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 September 30, 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)
13-3670828
(IRS employer identification no.)
885 Third Avenue
New York, New York 10022
(Address of principal executive offices)
(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 October 31, 1996, 16,297,859 shares (net of treasury shares) of
Common Stock, par value $0.01 per share of the Registrant were outstanding.
Page 1 of Pages 35
Index to Exhibits on Page 18
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CapMAC Holdings Inc. and Subsidiaries
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - September 30, 1996
and December 31, 1995...............................................4
Consolidated Statements of Income - three months ended and
nine months ended September 30, 1996 and September 30, 1995.........5
Consolidated Statements of Stockholders' Equity - nine months
ended September 30, 1996............................................6
Consolidated Statements of Cash Flows - nine months
ended September 30, 1996 and September 30, 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.....................................16
SIGNATURES ..................................................................17
INDEX TO EXHIBITS............................................................18
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
SEPTEMBER 30, 1996
(Unaudited)
3
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CapMAC Holdings Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
September 30,1996 December 31,1995
(Unaudited)
<S> <C> <C>
Investments:
Bonds at fair value (amortized cost $283,996 at September 30, 1996 and
$210,651 at December 31, 1995) $ 284,594 215,706
Short-term investments (at amortized cost which approximates fair
value) 43,524 82,019
Preferred stock (cost $325) 331 -
Investment in affiliates 34,713 32,033
Total investments 363,162 329,758
- ---------------------------------------------------------------------------------------------------------------------
Cash 1,320 1,033
Accrued investment income 3,604 3,136
Deferred acquisition costs 42,350 35,162
Premiums receivable 4,068 3,540
Prepaid reinsurance 17,801 13,171
Other assets 8,123 5,473
Total assets $ 440,428 391,273
=====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Unearned premiums $ 61,410 45,767
Reserve for losses and loss adjustment expenses 9,602 6,548
Ceded reinsurance 2,455 2,469
Accounts payable and other accrued expenses 19,422 11,367
Senior notes 15,000 15,000
Current income taxes 3,148 3,264
Deferred income taxes 9,660 10,776
Total liabilities 120,697 95,191
- ---------------------------------------------------------------------------------------------------------------------
Minority Interest 21,167 19,563
- ---------------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock - $0.01 par value per share; 20,000,000 shares are authorized;
none outstanding at September 30, 1996 and December 31,
1995 - -
Common stock - $0.01 par value per share; 50,000,000 shares are
authorized; 16,107,037 and 15,966,032 shares issued September 30, 1996, and
December 31, 1995; 16,106,991 and 15,965,995 shares
outstanding at September 30, 1996, and December 31, 1995 161 160
Additional paid-in capital 223,834 223,400
Unrealized (depreciation) appreciation on investments, net of tax (2,275) 2,443
Retained earnings 82,543 57,029
Unallocated ESOP shares (5,696) (6,497)
Cumulative translation adjustment, net of tax (3) (16)
- ---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 298,564 276,519
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities, minority interest, and stockholders' equity $ 440,428 391,273
=====================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
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CapMAC Holdings Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenues:
Direct premiums written $ 17,206 12,204 49,983 45,042
Assumed premiums written 8 102 1,032 925
Ceded premiums written (4,129) (6,188) (11,142) (11,834)
- ------------------------------------------------------------------------------------------------------------
Net premiums written 13,085 6,118 39,873 34,133
(Increase) decrease in unearned
premiums (3,042) 1,193 (11,014) (12,418)
- ------------------------------------------------------------------------------------------------------------
Net premiums earned 10,043 7,311 28,859 21,715
Advisory and other fees 5,750 7,239 21,327 12,394
Net investment income 4,485 3,329 12,404 9,228
Net realized capital (losses) gains (58) 346 110 500
Other income 53 - 160 -
- ------------------------------------------------------------------------------------------------------------
Total revenues 20,273 18,225 62,860 43,837
- ------------------------------------------------------------------------------------------------------------
Expenses:
Losses and loss adjustment expenses 1,248 821 3,432 2,279
Underwriting and operating expenses 4,916 2,896 14,031 11,561
Policy acquisition costs 2,126 2,022 6,249 5,481
Interest expense 300 300 902 902
- ------------------------------------------------------------------------------------------------------------
Total expenses 8,590 6,039 24,614 20,223
- ------------------------------------------------------------------------------------------------------------
Income before income taxes and
minority interest 11,683 12,186 38,246 23,614
- ------------------------------------------------------------------------------------------------------------
Income Taxes:
Current income tax 3,758 3,272 10,877 5,446
Deferred income tax (240) 881 1,414 1,815
Total income taxes 3,518 4,153 12,291 7,261
- ------------------------------------------------------------------------------------------------------------
Income before minority interest 8,165 8,033 25,955 16,353
- ------------------------------------------------------------------------------------------------------------
Minority interest 74 - 519 -
- ------------------------------------------------------------------------------------------------------------
NET INCOME $ 8,239 8,033 26,474 16,353
============================================================================================================
Primary earnings per share $ 0.46 0.57 1.51 1.21
Fully diluted earnings per share $ 0.46 0.57 1.47 1.21
============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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CapMAC Holdings Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1996
<S> <C>
Common stock:
Balance at beginning of period $ 160
Common stock issued 1
- -------------------------------------------------------------------------------------------------------------
Balance at end of period 161
- -------------------------------------------------------------------------------------------------------------
Additional paid-in capital:
Balance at beginning of period 223,400
Other, net 434
- -------------------------------------------------------------------------------------------------------------
