,
Capital Reinsurance paid dividends in the amount of $5.0 million to the Company.
KRE's major sources of liquidity are funds generated from reinsurance premiums,
net investment income and maturing investments. KRE, is a Bermuda domiciled
insurer whose distributions are governed by Bermuda law. Under Bermuda law and
the by-laws of KRE, 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 KRE'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. During 1999, KRE has paid no dividends to the Company.
Capital Mortgage, a wholly owned subsidiary of KRE, is 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 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 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 will retain sufficient surplus to support its obligations
and writings. To date, Capital Mortgage has not declared nor paid any dividends.
The maximum dividend payable by Capital Mortgage during 1999 is $0 since its
earned surplus was ($9.2) million as of December 31, 1998.
Capital Title, also a wholly owned subsidiary of KRE, is subject to the New York
insurance laws and regulations governing title insurers. Accordingly, dividends
may only be declared and distributed out of earned surplus as defined under New
York insurance law 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
24
<PAGE>
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. As of
December 31, 1998, Capital Title's maximum amount payable as a dividend during
1999 is approximately $3.6 million. During 1999, Capital Title has paid a $3.6
million dividend to KRE.
In January 1994, the Company 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 Company 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 Company. The Company 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.
For the nine months ended September 30, 1999, the Company declared and paid
common dividends in the amount of $4.2 million or $0.12 per share.
The Company reorganized its operating subsidiaries during the second quarter of
1999. As a result, KRE has become a direct wholly-owned subsidiary of the
Company. Capital Mortgage and Capital Title are now wholly-owned subsidiaries of
KRE and KRE owns all of the Company's equity interest in ACRE. As part of the
reorganization, approximately $137.0 million was transferred from Capital
Mortgage to KRE and KRE assumed certain reinsurance liabilities form Capital
Mortgage.
Cash flows from operations for the nine months ended September 30, 1999 and
1998, consisting of reinsurance premiums collected net of expenses, investment
income and income taxes, were ($49.3) million and $105.2 million, respectively.
The Company believes that current levels of cash flow from operations provide
the Company with sufficient liquidity to meet its operating needs. The Company'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, 1999, cash and investments were approximately $1.14 billion, a
decrease of $47.5 million, or 4.0%, from $1.18 billion at December 31, 1998. In
managing its investment portfolio, the Company places a high priority on quality
and liquidity. As of September 30, 1999, the entire investment portfolio was
invested in highly rated fixed income securities.
At September 30, 1999, approximately $113.2 million, or 10.0%, of the Company's
investment portfolio was composed of mortgage-backed securities ("MBS"). Of the
MBS portfolio, approximately $92.3 million, or 81.5%, 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, 1999, 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
25
<PAGE>
exposure to prepayments by purchasing less volatile types of MBS. As of
September 30, 1999, $3.0 million, or approximately 2.7%, 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, $110.2 million, or 97.3%, 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 September 30, 1999, 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.
Capital Reinsurance is party to a credit facility with Deutsche Bank AG (the "DB
Credit Facility") pursuant to which Deutsche Bank AG provides up to $100.0
million specifically designed to provide rating agency qualified capital to
further support Capital Reinsurance's claims-paying resources. This agreement
expires January 27, 2006. Capital Reinsurance has not borrowed under the DB
Credit Facility. In addition, on August 20, 1996, the Company 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 Company utilized $16 million of
the Chase Facility for purposes of paying subordinated notes that came due.
Interest on the bank note issued under the Chase Facility is payable quarterly
based upon the Company's chosen interest rate option under the terms of the
Chase Facility. In November 1996, the Company utilized the remaining $9 million
of the Chase Facility for purposes of acquiring RGB. Under the terms of the
Chase Facility, borrowed principal in the amount of $25 million becomes payable
in full on November 16, 1999. The company is currently negotiating an extension
of the payment date of the Chase Facility.
