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, 1997
[ ] 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, 1997, 17,331,104 shares (net of treasury shares) of
Common Stock, par value $0.01 per share of the Registrant were outstanding.
Page 1 of 31 Pages
Index to Exhibits on Page 22
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - September 30, 1997
and December 31, 1996...................................................4
Consolidated Statements of Income - three months ended and nine
months ended September 30, 1997 and September 30, 1996..................5
Consolidated Statements of Stockholders' Equity - nine months
ended September 30, 1997................................................6
Consolidated Statements of Cash Flows - nine months
ended September 30, 1997 and September 30, 1996.........................7
Notes to Consolidated Financial Statements..............................8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................10
PART II OTHER INFORMATION, AS APPLICABLE
Item 6. Exhibits and Reports on Form 8-K.................................20
SIGNATURES..................................................................21
INDEX TO EXHIBITS...........................................................22
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, 1997
(Unaudited)
3
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
ASSETS
<CAPTION>
September 30,1997 December 31,1996
(Unaudited)
<S> <C> <C>
Investments:
Bonds at fair value (amortized cost $332,595 at September 30, 1997
and $302,284 at December 31, 1996) $ 337,667 305,422
Short-term investments (at amortized cost which approximates fair
value) 37,219 33,752
Common stock 394 -
Investment in affiliates 35,673 34,886
Total investments 410,953 374,060
- -------------------------------------------------------------------------------------------------------------
Cash 1,577 966
Accrued investment income 4,097 3,847
Deferred acquisition costs 51,137 45,380
Premiums receivable 7,132 5,141
Prepaid reinsurance 23,348 18,489
Current income taxes 782 -
Other assets 14,894 9,351
Total assets $ 513,920 457,234
=============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Unearned premiums $ 76,023 68,262
Reserve for losses and loss adjustment expenses 15,389 10,985
Ceded reinsurance 5,653 1,738
Accounts payable and other accrued expenses 24,421 15,274
Senior notes 15,000 15,000
Current income taxes - 2,890
Deferred income taxes 13,120 9,590
Total liabilities 149,606 123,739
- -------------------------------------------------------------------------------------------------------------
Minority Interest 23,111 23,108
- -------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock - $0.01 par value per share; 20,000,000
shares are authorized; none outstanding at September 30, 1997
and December 31, 1996 - -
Common stock - $0.01 par value per share; 50,000,000 shares
are authorized; 17,331,189 and 16,425,324 shares issued
September 30, 1997, and December 31,1996; 17,331,104 and 16,425,274 shares
outstanding at September 30, 1997, and December 31, 1996 173 164
Additional paid-in capital 229,979 226,428
Unrealized appreciation (depreciation) on investments, net of tax 3,254 (71)
Retained earnings 112,438 89,310
Unallocated ESOP shares (4,550) (5,430)
Cumulative translation adjustment, net of tax (89) (14)
Treasury stock (2) -
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 341,203 310,387
- -------------------------------------------------------------------------------------------------------------
Total liabilities, minority interest, and stockholders' equity $ 513,920 457,234
=============================================================================================================
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
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues:
Direct premiums written $ 22,345 17,206 57,525 49,983
Assumed premiums written 225 8 1,141 1,032
Ceded premiums written (7,428) (4,129) (18,049) (11,142)
- ------------------------------------------------------------------------------------------------------------
Net premiums written 15,142 13,085 40,617 39,873
(Increase) decrease in unearned
premiums (1,663) (3,042) (2,903) (11,014)
- ------------------------------------------------------------------------------------------------------------
Net premiums earned 13,479 10,043 37,714 28,859
Advisory and other fees 7,268 5,750 17,941 21,327
Net investment income 5,179 4,485 15,589 12,404
Net realized capital (losses) gains - (58) (1,198) 110
Other income 26 53 74 160
- ------------------------------------------------------------------------------------------------------------
Total revenues 25,952 20,273 70,120 62,860
- ------------------------------------------------------------------------------------------------------------
Expenses:
Losses and loss adjustment expenses 1,528 1,248 4,404 3,432
Underwriting and operating expenses 7,251 4,916 21,550 14,031
Policy acquisition costs 2,372 2,126 7,425 6,249
Interest expense 300 300 902 902
- ------------------------------------------------------------------------------------------------------------
Total expenses 11,451 8,590 34,281 24,614
- ------------------------------------------------------------------------------------------------------------
Income before income taxes and
minority interest 14,501 11,683 35,839 38,246
- ------------------------------------------------------------------------------------------------------------
Income Taxes:
Current income tax 2,953 3,758 9,936 10,877
Deferred income tax 2,301 (240) 1,845 1,414
Total income taxes 5,254 3,518 11,781 12,291
- ------------------------------------------------------------------------------------------------------------
Income before minority interest 9,247 8,165 24,058 25,955
- ------------------------------------------------------------------------------------------------------------
Minority interest 223 74 91 519
- ------------------------------------------------------------------------------------------------------------
NET INCOME $ 9,470 8,239 24,149 26,474
============================================================================================================
Primary earnings per share $ 0.53 0.46 1.34 1.51
Fully diluted earnings per share $ 0.53 0.46 1.34 1.47
============================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
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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, 1997
<S> <C>
Common stock:
Balance at beginning of period $ 164
Common stock issued 9
- --------------------------------------------------------------------------------
Balance at end of period 173
- --------------------------------------------------------------------------------
Additional paid-in capital:
Balance at beginning of period 226,428
Issuance of common stock 3,551
- --------------------------------------------------------------------------------
Balance at end of period 229,979
- --------------------------------------------------------------------------------
Unrealized appreciation (depreciation) on investments, net of tax:
Balance at beginning of period (71)
Unrealized appreciation on investments 3,325
