SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 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 13-3670828
(State of Incorporation) (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 April 30, 1997, 17,268,704 shares (net of treasury shares) of
Common Stock, par value $0.01 per share of the Registrant were outstanding.
Page 1 of 26 Pages
Index to Exhibits on Page 17
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CapMAC Holdings Inc. and Subsidiaries
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - March 31, 1997
and December 31, 1996.............................................4
Consolidated Statements of Income - three months ended
March 31, 1997 and March 31, 1996.................................5
Consolidated Statements of Stockholders' Equity - three months
ended March 31, 1997..............................................6
Consolidated Statements of Cash Flows - three months
ended March 31, 1997 and March 31, 1996...........................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 2. Changes in Securities...............................................15
Item 6. Exhibits and Reports on Form 8-K....................................15
SIGNATURES ..............................................................16
INDEX TO EXHIBITS............................................................17
Part I - Financial Information
Item 1 - Financial Statements of CapMAC Holdings Inc. and Subsidiaries.
2
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CapMAC HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(Unaudited)
3
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<TABLE>
CapMAC Holdings Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
ASSETS
<CAPTION>
March 31,1997 December 31,1996
(Unaudited)
<S> <C> <C>
Investments:
Bonds at fair value (amortized cost $285,092 at March 31, 1997
and $302,284 at December 31, 1996) $ 281,530 $ 305,422
Short-term investments (at amortized cost which approximates fair
value) 55,964 33,752
Common stock 471 -
Investment in affiliates 35,724 34,886
Total investments 373,689 374,060
- -------------------------------------------------------------------------------------------------------------------
Cash 10,763 966
Accrued investment income 3,110 3,847
Deferred acquisition costs 48,442 45,380
Premiums receivable 4,788 5,141
Prepaid reinsurance 18,703 18,489
Other assets 8,816 9,351
Total assets $ 468,311 $ 457,234
===================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Unearned premiums $ 68,838 $ 68,262
Reserve for losses and loss adjustment expenses 12,528 10,985
Ceded reinsurance 2,163 1,738
Accounts payable and other accrued expenses 19,895 15,274
Senior notes 15,000 15,000
Current income taxes 4,470 2,890
Deferred income taxes 7,694 9,590
Total liabilities 130,588 123,739
Minority Interest 23,362 23,108
- -------------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock - $0.01 par value per share; 20,000,000 shares are authorized;
none outstanding at March 31, 1997 and December
31, 1996 - -
Common Stock - $0.01 par value per share; 50,000,000 shares are
authorized; 16,543,101 and 16,425,324 shares issued March 31, 1997 and December
31, 1996; 16,543,029 and 16,425,274 shares
outstanding at March 31, 1997 and December 31, 1996 165 164
Additional paid-in capital 227,273 226,428
Unrealized depreciation on investments, net of tax (2,316) (71)
Retained earnings 94,393 89,310
Unallocated ESOP shares (5,138) (5,430)
Cumulative translation adjustment, net of tax (14) (14)
Treasury stock (2) -
Total stockholders' equity 314,361 310,387
- -------------------------------------------------------------------------------------------------------------------
Total liabilities, minority interest, and stockholders' equity $ 468,311 $ 457,234
===================================================================================================================
See accompanying notes to consolidated financial statements.