Balance at end of period 223,834
- -------------------------------------------------------------------------------------------------------------
Unrealized (depreciation) appreciation on investments, net of tax:
Balance at beginning of period 2,443
Unrealized depreciation on investments (4,718)
Balance at end of period (2,275)
- -------------------------------------------------------------------------------------------------------------
Retained earnings:
Balance at beginning of period 57,029
Net income 26,474
Dividends paid (960)
Balance at end of period 82,543
- -------------------------------------------------------------------------------------------------------------
Unallocated ESOP shares:
Balance at beginning of period (6,497)
Allocation of ESOP shares 801
Balance at end of period (5,696)
- -------------------------------------------------------------------------------------------------------------
Cumulative translation adjustment, net of tax:
Balance at beginning of period (16)
Translation adjustment 13
- -------------------------------------------------------------------------------------------------------------
Balance at end of period (3)
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity $ 298,564
=============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
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CapMAC Holdings Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1996 September 30, 1995
<S> <C> <C>
Cash flows from operating activities:
Net income $ 26,474 16,353
- --------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Reserve for losses and loss adjustment expenses 3,054 1,474
Unearned premiums 15,643 17,982
Deferred acquisition costs (7,188) (6,981)
Premiums receivable (528) 81
Accrued investment income (468) 63
Income taxes payable 1,298 1,716
Net realized capital gains (110) (500)
Accounts payable and other accrued expenses 8,055 3,813
Prepaid reinsurance (4,630) (5,564)
Other, net (5,520) 1,407
Total adjustments 9,606 13,491
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 36,080 29,844
Cash flows from investing activities:
Cash flows from investing activities:
Purchases of investments (174,695) (142,560)
Purchases of investments in affiliates (3,333) (1,350)
Proceeds from sale of investments 35,389 43,086
Proceeds from maturities of investments 104,447 61,301
Net cash used in investing activities (38,192) (39,523)
- --------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities: Cash flows from financing activities:
Allocation of ESOP 801 661
Proceeds from sale of common stock - 9,000
Minority interest capital contribution to CapMAC Asia 2,123 -
Dividends paid (960) -
Other, net 435 -
Net cash provided by financing activities 2,399 9,661
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
Net increase (decrease) in cash 287 (18)
Cash balance at beginning of period 1,033 883
Cash balance at end of period $ 1,320 865
====================================================================================================================
Supplemental disclosures of cash flow information:
Income taxes paid $ 10,646 5,491
Interest paid $ 564 564
Tax and loss bonds purchased $ 131 54
====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
7
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CapMAC Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 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 Financial Services, Inc. ("CFS"), CapMAC
Financial Services, (Europe) Ltd., a subsidiary of CFS, and a lead
investor in CapMAC Asia Ltd.
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. On July 5, 1996, CapMAC Holdings completed a secondary public
offering by some of its stockholders of 3,737,500 shares of common
stock at an offering price of $28. The Company did not receive any
proceeds from the 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 nine months ended September 30, 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.
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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 September 30, 1996 versus Quarter Ended September 30, 1995
The Company reported record net income of $8.2 million, a 3% increase over net
income of $8.0 million reported during the third quarter of 1995. Primary
earnings per share and earnings per share on a fully diluted basis were $0.46
during the third quarter of 1996, compared to $0.57 during the same period in
1995. Earnings per share comparisons between the third quarter of 1996 and 1995
are affected by the impact of CapMAC Holdings' initial public offering, which
increased the average number of shares outstanding at September 30, 1996 to 15.6
million from 12.2 million at September 30, 1995.
Total revenues during the third quarter of 1996 were $20.2 million, an increase
of 11% from $18.2 million during the third quarter of 1995. This increase was
primarily due to higher premiums earned and investment income, offset by lower
advisory fees.
For the third quarter of 1996, gross premiums written were $17.2 million, an
increase of 40% from $12.3 million for the same period in 1995. The amount of
premiums ceded to reinsurers decreased from $6.2 million during the third
quarter of 1995 to $4.1 million in the third quarter of 1996. Net premiums
earned were $10.0 million for the third quarter of 1996, an increase of 37% from
$7.3 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 expected
to be contractually due to or to be earned by CapMAC in the future under
outstanding policies.
Business originated or renewed in the third quarter of 1996 was estimated to
generate $19.8 million of PFR, an increase of 95% over the same period in 1995.
However, the amount of guarantees issued (gross par written) decreased from $2.5
billion in the third quarter of 1995 to $2.2 billion in the third quarter of
1996, representing a decrease of 11%. A significant amount of gross par written
in the third quarter of 1995 was due to several commercial paper conduit
transactions that CapMAC guaranteed during such period. Because the amount of
PFR generated in any period with respect to commercial paper conduit
transactions closing in such period is based upon the average amount of
commercial paper expected to be outstanding during the
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term of the transaction, while gross par written is based on the maximum program
limit of such commercial paper conduit transactions, the change in PFR due to
the issuance of guarantees for such transactions does not correspond to the
change in gross par written resulting from such guarantees. At September 30,
1996, CapMAC had 580 policies outstanding which are expected to generate $186.5
million of PFR, up approximately 20% 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% at December 31, 1995 and September 30,
1996. Unearned premiums, representing premiums collected but not yet earned,
increased by $15.6 million from December 31, 1995 to a total of $61.4 million at
September 30, 1996.