Balance at end of period 3,254
- --------------------------------------------------------------------------------
Retained earnings:
Balance at beginning of period 89,310
Net income 24,149
Dividends declared - $.02 per share (1,021)
Balance at end of period 112,438
- --------------------------------------------------------------------------------
Unallocated ESOP shares:
Balance at beginning of period (5,430)
Allocation of ESOP shares 880
Balance at end of period (4,550)
- --------------------------------------------------------------------------------
Cumulative translation adjustment, net of tax:
Balance at beginning of period (14)
Translation adjustment (75)
- --------------------------------------------------------------------------------
Balance at end of period (89)
- --------------------------------------------------------------------------------
Treasury stock:
Balance at beginning of period -
Treasury shares acquired (2)
- --------------------------------------------------------------------------------
Balance at end of period (2)
- --------------------------------------------------------------------------------
Total stockholders' equity $ 341,203
================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
6
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
<S> <C> <C>
Cash flows from operating activities:
Net income $ 24,149 26,474
- -------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Reserve for losses and loss adjustment expenses 4,404 3,054
Unearned premiums, net 7,761 15,643
Deferred acquisition costs (5,757) (7,188)
Premiums receivable (1,991) (528)
Accrued investment income (250) (468)
Income taxes payable (1,245) 1,298
Net realized capital (gains) losses 1,198 (110)
Accounts payable and other accrued expenses 9,147 8,055
Prepaid reinsurance (4,859) (4,630)
Other, net (2,914) (5,520)
Total adjustments 5,494 9,606
- -------------------------------------------------------------------------------------------------
Net cash provided by operating activities 29,643 36,080
Cash flows from investing activities:
Purchases of investments (156,195) (174,695)
Purchases of investments in affiliates - (3,333)
Proceeds from sale of investments 74,768 35,389
Proceeds from maturities of investments 49,558 104,447
Net cash used in investing activities (31,869) (38,192)
- -------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Allocation of ESOP shares 880 801
Minority interest capital contribution to CapMAC Asia - 2,123
Dividends paid (1,021) (960)
Exercise of stock options and warrants 2,978 435
Net cash provided by financing activities 2,837 2,399
- -------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 611 287
Cash balance at beginning of period 966 1,033
Cash balance at end of period $ 1,577 1,320
=================================================================================================
Supplemental disclosures of cash flow information:
Income taxes paid $ 12,931 10,646
Interest paid $ 564 564
Tax and loss bonds purchased $ 155 131
=================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1997
1. Organization and Ownership
CapMAC Holdings Inc. ("Holdings" or the "Company"), a Delaware corporation,
is the sole stockholder of Capital Markets Assurance Corporation
("CapMAC"), CapMAC Financial Services Inc. ("CFS"), and CapMAC Investment
Management, Inc ("CIM"). CapMAC Assurance, S.A. is a subsidiary of Capital
Markets Assurance Corporation, and 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. On July 5, 1996, Holdings completed a
secondary public offering by some of its stockholders of 3,737,500 shares
of common stock. 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, 1997 may not be indicative of the results
that may be expected for the full year ending December 31, 1997. 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, 1996,
which was filed with the Securities and Exchange Commission on March 31,
1997.
3. Reclassifications
Certain prior period balances have been reclassified to conform to the
current period presentation.
4. Recent Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("Statement 128"). Statement 128 supersedes APB Opinion No. 15, Earnings
Per Share, ("APB Opinion No. 15"), and specifies the computation,
presentation, and disclosure requirements for earnings per share for
entities with publicly held common stock or potential common stock.
Statement 128 was issued to simplify the computation of earnings per share.
It requires dual presentation of "basic earnings per share" and "diluted
earnings per share" as defined. Statement 128 is effective for financial
statements for both interim and annual periods ending after December 15,
1997. Earlier application is not permitted. After adoption, all prior
period earnings per share data presented shall be restated to conform with
Statement 128.
8
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CapMAC Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1997
Under APB Opinion No. 15, the Company's primary and fully diluted earnings
per share amounts are $0.53 and $0.46 per share for the three-month periods
ended September 30, 1997 and 1996, respectively. The Company's primary
earnings per share amounts are $1.34 and $1.51 per share for the nine-month
periods ended September 30, 1997 and 1996, respectively, and the fully
diluted earnings per share amounts for the nine-month periods ended
September 30, 1997 and 1996 are $1.34 and $1.47 per share, respectively.
The basic earnings per share amounts, as computed under Statement 128, are
expected to be approximately $0.56 and $0.53 per share for the three-month
periods ended September 30, 1997 and 1996, respectively and $1.45 and $1.70
per share for the nine-month periods ended September 30, 1997 and 1996,
respectively. The Company anticipates the adoption of Statement 128 will
result in the presentation of diluted earnings per share amounts which will
not materially differ from the fully diluted amounts previously presented
under APB Opinion No. 15.
9
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
On November 14, 1997, CapMAC Holdings Inc. ("Holdings" or the "Company") entered
into an agreement with MBIA, Inc. ("MBIA") to merge the two companies in a stock
transaction. Under the agreement, shareholders of Holdings will receive MBIA
stock equal to $35 for each share of Holdings stock. If MBIA's stock price falls
below $53 per share, shareholders of Holdings will receive a fixed exchange
ratio of 0.6604 shares of MBIA stock for each share of Holdings stock, and if
MBIA's stock price rises above $70 per share, shareholders of Holdings will
receive a fixed exchange ratio of 0.5000 shares of MBIA stock for each Holdings
share. The fixed exchange ratio will be determined by the average closing price
of MBIA's stock for 15 consecutive days, ending three days prior to the closing
of the transaction.
It is anticipated that the merger will be structured as a tax-free exchange and
accounted for as a "pooling of interests." The transaction, which is subject to
regulatory approvals, approval by shareholders of Holdings and other customary
conditions, is expected to be completed by the end of the first quarter of 1998.