On March 10, 1999, Moody's Investors Service, Inc. ("Moody's") announced that it
had downgraded the financial strength rating of Capital Reinsurance to Aa2 from
Aaa. This action ended a review process that began on November 5, 1998. Moody's
cited increased competition in the monoline financial guaranty reinsurance
industry, an increased risk profile in business assumed and rising operating
leverage as reasons for the downgrade. Under certain of its reinsurance
agreements with two of its financial guaranty ceding companies, Capital
Reinsurance has agreed to increase the ceding commission payable under such
agreements as a result of the rating action by Moody's. The increase applies to
in-force and future business ceded by those companies. Total additional ceding
commission expense amounted to approximately $11.8 million. The expected
additional ceding
26
<PAGE>
commission will be amortized as the related reinsurance premium is earned. The
reinsurance agreements with the two ceding companies also give those companies
an option to reassume business previously ceded to Capital Reinsurance upon
certain adverse rating actions; however, those options to fully reassume were
not be triggered by Capital Reinsurance's March 10th downgrade. Additionally,
one of the ceding companies may reassume a minor portion of its previously ceded
business based on this rating action alone; that company is currently
considering whether or not to exercise the option to reassume.
On December 16, 1998, Standard & Poor's ("S&P") affirmed the triple - A
financial strength rating of Capital Reinsurance. In addition, on April 28, 1999
S&P affirmed the financial strength ratings of Capital Mortgage (double "A"),
KRE (double "A") and Capital Credit (single "A" plus). S&P also upgraded the
financial strength rating of Capital Title from double "A" minus to double "A".
On June 15, 1999, ACE Bermuda Insurance Ltd., a subsidiary of ACE Limited
("ACE"), invested $75 million in the Company through a purchase of common stock.
The proceeds were used to support the Company's ongoing business activity. ACE's
investment is equal to approximately 13% of the Company.
On October 6, 1999, Capital Re announced the postponement of its shareholder
meeting scheduled for October 7, 1999 for consideration of the proposed merger
with ACE Ltd. ("ACE") in accordance with an Agreement and Plan of Merger dated
as of June 10, 1999. The postponement was the result of an unsolicited bid
received by Capital Re from XL Capital Ltd. on October 6, 1999. Capital Re's
Board of Directors considered and responded to competing bids from ACE and XL
during the first three weeks of October. As announced by the Company on October
26, 1999, Capital Re signed a revised merger agreement with ACE which increased
the merger consideration payable to Capital Re shareholders from the (the
"Revised Meger Agreement") 0.6 of ACE ordinary shares for each of the
Corporation's Common Stocks provided for in the June 10, 1999 Merger Agreement,
to 0.65 ACE ordinary shares for each share of the Corporation's Common Stock
plus cash in an amount equal to the greater of $1.30 per share or an amount
necessary to deliver $14.00 in value to Capital Re shareholders, up to a maximum
cash amount of $4.68 per share, but in no event be less than $1.30 per share.
Capital Re shareholders would receive value of $14.00 per share at closing if
the price of ACE's ordinary shares is between $14.34 and $19.54 per ordinary
share. If the price of ACE's ordinary shares is below $14.34 per share or above
$19.54 per share, Capital Re shareholders would receive less value or more
value, respectively. Closing is conditioned on Capital Re's shareholders'
approval. Capital Re intends to call a special meeting of its shareholders to
vote on the revised merger agreement as soon as practicable following processing
of a revised proxy statement/ prospectus materials. In connection with the
revised Merger Agreement, the Company and ACE entered into a Stand-By Capital
Commitment under which the Company may borrow up to $50 million upon demand.
Under certain circumstance, ACE may convert outstanding borrowings into common
equity of the company at $14 per share.
Market Risk
The main objectives in managing the investment portfolios of the Company and its
operating subsidiaries are to maximize after-tax investment income and total
investment returns while
27
<PAGE>
minimizing credit risks in order to provide maximum support to the reinsurance
underwriting operations. Investment strategies are developed based on many
factors including underwriting results and the Company's resulting tax position,
regulatory requirements, fluctuations in interest rates and consideration of
other market risks. Investment decisions are managed by outside investment
professionals under discretionary investment management agreements and based on
guidelines established by management and approved by the board of directors.
