SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File Number 1-14096
CapMAC Holdings Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3670828
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
885 Third Avenue, New York, New York 10022
(Address of principal executive offices, including zip code)
(212) 755-1155
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, par value $.01 per share New York Stock Exchange, Inc.
Securities registered pursuant to section 12(g) of the Act:
None
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in part III of this Form 10-K or any
amendment to this Form 10-K [ ]
The aggregate market value of voting stock, excluding treasury shares,
held by non-affiliates of the registrant at March 24, 1997 was $459,069,915
(based on the closing price of the registrant's shares on the New York Stock
Exchange on March 24, 1997, which was $27.75).
At March 24, 1997, there were outstanding 16,543,060 shares of Common
Stock, par value $0.01 per share, of the registrant.
Documents Incorporated By Reference
Portions of the registrant's definitive Proxy Statement, to be mailed to
stockholders, for the annual meeting of stockholders to be held on May 7, 1997
are incorporated by reference into Part III hereof.
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TABLE OF CONTENTS
To be updated
Page
----
Item 1 Business........................................................ 2
Item 2. Properties...................................................... 33
Item 3. Legal Proceedings............................................... 33
Item 4. Submission of Matters to a Vote of Security Holders............. 33
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters................................. 34
Item 6. Selected Financial Data......................................... 35
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations................ 38
Item 8. Financial Statements and Supplementary Data..................... 47
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......................... 75
Item 10. Directors and Executive Officers of the Registrant.............. 76
Item 11. Executive Compensation.......................................... 76
Item 12. Security Ownership of Certain Beneficial Owners
and Management.................................................. 76
Item 13. Certain Relationships and Related Transactions.................. 76
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8K.......................................... 77
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Part I
Item 1. Business
General
CapMAC Holdings Inc. ("Holdings" or the "Company") is a holding
company which provides financial guaranty insurance, principally of asset-backed
obligations, through its wholly owned subsidiary Capital Markets Assurance
Corporation ("CapMAC") and advisory and structuring services through its wholly
owned subsidiaries CapMAC Financial Services, Inc. and CapMAC Financial Services
(Europe) Ltd. (collectively, "CFS"), primarily in connection with transactions
in which CapMAC issues guarantees. Holdings is also the parent of CapMAC
Investment Management, Inc. ("CIM"), a money management subsidiary incorporated
in 1996 to sponsor and manage specialized investment funds to be marketed to
institutional investors and high-net worth individuals in the U.S. and abroad.
CapMAC's claims-paying ability is rated triple-A by Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc. ("S&P"), Duff & Phelps Credit Rating
Co. ("DCR") and Nippon Investors Service, Inc., a Japanese rating agency. CapMAC
focuses on the asset-backed market while participating on a limited basis in
selected transactions in the primary municipal market. As of December 31, 1996,
obligations backed by consumer, trade and corporate receivables and other
taxable obligations constituted approximately 96% of CapMAC's portfolio of
insured obligations while municipal and government obligations constituted
approximately 4%.
Citicorp (through its subsidiary, Citibank (New York State)
established the predecessor to the Company ("Original Holdings") in 1987 to
focus primarily on the taxable structured asset-backed market. The Company was
previously called CapMAC Acquisition Corp. and is the successor by merger to
Original Holdings. The merger occurred on June 26, 1992 in connection with the
purchase from Citicorp of Original Holdings by a group of institutional
investors together with the Company's management and certain employees (the
"Acquisition"). CapMAC Acquisition Corp. then changed its name to CapMAC
Holdings Inc.
The Company raised additional equity capital through two private
placements and an initial public offering in 1995. In July 1995, the Company
sold 500,001 shares of newly issued common stock to ORIX USA Corporation. The
net proceeds of $9 million were contributed to CapMAC. In December 1995, the
Company completed the initial public offering of its common stock, in which the
Company sold 2,500,000 newly issued shares and certain members of its initial
group of investors sold 1,766,437 shares. Contemporaneously with the closing of
the initial public offering, the Company sold in a private placement an
additional 500,000 newly issued shares to Centre Reinsurance Limited ("Centre
Re"). The Company raised approximately $54.7 million of net proceeds from the
initial public offering and the sale to Centre Re, of which $50 million were
contributed to CapMAC. In July 1996, certain of the Acquisition investors sold
3,737,500 shares in a registered secondary public offering.
The Company is organized into five separate business units--Credit
Enhancement, Financial Engineering, Latin America, Project Finance and
Specialized Funds Management, reflecting both the Company's current business
operations and the anticipated focus of future business growth. The Company's
specialized funds management business is conducted through its wholly-owned
subsidiary, CIM. In addition, the Company has combined its overall marketing
efforts under a global marketing unit, which is part of CapMAC Financial
Services, Inc. To support its business and marketing efforts, the
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Company has four support units- Finance/Distribution, Research and Development,
Risk Management and Legal/Administration.
Financial guaranty insurance written by CapMAC generally guarantees
to the holder of the guaranteed obligation the timely payment of principal and
interest in accordance with the obligation's original payment schedule. In the
case of a default on the insured obligation, payment under the insurance policy
generally may not be accelerated by the holder without the consent of CapMAC,
even though the underlying obligation may be accelerated.
The structured asset-backed transactions guaranteed by CapMAC
include securities backed by trade and lease receivables, automobile loans,
credit card receivables, home equity loans, assets securing guaranteed
investment contracts issued by insurance companies, health care receivables,
residential mortgages and real estate tax lien receivables. CapMAC has also
insured securitizations backed by senior bank loans, sovereign and corporate
bonds of emerging market countries, premium receivables of property/casualty
insurance companies, and obligations of counterparties under hedging contracts
such as interest rate swaps and obligations of special purpose derivative
product subsidiaries of financial institutions. In connection with the
activities of the recently formed Project Finance business unit, it is
anticipated that CapMAC will insure obligations backed by revenues to be
generated from infrastructure and project financings, such as toll roads and
power plants, located primarily outside of the United States.
For primary issues, the Company works with issuers to structure
asset-backed transactions into investment grade obligations which it believes
would satisfy investment grade criteria of the rating agencies before the
addition of CapMAC's guarantee. The Company generally relies on a diversified
pool of underlying assets and structural and first loss protections to minimize
credit and legal risks. Protection to CapMAC against losses can be provided by
excess collateral, cash reserve accounts, and third party credit support. The
amount of such protection is sized to cover expected credit losses on the
underlying collateral pool, even under adverse scenarios. Consequently, CapMAC
insured issues are structured to meet a "zero-loss" underwriting standard.
Unlike underwriting used in connection with life, property and casualty and
other insurance products, where a certain level of loss is expected for a
portfolio of business written, "zero-loss" underwriting is a method of
underwriting in which no losses are expected on the insurance policy at the time
it is issued, based on worst-case assumptions.
The Company is also entering into a variety of other business
activities through its Financial Engineering business unit which may or may not
be related to the provision of financial guarantee insurance by CapMAC. These
include providing advisory services to specialty finance companies and, under
certain circumstances in connection with services provided by the Company,
making equity investments in such companies; creating and enhancing synthetic
investment products for investors; and participating in the production and
distribution of asset repackaging and arbitrage products for investors, such as
collateralized bond and loan obligations. These activities and investments have
a higher risk/reward profile than the provision of financial guarantee insurance
or advisory and structuring services. It is anticipated that investments in
Financial Engineering activities in general, and any equity investments of the
Company made in connection with such activities in particular, will generate
long-term revenue growth. However, the amount and timing of such revenue, and
the Company's success in these activities and investments, is uncertain.
Investments above a threshold amount are subject to review by a committee of the
Board of Directors.
The Company also has a secondary market insurance program in which
CapMAC provides
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guarantees of securities, primarily utility first mortgage bonds and municipal
obligations, that are already issued and trading in the secondary markets.
CapMAC issues both full and partial guarantees of securities. Full
guarantees provide a guarantee of all payments of principal and interest on the
insured security. Partial guarantees provide a guarantee of payments of
principal and interest on a security up to a specified percentage (less than
100%) of the outstanding principal amount of the security.
Industry Overview
The securitization market has continued to expand every year since
1987, as measured both by the aggregate principal amount of asset-backed
obligations issued and the variety of assets which have been securitized. While
mortgages, home equity loans, credit card receivables and auto loans constitute
the largest percentage of assets backing asset-backed securities, the variety of
asset-backed obligations available to investors has continued to expand
dramatically, as corporations, financial institutions and even state and local
governments have sought to access the capital markets at attractive interest
rates by securitizing their respective assets and utilizing the techniques of
structured finance.
The principles of securitization and structured finance have been
increasingly applied in overseas markets, although development in particular
countries has varied due to the sophistication of the capital markets and the
impact of financial regulatory requirements, accounting standards and legal
systems. Recently, securitization has been used to finance assets and
originators located in Europe, Japan, Hong Kong, and in various other Asian
countries, as well as in South America. Foreign issuers in countries have
increasingly applied the principles of structured finance to issue obligations
that are rated higher than the rating ceiling imposed by the sovereign debt
ratings of the countries in which they are domiciled, a trend which management
believes will continue, albeit at varying rates in each region and country.
Asset-backed obligations are typically issued in connection with
structured financings or securitizations, in which the securities being issued
are secured by or payable from a specific pool of assets having an ascertainable
cash flow and held by a special purpose issuing entity. While most asset-backed
obligations are secured by or represent interests in pools of assets, such as
residential and commercial mortgages and credit card and auto loan receivables,
financial guaranty insurance companies have also insured asset-backed
obligations secured by one or a few assets, such as utility first mortgage
bonds, project finance bonds and multifamily or commercial real estate. In
addition, so-called "future-flow" transactions, where the obligations are backed
by financial assets generated after the date on which the obligation is issued,
are often included in the general category of asset-backed obligations.
In general, asset-backed obligations are payable only from cash flow
generated by a pool of assets and take the form of either "pass-through"
obligations, which represent interests in the related assets, or "pay-through"
obligations, which generally are debt obligations collateralized by the related
assets. Both types of asset-backed obligations typically have the benefit of
overcollateralization or one or more forms of credit enhancement to cover credit
risks associated with the related assets.