Holdings, a Delaware corporation, is the sole stockholder of Capital Markets
Assurance Corporation ("CapMAC"), CapMAC Financial Services Inc. ("CFS"), and
CapMAC Investment Management, Inc ("CIM"). CapMAC Assurance, S.A. is a
subsidiary of CapMAC, and 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, 1997 versus Quarter Ended September 30, 1996
The Company reported net income of $9.5 million and primary and fully diluted
earnings per share of $0.53 during the third quarter of 1997 representing an
increase of 15% from net income of $8.2 million, or $0.46 per share on a primary
and fully diluted basis, reported for the third quarter of 1996. Operating
earnings, which the Company defines as net income less the effect of net
realized gains and losses, were $9.5 million, or $0.53 per share, up from $8.3
million, or $0.46 per share, earned in the third quarter of 1996.
Total revenues during the third quarter of 1997 were $26.0 million, an increase
of 28% from $20.3 million during the third quarter of 1996. This increase was
primarily due to higher premiums earned, advisory and other fees and net
investment income.
For the third quarter of 1997, gross premiums written were $22.6 million, an
increase of 31% from $17.2 million for the same period in 1996. This increase
was principally due to higher premiums written of $4.4 million from
international transactions and $1.0 million from domestic consumer transactions.
The amount of premiums ceded to reinsurers increased by 80% to $7.4 million
during the third quarter of 1997 from $4.1 million in the third quarter of 1996.
This was a result of upfront premiums collected and ceded for large
international transactions during the third quarter of 1997 and premiums ceded
for certain secondary market transactions closed in a prior period. Net premiums
earned were $13.5 million for the third quarter of 1997, an increase of 35% from
$10.0 million for the corresponding period in 1996.
CapMAC collects premiums primarily on an installment basis over the term of an
insurance policy and, to a lesser extent, on a one-time, up-front basis at the
time an 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 as revenue not only in the year an insurance policy is issued, but
over the full term such policy is outstanding. CapMAC reflects a relatively
10
<PAGE>
small portion of the expected future revenue on the business written in the
current period as premium earnings in the same period. To measure the amount of
business written in a period, the Company tracks the total estimated present
value of future revenues ("PFR"), which 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. The amount of PFR
generated in any given period is based on the weighted average life of the
guarantees issued during the period and the net premium and ceding commissions
expected to be earned with respect to such guarantees, whereas "gross par
written" is based on the principal amount of guarantees issued and aggregate
program limits with respect to commercial paper conduit transactions.
Accordingly, an increase or decrease in PFR may not proportionately correspond
with an increase or decrease in gross par written.
Business originated or renewed in the third quarter of 1997 was estimated to
generate $39.5 million of PFR, an increase of 99% over the $19.8 million of PFR
generated in the same period in 1996. This increase was due to higher net
premium and ceding commissions primarily from certain international and consumer
transactions partially offset by a decrease in net premium and ceding
commissions from corporate transactions. Correspondingly, gross par written
increased to $2.8 billion in the third quarter of 1997 from $2.2 billion in the
third quarter of 1996, representing an increase of 30%. At September 30, 1997,
CapMAC had 664 policies outstanding which are expected to generate $268.1
million of PFR, up approximately 15% from $232.7 million at December 31, 1996
relating to 607 policies outstanding at such date. The discount rate used for
purposes of the PFR calculation was 7% for 1997 and 1996.
At September 30, 1997, net par insured and outstanding was $23.2 billion, up 18%
from $19.7 billion at December 31, 1996. The remaining weighted average life of
the insured portfolio was estimated to be 6.5 years at September 30, 1997 and
6.4 years at December 31, 1996.
Advisory and other fees increased 26% to $7.3 million in the third quarter of
1997 from $5.8 million in the third quarter of 1996. Advisory fees are generally
received by CFS in relation to the closing of transactions which involve
advisory and structuring services provided by CFS. Fees collected for such
services amounted to $4.5 million in the third quarter of 1997, compared to $4.0
million in the third quarter of 1996. In addition to advisory fees, CFS also
collects recurring fees payable on a monthly and quarterly basis ("other fees")
primarily related to arranging for liquidity providers in transactions involving
insurance of commercial paper ("liquidity facility fees"), providing financial
technology to Mitsui Marine and Fire Insurance Co., Ltd. ("Mitsui Marine") under
a cooperation agreement ("technology fees") and administering third-party owned
and managed funding vehicles ("administrative fees"). The amount related to
other fees was $2.8 million in the third quarter of 1997, compared to $1.8
million in the third quarter of 1996, primarily due to higher technology fees
and administrative fees. Because advisory fees are generally earned upon the
closing of certain transactions, the timing and number 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 $5.2 million and $4.5 million in the third quarter of
1997 and 1996, respectively. Average assets available for investment during the
third quarter of 1997 increased to $363.3 million from $323.5 million during the
third quarter of 1996. The average annualized pre-tax yield on the investment
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portfolio increased to 6.1% in the third quarter of 1997 from 5.8% in the third
quarter of 1996 due to a higher interest rate environment. The average after-tax
yield on the investment portfolio was 4.7% in both the third quarter of 1997 and
1996. The amount of tax-exempt securities held in the Company's investment
portfolio decreased to 49% at September 30, 1997 from 58% at September 30, 1996.
There were no net capital gains realized for the third quarter of 1997 as
compared to $0.06 million of net capital losses in the third quarter of 1996.
Total expenses were $11.5 million in the third quarter of 1997, an increase of
33% from $8.6 million in the third quarter of 1996. 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 (in the form of additions to the SLR) were
$1.5 million in the third quarter of 1997 compared to $1.2 million in the third
quarter of 1996. Apart from additions to the SLR, the Company incurred no losses
during the first nine months of 1997 and the year ended December 31, 1996.
Underwriting and operating expenses were $7.3 million in the third quarter of
1997, a 48% increase from $4.9 million in the first quarter of 1996.