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</TABLE>
<PAGE>
<TABLE>
CapMAC Holdings Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
(Dollars in thousands)
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1997 March 31, 1996
<S> <C> <C>
Revenues:
Direct premiums written $ 16,454 $ 14,155
Assumed premiums written 261 874
Ceded premiums written (4,349) (1,910)
- -----------------------------------------------------------------------------------------------------------
Net premiums written 12,366 13,119
Increase in unearned premiums (363) (4,291)
- -----------------------------------------------------------------------------------------------------------
Net premiums earned 12,003 8,828
Advisory and other fees 3,373 9,872
Net investment income 5,249 4,111
Net realized capital (losses) gains (1,715) 149
Other income 27 56
- -----------------------------------------------------------------------------------------------------------
Total revenues 18,937 23,016
- -----------------------------------------------------------------------------------------------------------
Expenses:
Losses and loss adjustment expenses 1,543 1,075
Underwriting and operating expenses 7,217 4,838
Policy acquisition costs 2,581 2,064
Interest expense 301 301
- -----------------------------------------------------------------------------------------------------------
Total expenses 11,642 8,278
- -----------------------------------------------------------------------------------------------------------
Income before income taxes and minority interest 7,295 14,738
- -----------------------------------------------------------------------------------------------------------
Income Taxes:
Current income tax 2,354 3,899
Deferred income tax (632) 987
Total income taxes 1,722 4,886
- -----------------------------------------------------------------------------------------------------------
Income before minority interest 5,573 9,852
- -----------------------------------------------------------------------------------------------------------
Minority interest (161) 48
- -----------------------------------------------------------------------------------------------------------
Net Income $ 5,412 $ 9,900
===========================================================================================================
Primary earnings per share $ 0.30 $ 0.57
Fully diluted earnings per share $ 0.30 $ 0.57
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
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<TABLE>
CapMAC Holdings Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
(Unaudited)
(Dollars in thousands)
<CAPTION>
Three Months Ended
March 31, 1997
<S> <C>
Common stock:
Balance at beginning of period $ 164
Common stock issued 1
- -------------------------------------------------------------------------------
Balance at end of period 165
- -------------------------------------------------------------------------------
Additional paid-in capital:
Balance at beginning of period 226,428
Issuance of common stock 845
- -------------------------------------------------------------------------------
Balance at end of period 227,273
- -------------------------------------------------------------------------------
Unrealized depreciation on investments, net of tax:
Balance at beginning of period (71)
Unrealized depreciation on investments (2,245)
Balance at end of period (2,316)
- -------------------------------------------------------------------------------
Retained earnings:
Balance at beginning of period 89,310
Net income 5,412
Dividends declared - $.02 per share (329)
Balance at end of period 94,393
- -------------------------------------------------------------------------------
Unallocated ESOP shares:
Balance at beginning of period (5,430)
Allocation of ESOP shares 292
Balance at end of period (5,138)
- -------------------------------------------------------------------------------
Cumulative translation adjustment, net of tax:
Balance at beginning of period (14)
Translation adjustment -
Balance at end of period (14)
- -------------------------------------------------------------------------------
Treasury stock:
Balance at beginning of period -
Treasury shares acquired (2)
Balance at end of period (2)
- -------------------------------------------------------------------------------
Total stockholders' equity $ 314,361
===============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
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<TABLE>
CapMAC Holdings Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1997 March 31, 1996
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,412 $ 9,900
- -----------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Reserve for losses and loss adjustment expenses 1,543 713
Unearned premiums, net 576 4,499
Deferred acquisition costs (3,062) (2,397)
Premiums receivable 353 77
Accrued investment income 737 (220)
Income taxes payable 1,196 3,217
Net realized capital losses (gains) 1,715 (149)
Accounts payable and other accrued expenses 4,621 1,537
Prepaid reinsurance (214) (208)
Other, net (102) 277
Total adjustments 7,363 7,346
- ----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 12,775 17,246
Cash flows from investing activities:
Cash flows from investing activities:
Purchases of investments (91,936) (108,578)
Purchases of investments in affiliates - (3,333)
Proceeds from sale of investments 58,658 6,158
Proceeds from maturities of investments 29,739 86,281
Net cash used in investing activities (3,539) (19,472)
- ----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Cash flows from financing activities:
Allocation of ESOP shares 292 270
Minority interest capital contribution to CapMAC Asia - 2,151
Dividends paid (329) (319)
Exercise of stock options 598 -
Net cash provided by financing activities 561 2,102
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 9,797 (124)
Cash balance at beginning of period 966 1,033
Cash balance at end of period $ 10,763 $ 909
====================================================================================================
Supplemental disclosures of cash flow information:
Income taxes paid $ 563 $ 1,655
====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
7
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CapMAC Holdings Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
March 31, 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. CapMAC Financial Services (Europe)
Ltd. is a subsidiary of CFS, and CapMAC Assurance, S.A. is a
subsidiary of CapMAC. Holdings is also 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 three months ended March 31, 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.
Under APB Opinion No. 15, the Company's primary and fully diluted
earnings per share amounts are $.30 and $.57 per share for the
three-month periods ended March 31, 1997 and 1996, respectively. The
basic earnings per share amounts, as computed under Statement 128, are
expected to be approximately $.34 and $.64 per share for the
three-month periods ended March 31, 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.
8
<PAGE>
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"), 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").