At September 30, 1996, net par insured and outstanding was $16.9 billion, up 34%
from $12.6 billion at December 31, 1995. The remaining weighted average life of
the insured portfolio was estimated to be 6.7 years at September 30, 1996 and
6.0 years at December 31, 1995.
Advisory and other fees decreased 21% from $7.2 million in the third quarter of
1995 to $5.8 million in the third quarter of 1996. The advisory fees received by
CFS are related to the closing of transactions which involve significant
advisory and structuring services provided by CFS. Because advisory fees are
generally earned upon the closing of certain transactions, the timing of
transactions generating fees as well as the amount of such fees may result in
significant fluctuations in revenues attributable to such fees from period to
period.
Net investment income was $4.5 million in the third quarter of 1996 and $3.3
million for the corresponding period in 1995. Average assets available for
investment increased from $240.3 million during the third quarter of 1995 to
$323.5 million during the third quarter of 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. The average annualized pre-tax yield on the investment portfolio
increased from 5.6% in the third quarter of 1995 to 5.8% in the third quarter of
1996. The average after-tax yield on the investment portfolio increased from
4.6% in the third quarter of 1995 to 4.7% in the third quarter of 1996. Net
realized capital losses in the third quarter of 1996 were $0.1 million as
compared to $0.3 million of net realized capital gains in the third quarter of
1995. The amount of tax-exempt securities held in the Company's investment
portfolio decreased from 62% at September 30, 1995 to 58% at September 30, 1996.
Total expenses were $8.6 million in the third quarter of 1996, an increase of
42% from $6.0 million in the third 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 $1.2 million in the third quarter of
1996 compared to $0.8 million in the third
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quarter of 1995. At September 30, 1996, the Company had a net case basis loss
reserve of $281,000 as a result of CapMAC's first claim in 1995.
Underwriting and operating expenses were $4.9 million in the third quarter of
1996, a 70% increase from $2.9 million in the third 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 in the third quarter
of 1996, a 47% increase from $6.5 million in the third quarter of 1995. The
increase in underwriting and operating expenses was due to increased
compensation costs, operating expenses and lower ceding commission income. Staff
and benefit-related expenses, including the discretionary bonuses to employees,
constituted approximately 74% of gross underwriting and operating expenses in
the third quarter of 1996 compared to 92% in the third quarter of 1995. The
Company maintains a discretionary bonus plan under which annual bonuses are
awarded to employees. For the third quarter of 1996 and 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 $4.6 million and
$3.6 million in the third quarter of 1996 and 1995, respectively.
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 $2.0 million in the
third quarter of 1995 to $2.1 million in the third 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 third quarter of 1996 and
1995. In the third quarter of 1996 and 1995, the Company had a net tax expense
of $3.5 million and $4.2 million, respectively. The Company's effective tax rate
was 30.1% and 34.1% for the third 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. For the
third quarter of 1996, tax-exempt interest income of $2.5 million represented
22% of earnings before taxes ("EBT") compared to $1.9 million which represented
16% of EBT in the third quarter of the prior year.
Results of Operations
Nine Months Ended September 30, 1996 versus Nine Months Ended September 30, 1995
The Company reported record net income of $26.5 million, a 62% increase over net
income of $16.4 million reported during the first nine months of 1995. Primary
earnings per share were $1.51 during the first nine months of 1996, a 25%
increase over $1.21 during the first nine months of 1995. Earnings per share on
a fully diluted basis were $1.47 during the first nine months of 1996, a 21%
increase over $1.21 during the first nine months of 1995. Earnings per share
comparisons between the nine months ended September 30, 1996 and 1995 are
affected by the impact of Holdings' initial public offering, which increased the
average number of shares outstanding at September 30, 1996 to 15.6 million from
12.2 million at September 30, 1995.
Total revenues during the first nine months of 1996 were $62.9 million, an
increase of 43% as compared to $43.8 million during the first nine months of
1995. This increase was primarily due to higher advisory fees, premiums earned
and net investment income.
For the first nine months of 1996, gross premiums written were $51.0 million as
compared to $46.0 million
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for the same period in 1995 representing an increase of 11%. 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 $28.9 million for the first nine months of
1996, an increase of 33% from $21.7 million for the corresponding period in
1995.
Business originated or renewed in the first nine months of 1996 was estimated to
generate $58.4 million of PFR, an increase of 52% over the same period in 1995.
Correspondingly, the amount of guarantees issued (gross par written) increased
from $6.5 billion in the first nine months of 1995 to $8.1 billion in the first
nine months of 1996, representing an increase of 25%.
Advisory and other fees increased 72% from $12.4 million in the first nine
months of 1995 to $21.3 million in the first nine months of 1996. The increase
in advisory fees received by CFS related to the closing of transactions which
involved advisory and structuring services provided by CFS. Because advisory
fees are generally earned upon the closing of certain transactions, the timing
of transactions generating fees as well as the amount of such fees may result in
significant fluctuations in revenues attributable to such fees from period to
period.
Net investment income was $12.4 million in the first nine months of 1996 and
$9.2 million for the corresponding period in 1995. Average assets available for
investment increased from $228.2 million at September 30, 1995 to $312.3 million
during the nine months ended September 30, 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 placements 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 5.5% in the first nine
months of 1995 to 5.7% in the first nine months of 1996. The average after-tax
yield on the investment portfolio increased from 4.5% in the first nine months
of 1995 to 4.6% in the first nine months of 1996. Net realized capital gains in
the first nine months of 1996 and 1995 were $0.1 million and $0.5 million,
respectively.