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 ("Deferred Acquisition Costs" or
"DAC") and ceding commission income. Gross underwriting and operating expenses
were $10.4 million and $9.5 million in the third quarter of 1997 and 1996,
respectively. The increase in underwriting and operating expenses was due to
increased operating costs. Staff and benefit-related expenses, including the
accrual of discretionary bonuses to employees, constituted approximately 64% of
gross underwriting and operating expenses in the third quarter of 1997 compared
to 74% in the third quarter of 1996. The Company maintains a discretionary bonus
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<PAGE>
plan under which annual bonuses are awarded to employees. For the three months
ended September 30, 1997 and September 30, 1996, $0.6 million and $2.5 million
were accrued, respectively, for payment of bonuses under such plan. Underwriting
and operating expenses deferred by CapMAC were $3.2 million and $4.6 million in
the third quarter of 1997 and 1996, respectively.
Policy acquisition costs represent the amortization of DAC, which are those
expenses incurred by CapMAC in acquiring new business. The increase in policy
acquisition costs to $2.4 million in the third quarter of 1997 from $2.1 million
in the third quarter of 1996 related 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 1997 and 1996.
In the third quarter of 1997 and 1996, the Company had net tax expense of $5.3
million and $3.5 million, respectively. The Company's effective tax rate was
35.4% and 29.8% for the third quarter of 1997 and 1996, respectively. During the
third quarter of 1997 the effective tax rate was higher than the statutory tax
rate of 35% as the Company was not able to utilize certain operating and capital
losses it incurred. Additionally, tax exempt interest income as a percentage of
earnings before taxes ("EBT") for the third quarter of 1997 was lower than the
third quarter of 1996. The effective tax rate during the third quarter of 1996
was lower than the statutory tax rate of 35% primarily due to tax-exempt
interest income from the Company's investment portfolio. In the third quarter of
1997, tax-exempt interest income of $2.4 million represented 16% of EBT compared
to $2.5 million which represented 21% of EBT in the third quarter of the prior
year.
Results of Operations
Nine Months Ended September 30, 1997 versus Nine Months Ended September 30, 1996
The Company reported net income of $24.1 million and primary and fully diluted
earnings per share of $1.34 during the first nine months of 1997. Although the
Company recorded growth in net premiums earned and business written during the
first nine months of 1997, lower advisory fees and net realized capital losses
recorded in the first quarter of 1997 resulted in a decline in net income of 9%
from $26.5 million or $1.51 per share on a primary basis and $1.47 on a fully
diluted basis in the first nine months of 1996. Operating earnings were $24.9
million, or $1.38 per share on a primary and fully diluted basis for the first
nine months of 1997, down from $26.4 million, or $1.50 and $1.47 per share on a
primary and fully diluted basis, respectively, earned in the first nine months
of 1996. The decline in operating earnings was attributable to lower advisory
fees earned during the first quarter of 1997.
Total revenues during the first nine months of 1997 were $70.1 million, an
increase of 12% from $62.9 million during the first nine months of 1996. This
increase was primarily due to higher premiums earned, net investment income and
other fees partially offset by lower advisory fees.
For the first nine months of 1997, gross premiums written were $58.6 million as
compared to $51.0 million for the same period in 1996. This increase was
principally due to higher premiums written of $3.4 million from domestic
consumer transactions, $2.7 million from international transactions, $2.0
million from corporate transactions, offset by lower premiums written with
respect to municipal business of $0.5 million. However, because premiums ceded
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to reinsurers increased to $18.0 million during the first nine months of 1997
from $11.1 million in the first nine months of 1996, the net amount of premiums
written, after giving effect to premiums ceded, was $40.6 million in the first
nine months of 1997 as compared to $39.9 million for the first nine months of
1996. The increase in premiums ceded was a result of upfront premiums collected
and ceded for large international transactions during the third quarter of 1997
and premiums ceded for certain secondary market transactions closed in a prior
period. The amount of premiums ceded to reinsurers in 1996 was reduced in part
because on January 1, 1996, CapMAC reassumed the liability for all policies
previously reinsured by Winterthur Swiss Insurance Company ("Winterthur"),
resulting in the reassumption by CapMAC of approximately $1.4 billion of
principal insured by Winterthur as of December 31, 1995. In connection with this
reassumption of liability, Winterthur commuted and returned $2.0 million of
unearned premiums, net of ceding commission and Federal excise tax. Net premiums
earned were $37.7 million for the first nine months of 1997, an increase of 31%
from $28.9 million for the corresponding period in 1996.
Business originated or renewed in the first nine months of 1997 was estimated to
generate $78.8 million of PFR, an increase of 35% over the same period in 1996
due to higher premiums earned and ceding commissions obtained primarily from
corporate transactions and international transactions. Correspondingly, the
amount of guarantees issued (gross par written) increased to $9.6 billion in the
first nine months of 1997 from $7.2 billion in the first nine months of 1996,
representing an increase of 33%.
Advisory and other fees decreased 16% to $17.9 million in the first nine months
of 1997 from $21.3 million in the first nine months of 1996. Advisory fees
amounted to $10.3 million in the first nine months of 1997, compared to $17.6
million in the first nine months of 1996. During the second quarter of 1997
advisory fees included $1.6 million paid in connection with the early
termination of a transaction. Structured international transactions closed
during the first quarter of 1996 contributed to the comparatively large amount
of advisory fees collected during that period. Advisory fees related to
international business were $6.4 million and $15.7 million in the first nine
months of 1997 and 1996, respectively. In addition to advisory fees, CFS also
collects recurring fees payable on a monthly and quarterly basis ("other fees")
primarily related to arranging for liquidity providers in transactions involving
insurance of commercial paper ("liquidity facility fees"), providing financial
technology to Mitsui Marine under a cooperation agreement ("technology fee") and
administering third-party owned and managed funding vehicles ("administrative
fees"). The amount related to other fees was $7.7 million in the first nine
months of 1997, compared to $3.7 million in the first nine months of 1996,
primarily due to higher liquidity facility fees, technology fees and
administrative fees. As advisory fees are generally earned upon the closing of
certain transactions, the timing and number 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.
