SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-14096
CapMAC Holdings Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State of Incorporation)
885 Third Avenue
New York, New York 10022
(Address of principal executive offices)
13-3670828
(IRS employer identification no.)
(212) 755-1155
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
As of April 30, 1996, 15,965,995 shares (net of treasury shares) of
Common Stock, par value $0.01 per share of the Registrant were outstanding.
Page 1 of Pages 24
Index to Exhibits on Page 16
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - March 31, 1996 and
December 31, 1995 4
Consolidated Statements of Income - three months ended
March 31, 1996 and March 31, 1995 5
Consolidated Statements of Stockholders Equity - three
months ended March 31, 1996 6
Consolidated Statements of Cash Flows - three months
ended March 31, 1996 and March 31, 1995 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II OTHER INFORMATION, AS APPLICABLE
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
INDEX TO EXHIBITS 16
Part 1 - Financial Information
Item 1 - Financial Statements of CapMAC Holdings Inc. and Subsidiaries
2
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CapMAC HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(Unaudited)
3
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
March 31,1996 December 31,1995
(Unaudited)
<S> <C> <C>
Investments:
Bonds at fair value (amortized cost $258,874 at March 31, 1996
and $210,651 at December 31, 1995) .......................................................... $ 259,226 215,706
Short-term investments (at amortized cost which approximates fair
value) ...................................................................................... 50,380 82,019
Investment in affiliates .................................................................... 35,023 32,033
Total investments ........................................................................ 344,629 329,758
--------- ---------
Cash ........................................................................................ 909 1,033
Accrued investment income ................................................................... 3,356 3,136
Deferred acquisition costs .................................................................. 37,559 35,162
Premiums receivable ......................................................................... 3,463 3,540
Prepaid reinsurance ......................................................................... 13,379 13,171
Other assets ................................................................................ 2,823 5,473
Total assets ............................................................................. $ 406,118 391,273
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Unearned premiums ........................................................................... $ 50,266 45,767
Reserve for losses and loss adjustment expenses ............................................. 7,261 6,548
Ceded reinsurance ........................................................................... 2,773 2,469
Accounts payable and other accrued expenses ................................................. 12,904 11,367
Senior notes ................................................................................ 15,000 15,000
Current income taxes ........................................................................ 5,494 3,264
Deferred income taxes ....................................................................... 9,324 10,776
Total liabilities ........................................................................ 103,022 95,191
Minority Interest ........................................................................... 21,398 19,563
--------- ---------
Stockholders' Equity:
Common Stock - $0.01 par value per share; 50,000,000 shares are authorized;
15,966,032 shares issued March 31, 1996 and
December 31, 1995; 15,965,995 shares outstanding at March 31, ............................... 160 160
1996 and December 31, 1995; Preferred Stock - $0.01 par value
per share; 20,000,000 shares are authorized
Additional paid-in capital .................................................................. 223,400 223,400
Unrealized (depreciation) appreciation on investments, net of tax ........................... (2,244) 2,443
Retained earnings ........................................................................... 66,610 57,029
Unallocated ESOP shares ..................................................................... (6,227) (6,497)
Cumulative translation adjustment, net of tax ............................................... (1) (16)
Total stockholders' equity ............................................................... 281,698 276,519
--------- ---------
Total liabilities, minority interest, and stockholders' equity .......................... $ 406,118 391,273
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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CapMAC Holdings Inc. and Subsidiaries
Consolidated Statement of Income
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1996 March 31, 1995
<S> <C> <C>
Revenues:
Direct premiums written ..................................................................... $ 14,155 16,838
Assumed premiums written .................................................................... 874 154
Ceded premiums written ...................................................................... (1,910) (3,093)
--------- --------
Net premiums written ..................................................................... 13,119 13,899
Increase in unearned premiums ............................................................... (4,291) (6,798)
--------- --------
Net premiums earned ...................................................................... 8,828 7,101
Advisory fees ............................................................................... 9,549 2,024
Net investment income ....................................................................... 4,111 2,811
Net realized capital gains .................................................................. 149 9
Other income ................................................................................ 610 262
--------- --------
Total revenues ........................................................................... 23,247 12,207
--------- --------
Expenses:
Losses and loss adjustment expenses ......................................................... 1,075 696
Underwriting and operating expenses ......................................................... 5,069 4,080
Policy acquisition costs .................................................................... 2,064 1,725
Interest expense ............................................................................ 301 301
--------- --------
Total expenses ........................................................................... 8,509 6,802
--------- --------
Income before income taxes and minority interest ......................................... 14,738 5,405
--------- --------
Income Taxes:
Current income tax .......................................................................... 3,899 1,024