The following table sets forth certain industry information relating
to selected asset-backed obligations issued for the periods indicated:
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New U.S. Issuance of Asset-Backed Obligations (1)
Year Ended December 31,
-------------------------------------
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------
($ in billions)
Credit Cards $ 46.9 $ 47.0 $ 31.9 $ 19.6 $ 15.8
Auto Loans 32.1 24.7 17.5 24.8 23.2
Home Equities 36.3 16.1 10.1 7.1 6.2
Manufacturing Housing 7.9 5.6 4.3 2.5 2.8
Other (2) 28.2 14.4 12.0 5.9 3.2
- --------------------------------------------------------------------------------
Public Asset-Backed Insurance 151.4 107.8 75.8 59.9 51.2
Private Asset-Backed Insurance 22.2 17.9 12.7 13.1 11.5
Asset-Backed Commercial Paper 152.0 99.0 71.0 58.0 47.0
- --------------------------------------------------------------------------------
Total $325.6 $224.7 $159.0 $131.0 $109.7
================================================================================
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(1) Sources: For data on public asset-backed issuance, Dean Witter
Asset-Backed Securities Reference Guide, Year Ended 1992 and Year Ended
1993 and MCM CorporateWatch (data for 1994-1996); for data on asset-backed
commercial paper, Goldman Sachs, "Overview of the Commercial Paper
Market," February 1997; and for data on private asset-backed issuance,
Securities Data Co., as supplemented by CapMAC estimates.
(2) Including (but not limited to) obligations backed by student loans;
recreational vehicle loans; boat loans; unsecured consumer loans;
agricultural equipment loans; loans to small businesses; various
equipment, computer, rolling stock and aircraft leases; and trade and real
estate tax receivables.
Based on data compiled by the Association of Financial Guaranty
Insurers, the Company wrote approximately 30% of the financial guaranty
insurance directly written (excluding business assumed through reinsurance) by
financial guaranty insurers during 1995 on taxable asset-backed obligations.
Statistics for 1996 were unavailable as of the date of this report.
The rapid growth in the issuance of asset-backed obligations up to
1995 was due in part to increased capital requirements of commercial banks and
insurance companies and the contraction of credit extended to corporations.
Banks responded to increased capital requirements by selling certain of their
assets, such as credit card receivables and automobile loans, in securitized
structures to the financial markets. Finance companies were established which
utilized securitization as their primary source of funding. As the market for
asset-backed obligations has expanded and the cost to issuers has fallen, many
corporations found securitization of their assets to be a funding alternative
increasingly less costly than traditional forms of borrowing. The continuation
of the growth trend through 1996 appears to be a function of the increased
acceptance of securitization as an efficient financing technique which has
benefits for both issuers and investors, rather than a response to specific
changes in regulatory capital requirements or general credit market conditions.
The general trend in the asset-backed market has been that investors demand
higher premiums for financing novel assets or new issuers, and that this
interest rate premium is reduced as the market becomes more familiar with the
assets or the issuer, as applicable. Financial guaranty insurers tend to have a
higher rate of involvement with these new issuers and assets.
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Asset-backed obligations generally entail two forms of risks: asset
risk, which is related to the amount and quality of asset coverage; and
structural risk, which is related to the extent to which the transaction
structure protects the interests of the investors (and therefore the insurer).
In general, the amount and quality of asset coverage required is determined by
the historical performance of the assets. The projected future performance of
the underlying pool of assets (for example, loss and delinquency rates, yield
and the rate at which payments are received on the assets) will generally
determine whether the amount of overcollateralization or other credit
enhancement ultimately was sufficient to protect investors (and therefore the
insurer) against adverse asset performance. The ability of the servicer of the
assets to properly service and collect the underlying assets often is a factor
in determining future asset performance.
Structural risks addressed by asset-backed transactions include
bankruptcy and tax risks. Asset-backed structures are usually designed to
protect the investors (and therefore the insurer) from the bankruptcy or
insolvency of the entity that originated the underlying assets as well as from
the bankruptcy or insolvency of the servicer of those assets (which may be
receiving the cash payments from the underlying obligors). Related issues that
often raise concerns are whether the sale of the assets by the originator to the
issuer of the asset-backed obligations would be respected in the event of the
bankruptcy or insolvency of the originator and whether the servicer of the
assets may be permitted or required to delay the remittance to investors of any
cash collections held by it at, or received by it after, the time it becomes
subject to bankruptcy or insolvency proceedings. In addition, because the cash
flow generated by the underlying assets is the primary source for the repayment
of the asset-backed obligations, asset-backed transactions are structured to
take into account the tax status of the issuing entity and the tax
characterization (debt or equity) of the asset-backed obligations which are
issued. The Company endeavors to address these risks through its credit
underwriting guidelines, standards and procedures.
Municipal obligations comprise bonds, notes and other evidences of
indebtedness issued by states and their political subdivisions (such as
counties, cities, or towns), utility districts, public universities and
hospitals, public housing and transportation authorities and other public and
quasi-public entities. Municipal obligations are supported by the issuer's
taxing power in the case of general obligation bonds, or by the issuer's ability
to impose and collect fees and charges for public services or specific projects
in the case of most special revenue bonds. Although insurance of municipal
obligations represents the largest portion of the overall financial guaranty
insurance business, as of December 31, 1996 it forms only 4% of the Net Par
insured by CapMAC. "Net Par" is the amount of principal or other obligations
(excluding the interest portion) guaranteed under an insurance policy or a
reinsurance agreement, net of ceded reinsurance. CapMAC's share of the market
for the insurance of directly issued municipal bonds was approximately 0.3% in
1995 and is estimated to be less than 0.4% in 1996.
The Company's Project Finance business unit has been formed to
provide insurance for obligations backed by infrastructure and other project
financings. These obligations are subject to risks different from asset-backed
and municipal obligations, insofar as repayment of the obligation guaranteed
depends on the ability of the project to produce and sell its' product, such as
power or a commodity, or collect fees from the users of the project, in the case
of toll roads. In addition, certain projects are subject to risks relating to
construction and/or, if financed is outside of the United States, foreign
currency. These risks are addressed in each transaction though credit
underwriting guidelines, standards and procedures similar to those applied to
asset-backed and municipal obligations, and with respect to certain risks, third
party credit support. For example, construction risk may be mitigated with
letters of credit or corporate guarantees and currency risk may be addressed
through a currency swap.
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Generally, financial guaranty insurance companies have increasingly
sought to diversify their product base as the market for the insurance of
traditional asset-backed and municipal transactions has become more competitive.
This diversification has been in the form of an expansion of the core businesses
and in the provision of nontraditional new products. The overall trend has been
for financial guarantors of asset-backed obligations to insure a higher
proportion of obligations backed by new asset classes than obligations backed by
assets which have been securitized in large quantities and are therefore
familiar to investors. Financial guarantors generally also guaranty a higher
proportion of obligations issued by issuers who are unfamiliar to asset-backed
investors. This is because investors particularly value the additional security
provided by a financial guarantor when either the asset securitized or the
issuer is unfamiliar.
Underwriting Procedures and Guidelines
CapMAC specializes in the credit enhancement of structured
asset-backed obligations. Management believes that these generally represent a
lower risk of loss than the credit enhancement of obligations which are neither
backed by a dedicated pool of assets nor structured to protect against
bankruptcy risks because such obligations have at least some of the following
characteristics: (i) they typically involve a large, diverse pool of assets;
(ii) they employ structural protections which segregate the underlying assets
from the credit risk of the seller/servicer; and (iii) they have a first loss
protection built into the transaction, the amount of which is based on the
historical performance of the assets and is usually in the form of (a)
overcollateralization or cash collateral/reserves, (b) retention of risk by the
seller/servicer or (c) assumption of risk by a third party other than CapMAC.
While not all obligations guaranteed by CapMAC have all of the protective
characteristics described above, substantially all obligations employ at least
some of them. Structured asset-backed obligations are typically subject to
independent review and oversight by a variety of third parties (rating agencies,
underwriters, reinsurers, liquidity banks and legal counsel).
The Company has developed strict and highly specific underwriting
procedures for the various types of obligations CapMAC insures, consistent with
the financial guaranty industry's standard of "zero-loss" underwriting. The
Company's underwriting policies, procedures and guidelines outline the process
for analyzing, approving and monitoring all prospective and closed transactions.
The underwriting policies and procedures encompass the approval process and the
portfolio limits.
Each potential transaction is managed by the appropriate business
unit--Financial Engineering, Credit Enhancement, Project Finance or Latin
America. As transactions are assigned to each business unit, teams are
established consisting of members of that unit and/or other individuals with the
appropriate expertise within the Company.
A formal written analysis is prepared and is included in the
presentation by the transaction team to CapMAC's Underwriting Committee (the
"Underwriting Committee"), which must approve all transactions other than
certain transactions for approved programs. These approved programs may be
approved outside of the Underwriting Committee by a committee of three
individuals consisting of the head of exposure management and at least two
members of the Underwriting Committee. The Underwriting Committee is comprised
of 12 senior underwriting officers, including the Chief Underwriting Officer and
the Chairman/Chief Executive Officer. In addition to the Underwriting Committee,
the Underwriting Committee of CapMAC's Board of Directors must approve all
transactions which have an aggregate exposure greater than a specified limit or
which present certain risk issues. Upon approval by the
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applicable underwriting committees, the transaction team is responsible for
documenting and closing the transaction.
While the underwriting process necessarily varies depending on the
transaction, all evaluations for structured asset-backed transactions generally
include: a review of the transaction structure, an asset analysis, a financial
review of the entities involved (primarily the issuer and/or seller/servicer),
on-site due diligence and visits with management of the significant entities.
The Company has developed a pricing model that for each transaction
takes into account various factors, such as estimated prepayments on consumer
transactions, the level of capital required by insurance regulators and the
rating agencies, the estimated incremental expenses to underwrite and monitor
the transaction, an allocation of general and administrative expenses, a
statistically determined assessment of probable losses based on industry
experience, and the impact of any reinsurance and taxes. Using this pricing
model, the earnings from the transaction and the transaction's projected return
on capital are calculated.