14
<PAGE>
Net investment income was $15.6 million in the first nine months of 1997 and
$12.4 million for the corresponding period in 1996. Average assets available for
investment increased to $351.0 million during the nine-month period ended
September 30, 1997 from $312.3 million during the nine-month period ended
September 30, 1996. The average annualized pre-tax yield on the investment
portfolio increased to 6.0% in the first nine months of 1997 from 5.7% in the
first nine months of 1996. The average after-tax yield on the investment
portfolio was 4.7% in the first nine months of 1997 and 4.6% in the
corresponding period in 1996.
Net realized capital (losses) gains in the first nine months of 1997 and 1996
were ($1.2 million) and $0.1 million, respectively. In the first quarter of
1997, the Company recorded a pre-tax capital loss of $3.7 million (in addition
to a $2.0 million loss realized in the fourth quarter of 1996) related to
Holdings' investment in three derivatives products subsidiaries of The Mutual
Life Assurance Company of Canada (such subsidiaries, the "TMG Group"). Holdings
was committed to purchase common stock in TMG Group for approximately $11
million and fund its investment in TMG Group no later than February 27, 2000 at
which time the commitment amount would have contractually increased to
approximately $13 million. On July 8, 1997, Holdings sold its interest in the
TMG Group at its March 31, 1997 carrying value of $5.5 million. As a result, no
additional realized losses or gains were recognized in connection with the sale.
Holdings has no remaining commitment to purchase stock in the TMG Group.
Total expenses were $34.3 million in the first nine months of 1997, an increase
of 39% from $24.6 million in the first nine months of 1996. 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 (in the form of additions to the supplemental loss reserve)
were $4.4 million in the first nine months of 1997 compared to $3.4 million in
the first nine months of 1996.
Underwriting and operating expenses were $21.5 million in the first nine months
of 1997, a 54% increase from $14.0 million in the first nine months of 1996.
Underwriting and operating expenses consisted of gross underwriting and
operating expenses, reduced by DAC and ceding commission income. Gross
underwriting and operating expenses were $34.7 million and $27.5 million in the
first nine months of 1997 and 1996, 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 accrual of
discretionary bonuses to employees, constituted approximately 69% of gross
underwriting and operating expenses in the first nine months of 1997 compared to
74% in the first nine months of 1996. The Company maintains a discretionary
bonus plan under which annual bonuses are awarded to employees. As of September
30, 1997 and 1996, $6.7 million and $7.4 million were accrued, respectively, for
payment of bonuses under such plan. Underwriting and operating expenses deferred
by CapMAC were $13.2 million and $13.4 million in the first nine months of 1997
and 1996, respectively.
15
<PAGE>
The increase in policy acquisition costs to $7.4 million in the first nine
months of 1997 from $6.2 million in the first nine months of 1996 corresponds 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 1997 and
1996.
In the first nine months of 1997 and 1996, the Company had net tax expense of
$11.8 million and $12.3 million, respectively. The Company's effective tax rate
was 33% and 32% for the first nine months of 1997 and 1996, respectively. The
effective tax rates during these periods were lower than the statutory tax rate
of 35% in 1997 and 1996 primarily due to tax-exempt interest income. For the
nine months ended September 30, 1997, tax-exempt interest income of $7.1 million
represented 20% of EBT compared to $7.3 million representing 19% 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. In addition, the
Company has commenced conducting operations through CIM, its investment advisory
subsidiary which was capitalized in the first quarter of 1997. 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. Holdings requires liquidity
for payment of dividends to shareholders, investment in international and other
business ventures and debt service. While CFS has from time to time paid
dividends to Holdings, currently no dividends are expected to be received by
Holdings from CapMAC.
The Company's investment portfolio consists of both equity investments and high
quality, intermediate-term taxable and tax-exempt securities, and investment in
subordinated tranches of collateralized bond obligations in connection with its
financial engineering activities to obtain an optimal portfolio mix of
liquidity, quality, maturity and earnings. The average contractual maturity of
securities within the investment portfolio was 6.0 years at September 30, 1997
and 6.1 years at December 31, 1996. The average duration of the investment
portfolio at September 30, 1997 and December 31, 1996 was 4.2 years and 4.3
years, respectively. At September 30, 1997, the amortized cost of the Company's
investment portfolio was approximately $370.2 million (fair value of $375.3
million). The foregoing discussion excludes equity investments. Holdings' equity
investments include investments in P.T. ABS Finance Indonesia and CapMAC Asia as
well as other equity investments which are not liquid such as investments in
specialized finance companies. Holdings has also agreed to invest, if required,
an additional amount of $4.9 million in CapMAC Asia.
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 CapMAC insurance policies on a
short-term 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, except for the
CapMAC Asia investment commitment referred to above. The total liquidity
resources of the Company represented by its investment income, premiums,
advisory fees and liquidity arrangements are, in management's opinion,
adequate to meet the Company's cash needs.
16
<PAGE>
In the second quarter of 1997, the Company issued 725,539 new shares of common
stock in connection with the exercise and purchase of warrants. The warrants had
given the holders the right to purchase approximately 1.5 million shares of
common stock at a price of $13.33 per share. The number of shares issued to
warrant holders in connection with the Company's purchase or exercise of
warrants was based on the average closing price of the Company's common stock on
each of the ten business days preceding and including the purchase or exercise
date.
As discussed in "General" above, the Company has signed an agreement to merge
with MBIA, Inc. Any such merger, if consummated, is anticipated to increase the
sources of liquidity available to the Company.