Results of Operations
Quarter Ended March 31, 1997 versus Quarter Ended March 31, 1996
The Company reported net income of $5.4 million and primary and fully diluted
earnings per share ("EPS") of $0.30 during the first quarter of 1997. Although
the Company recorded growth in net premiums earned and business written during
the current quarter, lower advisory fees and net realized capital losses
resulted in a decline in net income of 45% from $9.9 million or $0.57 per share
on a primary and fully diluted basis in the first quarter of 1996. Operating
earnings, which the Company defines as net income less the effect of net
realized gains and losses, were $6.6 million, or $0.36 per share, down from the
record $9.8 million, or $0.56 per share, earned in the first quarter of 1996.
The decline in operating earnings was attributable to lower advisory fees earned
during the current quarter. As advisory fees are generally earned upon closing
certain transactions that involve significant structuring and advisory services,
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.
Total revenues during the first quarter of 1997 were $18.9 million, a decrease
of 18% from $23.0 million during the first quarter of 1996. This decrease was
primarily due to lower advisory fees and net realized capital losses, offset
partially by higher premiums earned and net investment income.
For the first quarter of 1997, gross premiums written were $16.7 million, an
increase of 11% from $15.0 million for the same period in 1996. This increase
was principally due to $1.9 million of premiums written with respect to domestic
consumer transactions, $0.9 million of premiums written with respect to domestic
corporate transactions, $0.8 million of premiums with respect to municipal
transactions, offset by lower premiums written with respect to the international
business of $1.9 million. However, the amount of premiums ceded to reinsurers
increased from $1.9 million during the first quarter of 1996 to $4.3 million in
the first quarter of 1997. 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 reinsured by Winterthur as of December 31, 1995. In connection with
this reassumption of liability, Winterthur commuted and returned unearned
premiums, net of ceding commission and Federal excise tax of $2.0 million which
reduced the amounts ceded to reinsurers in the first quarter of 1996. Net
premiums earned were $12.0 million for the first quarter of 1997, an increase of
36% from $8.8 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
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 also tracks the total estimated
present value of future revenues ("PFR"), which includes premiums (net of ceded
9
<PAGE>
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 first quarter of 1997 was estimated to
generate $22.2 million of PFR, an increase of 69% over the same period in 1996
due to higher net premium and ceding commission obtained primarily from certain
corporate asset-backed transactions. Correspondingly, gross par written
increased from $1.3 billion in the first quarter of 1996 to $3.3 billion in the
first quarter of 1997, representing an increase of 150%. At March 31, 1997,
CapMAC had 614 policies outstanding which are expected to generate $254.3
million of PFR, up approximately 9% 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 the first quarters of 1997 and 1996.
At March 31, 1997, net par insured and outstanding was $20.2 billion, up 3% from
$19.7 billion at December 31, 1996. The remaining weighted average life of the
insured portfolio was estimated to be 6.6 years at March 31, 1997 and 6.4 years
at December 31, 1996.
Advisory and other fees decreased 66% from $9.9 million in the first quarter of
1996 to $3.4 million in the first quarter of 1997. Advisory fees are received by
CFS in relation to the closing of transactions which involve significant
advisory and structuring services provided by CFS. Fees collected for such
services amounted to $1.3 million in the first quarter of 1997, compared to $9.3
million in the first quarter of 1996. Structured international transactions
closed during the first quarter of 1996 attributed to the large amount of
advisory fees collected during that period. Advisory fees related to
international business were $1.2 million and $9.0 million in the first quarter
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 the administration of third-party owned and managed funding vehicles.
The amount related to other fees was $2.1 million in the first quarter of 1997,
compared to $0.6 million in the first quarter of 1996, primarily due to the
increased utilization of such funding vehicles.
Net investment income was $5.2 million in the first quarter of 1997 and $4.1
million for the corresponding period in 1996. Average assets available for
investment increased from $301.0 million at March 31, 1996 to $338.8 million at
March 31, 1997. The average annualized pre-tax yield on the investment portfolio
increased from 6.9% in the first quarter of 1996 to 7.4% in the first quarter of
1997 due to a higher interest rate environment. The average after-tax yield on
the investment portfolio increased from 4.5% in the first quarter of 1996 to
4.8% in the first quarter of 1997. The amount of tax-exempt securities held in
the Company's investment portfolio decreased to 47% at March 31, 1997 from 59%
at March 31, 1996.