Each transaction is also reviewed by the Risk Management support
unit, specifically the Portfolio Manager, in the context of CapMAC's existing
insured portfolio to ensure compliance with general guidelines. Regulatory and
rating agency guidelines generally limit the amount of exposure that CapMAC can
retain with respect to any transaction guaranteed, and CapMAC sets internal
limits on its exposure, such as limits for each transaction and the type of
assets securitized. CapMAC also actively uses reinsurance to manage its
exposure.
On occasion, CapMAC reinsures other financial guaranty insurers.
CapMAC provides such reinsurance only on a transaction-by-transaction basis
pursuant to the underwriting standards and procedures utilized in direct
writings.
Monitoring Procedures
CapMAC monitors each transaction on an ongoing basis. The
responsibility for monitoring completed transactions rests primarily with the
Exposure Management Group within Risk Management, which reports to the Chief
Underwriting Officer. Typically, an officer from the Exposure Management Group
is assigned to each transaction and is responsible for continuous monitoring of
events and conditions which could affect the transaction until the end of the
term of the Company's insurance policy.
The culmination of the formal and informal monitoring plus periodic
reviews of the asset pools securing CapMAC's financial guaranty policy, if
appropriate, is a formal "Annual Review" which summarizes how the transaction
has performed since the last review. These reviews are approved by the
designated officer(s) of the Risk Management support unit and a member of the
Underwriting Committee. If the term of a transaction is to be extended or the
amount of the policy increased, then the review is formally presented and
approved by the Underwriting Committee or, under certain limited circumstances,
by the manager of the applicable business unit and two members of the
Underwriting Committee.
If a transaction is not performing according to expectations, or an
external event has occurred which had or may have an adverse effect, the
Exposure Management Group performs an "Event Review." An Event Review identifies
the condition or event giving rise to the Event Review, analyzes its effect on
the transaction, and recommends corrective action or special monitoring.
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Changes in condition can range from a deterioration in the asset
pool performance, as measured by delinquencies, losses, and prepayments or by a
change in servicer management ability, such as faulty reports. Additional
reasons for special monitoring include deterioration in the financial condition
of any significant party in the transaction (e.g., seller/servicer, trustee,
third party guarantor, major obligors) and adverse regulatory, political,
economic or environmental events.
Upon completion of an Event Review, the Underwriting Committee
approves an action plan, which may include exercising CapMAC's rights under the
transaction documentation. Such rights vary but may include replacing the
servicer of the assets, liquidating the program or taking other actions to
protect CapMAC's collateral.
Placing a transaction on "special monitoring" does not necessarily
imply an expectation of potential loss, but rather is part of the program of the
Exposure Management Group to identify specific transactions where there is a
change from the initial conditions under which the transaction was underwritten.
Portfolio of Insured Obligations
CapMAC uses several methods to measure and report exposure and
business volume under its financial guaranty policies. One method used to
determine exposure under a policy is the principal amount guaranteed under the
policy ("Par"), since CapMAC's liability for principal under the policy is
limited to the face amount of the policy. For example, if CapMAC issues a 10%
guarantee on a $100 million par amount asset-backed security, the Par exposure
is $10 million. In addition, for statutory and other purposes, CapMAC measures
the principal plus interest guaranteed under its policies, or statutory
principal and interest ("Statutory P&I"). In the above example, the Statutory
P&I is $10 million plus interest based upon the terms of the policy, since that
is the maximum amount of claims that CapMAC will have to pay. For purposes of
measuring certain business volume, CapMAC uses the principal amount of the
obligation that is supported by the CapMAC policy, whether a full or partial
guarantee; this is referred to as "Inforce Par." In the example above, the
Inforce Par would be reported as $100 million.
Reinsurance that meets certain regulatory and rating agency
requirements is used to reduce exposure. CapMAC reports Par and Statutory P&I
exposure both before ("Gross") and after ("Net") giving effect to reinsurance.
The following table shows CapMAC's policies outstanding as of December 31, 1996,
1995 and 1994.
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Insured Portfolio Policies Outstanding
Year Ended December 31,
-----------------------------------------
($ in millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Inforce Par (1) $42,001 $32,278 $23,578
Net Par (2) 19,655 12,628 9,397
Net Statutory P&I (3) 23,311 15,138 10,838
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(1) Inforce Par - the full amount of principal, commitment or other
obligations (excluding interest portion) of the securities or obligations
in respect of which an insurance policy or a reinsurance agreement has
been issued, whether or not the full amount is guaranteed by such policy
or agreement.
(2) Net Par - the amount of principal or other obligations (excluding interest
portion) guaranteed under an insurance policy or a reinsurance agreement,
net of ceded reinsurance.
(3) Net Statutory P&I - the amount of principal or other obligations and
interest guaranteed under an insurance policy or a reinsurance agreement,
net of ceded reinsurance, determined in accordance with rules and
procedures prescribed or permitted by state insurance regulatory
authorities.
Net Par is lower than Inforce Par because exposure is reduced due to
ceded reinsurance and because of the significant portion of partial guarantees
issued by CapMAC. At December 31, 1996, approximately 47% of Inforce Par
constituted full (100%) guarantees and the remaining 53% was associated with
partial guarantees. The following table displays the insured portfolio policies
written for the years ended December 31, 1996, 1995 and 1994:
Insured Portfolio Policies Written
Year Ended December 31,
--------------------------------------------
($ in millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Inforce Par $19,559(1) $27,069(2) $15,685(3)
Net Par 11,742 15,769 8,186
Net Statutory P&I 13,511 17,040 8,871
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(1) Inforce Par written in 1996 included the issuance of a guarantee on a
large commercial paper conduit and the renewal of two partial guarantees
on large asset-backed commercial paper conduits. If these guarantees were
excluded, Inforce Par written would have been $14,309.
(2) Inforce Par written in 1995 included the issuance of a guarantee with
respect to the assets held by an asset-backed investment vehicle and the
renewal of partial guarantees on two large commercial paper conduits. If
these guarantees were excluded, Inforce Par written would have been
$12,569.
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(3) Inforce Par written in 1994 included the issuance of partial guarantees on
two large asset-backed commercial paper conduits. If these partial
guarantees were excluded, Inforce Par written would have been $11,536.
The Company's management tracks the geographic distribution of its
insured obligations using a methodology developed internally. Management
believes that economic deterioration within one state or region will have less
of an impact on structured obligations backed by diversified pools of assets
located in such state or region and having significant first loss protection
than on non-structured obligations of a single issuer. Furthermore, in the case
of collateral pools backed by corporate obligations, the scope of an
originator's or corporate obligor's business may, if diversified geographically,
minimize the risk due to the economic deterioration in a state or region.
Consequently, the Company's management considers geographic exposure to be less
meaningful for structured obligations than for municipal or other single issuer
obligations.
In reporting geographic exposure associated with structured
asset-backed securities, CapMAC looks at the underlying collateral pool. If the
pool consists of corporate obligations with no clear concentration in a
particular state or region, then the transaction will be assigned to a category
called "nationally diversified corporate assets." For collateral pools of
consumer obligations, the transaction will be assigned to a category called
"nationally diversified consumer assets" provided that no more than 20% of the
collateral is associated with a particular state and provided that no more than
40% of the collateral falls into a particular region of states. If these
limitations are exceeded, then the entire transaction will be assigned to
specific states depending on the distribution of the underlying collateral.
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The following table sets forth the geographic distribution of CapMAC's insured
portfolio in terms of Net Par as of December 31, 1996, 1995 and 1994:
Insured Portfolio
Geographic Distribution
Net Par Outstanding(1)
($ in millions)
-------------------------------------------------
State/Region 1996 1995 1994
- --------------------------------------------------------------------------------
Nationally Diversified
Corporate Assets $ 4,750 24.2% $ 2,064 16.3% $2,023 21.5%
Nationally Diversified
Consumer Assets 4,263 21.6 2,197 17.4 1,121 11.9
California 1,736 8.8 1,257 10.0 1,019 10.8
New York 1,013 5.2 810 6.4 769 8.2
New Jersey 406 2.1 236 1.9 223 2.4
Florida 395 2.0 285 2.3 203 2.2
Texas 351 1.8 299 2.4 117 1.3
Maryland 348 1.8 356 2.8 326 3.5
Pennsylvania 334 1.7 301 2.4 276 2.9
Virginia 330 1.7 300 2.4 159 1.7
Ohio 150 0.8 154 1.2 199 2.1
Other U.S. (2) 3,126 15.8 2,568 20.2 1,745 18.5
Non-U.S. (2) 2,453 12.5 1,801 14.3 1,217 13.0
- --------------------------------------------------------------------------------
Total $19,655 100.0% $12,628 100.0% $9,397 100.0%
================================================================================
- ----------
(1) The geographic information presented above is based on the latest such
data available to the Company. Such data for asset-backed transactions is
based on information received from the seller/servicer and therefore may
not necessarily be the actual distribution as of the above indicated
dates.
(2) No state or country in these categories accounts for more than 2% of total
Net Par outstanding.
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The table below shows the implied credit quality of CapMAC's insured
portfolio, where credit quality is assessed without giving effect to CapMAC's
insurance policy. Rating assessments are determined based on an assessment from
one of the U.S. rating agencies or by CapMAC's own evaluation where such
assessments have not yet been received. The proposed transaction is then
evaluated thoroughly to ensure that it meets CapMAC's underwriting/credit
standards. Each accepted transaction undergoes continuous review to ensure that
no material changes occur which would affect the quality of the transaction.
Insured Portfolio
Distribution by Credit Quality
Net Par Outstanding
($ in millions)
Year Ended December 31,
---------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
AAA $ 898 4.6% $ 363 2.9% $ 166 1.8%
AA 1,064 5.4 636 5.0 453 4.8
A 4,053 20.6 3,145 24.9 2,122 22.6
BBB 13,511 68.7 8,318 65.9 6,640 70.7
Non-investment grade 129 0.7 166 1.3 16 0.1
- --------------------------------------------------------------------------------
Total $19,655 100.0% $12,628 100.0% $9,397 100.0%
================================================================================
The obligations insured by CapMAC are divided into three general
categories: consumer receivables, trade/corporate receivables and
municipal/government obligations.