Total expenses were $24.6 million in the first nine months of 1996, an increase
of 22% from $20.2 million in the first nine months 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.
Corresponding to the growth in the insured portfolio, the losses and loss
adjustment expenses were $3.4 million in the first nine months of 1996 compared
to $2.3 million in the first nine months of 1995.
Underwriting and operating expenses were $14.0 million in the first nine months
of 1996, a 21% increase from $11.6 million in the first nine months 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 $27.5 million and $24.1 million
in the first nine months of 1996 and 1995, respectively. The increase in
underwriting and operating expenses was due to increased compensation costs and
other operating costs, partially offset by increased ceding commission income.
Staff and benefit-related expenses, including the discretionary bonuses to
employees, constituted approximately 74% of gross underwriting and operating
12
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expenses in the first nine months of 1996 compared to 73% in the first nine
months of 1995. The Company maintains a discretionary bonus plan under which
annual bonuses are awarded to employees. As of September 30, 1996 and 1995, $7.4
million and $5.6 million were accrued, respectively, for payment of bonuses
under such plan. Underwriting and operating expenses deferred by CapMAC were
$13.4 million and $12.5 million in the first nine months of 1996 and 1995,
respectively.
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 $5.5 million in the
first nine months of 1995 to $6.2 million in the first nine months of 1996
relates to the increase in premiums earned in the corresponding periods.
Interest expense related to the senior debt was $0.9 million in the first nine
months of 1996 and 1995. In the first nine months of 1996 and 1995, the Company
had net tax expense of $12.3 million and $7.3 million, respectively. The
Company's effective tax rate was 32.1% and 30.8% for the first nine months 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 September 30, 1996, tax-exempt interest income
of $7.3 million represented 19% of EBT compared to $5.6 million which
represented 24% of EBT in the first nine months 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 and other business ventures and debt service. Additionally,
Holdings is required to purchase common stock in three derivatives products
subsidiaries 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.
While CFS has from time to time paid dividends to Holdings, 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 and other obligations 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, with respect to claims 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 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
13
<PAGE>
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 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 6.0 years and 4.7 years at September 30, 1996 and December 31, 1995,
respectively. The average duration of the investment portfolio at September 30,
1996 and December 31, 1995 was 4.4 years and 3.5 years, respectively. At
September 30, 1996, the amortized cost of the Company's investment portfolio was
approximately $327.8 million (fair value of $328.5 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 $150 million, standby corporate liquidity facility
presently scheduled to terminate in September 1999 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 $165 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 September 30, 1996,
CapMAC's Tangible Net Worth was $226.5 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 Ratings Services "S&P" and Moody's
Investors Service, Inc., respectively. As of September 30, 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 treaty. The agreement is
14
<PAGE>
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 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 September 30,
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 September 30, 1996, CapMAC had statutory qualified capital, which consisted
of statutory capital, unassigned surplus and contingency reserves, of $254.2
million, up from $239.9 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 81
to 1 at September 30, 1996. CapMAC's claims-paying resources as defined by the
Company (which includes statutory qualified capital, PFR and stop-loss
reinsurance) stood at $490.7 million and $445.3 million at September 30, 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 September 30,
1996, the amortized cost and fair value of the consolidated CFS portfolio was
$5.5 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.
15
<PAGE>
PART II - OTHER INFORMATION
Items 1,2,3, 4 and 5 are omitted either because they are inapplicable or because
the answer to such questions is negative.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.38 Fifth Amendment dated July 30, 1996 and Sixth Amendment dated
September 25, 1996 to Credit Agreement, dated June 25, 1992,
among CapMAC, Bank of Montreal individually and as agent, and
the banks from time to time party thereto
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.
16
<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: November 13, 1996 /s/ Paul V. Palmer
------------------ -----------------------
Paul V. Palmer
Managing Director and
Chief Financial Officer
Date: November 13, 1996 /s/ Gerard Edward Murray
------------------ -----------------------
Gerard Edward Murray
Senior Vice President and
Controller
(Principal Accounting Officer)
17
<PAGE>
Exhibit Index
Page Number
in Sequential
Exhibit No. Exhibit Number Copy
10.38 Fifth Amendment dated July 30, 1996 and Sixth Amendment
dated September 25, 1996 to Credit Agreement, dated
June 25, 1992, among CapMAC, Bank of Montreal individually
and as agent, and the banks from time to time party thereto 19
11 Computation of Earnings Per Share Assuming Full Dilution 28
27 Financial Data Schedule 29
99 Capital Markets Assurance Corporation Financial Statements 30
18
<PAGE>
Exhibit 10.38
CAPITAL MARKETS ASSURANCE CORPORATION
FIFTH AMENDMENT TO CREDIT AGREEMENT
To The Banks Party to the
June 25, 1992 Credit Agreement with
Capital Markets Assurance Corporation
Gentlemen:
The undersigned, Capital Markets Assurance Corporation (the "Company")
refers to the Credit Agreement dated as of June 25, 1992 as amended and
currently in effect between us (the "Credit Agreement"), capitalized terms used
without definition below to have the meanings ascribed to them in the Credit
Agreement. Upon satisfaction of the conditions precedent to effectiveness
hereinafter set forth, this letter shall serve as an agreement between us as
follows:
1. Amendments to Credit Agreement.
(a) Amount of Commitments. Each Bank's Commitment shall be as set forth
opposite its signature hereto, subject to any reductions made pursuant to the
terms of the Credit Agreement.