Deferred income tax ......................................................................... 987 541
Total income taxes ....................................................................... 4,886 1,565
--------- --------
Income before minority interest .......................................................... 9,852 3,840
--------- --------
Minority interest ........................................................................ 48 --
--------- --------
NET INCOME ............................................................................... $ 9,900 3,840
========= ========
Primary earnings per share .................................................................. $ 0.57 0.28
Fully diluted earnings per share ............................................................ $ 0.57 0.28
--------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
5
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CapMAC Holdings Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1996
<S> <C>
Common stock:
Balance at beginning of period .............................................................. $ 160
---------
Balance at end of period ................................................................. 160
---------
Additional paid-in capital:
Balance at beginning of period .............................................................. 223,400
---------
Balance at end of period ................................................................. 223,400
---------
Unrealized (depreciation) appreciation on investments, net of tax:
Balance at beginning of period .............................................................. 2,443
Unrealized depreciation on investments ...................................................... (4,687)
Balance at end of period ................................................................. (2,244)
---------
Retained earnings:
Balance at beginning of period .............................................................. 57,029
Net income .................................................................................. 9,900
Dividends paid .............................................................................. (319)
Balance at end of period ................................................................. 66,610
---------
Unallocated ESOP shares:
Balance at beginning of period .............................................................. (6,497)
Allocation of ESOP shares ................................................................... 270
Balance at end of period ................................................................. (6,227)
---------
Cumulative translation adjustment, net of tax:
Balance at beginning of period .............................................................. (16)
Translation adjustment ...................................................................... 15
Balance at end of period ................................................................. (1)
---------
Total stockholders' equity $ 281,698
=========
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,1996 March 31,1995
<S> <C> <C>
Cash flows from operating activities:
Net income .................................................................................. $ 9,900 3,840
--------- ---------
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Reserve for losses and loss adjustment expenses .......................................... 713 696
Unearned premiums ........................................................................ 4,499 8,075
Deferred acquisition costs ............................................................... (2,397) (2,662)
Premiums receivable ...................................................................... 77 (3,241)
Accrued investment income ................................................................ (220) 400
Income taxes payable ..................................................................... 3,217 (897)
Net realized capital gains ............................................................... (149) (9)
Accounts payable and other accrued expenses .............................................. 1,537 4,120
Prepaid reinsurance ...................................................................... (208) (1,277)
Other, net ............................................................................... 277 1,223
Total adjustments .................................................................. 7,346 6,428
--------- ---------
Net cash provided by operating activities ................................................ 17,246 10,268
Cash flows from investing activities:
Cash flows from investing activities:
Purchases of investments .................................................................... (108,578) (26,940)
Purchases of investments in affiliates ...................................................... (3,333) --
Proceeds from sale of investments ........................................................... 6,158 4,072
Proceeds from maturities of investments ..................................................... 86,281 12,561
Net cash used in investing activities .................................................... (19,472) (10,307)
--------- ---------
Cash flows from financing activities: Cash flows from financing activities:
Allocation of ESOP .......................................................................... 270 281
Minority interest capital contribution to CapMAC Asia ....................................... 2,151 --
Dividends paid .............................................................................. (319) --
Net cash provided by financing activities ................................................ 2,102 281
--------- ---------
Net (decrease) increase in cash
Net increase (decrease) in cash ............................................................. (124) 242
Cash balance at beginning of period ......................................................... 1,033 883
Cash balance at end of period ............................................................ $ 909 1,125
========= =========
Supplemental disclosures of cash flow information:
Income taxes paid ........................................................................... $ 1,655 2,463
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 1996
1. Organization and Ownership
CapMAC Holdings Inc. ("Holdings" or the "Company"), a Delaware
corporation, is the sole stockholder of Capital Markets Assurance
Corporation ("CapMAC"), and CapMAC Financial Services, Inc.("CFS").
CapMAC Financial Services (Europe) Limited ("CFS (Europe)") is a
subsidiary of CFS. The Company is also a lead investor in CapMAC Asia
Ltd.("CapMAC Asia").
Holdings provides financial guaranty insurance, principally of
asset-backed obligations, through CapMAC. CapMAC's claims paying
ability is rated triple-A by Moody's Investor Service, Inc., Standard &
Poor's Ratings Services, Duff and Phelps Credit Rating Co. and Nippon
Investors Service, Inc., a Japanese rating agency. Holdings also
provides advisory and structuring services in connection with
asset-backed financings, through CFS. On December 19, 1995 Holdings
sold 2,500,000 new shares of its common stock in an initial public
offering.