Obligations insured by CapMAC and primarily backed by consumer
receivables include pass-through and pay-through securities, commercial paper
obligations and other, more highly structured products. The consumer receivables
backing such obligations include automobile loans and leases, credit card
receivables, home equity loans, recreational vehicle loans, residential mortgage
loans, student loans and other consumer obligations.
Obligations insured by CapMAC and primarily backed by
trade/corporate receivables include obligations collateralized by corporate debt
securities, corporate loans and other corporate receivables and other products
underwritten primarily on the basis of the cash flow or market value of the
assets dedicated to the payment of the insured obligations. These assets include
corporate bonds, trade receivables, equity securities, securities which are
backed by senior bank loans, utility first mortgage bonds and other assets which
are neither consumer receivables nor municipal/government obligations. CapMAC
classifies as trade/corporate receivables insurance issued by it to guarantee
counterparty risk in areas such as interest rate swaps and special purpose
derivative products subsidiaries of financial institutions and insurance issued
which guarantees payment of previously issued bonds at a stated maturity date.
Obligations backed by municipal/government obligations insured by
CapMAC include, with respect to municipal obligations, general obligation bonds,
housing revenue bonds, municipal utility revenue bonds, health care revenue
bonds, transportation revenue bonds, tax-backed revenue and lease
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bonds and, with respect to government obligations, bonds of public and
quasi-public agencies of the United States, obligations of local and national
governments outside of the United States and obligations relating to
infrastructure financings.
The following table displays the insured portfolio breakdown by type
of underlying obligation insured by CapMAC in terms of Net Par outstanding as of
December 31, 1996, 1995 and 1994:
Insured Portfolio
By Type of Underlying Obligation
Net Par Outstanding
($ in millions)
Year Ended December 31,
--------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Consumer Receivables $10,362 52.8% $ 6,959 55.1% $4,740 50.4%
Trade/Corporate
Receivables 8,479 43.1 4,912 38.9 4,039 43.0
Municipal/Government
Obligations 814 4.1 757 6.0 618 6.6
- --------------------------------------------------------------------------------
Total $19,655 100.0% $12,628 100.0% $9,397 100.0%
================================================================================
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The following table provides a further breakdown by category of
asset, measured by Net Par outstanding as of December 31, 1996.
Insured Portfolio
By Category of Asset
Net Par Outstanding
As of December 31, 1996
($ in millions)
Category of Asset Net Par % Asset Type
- --------------------------------------------------------------------------------
Domestic:
Home Equity Loans and Residential Mortgages $ 6,176 31.4 Consumer
Other Corporate 2,769 14.1 Corporate
Overcollateralized Corporate Pools 2,183 11.1 Corporate
Credit Cards 1,680 8.5 Consumer
Auto Loans 1,135 5.8 Consumer
Other Consumer 1,028 5.2 Consumer
Noncollateralized Corporate Obligations 707 3.6 Corporate
Utilities 668 3.4 Corporate
Municipal/Government 647 3.3 Municipal
Recreational Vehicle and Marine 120 0.6 Consumer
- --------------------------------------------------------------------------------
Subtotal $17,113 87.0
- --------------------------------------------------------------------------------
International:
Other Corporate 1,830 9.3 Corporate
Overcollateralized Corporate Pools 312 1.6 Corporate
Other Consumer 211 1.1 Consumer
Sovereign 166 0.8 Sovereign
Residential Mortgages 12 0.1 Consumer
Noncollaterlized Corporate Obligations 11 0.1 Corporate
- --------------------------------------------------------------------------------
Subtotal $ 2,542 13.0
- --------------------------------------------------------------------------------
Total $19,655 100.0%
================================================================================
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The table below shows distribution of CapMAC's insured portfolio by
size of transaction insured on a Net Par basis as of December 31, 1996:
Insured Portfolio
by Size of Transaction Insured
Net Par Outstanding
As of December 31, 1996
Number of Percentage Percentage
($ in millions) Transactions of Total Net Par of Total
- --------------------------------------------------------------------------------
Greater than $200 23 3.8% $ 8,076 41.1%
$101 - $200 28 4.6 3,967 20.2
$51-$100 50 8.2 3,799 19.3
$25-$50 56 9.2 1,999 10.2
Less than $25 450 74.2 1,814 9.2
- --------------------------------------------------------------------------------
Total 607 100.0% $19,655 100.0%
================================================================================
The remaining weighted average life based upon Net Par of CapMAC's
insured portfolio as of December 31, 1996 was approximately 6.4 years, which
reflects CapMAC's focus on asset-backed securities. Financial guarantee
insurance companies which focus on the credit enhancement of municipal
obligations have insured portfolios with a weighted average life that is
typically longer than CapMAC's portfolio. The following table sets forth the
estimated terms to maturity of CapMAC's policies as of December 31, 1996, 1995
and 1994:
Insured Portfolio
Estimated Terms to Maturity of Insured Obligations (1)
($ in millions)
Year Ended December 31,
-----------------------------------
Estimated Terms to Maturity 1996 1995 1994
- --------------------------------------------------------------------------------
Due in five years or less $10,743 $ 6,163 $5,861
Due after five years through ten years 6,258 4,067 1,789
Due after ten years through fifteen years 916 1,002 948
Due after fifteen years through twenty years 399 384 246
Due after twenty years 1,339 1,012 553
- --------------------------------------------------------------------------------
Total $19,655 $12,628 $9,397
================================================================================
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<PAGE>
(1) Based on estimates by the issuers of the insured obligations as of the
original issuance dates of such obligations. Actual maturities could
differ from the contractual maturities because borrowers in certain
issuances have the right to call or prepay certain obligations with or
without call or prepayment penalties.
Loss Reserves
CapMAC maintains reserves in an amount believed by its management to
be sufficient to pay its estimated ultimate liability for losses and loss
adjustment expenses with respect to obligations it has insured. The reserves
established under Generally Accepted Accounting Principles ("GAAP") consist of a
reserve based on estimates of the portion of premiums earned required to cover
potential future claims inherent in currently insured obligations (a
"Supplemental Loss Reserve") and case basis reserves for expected levels of
defaults resulting from credit failures on currently insured obligations. The
Supplemental Loss Reserve and case basis reserves amounted to $10.7 million and
$0.3 million, respectively, at December 31, 1996. A case basis loss reserve is
established for insured obligations when, in the judgement 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 may be
reasonably estimated.
Under GAAP, CapMAC defers recognition of the premium received at the
inception of the insurance policy by crediting the premium to an unearned
premium reserve and amortizing the premium over the life of the underlying
insured obligation. CapMAC's unearned premium reserve, net of reinsurance, as of
December 31, 1996 was $49.8 million.
In addition to reserves established under GAAP, CapMAC establishes a
reserve under statutory accounting practices prescribed or permitted by state
insurance regulatory authorities ("SAP") for unearned premiums relating to
premiums received from an up-front insurance policy but not earned. These
premiums are earned in accordance with regulatory requirements over the term of
the obligations to which the premiums relate. At December 31, 1996, CapMAC's SAP
reserve for unearned premiums, net of reinsurance, was $52.9 million.
The New York financial guaranty insurance statute applicable to
CapMAC requires that financial guaranty insurers also maintain a special SAP
reserve called the "contingency reserve" to protect policyholders against the
impact of excessive losses occurring during adverse economic cycles. The
statutory contingency reserve with respect to CapMAC's insured portfolio has not
been utilized since CapMAC's inception. At December 31, 1996 CapMAC had
statutory contingency reserves totaling $66.1 million.
From CapMAC's commencement of operations in 1987 through December
31, 1996, CapMAC had incurred gross losses and loss adjustment expenses
(exclusive of additions to the Supplemental Loss Reserve) of $2.7 million with
respect to insured obligations, all of which related to a single transaction.
Such losses and expenses were covered under a quota share reinsurance
arrangement for $0.2 million and a reduction in the Supplemental Loss Reserve
for $2.5 million. The portion of the loss not covered under the quota share
agreement was funded through payments to CapMAC from the Lureco Trust Account,
as discussed in "--Reinsurance."
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<PAGE>
Because reserves are necessarily based on estimates and because of
the absence of a sufficient number of losses in its financial guaranty insurance
activities and in the financial guaranty insurance industry generally to
establish a meaningful statistical base, there can be no assurance that the case
basis reserves or the Supplemental Loss Reserve will be adequate in light of
subsequent experience with respect to defaults to cover losses in CapMAC's
insured portfolio. Losses from future defaults, depending on their magnitude,
could have a material adverse effect on the results of operations and financial
condition of the Company.
Reinsurance
Reinsurance is a commitment by one insurance company, the
"reinsurer," to reimburse another insurance company, the "ceding company," for a
specified portion of the insurance risks underwritten by the ceding company on
one or more specified policies in consideration for a portion of the premiums
received for the policy or policies being reinsured. The ceding company
generally receives from the reinsurer a commission based on a percentage of the
reinsurance premium (a "ceding commission") to cover the cost incurred by the
ceding company to generate the business being reinsured as well as to compensate
the ceding company for the monitoring and surveillance of the transaction(s) so
ceded. The reinsurance does not relieve the ceding company from any obligation
under the policy reinsured even if the reinsurer fails to pay the ceding company
under the reinsurance agreement.
The Company actively pursues reinsurance as a means of diversifying
and reducing risk, enhancing its return on capital and adding underwriting
capacity. Reinsurance of CapMAC's insured obligations is done both on a
facultative (transaction-by-transaction) and treaty (automatic cession) basis.
CapMAC uses both quota share reinsurance and excess of loss reinsurance
structures. Quota share reinsurance provides that the reinsurer reimburses the
ceding company on a pro-rata basis for a specified percentage of all losses
incurred under the policy reinsured starting with the first loss incurred.
Excess of loss or stop-loss reinsurance provides that the reinsurer reimburses
the ceding company for all or a specified percentage of losses incurred by the
ceding company in excess of a specified amount of losses.