Net realized capital losses were $1.7 million in the first quarter of 1997
compared to net realized capital gains of $0.1 million in the first quarter of
1996. In the first quarter of 1997, the Company recorded a pre-tax capital loss
of $3.7 million (in addition to the $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"). This represents a partial write-off of the approximately $11
million that Holdings is committed to invest in the TMG Group as of March 31,
1997. Mutual Life Assurance Company of Canada has recapitalized the TMG Group in
the first quarter of 1997, which has significantly reduced Holdings' future
investment from 17.7% to 7.1% of TMG Group's total capitalization. The effect of
the net realized capital losses of $1.7 million was a reduction in fully diluted
earnings of $0.06 per share for the first quarter of 1997. While the Company
will continue to monitor this investment, and if any further impairment occurs
additional write-offs will be taken, the Company is currently in discussions
with The Mutual Life Assurance Company of Canada about limiting the Company's
commitment to invest in the TMG Group.
10
<PAGE>
Total expenses were $11.6 million in the first quarter of 1997, an increase of
41% from $8.3 million in the first 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 were $1.5 million in the first quarter of
1997 compared to $1.1 million in the first quarter of 1996. Apart from additions
to the SLR, the Company incurred no losses in the first quarter of 1997 and the
year ended December 31, 1996.
Underwriting and operating expenses were $7.2 million in the first quarter of
1997, a 49% increase from $4.8 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 $12.9 million and $9.3 million in the first quarter 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 discretionary bonuses to employees,
constituted approximately 75% of gross underwriting and operating expenses in
the first quarter of 1997 compared to 73% in the first quarter of 1996. The
Company maintains a discretionary bonus plan under which annual bonuses are
awarded to employees. As of March 31, 1997 and March 31, 1996, $4.3 million and
$2.5 million were accrued, respectively, for payment of bonuses under such plan.
Underwriting and operating expenses deferred by CapMAC were $5.6 million and
$4.5 million in the first 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 $2.6 million in the first quarter of 1997 from $2.1 million
in the first 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 first quarter of 1997 and 1996.
In the first quarter of 1997 and 1996, the Company had net tax expense of $1.7
million and $4.9 million, respectively. The Company's effective tax rate was
24.4% and 33.0% for the first quarter 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 from the
Company's investment portfolio. In the first quarter of 1997, tax-exempt
interest income of $2.4 million represented 34% of earnings before taxes ("EBT")
compared to $2.3 million which represented 16% of EBT in the first quarter of
the prior year.
Liquidity and Capital Resources
The Company and Holdings. The operations of the Company are conducted
primarily through CapMAC and CFS, wholly owned subsidiaries of Holdings. In
addition, the Company anticipates 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 and
CapMAC. 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.
11
<PAGE>
The Company's investment portfolio consists of both equity investments and high
quality, intermediate-term taxable and tax-exempt securities to obtain an
optimal portfolio mix of liquidity, quality, maturity and earnings. The average
contractual maturity of securities within the investment portfolio was 6.1 years
at March 31, 1997 and December 31, 1996. The average duration of the investment
portfolio at March 31, 1997 and December 31, 1996 was 4.4 years and 4.3 years,
respectively. At March 31, 1997, the amortized cost of the Company's investment
portfolio was approximately $341.5 million (fair value of $338.0 million).
Holdings' strategic investments include investments in the TMG Group, P.T. ABS
Finance Indonesia and ASIA Services.
Holdings is currently committed to purchase common stock in TMG Group for
approximately $11 million. Holdings must 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. 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, 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.
In April 1997, the Company issued approximately 707,000 new shares of common
stock in connection with the exercise and purchase of all of the outstanding
warrants for its common stock. The outstanding 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 and ranged from
$23.43 to $24.79 per share.
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,
generally after exhaustion of other liquidity sources in the transaction, such
as the cash flow from the collateral underlying such obligations, funds from
CapMAC's investment portfolio may be required to satisfy claims. CapMAC
generally insures asset-backed transactions which have been structured to
address liquidity risks through, among other measures, the addition of other
liquidity sources, such as banks, to transactions. The insurance policies issued
by CapMAC provide, in general, that payment of principal, interest and other
amounts insured by CapMAC may not be accelerated by the holder of the obligation
but are paid by CapMAC in accordance with the obligation's original payment
schedule or, at CapMAC's option, on an accelerated basis. These policy
provisions prohibiting acceleration of certain claims are mandatory under
Article 69 of the New York Insurance Law and serve to reduce CapMAC's liquidity
requirements.