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 which results in a claim on a CapMAC insurance policy, after
exhaustion of other liquidity sources which may be available 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.
CapMAC 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. CapMAC 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 6.1 years at September 30, 1997 and December 31, 1996, respectively. The
average duration of the investment portfolio at September 30, 1997 and December
31, 1996 was 4.5 years and 4.3 years, respectively. At September 30, 1997, the
amortized cost of CapMAC's investment portfolio was approximately $344.2 million
(fair value of $349.2 million). CapMAC 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 June 12, 2000 which, if necessary, is
available (subject to satisfaction of customary drawing conditions) to provide
funds for any claims payments under its policies. 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, 1997, CapMAC has
never 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 several "stop-loss"
reinsurance treaties. Effective January 1, 1997 the stop-loss reinsurance
coverage increased to $75 million in excess of incurred losses above $150
million. This coverage increases annually based on increases in CapMAC's
statutory qualified capital. The stop-loss reinsurance is provided by Mitsui,
Marine and Fire Insurance Co., Ltd. ("Mitsui"), AXA Re Finance S.A. ("AXA Re"),
and Munchener
17
<PAGE>
Ruckversicherungs-Gesellschaft ("Munich Re"). At September 30, 1997, 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, 1997, CapMAC had statutory qualified capital, which consisted
of statutory capital, unassigned surplus and contingency reserves, of $278.6
million up from $260.2 million at December 31, 1996. CapMAC's policyholders'
leverage ratio, which is measured by the ratio of net principal and interest
insured to statutory qualified capital, was 98 to 1 at September 30, 1997 and 90
to 1 at December 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 $621.7 million and $542.9 million at September
30, 1997 and December 31, 1996, respectively.
In early 1997, CapMAC made an investment of 50 million French francs
(approximately 10 million U.S. dollars) in CapMAC Assurance, S.A. an insurance
subsidiary established in Paris, France. CapMAC Assurance, S.A., is licensed to
write financial guarantee insurance in the European Union member states. In the
third quarter of 1997, CapMAC Assurance, S.A. closed its first transaction.
CapMAC Financial Services. The primary sources of funds for CFS are payments by
Holdings, CapMAC and CFS (Europe) under a service agreement (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,
1997, the amortized cost and fair value of the consolidated CFS portfolio was
$10.6 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 (except employees of CIM) are employed
by CFS. Under the CFS Servicing Agreement, CFS allocates expenses to Holdings,
CapMAC and CFS (Europe) for services provided to these entities. 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.
CapMAC Investment Management. CIM is a registered investment advisor and has
been formed for the purpose of establishing investment funds and providing
investment advice regarding asset-backed structures, mortgage-backed securities,
foreign and domestic fixed income and equity securities and certain other
securities based on the investment objectives of its clients. CIM has been
initially capitalized with approximately $2 million and has commenced operations
in the first quarter of 1997. At September 30, 1997, CIM had approximately $151
million of assets under management. CIM generates revenues through fees charged
for assets under management.
Recent Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share
("Statement 128"). Statement 128 supersedes APB Opinion No. 15, Earnings Per
Share, ("APB Opinion No. 15"), and specifies the computation, presentation, and
disclosure requirements for earnings per share for entities with publicly held
common stock or potential common stock. Statement 128 was issued to simplify the
computation of earnings per share. It requires dual presentation of "basic
earnings per share" and "diluted earnings per share" as defined. Statement 128
is effective for financial statements for both interim and annual periods ending
after December 15, 1997. Earlier application is not permitted. After adoption,
all prior period earnings per share data presented shall be restated to conform
with Statement 128.
18
<PAGE>
Under APB Opinion No. 15, the Company's primary and fully diluted earnings per
share amounts are $0.53 and $0.46 per share for the nine-month periods ended
September 30, 1997 and 1996, respectively. The Company's primary earnings per
share amounts are $1.34 and $1.51 per share for the nine-month periods ended
September 30, 1997 and 1996, respectively, and the fully diluted earnings per
share amounts for the nine-month periods ended September 30, 1997 and 1996 are
$1.34 and $1.47 per share, respectively. The basic earnings per share amounts,
as computed under Statement 128, are expected to be approximately $0.56 and
$0.53 per share for the three-month periods ended September 30, 1997 and 1996,
respectively, and $1.45 and $1.70 per share for the nine-month periods ended
September 30, 1997 and 1996, respectively. The Company anticipates the adoption
of Statement 128 will result in the presentation of diluted earnings per share
amounts which will not materially differ from the fully diluted amounts
previously presented under APB Opinion No. 15.
SFAS No. 130, Reporting Comprehensive Income, ("Statement 130") was issued in
June 1997 and establishes standards for the reporting and presentation of
comprehensive income and its components in a full set of financial statements.
Comprehensive income encompasses all changes in shareholders' equity (except
those arising from transactions with owners) and includes net income, net
unrealized capital gains or losses on available for sale securities and foreign
currency translation adjustments. As this new standard only requires additional
information in a financial statement, it will not affect the Company's financial
position or results of operations. Statement 130 is effective for fiscal years
beginning after December 15, 1997, with earlier application permitted. The
Company is currently evaluating the presentation alternatives permitted by the
statement.
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, ("Statement 131") was issued in June 1997 and establishes standards
for the reporting of information relating to operating segments in annual
financial statements, as well as disclosure of selected information in interim
financial reports. This statement supersedes SFAS No. 14, Financial Reporting
for Segments of a Business Enterprise, which requires reporting segment
information by industry and geographic area (industry approach). Under Statement
131, operating segments are defined as components of a company for which
separate financial information is available and is used by management to
allocate resources and assess performance (management approach). This statement
is effective for year-end 1998 financial statements. Interim financial
information will be required beginning in 1999 (with comparative 1998
information). The Company is currently evaluating the segment information
disclosures required by Statement 131.