CapMAC monitors the creditworthiness of all of its reinsurers on a
continual basis. As of December 31, 1996, 97% of CapMAC's reinsurance was ceded
to reinsurers who were rated AA or better by S&P. CapMAC reinsures with two
triple-A rated monoline financial guarantee reinsurance companies in the United
States and with a number of international companies located in Europe and Japan.
As of December 31, 1996, 22% of CapMAC's Gross Statutory P&I outstanding was
reinsured, of which no single entity reinsured more than 8.4% of Gross Statutory
P&I outstanding.
CapMAC entered into a Stop-loss Reinsurance Agreement with Mitsui
Marine and Fire Insurance Co., Ltd. ("Mitsui Marine") as reinsurer (the "Mitsui
Stop-loss Agreement"), effective December 1, 1995, pursuant to which Mitsui
Marine was required to pay any losses in excess of $100 million losses in the
aggregate incurred by CapMAC during the term of the Mitsui Stop-loss Agreement
on the insurance policies in effect on December 1, 1995 and written through
December 31, 1996, up to an aggregate limit of $50 million. The Mitsui Stop-loss
Agreement replaced a stop-loss agreement with Winterthur Swiss Insurance Company
which had been in effect since the Acquisition in June, 1992.
Effective January 1, 1997, the Mitsui Stop-loss Agreement was
amended and restated, and additional stop loss agreements were entered into with
AXA Re Finance S.A. ("AXA Re") and Munchener Ruckverischerungs-Gesellschaft
("Munich Re") such that Mitsui Marine, AXA Re and Munich Re are
18
<PAGE>
required to pay in the aggregate any losses up to $75 million in the aggregate
incurred by CapMAC in excess of $150 million increasing annually based on
increases in CapMAC's statutory qualified capital. The Mitsui Stop-loss
Agreement requires Mitsui to pay 40% of any such losses up to a maximum of $30
million; the stop-loss agreement with AXA Re requires AXA Re to pay
approximately 27% of any such losses up to a maximum of $20 million; and the
stop-loss agreement with Munich Re requires Munich Re to pay approximately 33%
of any such losses up to a maximum of $25 million.
The Mitsui Stop-loss Agreement and each of the stop-loss agreements
with AXA Re and Munich Re have an initial term of one year and are subject to
automatic one year extensions unless either party to any of the agreements
provides the other with 180 days notice that it does not intend to renew such
agreement. The Mitsui Stop-loss Agreement and each of the stop-loss agreements
with AXA Re and Munich Re are also subject to early termination by CapMAC in
certain circumstances.
Effective April 1, 1994, CapMAC and Luxembourg European Reinsurance
LURECO S.A. ("Lureco"), entered into a Per Annum Aggregate Reinsurance Treaty
(the "Lureco Treaty") pursuant to which Lureco reinsures CapMAC for certain
losses and related expenses, including all amounts which have been incurred by
CapMAC for anticipated settlement of claims regardless of whether such amounts
have been paid by CapMAC. The Lureco Treaty provides that the annual reinsurance
premium payable by CapMAC to Lureco, after deduction of the reinsurer's fee
payable to Lureco, be deposited in a trust account (the "Lureco Trust Account")
to be applied by CapMAC, at its option, to offset losses and loss expenses
incurred by CapMAC in connection with incurred claims. Amounts on deposit in the
Lureco Trust Account which have not been applied against claims are
contractually due to CapMAC at the termination of the treaty. The agreement is
renewable annually at CapMAC's option, subject to certain conditions.
The premium deposit amounts in the Lureco Trust Account have been
reflected as assets by CapMAC during the term of the agreement. Premiums in
excess of the deposit amounts have been recorded as ceded premiums in the
statements of operations. In the 1996 policy year the agreement provided $7
million of loss coverage in excess of the premium deposit amount of $5 million
retained in the Lureco Trust Account. Additional coverage is provided for losses
incurred in excess of 200% of the net premiums earned up to $4 million for any
one agreement year. In September of 1995, claims incurred of approximately $2.5
million on a CapMAC insurance policy were applied against the Lureco Trust
Account.
The reinsurance of risk does not relieve the ceding insurer of its
original liability to its policyholders. A contingent liability exists with
respect to the aforementioned reinsurance arrangements which may become a
liability of CapMAC in the event the reinsurers are unable to meet obligations
assumed by them under the reinsurance contracts.
CapMAC Financial Services
CFS provides advisory and structuring services to third parties in
connection with asset securitization transactions, primarily those in which
CapMAC issues a guaranty. CFS provides customers, such as banks, large and
mid-sized corporations, insurance companies and other financial institutions,
with advice as to the most appropriate structure to use for a given
securitization transaction based on the nature of the assets and financial
objective of the customer. Depending on the structure of the transaction, CFS
will provide advice regarding the most advantageous available funding mechanism,
the hedging of certain risks through third-parties and liquidity facilities in
transactions involving issuance of commercial paper.
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<PAGE>
CFS' sole role with respect to hedging contracts is to provide advisory
services, and neither CFS nor the Company takes any offsetting position with
respect to any such hedging contracts. CFS also provides clients with guidance
on the review process by the rating agencies with respect to transactions.
CFS also serves as a technical advisor to Asian Securitization and
Infrastructure Assurance (Pte) Ltd ("Asia Services"), a financial guaranty
company located in Singapore formed in 1995 to provide guarantees and engage in
related business activities in the Asian fixed income capital markets, and to
P.T. ABS Finance Indonesia, a securitization corporation located in Indonesia.
The Company owns an indirect equity interest in Asia Services and is a minority
shareholder of P.T. ABS Finance Indonesia.
The structuring of the more complex and innovative asset
securitization transactions in which CFS participates generally involve advisory
and structuring services for which fees are generally paid upon closing of the
transaction; consequently, the timing of such transactions and the amount of the
related fees can result in significant fluctuations attributable to such fees
from period to period. Transactions may involve more than one advisor, and CFS
competes with a number of advisors including financial guarantors, investment
banks and advisory boutiques for advisory assignments that typically culminate
in insured funding and/or restructuring solutions. Generally, CFS receives
larger fees in connection with transactions which require an increased
expenditure of time and effort to achieve a satisfactory execution. These
transactions typically involve unfamiliar assets or structures. Advisory and
other fees received by CFS increased from $17.0 million for the year ended
December 31, 1995 to $27.1 million for the year ended December 31, 1996.
CFS also has within it the global marketing unit of the Company,
which is responsible for the overall global marketing efforts on behalf of the
Company and its subsidiaries. The global marketing unit is organized along
geographic and industry lines and manages relationships with the Company's major
clients.
CFS is a wholly owned subsidiary of Holdings and was incorporated in
Delaware in 1992 in connection with the Acquisition. While the scope of CFS'
business activities has expanded since the Acquisition, CFS was created to
provide various services to CapMAC and to engage in other activities in support
of CapMAC's business. At the time of the Acquisition, the CFS Servicing
Agreement detailing the terms and conditions of the services to be provided by
CFS for CapMAC was executed and approved by the Insurance Department of the
State of New York. Under the CFS Servicing Agreement, which is still in force,
CFS bills CapMAC a fee for providing administrative services to CapMAC,
including activities related to underwriting, reinsurance, marketing,
accounting, data processing and other services, but not in excess of CFS's cost
for such services. CFS also provides administrative services to Holdings and CFS
Europe.
CapMAC Investment Management
CapMAC Investment Management, Inc. ("CIM") is a new subsidiary of
Holdings incorporated in Delaware in October 1996. 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. The Company has hired the president of CIM and is
currently in the process of hiring additional personnel. It is anticipated that
CIM will be initially capitalized with approximately $2 million and will
commence operations in early 1997.
20
<PAGE>
It is anticipated that CIM will generate income through fees charged
for assets under management. The Company does not expect that CIM will be
profitable in 1997.
Derivative Products
In 1995, Holdings entered into a strategic alliance with The Mutual Life
Assurance Company of Canada ("MLC"), and three of its derivatives products
subsidiaries (each such subsidiary, a "TMG Subsidiary" and such subsidiaries
collectively, the "TMG Group") to assist the TMG Group in providing a broad
range of derivative products, with an initial emphasis on "municipal
derivatives," including investment agreements and long dated interest rate
swaps. The TMG Group also provides interest rate swaps, currency swaps and
equity-linked financial products. Because the obligations of the TMG Group under
its derivative transactions are guaranteed by The Mutual Life Assurance Company
of Canada, the TMG Group is rated AA by S&P and Aa3 by Moody's. CapMAC intended
that the relationship with the TMG Group would facilitate the hedging of risks
inherent within particular structured transactions insured by CapMAC and help
CapMAC better evaluate such risks.
Holdings has warrants to purchase shares of stock in each TMG Subsidiary
for an aggregate initial exercise price of $10 million. Holdings may exercise
its warrants in whole or in part (subject to a 25% minimum) at any time.
Holdings is obligated to exercise its warrants upon the demand of any TMG
Subsidiary after February 27, 2000 and earlier upon the occurrence of certain
events relating to the TMG Group as well as certain events relating to Holdings
and CapMAC. The amount of Holdings investment in the TMG Group at any date is
the initial exercise price of $10 million plus an imputed cost-of-carry on the
investment (calculated pursuant to a LIBOR based formula). For example, if the
warrants were exercised on February 27, 2000, it is estimated (assuming a
constant LIBOR rate of 5%) that the total cost to exercise the warrants will be
approximately $13 million.
After exercising the warrants, the Company has the right to require MLC to
purchase the shares in the TMG Group held by it during the six month period
beginning on February 27, 2002. The price to be paid by MLC for such shares
would be their book value, except in certain limited circumstances. Originally,
management expected that the Company would exercise its warrants on February 27,
2000, hold the stock for two years and, depending on management's evaluation of
the value of its investment, sell the shares to MLC during the six-month period
beginning on February 27, 2002. Recent losses incurred by the TMG Group, which
have caused the Company to write-down the value of its investment as described
below, and the on-going capital restructuring of the TMG Group, have caused the
Company to reevaluate its intentions with respect to the warrants, and it is not
possible to determine as of the date of this report what actions, if any, the
Company will take.