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 6.6 years
and 6.5 years at March 31, 1997 and December 31, 1996, respectively. The average
duration of the investment portfolio at March 31, 1997 and December 31, 1996 was
4.8 years and 4.6 years, respectively. At March 31, 1997, the amortized cost of
CapMAC's investment portfolio was approximately $314.5 million (fair value of
12
<PAGE>
$311.0 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 September 1999 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 March 31, 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 new stop-loss reinsurance is provided by
Mitsui, Marine and Fire Insurance Co., Ltd. ("Mitsui"), AXA Re Finance S.A.
("AXA Re"), and Munchener Ruckversicherungs-Gesellschaft ("Munich Re"). At March
31, 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 March 31, 1997, CapMAC had statutory qualified capital, which consisted of
statutory capital, unassigned surplus and contingency reserves, of $266.2
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 90 to 1 at March 31, 1997 and
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 $595.5 million and $542.9 million at March 31,
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 to be established in Paris, France. CapMAC Assurance, S.A., is
licensed to write financial guarantee insurance in the European Union member
states.
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
March 31, 1997, the amortized cost and fair value of the consolidated CFS
portfolio was $8.0 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 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. CIM is expected to generate revenue through fees
charged for assets under management.
13
<PAGE>
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.
Under APB Opinion No. 15, the Company's primary and fully diluted earnings per
share amounts are $.30 and $.57 per share for the three-month periods ended
March 31, 1997 and 1996, respectively. The basic earnings per share amounts, as
computed under Statement 128, are expected to be approximately $.34 and $.64 per
share for the three-month periods ended March 31, 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.
14
<PAGE>
PART II - OTHER INFORMATION
Items 1,3,4 and 5 are omitted either because they are inapplicable or because
the answer to such questions is negative.
Item 2. Changes in Securities
At the time the Company became a public company in December, 1995, warrants
for 2,230,025 shares of common stock were outstanding. All the warrants were
issued in June 1992 to certain stockholders of the Company. The exercise price
for the warrants was $13.33 per share. During 1996, warrants for 551,389.5
shares were exercised, with each holder electing to reduce the number of shares
received by such holder upon exercise instead of paying the exercise price in
cash. The number of shares deducted from the shares issued to each such holder
was calculated by dividing the aggregate exercise price of the warrants
exercised by the rolling ten-day average of the market price for the Company's
common stock on the date of exercise (the "Market Price"). The aggregate number
of shares issued in 1996 in connection with the exercise of the warrants was
321,758. In lieu of fractional shares, each warrant holder received cash from
the Company based on the Market Price of the Company's common stock on the date
of exercise.
During the first quarter of 1997, warrants for an additional 139,727 shares
of common stock were exercised. Instead of paying the exercise price of the
warrants in cash, each of the holders elected to reduce the number of shares
received based on the Market Price. The aggregate number of shares issued in the
first quarter of 1997 in connection with the exercise of warrants was 84,727.
Because the exercise of the warrants and delivery of the shares of common stock
by the Company to the holders did not involve a public offering and was an
exchange of securities where no commission was charged, the transactions were
completed in reliance upon the exemptions set forth in Sections 4(2) and 3(a)(9)
of the Securities Act of 1933, as amended.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11. Computation of Earnings Per Share Assuming Full Dilution
27. Financial Data Schedule
99. Additional Exhibits - Capital Markets Assurance Corporation
and Subsidiary Financial Statements
(b) Reports on Form 8-K - No Reports on Form 8-K were filed in this
quarter.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CapMAC Holdings Inc.