2. Basis of Presentation
The Company's consolidated unaudited interim financial statements have
been prepared on the basis of generally accepted accounting principles
and, in the opinion of management, reflect all adjustments necessary
for a fair presentation of the Company's financial condition, results
of operations and cash flows for the periods presented. The results of
operations for the three months ended March 31, 1996 may not be
indicative of the results that may be expected for the full year ending
December 31, 1996. These consolidated financial statements and notes
should be read in conjunction with the financial statements and notes
included in the audited financial statements of CapMAC Holdings Inc.
and its subsidiaries contained in the Company's Annual Report on Form
10-K for the year ended December 31, 1995, which was filed with the
Securities and Exchange Commission on March 31, 1996.
3. Reclassifications
Certain prior period balances have been reclassified to conform to the
current period presentation.
8
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
CapMAC Holdings Inc. ("Holdings" or the "Company"), a Delaware corporation, is
the sole stockholder of Capital Markets Assurance Corporation ("CapMAC"), and
CapMAC Financial Services, Inc. ("CFS"). CapMAC Financial Services (Europe)
Limited ("CFS (Europe)") is a subsidiary of CFS. The Company is also a lead
investor in CapMAC Asia Ltd.("CapMAC Asia").
Results of Operations
Quarter Ended March 31, 1996 versus Quarter Ended March 31, 1995
The Company reported record net income of $9.9 million, a 158% increase over net
income of $3.8 million reported during the first quarter of 1995. Primary
earnings per share and earnings per share on a fully diluted basis were $0.57
during the first quarter of 1996, a 104% increase over $0.28 during the first
quarter of 1995.
Total revenues during the first quarter of 1996 were $23.2 million, an increase
of 90% from $12.2 million during the first quarter of 1995. This increase was
primarily due to higher advisory fees, premiums earned and net investment
income.
For the first quarter of 1996, gross premiums written were $15.0 million, a
decrease of 12% from $17.0 million for the same period in 1995. The decrease in
gross premiums written was the result of a lower volume of secondary market
transactions which typically collect premiums in a single payment on the policy
inception date. However, the amount of premiums ceded to reinsurers decreased
from $3.1 million during the first quarter of 1995 to $1.9 million in the first
quarter of 1996. On January 1, 1996, CapMAC reassumed the liability for all
policies previously reinsured by Winterthur Swiss Insurance Company
("Winterthur"). As a result, CapMAC reassumed approximately $1.4 billion of
principal insured by Winterthur as of December 31, 1995. In connection with this
reassumption of liability, Winterthur commuted unearned premiums, net of ceding
commission and federal excise tax of $2.0 million. Net premiums earned were $8.8
million for the first quarter of 1996, an increase of 24% from $7.1 million for
the corresponding period in 1995.
CapMAC collects premiums primarily on an installment basis over the term of the
insurance policy and, to a lesser extent, on a one-time, up-front basis at the
time the insurance policy is issued. Due to the annuity nature of premium
income, CapMAC has an embedded future revenue stream which will be collected and
recognized over the term of the book of business, not only in the year the
business is written. CapMAC reflects a relatively small portion of the expected
future revenue on the business written in the current period as premium earnings
in the same period. The total estimated present value of future revenues "PFR"
includes premiums (net of ceded premiums) and ceding commission income
contractually due to or to be earned by CapMAC in the future under outstanding
policies.
Business originated or renewed in the first quarter of 1996 was estimated to
generate $13.1 million of PFR, a decrease of 22% over the same period in 1995.
Correspondingly, the amount of guarantees issued (gross par written) decreased
from $2.8 billion in the first quarter of 1995 to $1.3 billion in the first
quarter of 1996, representing a decrease of 52%. These decreases resulted from
CapMAC insuring several conduits
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and one large consumer receivable transaction during the first quarter of 1995.
At March 31, 1996, CapMAC had 493 policies outstanding which are expected to
generate $168.3 million of PFR, up approximately 8% from $155.4 million at
December 31, 1995 relating to 476 policies outstanding at such date. The
discount rate used for purposes of the PFR calculation was 7% for the first
quarters of 1996 and 1995. Unearned premiums, representing premiums collected
but not yet earned, increased by $4.5 million from December 31, 1995 to a total
of $50.3 million at March 31, 1996.
At March 31, 1996, net par insured and outstanding was $14.0 billion, up 11%
from $12.6 billion at December 31, 1995. The remaining weighted average life of
the insured portfolio was estimated to be 6.3 years at March 31, 1996 and 6.0
years at December 31, 1995.
Advisory fees increased 372% from $2.0 million in the first quarter of 1995 to
$9.5 million in the first quarter of 1996. The increase in advisory fees
received by CFS related to the closing of transactions which involved
significant advisory and structuring services provided by CFS.
Other income increased $0.3 million from $0.3 million in the first quarter of
1995 to $0.6 million in the first quarter of 1996.