The Company values the warrants as of any date of determination based upon
the difference between the exercise price of the warrants as of such date and
the estimated fair value of the percentage share of the TMG Group it would own
upon exercise of the warrants. Based upon losses incurred and projections by the
TMG Group at the end of the fourth quarter of 1996, the Company in the fourth
quarter of 1996 realized a pre-tax capital loss of $2.0 million on its
investment in the warrants. Estimated losses by the TMG Group during the first
quarter of 1997 are materially worse than the expectations of the management of
the TMG Group at year end 1996, and therefore the Company's current estimate is
that Holdings will realize an additional non-operating charge to earnings in the
first quarter of approximately $3.5 million to $4.0 million. The effect of the
write-off in the fourth quarter of 1996 and the current estimate of the
write-off for the first quarter of 1997 will be to reduce the value of the
Company's TMG Group warrants to approximately $5.0 million to $5.5 million as of
March 31, 1997. MLC has announced that it has
21
<PAGE>
contributed an additional $50 million to the TMG Group, which has the effect of
diluting the Company's investment from an approximately 17% ownership interest
to approximately 7%. However, notwithstanding the additional capital
contribution, the Company may in the future realize additional losses of part or
all of the remaining value of the warrants.
The agreement between the Company and MLC governing CapMAC's investment in
the TMG Group contains covenants restricting the Company's ability to incur
liens on its property, other than certain permitted liens, or incur debt (other
than certain permitted debt) which would result in the Company's total debt
(other than certain permitted debt) to capital ratio exceeding 25%.
Funding Vehicles
In order to be able to offer its customers a variety of funding
options in addition to credit enhancement, the Company, together with two
investment banks, participated in the formation of Triple-A One Funding
Corporation, Triple-A One Plus Funding Corporation and Hemispheres Funding
Corporation. Triple-A One Funding Corporation and Triple-A One Plus Funding
Corporation (collectively, "Triple-A One Funding") are third party owned and
managed special purpose conduits that issue asset-backed commercial paper, and
Hemispheres Funding Corporation ("Hemispheres") is a third party owned and
managed special purpose conduit that issues asset-backed medium term notes. Each
of these conduits provides multiple sellers/borrowers with access to the
commercial paper and medium term note markets on better terms than they could
obtain by issuing securities directly. CFS provides administrative and referral
services to these conduits, and CapMAC guarantees the underlying asset-backed
transactions. In general, customers of the Company transfer or pledge
receivables to the conduits in exchange for funds which are raised either by the
sale of commercial paper (in the case of Triple-A One Funding) or medium term
notes (in the case of Hemispheres). Typically, payment of principal and interest
on the obligations issued by the conduits is dependent on the performance of the
underlying assets, as supported by one or more guarantees issued by CapMAC. As
of December 31, 1996, the aggregate principal amount of commitments issued by
Triple-A One Funding was approximately $5.5 billion and the commercial paper
outstanding under such commitments was approximately $2.9 billion, while the
total notes issued by Hemispheres amounted to approximately $1.0 billion. It is
anticipated that the Company may participate in the establishment of additional
special purpose asset-backed commercial paper and medium-term note conduits to
provide additional funding opportunities to its customers.
International Operations
The Company participates in international transactions through its
headquarters in New York, its offices in Europe and by way of joint ventures and
other business arrangements in Asia. The aggregate Net Par resulting from
international transactions totaled $2.5 billion as of December 31, 1996, $1.7
billion as of December 31, 1995 and $1.2 billion as of December 31, 1994. An
obligation insured by CapMAC is deemed to involve an "international transaction"
when either the originator or the assets underlying the insured obligations are
primarily located outside the United States.
Europe
CapMAC established its representative office in London in 1990. The
office presently has a staff of four professionals. Activities in Europe are
based out of the London office. CapMAC transactions which are originated through
the London office are issued insurance policies out of CapMAC's
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<PAGE>
New York headquarters. CapMAC's office in Paris, which is the headquarters of
CapMAC's newly established French subsidiary, CapMAC Assurance, S.A., works
closely with the London office and focuses on those aspects of transactions
which involve assets, investors or clients located in continental Europe. The
Company has capitalized CapMAC Assurance, S.A., and will be able to write
financial guaranty insurance throughout the countries of the European Economic
Community upon receipt of its license from the French authorities, which it
anticipates receiving in 1997. A substantial portion of the policies written by
such subsidiary will be reinsured by CapMAC.
Asia
Given the growing importance and growth prospects of Asia's
economies, the Company has undertaken a number of initiatives to expand into
Asia. These initiatives have resulted in separate arrangements with respect to
Japan, the Asian emerging markets and Indonesia.
In June 1995, CapMAC and CFS entered into a cooperation agreement with
Mitsui Marine regarding the development of the financial guaranty business in
Japan, including the provision of financial guaranties and other credit
enhancement in connection with securities or obligations that are backed by
assets originated in Japan or which are issued by Japanese entities. The
agreement requires CFS to make financial technology available to Mitsui Marine,
provides for mutual business development, reinsurance, business promotion,
employee exchanges and related training, and office sharing. It also includes
provisions regarding the reinsurance of transactions related to the provision of
credit enhancement for financial obligations offered and sold in Japan and
Japanese financial obligations which are offered and sold outside of Japan.
As part of its strategy to expand into Asia, the Company has promoted the
establishment of and in December, 1995, through its affiliate, CapMAC Asia Ltd.
("CapMAC Asia"), made an investment in Asia Credit Services (Pte) Ltd ("Asia
Services"), which owns all of the stock of Asian Securitization and
Infrastructure Assurance (Pte) Ltd ("ASIA Ltd."), a regional financial guaranty
company located in Singapore. The Company's initial investment consisted of
approximately $11.2 million in cash and a commitment to provide up to an
additional $6.8 million in certain circumstances. During 1996, the Company
invested an additional $1.2 million in CapMAC Asia and sold $1.9 million of its
investment to certain of its employees, directors and shareholders. As of
December 31, 1996, as a result of the additional investment and the sale to
employees, directors and shareholders, the amount of the Company's commitment to
provide additional financing to CapMAC Asia had been reduced to $4.9 million.
The total subscribed capital of Asia Services is $150 million, of which $102
million has been paid-in as of December 31, 1996.
ASIA Ltd. was formed to provide guarantees of debt securities in the
primary and secondary Asian fixed income capital markets, and together with Asia
Services, to engage in related business activities in the Asian capital markets
and to provide technical advice and assistance in connection with Asian
securitization transactions. CFS has entered into a technical assistance and
cooperation agreement, pursuant to which CFS or its designated affiliate will
provide certain technical, advisory and structuring services to Asia Services
and ASIA Ltd., including employee exchanges between CFS and Asia Services and
ASIA Ltd., and CapMAC will have the right to reinsure certain transactions
entered into by ASIA Ltd. and to participate in ASIA Ltd.'s treaty reinsurance.
The agreement also limits the Company's ability to compete in Asia directly with
Asia Services and ASIA Ltd. with respect to credit enhancement activities.
23
<PAGE>
In consideration for its role in the creation of Asia Services and ASIA
Ltd. and in connection with the technical assistance to be provided by CFS, the
Company has options to purchase for a nominal price shares of Asia Services
representing up to 10% of its paid-in capital, the amount of such options to be
determined based on the internal rate of return to the investors in Asia
Services at the time of public offering or sale of the stock of Asia Services.
In April 1995, Holdings became a minority shareholder in P.T. ABS Finance
Indonesia ("ABS Finance"), formerly known as P.T. Citimas Capital (Pte) Ltd., a
corporation established to develop securitization in Indonesia for obligations
that are backed by assets originated in Indonesia or that are issued by
Indonesian entities. ABS Finance participates as a principal in the
securitization markets in Indonesia, but does not offer financial guaranty
insurance in Indonesia. Simultaneously with the execution of the joint venture
agreement with the other investors in ABS Finance, CFS entered into a technical
assistance agreement with ABS Finance to provide technical and advisory
assistance to ABS Finance, including making employees of the Company available
to ABS Finance on a short-term basis to provide technical assistance with
respect to securitizations and training ABS Finance professional staff in New
York and elsewhere as agreed upon by ABS Finance and CFS. In addition, CapMAC
has the right to reinsure transactions which are executed by ABS Finance and to
provide direct insurance on those transactions which ABS Finance chooses not to
underwrite. Each of CFS and ABS Finance have agreed that they will not enter
into any cooperation or arrangement similar to the technical assistance
agreement with any other party with respect to the development of securitization
in Indonesia or the issuance of Indonesian asset-backed securities.
Investment Portfolio
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. Holdings' equity investments include investments in the TMG Group,
ABS Finance and ASIA Services, as well as other equity investments which are not
liquid and may be speculative, such as investments in specialized finance
companies in connection with its Financial Engineering activities. The
discussion in this section with respect to the Company's investment portfolio
excludes the equity investments of Holdings.
CapMAC has a conservative investment strategy of limiting investment
to government obligations and securities that are rated A or better and
short-term investments rated A1+/P1 or higher by the major U.S. rating agencies.
Any investment in a security rated below A requires special approval. If a
security's rating falls below single-A subsequent to purchase, a case-by-case
determination is made as to whether the security should be sold. Under CapMAC's
investment guidelines the amount of securities rated single-A or lower is
restricted to 40% of the total portfolio, with the remainder comprised of
double-A and triple-A rated securities, and U.S. Government and federal agency
securities. Currently, CapMAC's investment guidelines do not allow investments
in equity securities, securities issued by affiliates and securities that CapMAC
insures, without prior approval of the Investment Committee of the Board of
Directors. The Company's investment portfolio has an average credit quality of
at least AA as of December 31, 1996. The Company's investment portfolio is
managed by the firm of Standish, Ayer & Wood, Inc.
As of December 31, 1996, the carrying value of the Company's investments
(excluding equity investments) was $339.2 million. This investment portfolio
consisted of marketable, investment grade and
24
<PAGE>
fixed income securities. Based upon their respective estimated fair values at
December 31, 1996, approximately 53.7% of the Company's investments were in
obligations of states, municipalities and political subdivisions, 38.5% in U.S.