Registrant
Date: May 14, 1997 /s/ Paul V. Palmer
Paul V. Palmer
Managing Director and
Chief Financial Officer
Date: May 14, 1997 /s/ Gerard Edward Murray
Gerard Edward Murray
Senior Vice President and
Controller
(Principal Accounting Officer)
16
<PAGE>
Exhibit Index
Page Number
in Sequential
Exhibit No. Exhibit Number Copy
11. Computation of Earnings Per Share 18
27. Financial Data Schedule 20
99. Capital Markets Assurance Corporation and Subsidiary
Financial Statements 21
17
<PAGE>
<TABLE>
Exhibit 11a
CapMAC Holdings Inc. and Subsidiaries
Computation of Per Share Earnings
(Dollars in thousands except Share data)
<CAPTION>
Three Months Ended
March 31
<S> <C> <C>
1997 1996
- ------------------------------------------------------ ------- ---- -------
Modified Treasury Stock Method E.P.S. - Fully Diluted
Net income $ 5,412 $ 9,900
- ------------------------------------------------------ ------- ---- -------
Average number of common shares outstanding 16,103 15,489
Assumed exercise of dilutive stock options 1,963 1,869
- ------------------------------------------------------ ------- ---- -------
Fully diluted number of shares 18,066 17,358
Earnings per share assuming full dilution $ .30 $ .57
- ------------------------------------------------------ ------- ---- -------
Common stock equivalents 4,238 4,336
Proceeds from exercise of all equivalents $ 72,546 $ 60,457
Purchase of treasury stock 2,725 2,468
Market value per share $ 26.63 $ 24.50
- ------------------------------------------------------ ------- ---- -------
As of March 31, 1997 approximately 4,238,000 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 $72.5
million. Using the Modified Treasury Stock method, it is assumed that the
proceeds from the exercised common stock equivalents would be used to purchase
up to 20% of the outstanding shares using the market value of $26.63 per share
on March 31, 1997. The dilution would be the equivalent of approximately
1,963,000 shares.
</TABLE>
18
<PAGE>
<TABLE>
Exhibit 11b
CapMAC Holdings Inc. and Subsidiaries
Computation of Per Share Earnings
(Dollars in thousands except Share data)
<CAPTION>
Three Months Ended
March 31
1997 1996
<S> <C> <C>
- ---------------------------------------------------- ------ ---------
Modified Treasury Stock Method E.P.S. - Primary
Net income $ 5,412 $ 9,900
- ---------------------------------------------------- ------ ---------
Average number of common shares outstanding 16,103 15,489
Assumed exercise of dilutive stock options 1,986 1,834
- ---------------------------------------------------- ------ ---------
Fully diluted number of shares 18,089 17,323
Earnings per share assuming full dilution $ .30 $ .57
- ---------------------------------------------------- ------ ---------
Common stock equivalents 4,238 4,336
Proceeds from exercise of all equivalents $ 72,546 $ 60,457
Purchase of treasury stock 2,285 2,503
Average market value per share $ 31.75 $ 24.16
- ---------------------------------------------------- ------ ---------
As of March 31, 1997 approximately 4,238,000 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 $72.5
million. Using the Modified Treasury Stock method, it is assumed that the
proceeds from the exercised common stock equivalents would be used to purchase
up to 20% of the outstanding shares using the average market value of $31.75 per
share for three months ended March 31, 1997. The dilution would be the
equivalent of approximately 1,986,000 shares.
19
</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 March 31, 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 Dollars
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 337494
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 471
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 373689
<CASH> 10763
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 48442
<TOTAL-ASSETS> 468311
<POLICY-LOSSES> 12528
<UNEARNED-PREMIUMS> 68838
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 15000
0
0
<COMMON> 165
<OTHER-SE> 314196
<TOTAL-LIABILITY-AND-EQUITY> 468311
12003
<INVESTMENT-INCOME> 5249
<INVESTMENT-GAINS> (1715)
<OTHER-INCOME> 3400
<BENEFITS> 1543
<UNDERWRITING-AMORTIZATION> 2581
<UNDERWRITING-OTHER> 7217
<INCOME-PRETAX> 7295
<INCOME-TAX> 1722
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5412
<EPS-PRIMARY> .30
<EPS-DILUTED> .30
<RESERVE-OPEN> 10985
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 12528
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
CAPITAL MARKETS ASSURANCE CORPORATION AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(Unaudited)
21
<PAGE>
<TABLE>
Capital Markets Assurance Corporation and Subsidiary
Consolidated Balance Sheets
(Dollars in thousands)
ASSETS
<CAPTION>
March 31, 1997 December 31,1996
(Unaudited)
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
Investments:
Bonds at fair value (amortized cost $276,563 at March 31, 1997
and $294,861 at December 31, 1996) $ 273,096 $ 297,893
Short-term investments (at amortized cost which approximates fair
value) 37,903 16,810
- -------------------------------------------------------------------------------------------------------------------
Total investments 310,999 314,703
- -------------------------------------------------------------------------------------------------------------------
Cash 9,399 371
Accrued investment income 3,070 3,807
Deferred acquisition costs 48,442 45,380
Premiums receivable 4,788 5,141
Prepaid reinsurance 18,703 18,489
Other assets 6,901 6,424
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 402,302 $ 394,315
===================================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums $ 68,838 $ 68,262