Market risk represents the potential for loss due to adverse changes in the fair
value of financial instruments. The market risks related to financial
instruments of the Company and its operating subsidiaries primarily relate to
the investment portfolio, which exposes the Company to risks related to interest
rates and, to a lesser extent, credit quality and prepayment. Analytical tools
and monitoring systems are in place to assess each of these elements of market
risk.
Interest rate risk is the price sensitivity of a fixed income security to
changes in interest rates. Management views these potential changes in price
within the overall context of asset and liability management. Wherever possible,
the duration of asset and liability portfolios are matched. However, the
duration of most of the asset portfolio is managed according to the level of
expected return and volatility deemed tolerable by management. The duration of
the liability portfolio does not lend itself to active duration management due
to the low frequency, high severity losses in a majority of the Company's
reinsured businesses. Other factors are considered in determining the duration
of the asset portfolio, which the Company believes mitigates the overall effect
of interest risk for the Company.
The following table provides information about the Company's fixed maturity
investments at September 30, 1999 that are sensitive to changes in interest
rates. The table presents cash flows of principal amounts and related weighted
average interest rates by expected maturity dates. The cash flows are based on
the earlier of the call date or the maturity date or, for mortgage-backed
securities, expected payment patterns. Actual cash flows could differ from the
expected amounts.
Long-term Fixed Maturities
Expected Cash Flows of Principal Amounts
(dollars in millions)
<TABLE>
<CAPTION>
Amortized Market
1999 2000 2001 2002 2003 Thereafter Cost Value
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tax-exempt $0.0 $1.8 $.8 $1.8 $10.8 $475.0 $490.2 $485.3
Average Interest Rate 0.0% 5.7% 6.3% 6.4% 7.0% 5.7% -- --
Taxable-other than mortgage-backed 3.7 42.2 37.4 39.5 23.3 185.6 331.7 323.3
securities
Average Interest Rate 7.6% 6.3% 7.5% 6.5% 6.6% 5.6% -- --
Mortgage-backed securities 2.9 10.8 10.1 9.1 9.3 72.7 114.9 113.2
Average Interest Rate 7.1% 7.0% 7.0% 6.9% 6.9% 6.9% -- --
------ ------ ------ ------ ------ ------
Total $6.6 $54.8 $48.3 $50.4 $43.4 $733.3 $936.8 $921.8
------ ------ ------ ------ ------ ------ ------ ------
</TABLE>
28
<PAGE>
The Company and its operating subsidiaries have consistently invested in high
quality marketable securities. As a result, the Company believes that it has
minimal credit quality risk. Taxable bonds in the Company's domestic portfolio
consist of U.S. Treasury, government agency, mortgage-backed and corporate
securities. At September 30, 1999, approximately 24.1% of taxable bonds were
issued by the U.S. Treasury or U.S. government agencies and approximately 67.1%
were rated AA or better by Moody's or S&P. Of the tax exempt bonds,
approximately 97.9% were rated AA or better with more than 79.5% rated AAA. At
September 30, 1999, both taxable and tax exempt bonds had a weighted average
maturity of approximately 9.52 years.
The Company's taxable bond portfolio includes mortgage-backed securities, which
comprised 25.7% of the portfolio at September 30, 1999. Prepayment risk refers
to the changes in prepayment patterns that can either shorten or lengthen the
expected timing of the principal repayments and thus the average life and the
effective yield of a security. Such risk exists primarily within the Company's
portfolio of mortgage-backed securities. The Company invests primarily in those
classes of mortgage-backed securities that are less subject to prepayment risk.
All of the above risks are monitored on an ongoing basis. A combination of
in-house systems and proprietary models and externally licensed software are
used to analyze individual securities as well as each portfolio. These tools
provide management with information to assist them in the evaluation of the
market risks of the portfolio.