Treasury obligations and mortgage-backed securities of U.S. government
corporations and agencies, and 7.8% in corporate and asset-backed securities. As
of December 31, 1996, all of the Company's investments were classified as
available-for-sale securities. The following tables set forth certain
information concerning the investment portfolio (excluding equity investments)
of the Company:
Investment Portfolio
Distribution by Credit Ratings
as of December 31, 1996
<TABLE>
<CAPTION>
Estimated Percentage
$ in thousands Fair Value of Total
- --------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury obligations and mortgage-backed securities of U.S.
government instrumentalities and agencies (1) $130,759 38.5%
AAA 127,340 37.5
AA 35,811 10.6
A 45,264 13.4
- --------------------------------------------------------------------------------------------
Total $339,174 100.0%
============================================================================================
</TABLE>
- ----------
(1) Mortgage-backed securities consist entirely of Government National
Mortgage Association (GNMA), Federal National Mortgage Association (FNMA),
Federal Home Loan Mortgage Corporation (FHLMC) and other federal agency
securities.
25
<PAGE>
Investment Portfolio
By Type of Securities
as of December 31, 1996
<TABLE>
<CAPTION>
Weighted
Amortized Estimated Average
Investment Category Cost Fair Value Yield
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury obligations $ 4,059 4,069 6.15%
Mortgage-backed securities of U.S. government
instrumentalities and agencies 105,371 104,577 6.20
Obligations of states, municipalities and political
subdivisions 177,811 181,858 5.23
Corporate and asset-backed securities 15,043 14,918 4.02
- ---------------------------------------------------------------------------------------
Total long-term investments 302,284 305,422 5.50
Short term investments 33,752 33,752 4.54
- ---------------------------------------------------------------------------------------
Total $336,036 339,174 5.34%
=======================================================================================
</TABLE>
Distribution of Investments by Maturity
as of December 31, 1996
($ in thousands)
Maturity Amortized Cost Estimated Fair Value
- --------------------------------------------------------------------------------
Due in one year or less (1) $ 38,637 $ 38,654
Due after one year through five years 31,821 32,815
Due after five years through ten years 76,450 78,200
Due after ten years 83,757 84,928
- --------------------------------------------------------------------------------
Sub-total 230,665 234,597
Mortgage-backed securities 105,371 104,577
- --------------------------------------------------------------------------------
Total(2) $336,036 $339,174
================================================================================
- ----------
(1) Includes long-term investments in the amount of $4.9 million maturing
within one year and short-term mortgage backed securities in the amount of
$22.1 million.
(2) The average contractual maturity of the Company's investment portfolio was
approximately 6.1 years.
26
<PAGE>
Competition
The credit enhancement activities of the Company face competition
from both other providers of third party credit enhancement and from
alternatives to third party credit enhancement. Because the majority of
asset-backed (and municipal) obligations are sold without third party credit
enhancement, each transaction proposed to be insured by CapMAC generally must
compete with an alternative structure which does not employ third party credit
enhancement. CapMAC also competes with other monoline primary financial guaranty
insurers. Historically, the primary competitor of CapMAC in asset-backed
obligations was Financial Security Assurance Inc. However, Financial Guaranty
Insurance Company, MBIA Insurance Corporation (formerly Municipal Bond Investors
Assurance Corporation), and AMBAC Indemnity Corporation, which originally
focused on providing guarantees for municipal obligations, have increased their
levels of participation in the asset-backed market, and the Company expects such
competition to continue. The Company expects to face increased competition in
its primary business of providing financial guarantees with respect to
asset-backed obligations both from other monoline primary financial guaranty
insurers and from alternative structures which do not employ credit enhancement.
Competition for the credit enhancement of asset-backed obligations is also
provided by traditional credit enhancers such as mortgage pool insurers and bank
letter of credit providers. CapMAC also competes with other forms of credit
enhancement, including senior/subordinated structures and various forms of cash
collateral.
CFS competes with other providers of advisory and structuring
services, such investment and commercial banks. CIM will compete with mutual
funds, hedge funds and other asset managers.
Insurance law generally restricts multiline insurance companies,
such as the large property and casualty insurers and life insurance companies,
from engaging in the financial guaranty insurance business on a direct basis
other than through separately capitalized affiliates. Entry requirements include
(i) assembling the group of experts required to operate a financial guaranty
business, (ii) establishing the triple-A claims-paying ability ratings with the
statistical rating agencies, (iii) complying with substantial capital
requirements, (iv) developing name recognition and market acceptance with
issuers, investment bankers and investors and (v) developing an understanding of
financial guaranty insurance regulatory matters. Multiline insurance companies
are not major participants in the financial guaranty business in the United
States.
Rating Agencies
Moody's, S&P, DCR and Nippon Investors Service, Inc. periodically
review the business and financial condition of CapMAC and other companies
providing financial guaranty insurance. These rating agency reviews focus on the
insurer's underwriting policies and procedures and the quality of the
obligations insured. The rating agencies frequently perform assessments of the
credits insured by CapMAC to confirm that CapMAC continues to meet the criteria
considered necessary by the particular rating agency to maintain CapMAC's
triple-A claims-paying ability rating. CapMAC's ability to engage in business as
currently conducted, and its results of operations and financial condition,
would be materially adversely affected by any reduction in its ratings.
27
<PAGE>
Insurance Regulatory Matters
General Law
CapMAC is licensed to engage in insurance business in all 50 states,
the District of Columbia and Puerto Rico. As a domestic insurer, CapMAC is
subject to the insurance laws of New York, including the New York Insurance Law.
CapMAC is also subject to the insurance laws and regulations of the other states
in which it is licensed to transact an insurance business. These laws and
regulations, as well as the level of supervisory authority that may be exercised
by the various state insurance departments, vary by jurisdiction, but generally
require insurance companies to maintain minimum standards of business conduct
and solvency, to meet certain financial tests, to file certain reports with
regulatory authorities, including information concerning their capital
structure, ownership and financial condition, and to require prior approval of
certain changes in control of domestic insurance companies and their direct and
indirect parents and the payment of certain dividends and distributions. In
addition, these laws and regulations require approval of certain intercorporate
transfers of assets and certain transactions between insurance companies and
their direct and indirect parents and affiliates, and generally require that all
such transactions have terms no less favorable than terms that would result from
transactions between parties negotiating at arm's length. CapMAC is required to
file quarterly and financial statements prepared in accordance with SAP in each
jurisdiction in which it is licensed, and is subject to single and aggregate
risk limits and other statutory restrictions concerning the types and quality of
investments and the filing and use of policy forms and premium rates. In
addition, CapMAC's accounts and operations are subject to periodic examination
by the New York Superintendent of Insurance (the "New York Superintendent") (the
last such examination having been conducted in 1995 for the five years ended
December 31, 1993) and other state insurance regulatory authorities. No material
deficiencies were indicated in the report issued in connection with the last
examination.
Insurance Holding Company Laws
Holdings and CapMAC are subject to regulation under the insurance
holding company statute of New York (where CapMAC is domiciled) as well as of
other jurisdictions where CapMAC is licensed to conduct an insurance business.
The requirements of holding company statutes vary from jurisdiction to
jurisdiction but generally require insurance holding companies and their
insurance subsidiaries to register and file certain reports describing, among
other information, their capital structure, ownership and financial condition.
The holding company statutes impose standards on certain transactions with
related companies, which require that all transactions be fair and reasonable
and that specified types of transactions and those exceeding specified limits
require prior notice to or approval by insurance regulators.
Under the insurance holding company laws in effect in New York, any
acquisition of control of Holdings, and thereby indirect control of CapMAC,
requires the prior approval of the New York Superintendent. "Control" is defined
as the direct or indirect power to direct or cause the direction of the
management and policies of a person, whether through the ownership of voting
securities, by contract or otherwise. Any purchaser of 10% or more of the
outstanding voting securities of a corporation is presumed to have acquired
control of that corporation and its subsidiaries, although the insurance
regulator may find that "control" in fact does or does not exist when a person
owns or controls either a lesser or greater amount of voting securities.
28
<PAGE>
New York Financial Guaranty Insurance Law
In 1989, New York enacted Article 69 ("Article 69") of the New York
Insurance Law, a comprehensive financial guaranty insurance statute, which
governs all financial guaranty insurers licensed to do business in New York,
including CapMAC. This statute limits the business of financial guaranty
insurers to financial guaranty insurance and related lines (such as credit,
surety and residual value insurance).
Article 69 requires that financial guaranty insurers maintain a
special SAP reserve called the "contingency reserve" to protect policyholders
against the effects of adverse economic developments or cycles or other
unforeseen circumstances. Article 69 requires a financial guaranty insurer to
provide a contingency reserve (i) with respect to policies written prior to July
1, 1989 in an amount equal to 50% of earned premiums and (ii) with respect to
policies written on and after July 1, 1989, quarterly on a pro rata basis over a
period of 20 years for municipal bonds and 15 years for all other obligations,
in an amount equal to the greater of 50% of premiums written for the relevant
category of insurance or a percentage of the principal guaranteed, varying from
0.55% to 2.50%, depending upon the type of obligation guaranteed, until the
contingency reserve amount for the category equals the applicable percentage of
net unpaid principal. Virtually all of CapMAC's currently outstanding policies
were written after July 1, 1989. This reserve must be maintained for the periods
specified above, except that reductions by the insurer may be permitted under
specified circumstances in the event that actual loss experience exceeds certain
thresholds or if the reserve accumulated is deemed excessive in relation to the
insurer's outstanding insured obligations. Financial guaranty insurers are also
required to maintain reserves for losses and loss adjustment expenses on a
case-by-case basis and reserves for unearned premiums.
Article 69 establishes single risk limits for financial guaranty
insurers applicable to all obligations issued by a single entity and backed by a
single revenue source. For example, under the limit applicable to qualifying
asset-backed securities, the lesser of (i) the insured average annual debt
service for a single risk or (ii) the insured unpaid principal (reduced by the
extent to which the unpaid principal of the supporting assets exceeds the
insured unpaid principal) divided by nine, net of qualifying reinsurance and
collateral, may not exceed 10% of the aggregate of the insurer's surplus to
policyholders and contingency reserve, subject to certain conditions. Under the
risk limit applicable to municipal obligations the insured average annual debt
service for a single risk, net of qualifying reinsurance and collateral, may not
exceed 10% of the sum of the insurer's policyholders' surplus and contingency
reserve, and the insured principal, net of qualifying reinsurance and
collateral, may not exceed 75% of the sum of the insurer's policyholders'
surplus and contingency reserve. Single risk limits are also specified for other
categories of insured obligations.