Reserve for losses and loss adjustment expenses 12,528 10,985
Ceded reinsurance 2,163 1,738
Accounts payable and other accrued expenses 11,214 8,019
Current income taxes 1,301 679
Deferred income taxes 13,784 15,139
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 109,828 104,822
- -------------------------------------------------------------------------------------------------------------------
Stockholder's Equity:
Common stock - $1.00 par value per share; 15,000,000 shares are authorized,
issued and outstanding at March 31, 1997 and
December 31, 1996 15,000 15,000
Additional paid-in capital 208,475 208,475
Unrealized (depreciation) appreciation on investments, net of tax (2,253) 1,970
Retained earnings 71,252 64,048
- -------------------------------------------------------------------------------------------------------------------
Total stockholder's equity 292,474 289,493
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $ 402,302 $ 394,315
===================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
<TABLE>
Capital Markets Assurance Corporation and Subsidiary
Consolidated Statements of Income
(Unaudited)
(Dollars in thousands)
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1997 March 31, 1996
<S> <C> <C>
Revenues:
Direct premiums written $ 16,454 $ 14,155
Assumed premiums written 261 874
Ceded premiums written (4,349) (1,910)
- ----------------------------------------------------------------------------
Net premiums written 12,366 13,119
Increase in unearned premiums (363) (4,291)
- ----------------------------------------------------------------------------
Net premiums earned 12,003 8,828
Net investment income 4,702 3,877
Net realized capital gains 2,043 149
Other income 43 54
- ----------------------------------------------------------------------------
Total revenues 18,791 12,908
- ----------------------------------------------------------------------------
Expenses:
Losses and loss adjustment expenses 1,543 1,075
Underwriting and operating expenses 4,671 3,978
Policy acquisition costs 2,581 2,064
- ----------------------------------------------------------------------------
Total expenses 8,795 7,117
- ----------------------------------------------------------------------------
Income before income taxes 9,996 5,791
- ----------------------------------------------------------------------------
Income Taxes:
Current income tax 1,873 664
Deferred income tax 919 823
- ----------------------------------------------------------------------------
Total income taxes 2,792 1,487
- ----------------------------------------------------------------------------
Net Income $ 7,204 $ 4,304
============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
<TABLE>
Capital Markets Assurance Corporation and Subsidiary
Consolidated Statement of Stockholder's Equity
(Unaudited)
(Dollars in thousands)
<CAPTION>
Three Months Ended
March 31, 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 (depreciation) appreciation
on investments, net of tax:
Balance at beginning of period ............................. 1,970
Unrealized depreciation on investments ..................... (4,223)
---------
Balance at end of period ................................ (2,253)
---------
Retained earnings:
Balance at beginning of period ............................. 64,048
Net income ................................................. 7,204
---------
Balance at end of period ................................ 71,252
---------
Total stockholder's equity .............................. $ 292,474
=========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
<TABLE>
Capital Markets Assurance Corporation and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1997 March 31, 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,204 $ 4,304
- ------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Reserve for losses and loss adjustment expenses 1,543 713
Unearned premiums, net 576 4,499
Deferred acquisition costs (3,062) (2,397)
Premiums receivable 353 77
Accrued investment income 737 (220)
Income taxes payable 1,541 947
Net realized capital gains (2,043) (149)
Accounts payable and other accrued expenses 3,195 287
Prepaid reinsurance (214) (208)
Other, net 78 89
- ------------------------------------------------------------------------------------------------
Total adjustments 2,704 3,638
- ------------------------------------------------------------------------------------------------
Net cash provided by operating activities 9,908 7,942
- ------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of investments (74,308) (87,335)
Proceeds from sales of investments 58,658 6,158
Proceeds from maturities of investments 14,770 73,280
- ------------------------------------------------------------------------------------------------
Net cash used in investing activities (880) (7,897)
- ------------------------------------------------------------------------------------------------
Net increase in cash 9,028 45
Cash balance at beginning of period 371 344
- ------------------------------------------------------------------------------------------------
Cash balance at end of period $ 9,399 $ 389
================================================================================================
Supplemental disclosures of cash flow
information:
Income taxes paid $ 1,250 $ 525
================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
Capital Markets Assurance Corporation and Subsidiary
Notes to Unaudited Consolidated Financial Statements
March 31, 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 three months ended March 31, 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.
26