(b) Commitment Fees. The second sentence of Section 2.1 of the Credit
Agreement shall be amended by striking the fraction "1/5" therefrom and
substituting the number ".15" therefor and by striking the figure "5/8"
therefrom and substituting the figure ".45" therefor.
(c) Net Worth. Section 5.7 of the Credit Agreement shall be amended by
adding the following of the end thereof: ", provided that from and after the
date the Commitments are increased to $150,000,000 (the Banks not being
obligated to provide such increase) the Company shall at all times maintain
Tangible Net Worth of not less than $165,000,000."
(d) Extension of the Termination Date. The definition of the term
"Termination Date" appearing in Section 7.1 of the Credit Agreement shall be
amended by striking the date "June 12, 1998" therefrom and substituting the date
"June 12, 1999" therefor.
2. Conditions Precedent to Effectiveness.
The amendments herein provided for shall not become effective unless
and until each of the following conditions precedent have been satisfied:
(a) the Agent shall have received counterparts hereof which, taken
together, bear the signatures of the Company and the Banks;
(b) the Agent shall have received a Certificate of the Secretary of the
Company in the
19
<PAGE>
form annexed hereto as Exhibit A in sufficient counterparts for the Banks;
(c) the Agent shall have received for each Bank a Note in the amount of
its Commitment as increased hereby, all such notes to constitute "Notes" for all
purposes of this Agreement;
(d) if there are any Loans outstanding at the time this Amendment
becomes effective, there shall as of the date of such effectiveness be such
nonratable borrowings and repayments made under the Credit Agreement as shall be
necessary so that after giving effect thereto, the percentage of each Bank's
Commitment as reallocated pursuant hereto which is in use is identical,
provided, that no such reallocations borrowing shall be made if at the time a
Default or Event of Default has occurred and is continuing; and
(e) The representations and warranties contained in Section 3 of the
Credit Agreement as amended hereby shall be true and correct as of the time the
other conditions precedent to effectiveness hereinabove set forth have been
satisfied, the satisfaction by the Company of such other conditions precedent to
constitute a representation from the Company to the foregoing effects, such
representation to be deemed made in connection with the Credit Agreement.
3. Miscellaneous.
Except as specifically amended hereby all of the terms, conditions and
provisions of the Credit Agreement shall stand and remain unchanged and in full
force and effect. No reference to this Fifth Amendment to Credit Agreement need
be made in any instrument or document at any time referring to the Credit
Agreement, a reference to the Credit Agreement in any of such to be deemed to be
a reference to the Credit Agreement as amended hereby. This Fifth Amendment to
Credit Agreement shall be construed and determined in accordance with the laws
of the State of New York. This Fifth Amendment to Credit Agreement shall be
executed in counterparts and by separate parties hereto on separate
counterparts, each to constitute an original but all but one and the same
instrument. Upon satisfaction of the conditions precedent to effectiveness set
forth in Section 3 hereof, this Fifth Amendment to Credit Agreement shall become
effective.
20
<PAGE>
Dated as of this 30th day of July, 1996.
CAPITAL MARKETS ASSURANCE
CORPORATION
By /s/ Robert L. Nevin, Jr.
------------------------------
Its Managing Director
------------------------------
Accepted and agreed to as of the date last above written.
Commitment Amount and Percentage BANK OF MONTREAL, individually and as
Agent
$45,000,000 41% By /s/ Richard J. McClorey
------------------------------
Its Director
------------------------------
$40,000,000 36% DEUTSCHE BANK AG, NEW YORK BRANCH
By /s/ Louis Caltavuturo
------------------------------
Its Assistant Vice President
------------------------------
$25,000,000 23% BANQUE NATIONALE DE PARIS
By /s/ Eric Fellows
------------------------------
Its Vice President
------------------------------
21
<PAGE>
EXHIBIT A
CERTIFICATE OF THE SECRETARY OF
CAPITAL MARKETS ASSURANCE CORPORATION
The undersigned, Ram D. Wertheim, certifies that he is the duly elected,
qualified and acting secretary of Capital Markets Assurance Corporation, a
corporation duly organized and existing under the laws of the State of New York
and that as such Secretary he is the keeper of the corporate records and seal of
said corporation.
The undersigned further certifies that the Resolution of the Board of
Directors of said Corporation attached as Exhibit A to the certificate of the
undersigned dated June 25, 1992 and heretofore delivered to the Banks have not
been rescinded or modified in any respect but still remain in full force and
effect and that the persons named in such certificate as being the duly elected,
qualified and acting incumbents of their respective offices remain the duly
elected, qualified and acting incumbents of said offices.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the corporate
seal of said Corporation__________day of_________, 1996.