The Year 2000
The Company is actively pursuing its Year 2000 analysis and preparation. The
Year 2000 issue involves potential complications related to computer systems,
machinery and electronics that contain computer code, whether in software or
embedded within microchips, that recognize years in two digit code, e.g. "98"
for the year 1998. Software or microchips that recognize the Year 2000 as "00"
or any year thereafter in its two digit equivalent, threatens date sensitive
calculations by potentially misapplying the date (e.g. "00" could be applied as
1900 rather than 2000). Any coding that causes a date recognition error of this
sort is commonly referred to as a Year 2000 bug.
State of Readiness
The Company has assembled a team consisting of officers and employees of the
finance and information systems departments to oversee the Company's readiness
for the Year 2000. In all material respects, the Company's systems are year 2000
compliant.
The following is a summary of the Company's internal readiness status:
o In-house Applications: All key in-house applications have been tested
and are Year 2000 compliant.
o Accounting Software: Vendors for the major accounting software
packages used by the Company have stated that the software versions
the Company uses are Year 2000 compliant.
29
<PAGE>
o Administration/Human Resources; Operating System Software; Network/Lan
Utilities; Desktop Hardware: These applications are Year 2000
compliant.
o General Office Services:. These systems are Year 2000 compliant.
The Company has not had to defer any of its expected information technology or
other technology installations, updates or enhancements in order to accommodate
its Year 2000 review and remediation work.
Costs
Due to the youthfulness of the Company's information technology and other
systems, testing and remediation have been fairly uncomplicated. Moreover, none
of the Company's technology is mainframe computer based. Mainframes
traditionally use older coding methodologies and, thus, are more likely to be
double digit dated coded. No external consultants have been retained. Internal
information technology personnel have overseen and implemented the testing and
remediation of the systems and technology. The amount of additional time
allocable to employees' efforts has been nominal. All system upgrade costs
incurred would have been incurred by the Company as part of routine software
upgrades and all patches have been provided without any material cost to the
Company. The Company does not expect any material additional costs and expects
that, including the cost allocation of internal personnel, the overall testing
and remediation will be less than $50,000 as originally anticipated. The costs
are being funded through operating cash flows and will be expensed as incurred.
The Risk of the Company's Year 2000 Issues
A Year 2000 bug issue may manifest itself as (i) a failure of the Company's
software, systems and general technology, (ii) a failure of a client's or
vendor's software or systems which would impact the Company, and (iii) insurance
claims against the Company due to Year 2000 issues. Management believes that the
likelihood that a failure of the Company's software and systems would have a
material effect on the business of the Company is minimal. The information
technology and other systems are not critical to the carrying-on of the
Company's business. Additionally, all critical accounting, financial reporting
and human resources functions can be maintained on a manual basis for a period
of time without materially impeding the operations of the Company. Similarly, a
failure of clients and vendors to properly provide data or services will also
not materially affect the Company's ability to continue its operations. Such a
failure would likely be temporary and could be compensated for in the short-term
by using manual alternatives to tracking business with our clients or vendors.
Reinsurance losses pose the most reasonably likely worst case scenario for the
Company arising out of Year 2000 bugs. The issue would originate with a default
on debt service obligations of bond issuers due to the issuer's own Year 2000
bug difficulties. In the event of such a default, the Company's clients, the
ceding companies, will be required to make debt service payments on behalf of
the defaulting issuers. The Company will have to make prompt payment to its
clients for its agreed upon portion of such losses. Such defaults by bond
issuers would generally be of a technical nature, arising out of temporary
inabilities to process payments or calculate payment amounts. Additionally, the
defaulted debt service obligations would generally not require our clients, the
ceding insurers, to make debt service payments on behalf of the issuers for a
30
<PAGE>
prolonged period. Once issuers or payment agents have cured any errors, they
would resume debt service payment and reimburse the insurers for all payments
made. Hence, the reasonable worst case scenario for the Company under such
circumstances would involve liquidity pressure which should ease quickly. There
is no way to quantify the potential exposure under this scenario as there has
never been any event similar to the Year 2000. Consequently, it is difficult to
make assumptions based on the Company's business. However, as the Company's
operating units affected by such an occurrence already meet the rating agency
stress test requirements designed to simulate depression-era conditions, the
Company believes it can withstand temporary defaults of that magnitude based on
the Year 2000 bug.