Net investment income was $4.2 million in the first quarter of 1996 and $2.8
million for the corresponding period in 1995. Average assets available for
investment increased from $216.1 million at March 31, 1995 to $301.0 million at
March 31, 1996. The increase was primarily due to investing the proceeds of the
initial public offering of the Company's common stock completed in December 1995
as well as the private placement of the Company's common stock to Centre
Reinsurance Limited concurrent with the public offering and to ORIX USA
Corporation in July 1995. The average annualized pre-tax yield on the investment
portfolio increased from 6.8% in the first quarter of 1995 to 6.9% in the first
quarter of 1996 due to a higher interest rate environment. The average after-tax
yield on the investment portfolio increased from 4.4% in 1995 to 4.5% in 1996.
Net realized capital gains in the first quarter of 1996 were $0.1 million higher
than the same period in 1995. The amount of tax-exempt securities held in the
Company's investment portfolio decreased from 60% at March 31, 1995 to 59% at
March 31, 1996.
Total expenses were $8.5 million in the first quarter of 1996, an increase of
25% from $6.8 million in the first quarter of 1995. Total expenses included
additions to the reserve for losses and loss adjustment expenses, underwriting
and operating expenses, policy acquisition costs, and interest expense.
CapMAC maintains a reserve for losses and loss adjustment expenses which
consists of a Supplemental Loss Reserve ("SLR") and, if appropriate, a case
basis loss reserve for expected levels of defaults resulting from credit
failures on currently insured issues. The SLR is based on estimates of the
portion of earned premiums required to cover those claims. A case basis loss
reserve is established for insured obligations when, in the judgment of
management, a default in the timely payment of debt service is imminent. For
defaults considered temporary, a case basis loss reserve is established in an
amount equal to the present value of the anticipated defaulted debt service
payments over the expected period of default. If the default is judged not to be
temporary, the present value of all remaining defaulted debt service payments is
recorded as a case basis loss reserve. Anticipated salvage recoveries are
considered in establishing case basis loss reserves when such amounts are
reasonably estimable. Corresponding to the growth in the insured portfolio, the
losses and loss adjustment expenses were $1.1 million in the first quarter of
1996 compared to $0.7 million in the first quarter of 1995. At March 31, 1996,
the Company had a net case basis loss reserve of $295,000 as a result of
CapMAC's first claim in 1995.
Underwriting and operating expenses were $5.1 million in the first quarter of
1996, a 24% increase from
10
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$4.1 million in the first quarter of 1995. Underwriting and operating expenses
consisted of gross underwriting and operating expenses, reduced by the deferral
to future periods of certain costs related to CapMAC's acquisition of new
business and ceding commission income. Gross underwriting and operating expenses
were $9.5 million and $8.5 million in the first quarter of 1996 and 1995,
respectively. The increase in underwriting and operating expenses was due to
increased compensation costs and other operating costs. Staff and
benefit-related expenses, including the discretionary bonuses to employees,
constituted approximately 71% of gross underwriting and operating expenses in
the first quarter 1996 compared to 69% in the first quarter 1995. The Company
maintains a discretionary bonus plan under which annual bonuses are awarded to
employees. As of March 31, 1996 and March 31, 1995, $2.5 million and $1.9
million were accrued, respectively, for payment of bonuses under such plan.
Underwriting and operating expenses deferred by CapMAC were $4.4 million in the
first quarter of 1996 and 1995.
Policy acquisition costs represent the amortization of deferred acquisition
costs ("DAC"), which are those expenses incurred by CapMAC in acquiring new
business. The increase in policy acquisition costs from $1.7 million in the
first quarter of 1995 to $2.1 million in the first quarter of 1996 relates to
the increase in premiums earned in the corresponding periods. Interest expense
related to the senior debt was $0.3 million in the first quarter of 1996 and
1995. In the first quarter of 1996 and 1995, the Company had net tax expense of
$4.9 million and $1.6 million, respectively. The Company's effective tax rate
was 33.2% and 29.0% for the first quarter of 1996 and 1995, respectively. The
effective tax rates during these periods were lower than the statutory tax rate
of 35% in 1996 and 1995 primarily due to tax-exempt interest income. As of March
31, 1996, tax-exempt interest income of $2.3 million represented 16% of earnings
before taxes ("EBT") compared to $1.7 million which represented 31% of EBT in
the first quarter of the prior year.
Liquidity and Capital Resources
The Company and Holdings. The operations of the Company are conducted primarily
through CapMAC and CFS, wholly owned subsidiaries of Holdings. The liquidity of
Holdings both on a short-term (less than twelve months) and long-term (twelve
months or longer) basis will be dependent on several factors including
borrowings, equity issuances and dividends from CFS and CapMAC. Holdings
requires liquidity for payment of dividends to shareholders, investment in
international business ventures and debt service. Additionally, Holdings is
required to purchase common stock in three derivatives products subsidaries of
the Mutual Life Assurance Company of Canada (such subsidiaries, the "TMG Group")
for approximately $13 million no later than February 27, 2000, and it has agreed
to invest an additional amount of $6 million in CapMAC Asia. Currently, no
dividends are expected to be received by Holdings from CapMAC.