(SEAL)
CAPITAL MARKETS ASSURANCE
CORPORATION
Ram D. Wertheim, Secretary
22
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
SIXTH AMENDMENT TO CREDIT AGREEMENT
To the Banks Party or to Become Party to the
June 25, 1992 Credit Agreement with
Capital Markets Assurance Corporation
Gentlemen:
The undersigned, Capital Markets Assurance Corporation (the "Company")
refers to the Credit Agreement dated as of June 25, 1992 as amended and
currently in effect between the Company, Bank of Montreal individually and as
agent and the Bank parties thereto (the "Credit Agreement"), capitalized terms
used without definition below to have the meanings ascribed to them in the
Credit Agreement. Upon satisfaction of the conditions precedent to effectiveness
hereinafter set forth, this letter shall serve as an agreement between us as
follows:
1. Amendments to Credit Agreement
(a) Addition of Bank of America Illinois as a "Bank".
Effective as of the opening of business on September 25, 1996, Bank of America
Illinois shall become a Bank party to the Credit Agreement with all of the
rights and obligations of a Bank thereunder and from and after such date all
references in the Credit Agreement or any instrument of document executed and
delivered pursuant thereto to the "Banks" shall be deemed a reference to Bank of
America Illinois as well as to all other Banks party to the Credit Agreement.
The Commitment of Bank of America Illinois shall be as set forth opposite its
signature hereto (subject to any reductions hereafter made pursuant to the terms
of the Credit Agreement) and Bank of America Illinois' lending office and
address for notices shall be as set forth on its signature page hereto.
(b) Section 3.4 (Financial Statements)
Section 3.4(a) to the Credit Agreement shall be amended by striking the word
"and" appearing between the years "1992" and "1993" and by adding the following
immediately following the year "1993": "1994 and 1995". Section 3.4(b) shall be
amended by striking the date "December 31, 1991" and substituting the date
"December 31, 1995" therefor and by striking the phrase "except that the Company
has made a special distribution in an amount not in excess of "$95,000,000"
therefrom.
(c) Section 3.12 (Taxes)
Section 3.12 of the Credit Agreement shall be amended by striking the date
"December 31, 1989" therefrom and substituting the date "December 31, 1994".
Section 5.7 of the Credit Agreement shall be amended by striking the proviso
thereto added by the July 30, 1996 Fifth Amendment to Credit Agreement and by
striking the figure "140,000,000" appearing therein and substituting the figure
"$165,000,000" therefor.
2. Conditions Precedent to Effectivenes
The amendments herein provided for shall not become effective unless and until
each of the following conditions precedent have been satisfied:
(a) the Agent shall have received counterparts hereof which, taken
together, bear the signatures of the Company, the Banks now party to the Credit
Agreement and Bank of America Illinois;
23
<PAGE>
(b) the Agent shall have received a Certificate of the Secretary of the
Company in the form annexed hereto as Exhibit A in sufficient counterparts for
the Banks;
(c) the Agent shall have received for Bank of America Illinois a Note in
the amount of its Commitment such note to constitute a "Note" for all purposes
of the Credit Agreement and all instruments and documents delivered pursuant
thereto;
(d) if there are any Loans outstanding on September 25, 1996 and this
Amendment has become effective, there shall as of such date be such nonratable
borrowings and repayments made under the Credit Agreement as shall be necessary
so that after giving effect thereto, the percentage of each Bank's Commitment
which is in use is identical; and
(e) The representations and warranties contained in Section 3 of the Credit
Agreement as amended hereby shall be true and correct as of the time the other
conditions precedent to effectiveness hereinabove set forth have been satisfied
and no Default or Event of Default shall have occurred and be continuing, the
satisfaction by the Company of such other conditions precedent to constitute a
representation from the Company to the foregoing effects, such representation to
be deemed made in connection with the Credit Agreement.
3. Miscellaneous.
Except as specifically amended hereby all of the terms, conditions and
provisions of the Credit Agreement shall stand and remain unchanged and in full
force and effect. No reference to this Sixth Amendment to Credit Agreement need
be made in any instrument or document at any time referring to the Credit
Agreement, a reference to the Credit Agreement in any of such to be deemed to be
a reference to the Credit Agreement as amended hereby. This Sixth Amendment to
Credit Agreement shall be construed and determined in accordance with the laws
of the State of New York. This Sixth Amendment to Credit Agreement may be
executed in counterparts and by separate parties hereto on separate
counterparts, each to constitute an original but all but one and the same
instrument. Upon satisfaction of the conditions precedent to effectiveness set
forth in Section 2 hereof, this Sixth Amendment to Credit Agreement shall become
effective.
24
<PAGE>
Dated as of this 25th day of September, 1996.
CAPITAL MARKETS ASSURANCE
CORPORATION
By /s/ Robert L. Nevin, Jr.
------------------------------
Its Managing Director
------------------------------
Accepted and agreed to as of the day and year last above
written.