Contingency Plans
The Company does not have a prescribed contingency plan relative to Year 2000
bug issues. The Company does not predict that a failure of its information
technology systems will materially affect daily operations or have an immediate
impact on the Company's ability to conduct business. All internal financial
reporting of the Company may be conducted by hand. As for any failure of a bond
issuer that has been reinsured by the Company, the Company expects to handle
such matters in the ordinary course of business. As the Company is a reinsurer,
payments are requested in bulk by the Company's ceding insurers, and payment of
reinsurance proceeds would be made in bulk. The Company is not required to make
payment to individual bond obligees. Ultimately, all recovery efforts in the
event of any Year 2000 bug related event can either be handled internally, or
would require the intervention of hardware, software or other technology
vendors. The Company maintains a list of the appropriate contacts at such
vendors in the event such a need arises.
31
<PAGE>
Long-term Fixed Maturities
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.
32
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------ ----------- ----
11. STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(UNAUDITED) 34
33
<PAGE>
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 15, 1999 BY /S/ DAVID A. BUZEN
------------------
DAVID A. BUZEN
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
DATE: NOVEMBER 15, 1999 BY /S/ ALAN S. ROSEMAN
-------------------
ALAN S. ROSEMAN
EXECUTIVE VICE PRESIDENT,
GENERAL COUNSEL AND SECRETARY
34
CAPITAL RE CORPORATION AND SUBSIDIARIES
Exhibit 11 Statement Re: Computation of Per Share Earnings
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
1999 1998 1999 1998
--------------------- ----------------------
<S> <C> <C> <C> <C>
Net Income from Continuing Operations 13,070 14,335 (57,145) 54,292
Net Income (39,161) 14,470 (133,041) 54,450
Basic weighted average shares outstanding during the period 36,523 31,912 33,792 31,871
Potentially dilutive employee stock options 147 820 266 859
--------------------- ----------------------
Diluted weighted average shares outstanding during the period 36,670 32,732 34,058 32,730
===================== ======================
Basic earnings per common share from continuing operations $0.36 $0.45 ($1.69) $1.70
===================== ======================
Diluted earnings per common share from continuing operations $0.36 $0.44 ($1.68) $1.66
===================== ======================
Basic earnings per common share ($1.07) $0.45 ($3.94) $1.71
===================== ======================
Diluted earnings per common share ($1.07) $0.44 ($3.91) $1.66
===================== ======================
</TABLE>
35
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 1,130,494
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,130,494
<CASH> 6,780
<RECOVER-REINSURE> 8,516
<DEFERRED-ACQUISITION> 148,431
<TOTAL-ASSETS> 1,418,394
<POLICY-LOSSES> 107,383
<UNEARNED-PREMIUMS> 416,188
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 99,884
370
75,000
<COMMON> 0
<OTHER-SE> 501,343
<TOTAL-LIABILITY-AND-EQUITY> 1,418,394
142,293
<INVESTMENT-INCOME> 52,440
<INVESTMENT-GAINS> (3,926)
<OTHER-INCOME> 5,101
<BENEFITS> 200,161
<UNDERWRITING-AMORTIZATION> 39,177
<UNDERWRITING-OTHER> 11,446
<INCOME-PRETAX> (92,452)
<INCOME-TAX> (35,307)
<INCOME-CONTINUING> (57,145)
<DISCONTINUED> (75,896)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (133,041)
<EPS-BASIC> (3.94)
<EPS-DILUTED> (3.91)
<RESERVE-OPEN> 84,553
<PROVISION-CURRENT> 56,320
<PROVISION-PRIOR> 59,914
<PAYMENTS-CURRENT> 292
<PAYMENTS-PRIOR> 101,567
<RESERVE-CLOSE> 98,928
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