Management believes that the Company's operating liquidity needs, both on a
short-term basis and long-term basis, can be funded exclusively from its
operating cash flow. The Company has a number of sources of liquidity which it
expects to have available to pay claims on a short- and long-term basis: the
cash flow from its written premiums, advisory fees collected, its investment
portfolio and the earnings thereon, its bank line of credit, its reinsurance
arrangements with third-party reinsurers, the capital markets and, under certain
circumstances, realizations from collateral underlying its insured transactions.
The Company has no material commitments for capital expenditures, although it
has the strategic alliance investment commitments referred to above. The total
liquidity resources of the Company represented by its investment income, its
premium and advisory fees collections and its liquidity arrangements are, in
management's opinion, adequate to meet the Company's cash needs.
CapMAC. CapMAC's primary sources of funds are from premiums received and
earnings from its
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investment portfolio. Currently CapMAC's primary use of funds is to pay
operating expenses. In the event of a default by an issuer of an insured
obligation and upon exhaustion of other liquidity sources in the transaction,
such as the cash flow from the collateral underlying such obligations, funds
from CapMAC's investment portfolio may be required to satisfy claims. CapMAC
generally insures asset-backed transactions which have been structured to
address liquidity risks through, among other measures, the addition of other
liquidity sources, such as banks, to transactions. The insurance policies issued
by CapMAC provide, in general, that payment of principal, interest and other
amounts insured by CapMAC may not be accelerated by the holder of the obligation
but are paid by CapMAC in accordance with the obligation's original payment
schedule or, at CapMAC's option, on an accelerated basis. These policy
provisions prohibiting acceleration of certain claims are mandatory under
Article 69 of the New York Insurance Law and serve to reduce CapMAC's liquidity
requirements.
The Company has a conservative investment strategy of investing in U.S.
government and agency obligations and securities that are rated "A" or better by
the major rating agencies. The Company has readily marketable, high quality,
fixed income securities and short-term investments in its investment portfolio.
The average contractual maturity of securities within the investment portfolio
was 6.3 years and 4.7 years at March 31, 1996 and December 31, 1995,
respectively. The average duration of the investment portfolio at March 31, 1996
and December 31, 1995 was 3.9 years and 3.5 years, respectively. At March 31,
1996, the amortized cost of the Company's investment portfolio was approximately
$309.3 million (fair value of $309.6 million). The Company manages its
investments with the objectives of preserving its capital and claims-paying
ability, maintaining a high level of liquidity, minimizing taxes and, within
these constraints, optimizing long-term total return.
CapMAC has available a $100 million, standby corporate liquidity facility
presently scheduled to terminate in June 1998 which, if necessary, is available
(subject to satisfaction of customary drawing conditions) to provide funds for
any claim payments under its policies. Such drawing conditions include a
requirement that CapMAC maintain at least $140 million of "Tangible Net Worth,"
which is defined as the difference between the market value of CapMAC's
portfolio of marketable securities plus the amount of its cash on hand and the
total liabilities and reserves of CapMAC determined in accordance with GAAP,
excluding any loans made under the liquidity facility. As of March 31, 1996,
CapMAC's Tangible Net Worth was $223.3 million. The liquidity facility is
provided by a consortium of banks headed by Bank of Montreal, as agent, which is
rated A1+ and P1 by Standard & Poor's Rating Services (S&P) and Moody's
Investors Service, Inc., respectively. As of March 31, 1996, CapMAC has not
borrowed under this corporate liquidity facility.
Reinsurance arrangements provide a further source of liquidity to CapMAC. CapMAC
actively pursues reinsurance as a means of diversifying and reducing risk,
enhancing return on capital and adding underwriting capacity. In addition to its
facultative and treaty reinsurance agreements, CapMAC has a "stop-loss"
reinsurance treaty with Mitsui Marine and Fire Insurance Co., Ltd. which
indemnifies CapMAC for up to $50 million of incurred losses above $100 million.
Effective April 1, 1994, CapMAC and Luxembourg European Reinsurance LURECO S.A.