19
<PAGE>
PART II - OTHER INFORMATION
Items 1 through 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
11 Computation of Earnings Per Share
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.
20
<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 14, 1997 /s/ Paul V. Palmer
Paul V. Palmer
Managing Director and
Chief Financial Officer
Date: November 14, 1997 /s/ Gerard Edward Murray
Gerard Edward Murray
Senior Vice President and
Controller
(Principal Accounting Officer)
21
<PAGE>
Exhibit Index
Page Number
in Sequential
Exhibit No. Exhibit Number Copy
11 Computation of Earnings Per Share 23
27 Financial Data Schedule 25
99 Capital Markets Assurance Corporation Financial Statements 26
22
<PAGE>
Exhibit 11a
CapMAC Holdings Inc. and Subsidiaries
Statement Re Computation of Per Share Earnings
(Dollars in thousands, except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
<S> <C> <C> <C> <C>
E.P.S. - Fully Diluted
- ---------------------------------------------------- ---------- ------------ ---------- --------
Net Income $ 9,470 8,240 $ 24,149 26,474
- ---------------------------------------------------- ---------- ------------ ---------- --------
Average number of common shares outstanding 16,977 15,627 16,672 15,548
Assumed exercise of dilutive stock options 975 2,420 1,304 2,421
Fully diluted number of shares 17,952 18,047 17,976 17,969
Earnings per share assuming full dilution $ .53 .46 $ 1.34 1.47
- ---------------------------------------------------- ---------- ------------ ---------- --------
Common stock equivalents 2,080 4,319 2,080 4,319
Proceeds from exercise of all equivalents $ 32,137 62,897 $ 32,137 62,897
Purchase of treasury stock 995 1,899 995 1,899
Market value per share $ 32.313 33.13 $ 32.313 33.13
- ---------------------------------------------------- ---------- ------------ ---------- --------
As of September 30, 1997 approximately 2,080,000 dilutive stock options had been
granted and were outstanding. Based upon various exercise prices, the total
consideration for the common stock equivalents will be approximately $32.1
million. Using the Treasury Stock Method, it is assumed that the proceeds from
the exercised common stock equivalents would be used to purchase outstanding
shares using a market value of $32.31 per share for nine months ended September
30, 1997. The dilution would be the equivalent of approximately 975,000 shares.
The Treasury Stock Method is used to calculate EPS for periods during 1997, the
Modified Treasury Method is used for EPS calculation during periods in 1996.
</TABLE>
23
<PAGE>
Exhibit 11b
CapMAC Holdings Inc. and Subsidiaries
Statement Re Computation of Per Share Earnings
(Dollars in thousands, except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
<S> <C> <C> <C> <C>
E.P.S. - Primary
- ----------------------------------------------------- ---------- ------------ ---------- ---------
Net Income $ 9,470 8,240 $ 24,149 26,474
- ----------------------------------------------------- ---------- ------------ ---------- ---------
Average number of common shares outstanding 16,977 15,627 16,672 15,548
Assumed exercise of dilutive stock options 1,017 2,216 1,374 2,015
- ----------------------------------------------------- ---------- ------------ ---------- ---------
Fully diluted number of shares 17,994 17,843 18,406 17,563
Earnings per share assuming full dilution $ .53 .46 $ 1.34 1.51
- ----------------------------------------------------- ---------- ------------ ---------- ---------
Common stock equivalents 2,080 4,319 2,080 4,319
Proceeds from exercise of all equivalents $ 32,137 62,897 $ 32,167 62,897
Purchase of treasury stock 1,061 2,103 1,063 2,304
Average market value per share $ 30.30 29.91 $ 30.22 27.30
- ----------------------------------------------------- ---------- ------------ ---------- ---------
As of September 30, 1997 approximately 2,080,000 dilutive stock options had been
granted and were outstanding. Based upon various exercise prices, the total
consideration for the common stock equivalents will be approximately $32.1
million. Using the Treasury Stock Method, it is assumed that the proceeds from
the exercised common stock equivalents would be used to purchase outstanding
shares using an average market value of $30.30 per share for nine months ended
September 30, 1997. The dilution would be the equivalent of approximately
2,080,000 shares. The Treasury Stock Method is used to calculate EPS for periods
during 1997, the Modified Treasury Method is used for EPS calculation during
periods in 1996.