ADDRESS AND AMOUNT AND PERCENTAGE OF
COMMITMENTS:
$45,000,000 30% BANK OF MONTREAL, individually and as
Agent
430 Park Avenue, 14th Floor
New York, NY 10022
Attn: Richard McClorey
Telephone: (212) 606-1444
Fax: (212) 605-1455
By /s/ Richard J. McClorey
----------------------------------
Its Director
----------------------------------
LENDING OFFICE:
Bank of Montreal
115 South LaSalle Street
Chicago, Illinois 60603
Attention: Manger-Loan Operations
$40,000,000 26.66667% BANK OF AMERICA ILLINOIS
231 South LaSalle Street
Chicago, Illinois 60697
Attention: Elizabeth Bishop
Telephone: (312) 828-6550
Fax: (312) 987-0889
By /s/ Carol W. Shroder
---------------------------------
Its Managing Director
---------------------------------
LENDING OFFICE:
Bank of America Illinois
231 South LaSalle Street
Chicago, Illinois 60697
Attention: Elizabeth Bishop
25
<PAGE>
$40,000,000 26.66667% DEUTSCHE BANK AG
NEW YORK BRANCH
By /s/ Louis Caltavuturo
--------------------------------
Its Assistant Vice President
--------------------------------
By /s/ John S. Mcgill
--------------------------------
Its Vice President
--------------------------------
Address for Notices:
Deutsche Bank, AG
New York Branch
31 West 52nd Street
New York, New York 10019
Attn: Mac Johnson
Telephone: (212) 474-8107
Fax: (212) 474-8108
LENDING OFFICE:
31 West 52nd Street
New York, New York 10019
Attn: Mac Johnson
$25,000,000 16.66667% BANQUE NATIONALE DE PARIS
By /s/ Eric Fellows
--------------------------------
Its Vice President
--------------------------------
By /s/ Nathalie Coulon
--------------------------------
Its Assistant Vice President
--------------------------------
Address for Notices:
Banque Nationale de Paris
499 Park Avenue, 7th Floor
New York, New York 10022
Attn: Eric Fellows
Telephone: (212) 415-9722
Fax: (212) 418-8269
LENDING OFFICE:
499 Park Avenue, 7th Floor
New York, New York 10022
Attn: Eric Fellows
26
<PAGE>
EXHIBIT A
CERTIFICATE OF THE SECRETARY OF
CAPITAL MARKETS ASSURANCE CORPORATION
The undersigned, Ram D. Wertheim, certifies that he is the duly
elected, qualified and acting secretary of Capital Markets Assurance
Corporation, a corporation duly organized and existing under the laws of the
State of New York and that as such Secretary he is the keeper of the corporate
records and seal of said corporation.
The undersigned further certifies that the Resolutions of the Board of
Directors of said Corporation attached as Exhibit A to the certificate of the
undersigned dated June 25, 1992 and heretofore delivered to the Banks have not
been rescinded or modified in any respect but still remain in full force and
effect and that the persons named in such certificate as being the duly elected,
qualified and acting incumbents of their respective offices remain the duly
elected, qualified and acting incumbents of said offices.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the
corporate seal of said Corporation____________day of____________, 1996.
(SEAL)
CAPITAL MARKETS ASSURANCE
CORPORATION
Ram D. Wertheim, Secretary
27
<TABLE>
CapMAC Holdings Inc. and Subsidiaries
Statement Re Computation of Per Share Earnings
(Dollars in thousands, except Per Share Amounts)
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
---------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Modified Treasury Stock Method E.P.S. - Primary
- -----------------------------------------------------
Net Income $ 8,240 8,030 $ 26,474 16,353
Savings (Expense) on Debt Prepayment 0 (37) 0 214
Compensation Expense 0 52 0 139
Interest Earned on Investments 0 3 0 9
---------- ----------- ---------- --------
Adjusted Net Income 8,240 8,049 26,474 16,715
- ----------------------------------------------------- ---------- ----------- ---------- --------
Average number of common shares outstanding 15,627 12,168 15,548 11,920
Incremental Common Shares 2,223 1,862 2,025 1,862
Fully Diluted number of Shares 17,851 14,030 17,573 13,782
Earnings per share assuming full dilution $ 0.46 0.57 $ 1.51 1.21
- ----------------------------------------------------- ---------- ----------- ---------- --------
As of September 30, 1996 approximately 4,293,000 stock options and warrants had
been granted and were outstanding. Based upon various exercise prices, the total
consideration for the common stock equivalents will be approximately $62.0
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 $27.35 per
share for nine months ended September 30, 1996. The dilution would be the
equivalent of approximately 2,025,150 shares.
28
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
extracted from CapMAC Holdings Inc. and Subsidiaries Consolidated Balance Sheets
for the quarter ending September 30, 1996 and the consolidated 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 328449
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 363162
<CASH> 1320
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 42350
<TOTAL-ASSETS> 440428
<POLICY-LOSSES> 9602
<UNEARNED-PREMIUMS> 61410
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 15000
0
0
<COMMON> 161
<OTHER-SE> 298403
<TOTAL-LIABILITY-AND-EQUITY> 440428
28859
<INVESTMENT-INCOME> 12404
<INVESTMENT-GAINS> 110
<OTHER-INCOME> 21487
<BENEFITS> 3432
<UNDERWRITING-AMORTIZATION> 6249
<UNDERWRITING-OTHER> 14031
<INCOME-PRETAX> 38246
<INCOME-TAX> 12291
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26474
<EPS-PRIMARY> 1.51
<EPS-DILUTED> 1.47
<RESERVE-OPEN> 8369
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 9602
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
CAPITAL MARKETS ASSURANCE CORPORATION
FINANCIAL STATEMENTS
September 30, 1996
(Unaudited)
30
<PAGE>
Capital Markets Assurance Corporation
Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS
September 30, 1996 December 31,1995
(Unaudited)
------------------ ----------------
<S> <C> <C>
Investments:
Bonds at fair value (amortized cost $283,996 at September 30, 1996
and $210,651 at December 31, 1995) ............................................................. $284,595 215,706
Short-term investments (at amortized cost which
approximates fair value) ....................................................................... 23,081 68,646
-------- --------
Total investments ........................................................................... 307,676 284,352
-------- --------
Cash ........................................................................................... 514 344
Accrued investment income ...................................................................... 3,604 3,136
Deferred acquisition costs ..................................................................... 42,350 35,162
Premiums receivable ............................................................................ 4,068 3,540
Prepaid reinsurance ............................................................................ 17,801 13,171
Other assets ................................................................................... 4,194 3,428
-------- --------
Total assets ................................................................................ $380,207 343,133
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums .............................................................................. $ 61,410 45,767
Reserve for losses and loss adjustment expenses ................................................ 9,602 6,548
Ceded reinsurance .............................................................................. 2,455 2,469
Accounts payable and other accrued expenses .................................................... 12,446 10,844
Current income taxes ........................................................................... -- 136
Deferred income taxes .......................................................................... 13,608 11,303
-------- --------
Total liabilities ........................................................................... 99,521 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 ............................................. 389 3,286
Retained earnings .............................................................................. 56,822 41,972
-------- --------
Total stockholder's equity .................................................................. 280,686 266,066
-------- --------
Total liabilities and stockholder's equity .................................................. $380,207 343,133
======== ========
</TABLE>
See accompanying notes to financial statements.