("Lureco"), entered into a Per Annum Aggregate Reinsurance Treaty (the "Lureco
Treaty") pursuant to which Lureco reinsures CapMAC for certain losses and
related expenses, including all amounts which have been incurred by CapMAC for
anticipated settlement of claims regardless of whether such amounts have been
paid by CapMAC. The Lureco Treaty provides that the annual reinsurance premium
payable by CapMAC to Lureco, after deduction of the reinsurer's fee payable to
Lureco, be deposited in a trust account (the "Lureco Trust Account") to be
applied by CapMAC, at its option, to offset losses and loss expenses incurred by
CapMAC in connection with incurred claims. Amounts on deposit in the Lureco
Trust Account which have not been applied against claims are contractually due
to CapMAC at the termination of the
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treaty. The agreement is renewable annually at CapMAC's option, subject to
certain conditions. The agreement was renewed for the 1996 policy year and
provides $7 million of loss coverage in excess of the premium deposit amount of
$5.0 million retained in the Lureco Trust Account. Additional coverage is
provided for losses incurred in excess of 200% of the net premiums earned up to
$4 million for any one agreement year. In September 1995, claims incurred of
approximately $2.5 million on an insurance policy were applied against the
Lureco Trust Account. At March 31, 1996, the majority of CapMAC's reinsurance
capacity was held by reinsurers who were rated AA or better by S&P. CapMAC
monitors the creditworthiness of all of its reinsurers on a regular basis.
At March 31, 1996, CapMAC had statutory qualified capital, which consisted of
statutory capital, unassigned surplus and contingency reserves, of $245 million
up from $240 million at December 31,1995. CapMAC's policyholders' leverage
ratio, which is measured by the ratio of net principal and interest insured to
statutory qualified capital, was 63 to 1 at December 31, 1995 and 68 to 1 at
March 31, 1996. These ratios were within aggregate limits permissible under New
York State Financial Guaranty Law. CapMAC's claims-paying resources as defined
by the Company (which includes statutory qualified capital, PFR and stop-loss
reinsurance) stood at $463.7 million and $445.3 million at March 31, 1996 and
December 31, 1995, respectively.
CapMAC Financial Services. The primary sources of funds for CFS are payments by
CapMAC under a service agreement between CFS and CapMAC (the "CFS Servicing
Agreement") and the collection of advisory fees for providing advisory and
structuring services to third parties. In addition, both CFS and CFS (Europe)
generate earnings from their respective investment portfolios. At March 31,
1996, the amortized cost and fair value of the consolidated CFS portfolio was
$14.2 million. The entire portfolio was highly liquid with maturities of less
than one year. The primary use of the funds of CFS is to pay its operating
expenses. All of the Company's personnel are employed by CFS. Under the CFS
Servicing Agreement, CFS allocates expenses to CapMAC for services provided to
CapMAC. It is intended that a portion of CFS' funds be used to pay dividends to
Holdings in order that Holdings will have funds available to pay dividends and
satisfy its obligations.
13
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PART II - OTHER INFORMATION
Items 1,2,3,4 are omitted either because they are inapplicable or because
and 5. the answer to such questions is negative.
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits
11. Computation of Earnings Per Share Assuming Full Dilution
27. Financial Data Schedule
99. Additional Exhibits - Capital Markets Assurance
Corporation Financial Statements
(b)Reports on Form 8-K - No Reports on Form 8-K were filed in
this quarter.
14
<PAGE>
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.
CapMAC Holdings Inc.
Registrant
Date: May 14, 1996 /s/ Paul V. Palmer
Paul V. Palmer
Managing Director and
Chief Financial Officer
Date: May 14, 1996 /s/ Gerard Edward Murray
Gerard Edward Murray
Vice President and
Controller
(Principal Accounting Officer)
15
<PAGE>
Exhibit Index
Page Number
in Sequential
Exhibit No. Exhibit Number Copy
11. Computation of Earnings Per Share Assuming Full Dilution 17
27. Financial Data Schedule 18
99. Capital Markets Assurance Corporation Financial Statements 19
<TABLE>
CapMAC Holdings Inc. and Subsidiaries
Statement Re Computation of Per Share Earnings
(Dollars in thousands, except Per Share Amounts)
<CAPTION>
Three Months Ended
Modified Treasury Stock Method E.P.S. - Primary March 31,1996 March 31,1995
<S> <C> <C>
Net Income.............................................................................. $ 9,900 $ 3,840
Savings (Expense) on Debt Prepayment ................................................... 0 (99)
Compensation Expense ................................................................... 0 42
Interest Earned on Investments ......................................................... 0 10
-------- --------
Adjusted Net Income .................................................................... 9,900 $ 3,793
-------- --------
Average number of common shares outstanding ............................................ 15,488 11,743
Incremental Common Shares .............................................................. 1,834 1,946
-------- --------
Fully Diluted Number of Shares ........................................................ 17,322 13,689
-------- --------
Earnings per share assuming full dilution .............................................. $ 0.57 $ 0.28
-------- --------
</TABLE>
As of March 31, 1996 approximately 4,336,200 stock options, warrants and
restricted stock units had been granted and were outstanding. Based upon
various exercise prices, the total consideration for the common stock
equivalents will be approximately $60.5 million. Using the Modified
Treasury Stock method, it is assumed that the proceeds from the exercised
common stock equivalents would be used to purchase up to 20% of the
outstanding shares using an average market value of $24.16 per share for
quarter ended March 31, 1996. The dilution would be the equivalent of
approximately 1,833,500 shares.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORNATION extracted from CapMAC
Holdings Inc. and Subsidiaries Consolidated Balance Sheets for the quarter
ending March 31, 1996 and the consolidated statements of income, stockholders
equity and cash flows, for the quarter then ended and the notes thereto and is
qualified in its entirety by reference to such financial statements
</LEGEND>
<CIK> 0000889906
<NAME> CapMAC Holdings Inc.