24
</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, 1997 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 Dollar
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1997
<PERIOD-END> Sep-30-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 374886
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 394
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 410953
<CASH> 1577
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 51137
<TOTAL-ASSETS> 513920
<POLICY-LOSSES> 15389
<UNEARNED-PREMIUMS> 76023
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 15000
0
0
<COMMON> 173
<OTHER-SE> 513747
<TOTAL-LIABILITY-AND-EQUITY> 513920
37714
<INVESTMENT-INCOME> 15589
<INVESTMENT-GAINS> (1198)
<OTHER-INCOME> 18015
<BENEFITS> 4404
<UNDERWRITING-AMORTIZATION> 7425
<UNDERWRITING-OTHER> 21550
<INCOME-PRETAX> 35839
<INCOME-TAX> 11781
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24149
<EPS-PRIMARY> 1.34
<EPS-DILUTED> 1.34
<RESERVE-OPEN> 10985
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 15389
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
CAPITAL MARKETS ASSURANCE CORPORATION AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
26
<PAGE>
Capital Markets Assurance Corporation and Subsidiary
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
ASSETS
<CAPTION>
September 30, 1997 December 31, 1996
(Unaudited)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments:
Bonds at fair value (amortized cost $323,043 at September
30, 1997 and $294,861 at December 31, 1996) $ 328,035 297,893
Short-term investments (at amortized cost which
approximates fair value) 21,119 16,810
- -----------------------------------------------------------------------------------------------------
Total investments 349,154 314,703
- -----------------------------------------------------------------------------------------------------
Cash 999 371
Accrued investment income 3,998 3,807
Deferred acquisition costs 51,137 45,380
Premiums receivable 7,132 5,141
Prepaid reinsurance 23,348 18,489
Other assets 5,666 6,424
- -----------------------------------------------------------------------------------------------------
Total assets $ 441,434 394,315
=====================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums $ 76,023 68,262
Reserve for losses and loss adjustment expenses 15,389 10,985
Ceded reinsurance 5,653 1,738
Accounts payable and other accrued expenses 14,270 8,019
Current income taxes 626 679
Deferred income taxes 17,383 15,139
- -----------------------------------------------------------------------------------------------------
Total liabilities 129,344 104,822
- -----------------------------------------------------------------------------------------------------
Stockholder's Equity:
Common stock - $1.00 par value per share; 15,000,000 shares
are authorized, issued and outstanding at September 30, 1997
and December 31, 1996 15,000 15,000
Additional paid-in capital 208,475 208,475
Unrealized appreciation on investments, net of tax 3,251 1,970
Retained earnings 85,440 64,048
Cumulative translation adjustment, net of tax (76) -
- -----------------------------------------------------------------------------------------------------
Total stockholder's equity 312,090 289,493
- -----------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $ 441,434 394,315
=====================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
27
<PAGE>
Capital Markets Assurance Corporation and Subsidiary
Consolidated Statements of Income
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues:
Direct premiums written $ 22,345 17,206 57,525 49,983
Assumed premiums written 225 8 1,141 1,032
Ceded premiums written (7,428) (4,129) (18,049) (11,142)
- -----------------------------------------------------------------------------------------------
Net premiums written 15,142 13,085 40,617 39,873
Increase in unearned premiums (1,663) (3,042) (2,903) (11,014)
- -----------------------------------------------------------------------------------------------
Net premiums earned 13,479 10,043 37,714 28,859
Net investment income 4,958 4,307 14,344 12,296
Net realized capital gains (loss) - (57) 2,549 111
Other income 51 25 139 104
- -----------------------------------------------------------------------------------------------
Total revenues 18,488 14,318 54,746 41,370
- -----------------------------------------------------------------------------------------------
Expenses:
Losses and loss adjustment expenses 1,528 1,248 4,404 3,432
Underwriting and operating expenses 4,430 3,780 13,309 11,142
Policy acquisition costs 2,372 2,126 7,425 6,249
- -----------------------------------------------------------------------------------------------
Total expenses 8,330 7,154 25,138 20,823
- -----------------------------------------------------------------------------------------------
Income before income taxes 10,158 7,164 29,608 20,547
- -----------------------------------------------------------------------------------------------
Income Taxes:
Current income tax 2,502 1,027 6,652 3,008
Deferred income tax 172 718 1,564 2,689
- -----------------------------------------------------------------------------------------------
Total income taxes 2,674 1,745 8,216 5,697
- -----------------------------------------------------------------------------------------------
Net Income $ 7,484 5,419 21,392 14,850
===============================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
28
<PAGE>
Capital Markets Assurance Corporation and Subsidiary
Consolidated Statement of Stockholder's Equity
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1997
<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 208,475
- --------------------------------------------------------------------------------
Balance at end of period 208,475
Unrealized appreciation on investments, net of tax:
Balance at beginning of period 1,970
Unrealized appreciation on investments 1,281
- --------------------------------------------------------------------------------
Balance at end of period 3,251
- --------------------------------------------------------------------------------
Retained earnings:
Balance at beginning of period 64,048
Net income 21,392
- --------------------------------------------------------------------------------
Balance at end of period 85,440
- --------------------------------------------------------------------------------
Cumulative translation adjustment, net of tax:
Balance at beginning of period -
Translation adjustment (76)
- --------------------------------------------------------------------------------
Balance at end of period (76)
- --------------------------------------------------------------------------------
Total stockholder's equity $ 312,090
================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
29
<PAGE>
Capital Markets Assurance Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
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Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 21,392 14,850
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Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Reserve for losses and loss adjustment expenses 4,404 3,054
Unearned premiums, net 7,761 15,643
Deferred acquisition costs (5,757) (7,188)
Premiums receivable (1,991) (528)
Accrued investment income (191) (468)
Income taxes payable 1,511 2,341
Net realized capital gains (2,549) (111)
Accounts payable and other accrued expenses 6,251 5,445
Prepaid reinsurance (4,859) (4,630)
Other, net 5,089 (381)
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Total adjustments 9,669 13,177
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Net cash provided by operating activities 31,061 28,027
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Cash flows from investing activities:
Purchases of investments (137,369) (154,308)
Proceeds from sales of investments 74,768 35,388
Proceeds from maturities of investments 32,168 91,063
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Net cash used in investing activities (30,433) (27,857)
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Net increase in cash 628 170
Cash balance at beginning of period 371 344
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Cash balance at end of period $ 999 514
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Supplemental disclosures of cash flow
information:
Income taxes paid $ 6,550 3,225
Tax and loss bonds purchased $ 155 131
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See accompanying notes to consolidated financial statements.
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Capital Markets Assurance Corporation and Subsidiary
Notes to Unaudited Consolidated Financial Statements
September 30, 1997
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"). In early
1997, CapMAC made an investment of 50 million French francs
(approximately 10 million U.S. dollars) in CapMAC Assurance, S.A., an
insurance subsidiary to be established in Paris, France. CapMAC
Assurance, S.A., is licensed to write financial guarantee insurance in
the European Union member states.
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 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 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, 1997 may not be
indicative of the results that may be expected for the full year ending
December 31, 1997. 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 as of December
31, 1996 and 1995, and for each of the years in the three-year period
ended December 31, 1996.
3. Reclassifications
Certain prior period balances have been reclassified to conform to the
current period presentation.
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