31
<PAGE>
Capital Markets Assurance Corporation
Statements of Income
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Direct premiums written .................................... $ 17,206 12,204 49,983 45,042
Assumed premiums written ................................... 8 102 1,032 925
Ceded premiums written ..................................... (4,129) (6,188) (11,142) (11,834)
-------- -------- -------- --------
Net premiums written .................................... 13,085 6,118 39,873 34,133
(Increase) decrease in unearned premiums ................... (3,042) 1,193 (11,014) (12,418)
-------- -------- -------- --------
Net premiums earned ..................................... 10,043 7,311 28,859 21,715
Net investment income ...................................... 4,307 3,013 12,296 8,606
Net realized capital gains (loss) .......................... (57) 364 111 449
Other income ............................................... 25 14 104 38
-------- -------- -------- --------
Total revenues .......................................... 14,318 10,702 41,370 30,808
-------- -------- -------- --------
Expenses:
Losses and loss adjustment expenses ........................ 1,248 821 3,432 2,279
Underwriting and operating expenses ........................ 3,780 2,563 11,142 9,939
Policy acquisition costs ................................... 2,126 2,022 6,249 5,481
-------- -------- -------- --------
Total expenses .......................................... 7,154 5,406 20,823 17,699
-------- -------- -------- --------
Income before income taxes .............................. 7,164 5,296 20,547 13,109
-------- -------- -------- --------
Income Taxes:
Current federal income tax ................................. 1,027 231 3,008 895
Deferred federal income tax ................................ 718 1,280 2,689 2,256
-------- -------- -------- --------
Total income taxes ...................................... 1,745 1,511 5,697 3,151
-------- -------- -------- --------
NET INCOME .............................................. $ 5,419 3,785 14,850 9,958
========= ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
32
<PAGE>
Capital Markets Assurance Corporation
Statement of Stockholder's Equity
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 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 ..................... (2,897)
---------
Balance at end of period ................................ 389
---------
Retained earnings:
Balance at beginning of period ............................. 41,972
Net income ................................................. 14,850
---------
Balance at end of period ................................ 56,822
---------
Total stockholder's equity .............................. $ 280,686
=========
</TABLE>
See accompanying notes to financial statements.
33
<PAGE>
Capital Markets Assurance Corporation
Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1996 September 30, 1995
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income ....................................................................... $ 14,850 9,958
--------- ---------
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Reserve for losses and loss adjustment expenses ............................... 3,054 1,474
Unearned premiums ............................................................. 15,643 17,982
Deferred acquisition costs .................................................... (7,188) (6,981)
Premiums receivable ........................................................... (528) 81
Accrued investment income ..................................................... (468) 63
Income taxes payable .......................................................... 2,341 2,447
Net realized capital gains .................................................... (111) (449)
Accounts payable and other accrued expenses ................................... 5,445 3,456
Prepaid reinsurance ........................................................... (4,630) (5,564)
Other, net .................................................................... (381) 2,253
--------- ---------
Total adjustments ....................................................... 13,177 14,762
--------- ---------
Net cash provided by operating activities .................................... 28,027 24,720
--------- ---------
Cash flows from investing activities:
Purchases of investments ......................................................... (154,308) (109,235)
Proceeds from sale of investments ................................................ 35,388 38,577
Proceeds from maturities of investments .......................................... 91,063 37,361
--------- ---------
Net cash used in investing activities ......................................... (27,857) (33,297)
--------- ---------
Cash flows from financing activities:
Paid-in capital .................................................................. -- 9,000
--------- ---------
Net cash provided by financing activities ..................................... -- 9,000
--------- ---------
Net increase in cash ............................................................. 170 423
Cash balance at beginning of period .............................................. 344 85
--------- ---------
Cash balance at end of period ................................................. $ 514 508
========= =========
Supplemental disclosures of cash flow information:
Income taxes paid ................................................................ $ 3,225 650
Tax and loss bonds purchased ..................................................... $ 131 54
========= =========
</TABLE>
See accompanying notes to financial statements.
34
<PAGE>
Capital Markets Assurance Corporation
Notes to Unaudited Financial Statements
September 30, 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 the CapMAC's financial condition, results of operations
and cash flows for the periods presented. The results of operations for
the nine months ended September 30, 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.
35