<MULTIPLIER> 1000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 309606
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 344629
<CASH> 909
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 37559
<TOTAL-ASSETS> 406118
<POLICY-LOSSES> 7261
<UNEARNED-PREMIUMS> 50266
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 15000
0
0
<COMMON> 160
<OTHER-SE> 281538
<TOTAL-LIABILITY-AND-EQUITY> 406118
8828
<INVESTMENT-INCOME> 4111
<INVESTMENT-GAINS> 149
<OTHER-INCOME> 10159
<BENEFITS> 1075
<UNDERWRITING-AMORTIZATION> 2064
<UNDERWRITING-OTHER> 5069
<INCOME-PRETAX> 14738
<INCOME-TAX> 4886
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9900
<EPS-PRIMARY> 0.57
<EPS-DILUTED> 0.57
<RESERVE-OPEN> 6548
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 7261
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
CAPITAL MARKETS ASSURANCE CORPORATION
FINANCIAL STATEMENTS
MARCH 31, 1996
(Unaudited)
19
<PAGE>
Capital Markets Assurance Corporation
Balance Sheets
(Unaudited)
(Dollars in thousands)
<TABLE>
ASSETS
<CAPTION>
March 31,1996 December 31,1995
(Unaudited)
<S> <C> <C>
Investments:
Bonds at fair value (amortized cost $258,874 at March 31, 1996
and $210,651 at December 31, 1995) .......................................................... $259,226 215,706
Short-term investments (at amortized cost which approximates fair
value) ...................................................................................... 28,636 68,646
-------- --------
Total investments ........................................................................ 287,862 284,352
-------- --------
Cash ........................................................................................ 389 344
Accrued investment income ................................................................... 3,356 3,136
Deferred acquisition costs .................................................................. 37,559 35,162
Premiums receivable ......................................................................... 3,463 3,540
Prepaid reinsurance ......................................................................... 13,379 13,171
Other assets ................................................................................ 3,477 3,428
-------- --------
Total assets ............................................................................. $349,485 343,133
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums ........................................................................... $ 50,266 45,767
Reserve for losses and loss adjustment expenses ............................................. 7,261 6,548
Ceded reinsurance ........................................................................... 2,773 2,469
Accounts payable and other accrued expenses ................................................. 7,288 10,844
Current income taxes ........................................................................ 260 136
Deferred income taxes ....................................................................... 11,657 11,303
-------- --------
Total liabilities ........................................................................ 79,505 77,067
-------- --------
Stockholder's Equity:
Common stock ................................................................................ 15,000 15,000
Additional paid-in capital .................................................................. 208,475 205,808
Unrealized appreciation on investments, net of tax .......................................... 229 3,286
Retained earnings ........................................................................... 46,276 41,972
-------- --------
Total stockholder's equity ............................................................... 269,980 266,066
-------- --------
Total liabilities and stockholder's equity ............................................... $349,485 343,133
======== ========
</TABLE>
See accompanying notes to financial statements.
20
<PAGE>
Capital Markets Assurance Corporation
Statements of Income
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1996 March 31, 1995
<S> <C> <C>
Revenues:
Direct premiums written ..................................................................... $ 14,155 16,838
Assumed premiums written .................................................................... 874 154
Ceded premiums written ...................................................................... (1,910) (3,093)
--------- --------
Net premiums written ..................................................................... 13,119 13,899
Increase in unearned premiums ............................................................... (4,291) (6,798)
--------- --------
Net premiums earned ...................................................................... 8,828 7,101
Net investment income ....................................................................... 3,877 2,637
Net realized capital gains .................................................................. 149 65
Other income ................................................................................ 54 12
--------- --------
Total revenues ........................................................................... 12,908 9,815
--------- --------
Expenses:
Losses and loss adjustment expenses ......................................................... 1,075 696
Underwriting and operating expenses ......................................................... 3,978 3,738
Policy acquisition costs .................................................................... 2,064 1,725
--------- --------
Total expenses ........................................................................... 7,117 6,159
--------- --------
Income before income taxes ............................................................... 5,791 3,656
--------- --------
Income Taxes:
Current federal income tax .................................................................. 664 320
Deferred federal income tax ................................................................. 823 519
--------- --------
Total income taxes ....................................................................... 1,487 839
--------- --------
NET INCOME ............................................................................... $ 4,304 2,817
========= ========
</TABLE>
See accompanying notes to financial statements.
21
<PAGE>
Capital Markets Assurance Corporation
Statement of Stockholder's Equity
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1996
<S> <C>
Common stock:
Balance at beginning of period .............................................................. $ 15,000
---------
Balance at end of period ................................................................. 15,000
---------
Additional paid-in capital:
Balance at beginning of period .............................................................. 205,808
Capital contribution ........................................................................ 2,667
---------
Balance at end of period ................................................................. 208,475
Unrealized (depreciation) appreciation on investments, net of tax:
Balance at beginning of period .............................................................. 3,286
Unrealized depreciation on investments ...................................................... (3,057)
---------
Balance at end of period ................................................................. 229
---------
Retained earnings:
Balance at beginning of period .............................................................. 41,972
Net income .................................................................................. 4,304
---------
Balance at end of period ................................................................. 46,276
---------
Total stockholder's equity ............................................................... $ 269,980
=========
</TABLE>
See accompanying notes to financial statements.
22
<PAGE>
Capital Markets Assurance Corporation
Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,1996 March 31,1995
<S> <C> <C>
Cash flows from operating activities:
Net income .................................................................................. $ 4,304 2,817
--------- --------
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Reserve for losses and loss adjustment expenses .......................................... 713 696
Unearned premiums ........................................................................ 4,499 8,075
Deferred acquisition costs ............................................................... (2,397) (2,662)
Premiums receivable ...................................................................... 77 (3,241)
Accrued investment income ................................................................ (220) 400
Income taxes payable ..................................................................... 947 839
Net realized capital gains ............................................................... (149) (65)
Accounts payable and other accrued expenses .............................................. 287 4,364
Prepaid reinsurance ...................................................................... (208) (1,277)
Other, net ............................................................................... 89 1,355
--------- --------
Total adjustments .................................................................. 3,638 8,484
--------- --------
Net cash provided by operating activities ................................................ 7,942 11,301
--------- --------
Cash flows from investing activities:
Purchases of investments .................................................................... (87,335) (18,235)
Proceeds from sale of investments ........................................................... 6,158 4,072
Proceeds from maturities of investments ..................................................... 73,280 3,391
--------- --------
Net cash used in investing activities .................................................... (7,897) (10,772)
--------- --------
Net increase in cash ........................................................................ 45 529
Cash balance at beginning of period ......................................................... 344 85
--------- --------
Cash balance at end of period ............................................................ $ 389 614
========= ========
Supplemental disclosures of cash flow information:
Income taxes paid ........................................................................... $ 525 --
========= ========
</TABLE>
See accompanying notes to financial statements.
23
<PAGE>
Capital Markets Assurance Corporation
Notes to Unaudited Financial Statements
March 31, 1996
1. Background
Capital Markets Assurance Corporation ("CapMAC") is a New
York-domiciled monoline stock insurance company which engages only in
the business of financial guaranty and surety insurance. CapMAC is a
wholly owned subsidiary of CapMAC Holdings Inc. ("Holdings"). CapMAC is
licensed in all 50 states in addition to the District of Columbia, the
Commonwealth of Puerto Rico and the territory of Guam. CapMAC insures
structured asset-backed, corporate, municipal and other financial
obligations in the U.S. and international capital markets. CapMAC also
provides financial guaranty reinsurance for structured asset-backed,
corporate, municipal and other financial obligations written by other
major insurance companies.
CapMAC's claims-paying ability is rated triple-A by Moody's Investors
Service, Inc., Standard & Poor's Ratings Services, Duff & Phelps Credit
Rating Co., and Nippon Investors Service, Inc., a Japanese rating
agency. Such ratings reflect only the views of the respective rating
agencies, are not recommendations to buy, sell or hold securities and
are subject to revision or withdrawal at any time by such rating
agencies.
2. Basis of Presentation
CapMAC's unaudited interim financial statements have been prepared on
the basis of generally accepted accounting principles and, in the
opinion of management, reflect all adjustments necessary for a fair
presentation of CapMAC's financial condition, results of operations and
cash flows for the periods presented. The results of operations for the
three months ended March 31, 1996 may not be indicative of the results
that may be expected for the full year ending December 31, 1996. These
financial statements and notes should be read in conjunction with the
financial statements and notes included in the audited financial
statements of CapMAC as of December 31, 1995 and 1994, and for each of
the years in the three-year period ended December 31, 1995.
3. Reclassifications
Certain prior period balances have been reclassified to conform to the
current period presentation.