Article 69 also establishes aggregate risk limits on the basis of
aggregate net liability insured as compared to the sum of policyholders' surplus
and contingency reserves. "Aggregate net liability" is defined as outstanding
principal and interest of guarantied obligations insured, net of qualifying
reinsurance and collateral. Under these limits, policyholders' surplus and
contingency reserves must not be less than a percentage of aggregate net
liability equal to the sum of various percentages of aggregate net liability for
various categories of specified obligations. The percentage varies from a low of
0.33% for municipal obligations to 4% for certain non-investment grade
obligations.
Article 69 was amended in 1996. Among the most significant revisions
were changes to financial guaranty insurers to write policies in currencies of
all countries which have an investment grade
29
<PAGE>
sovereign rating, and, subject to the approval of the New York State Department
of Insurance, in countries that do not have an investment grade sovereign
rating.
Financial Guaranty Insurance Regulation in Other Jurisdictions
CapMAC is subject to laws and regulations of jurisdictions other
than the State of New York concerning the transaction of financial guaranty
insurance. The laws and regulations of these other jurisdictions are generally
not more stringent in any material respect than the New York Insurance Law.
The London office of CapMAC operates as a marketing and sales office
with underwriting activities conducted through the Company's New York office
under a no-action response by the U.K. Department of Trade and Industry to the
Company's filings. The Paris office of CapMAC is presently a representative
office. It is anticipated that in 1997 CapMAC Assurance, S.A. will be granted a
license to write financial guarantee insurance by the French authorities. Unlike
the current representative office, CapMAC Assurance will be permitted to write
financial guarantee insurance in all of the countries of the European Economic
Community.
Dividend Restrictions
Pursuant to the insurance laws of New York, CapMAC may declare
dividends, subject to any restriction in its articles of incorporation, only out
of its earned surplus. Earned surplus is defined as the portion of
policyholders' surplus that represents the net earnings, gains or profits, after
deduction of all losses, that have not been distributed to the shareholders as
dividends, or transferred to stated capital or capital surplus or applied to
other purposes permitted by law, but does not include unrealized appreciation of
assets. CapMAC may not declare or distribute any dividend to shareholders which,
together with all dividends declared or distributed by it during the preceding
12 months, exceeds the lesser of (i) 10% of policyholders' surplus as of the
date of its last statement on file with the New York Superintendent or (ii)
adjusted net investment income during such period unless, upon prior application
therefor, the New York Superintendent approves a greater dividend distribution
based upon his finding that CapMAC will retain sufficient policyholders' surplus
to support its obligations and writings. "Adjusted net investment income" is
defined as net investment income for the 12 months immediately preceding the
declaration or distribution of the current dividend increased by the excess, if
any, of net investment income over dividends declared or distributed during the
period commencing 36 months prior to the declaration or distribution of the
current dividend and ending 12 months prior thereto.
Based upon CapMAC's statutory financial statements for the year
ended December 31, 1996, under current New York insurance laws, CapMAC is
presently unable to pay any dividends to Holdings without the prior approval of
the New York Superintendent because it has a negative earned surplus under SAP.
Holdings, however, has paid quarterly dividends on its common stock each quarter
since it became a public company and management currently expects Holdings to
continue to pay quarterly dividends at the annual rate of $0.08 per share per
year on its common stock using funds available from sources other than CapMAC.
Dividends are normally paid on the Wednesday preceding the end of February, May,
August and October to holders of record two weeks earlier.
Employees
As of March 24, 1997, the Company has 157 full-time employees. None
of the employees are covered by collective bargaining agreements. The Company
considers its employee relations to be good.
Forward Looking Statements
The Company through its management may from time to time make oral
forward-looking statements. In connection with the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995, the Company is hereby
identifying important factors that could cause actual results to differ
materially from those contained in any forward-looking statement made by or on
behalf of the Company. Any such statement is qualified by reference to the
following cautionary statements.
30
<PAGE>
The Company operates in highly competitive markets, and demand for
financial guaranty insurance depends upon many factors, some of which are beyond
the control of the Company. Additionally, the demand for the advisory services
rendered by CFS is highly dependent upon the number and nature of the
transactions done by CapMAC. Periodic results may fluctuate depending on the
volume and timing of the closing of transactions. The establishment of the
appropriate level of loss reserves is an inherently uncertain process involving
numerous estimates and subjective judgments by management, and therefore there
can be no assurance that losses in CapMAC's insured portfolio will not exceed
the loss reserves. Finally, the total estimated present value of future revenues
("PFR") actually realized by the Company could be reduced in the future by
factors such as early termination of insurance contracts, accelerated
prepayments of underlying obligations or lower than anticipated utilization of
insured structured programs, such as commercial paper conduits. See Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, for a discussion of PFR.
Developments in any of these areas, as well as other risks and
uncertainties detailed from time to time in the Company's Securities and
Exchange Commission filings, could cause the Company's results to differ from
results that have been or may be projected by or on behalf of the Company. The
Company cautions that the foregoing list of important factors is not exclusive.
The Company does not undertake to update any forward-looking statements that may
be made from time to time by or on behalf of the Company.
Executive Officers of the Registrant
Set forth below is certain information with respect to each
executive officer of the Registrant. Each person holds the position set forth
below in both Holdings and CapMAC.
<TABLE>
<CAPTION>
Name and Age Position Served Since
- ------------ -------- ------------
<S> <C> <C>
John B. Caouette, 52 Chairman of the Board of Directors, President 1987
and Chief Executive Officer since 1987.
Michael L. Hein, 54 Managing Director since 1989. Currently 1988
responsible for United States marketing. Head
of Corporate Structured Finance from 1989
through March, 1996. Senior Vice President
from 1988 to 1989.
Allyn W. Keiser, 51 Managing Director since 1996 and President of 1996
CapMAC Financial Services since January,
1997. From 1980 to 1996, Mr. Keiser was
held a variety of management positions at
Canadian Imperial Bank of Commerce. He was
appointed Executive Vice President, North
American Corporate Banking in 1992 and
became a Managing Director of CIBC Wood
Gundy in 1994.
</TABLE>
31
<PAGE>
<TABLE>
<S> <C> <C>
Charles J. Lester, 47 Managing Director since 1989. Currently 1988
responsible for Europe/Global Project Finance
business development unit. Head of Europe
and Global Relationship Management from
1994 to March, 1996. Senior Vice President,
1988 to 1989.
C. Thomas Meyers, 59 Managing Director since 1989. Currently 1987
responsible for Credit Enhancement business
unit. Head of Consumer Structured Finance
from 1989 through March, 1996. Senior Vice
President from 1987 to 1989.
Maryam H. Muessel, 38 Managing Director since 1996. Currently 1988
responsible for Financial Engineering business
unit. Senior Vice President in the Corporate
Structured Finance Group until March, 1996.
Jan Nicholson, 51 Managing Director since 1988. Currently 1988
responsible for new product development.
Head of real estate securitization at CapMAC
from 1988 to 1990. Held various positions at
Citicorp including Senior Credit Officer and
Department Head of Citicorp Real Estate from
1990 to 1994, when she returned to CapMAC
in her current position
Paul V. Palmer, 47 Managing Director since 1990 and Chief 1990
Financial Officer since 1995. Head of
Finance/Distribution support unit since March,
1996.
Joyce S. Richardson, 52 Managing Director since 1987 with 1987
responsibility for Latin America since January,
1996. Ms. Richardson was Chief
Underwriting Officer from 1987 to January,
1996.
Ram D. Wertheim, 42 Secretary and General Counsel since 1989. 1989
Appointed head of Legal/Administration
support unit in March, 1996. Mr. Wertheim
was named Managing Director in 1994 and
Chief Administrative Officer in 1995. From
1989 to 1994, Mr. Wertheim was Senior Vice
President.
Ruth D. Whaley, 41 Managing Director and Chief Underwriting 1987
Officer since January, 1996. Appointed head
of Risk Management support unit in March,
1996. From 1987 to 1994, Ms. Whaley was
Vice President and from 1994 to 1996, Senior
Vice President in the Underwriting Department.
Howard A. York, 52 Managing Director and President, CapMAC 1996
Investment Management, Inc. since November,
1996. From 1978 until 1993, Mr. York was
with the ITT Hartford Group, Inc. and its
predecessor companies, where he held a variety
of management positions ending with Executive
Vice President and Chief Investment Officer.
He joined American General Corporation as
Executive Vice President and Chief Investment
Officer in 1993 and then was President and
Chief Investment Officer of Metropolitan Life
Investment Management Corporation from 1994
until 1996.
</TABLE>
32
<PAGE>
Item 2. Properties.
The Company maintains its principal executive offices at 885 Third
Avenue, New York, New York 10022. CapMAC also maintains offices in London,
England and Paris, France. The headquarters of CapMAC Assurance, S.A. is in
Paris. All offices are leased. The Company does not own any real property.
Item 3. Legal Proceedings.
There are no material legal proceedings pending against the Company
or any of its affiliates.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the stockholders of the
Company during the fourth quarter of 1996.
33
<PAGE>
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
The Company's common stock is traded on the New York Stock Exchange.
The high and low sales price per share and the dividend paid for each quarterly
period since the initial public offering of the Company's common stock on
December 14, 1995 is set forth below:
Dividends Paid Per Share Market Price
------------------------ -----------------------------
High Low Close
- --------------------------------------------------------------------------------
1996
1st Quarter $ 0.02 25 3/8 22 1/4 24 1/2
2nd Quarter $ 0.02 29 7/8 23 5/8 28 1/2
3rd Quarter $ 0.02 33 1/8 26 3/4 33 1/8
4th Quarter $ 0.02 36 5/8 30 5/8 33 1/8
- --------------------------------------------------------------------------------
1995
December 14-31 -- 25 1/8 21 3/8 25 1/8
- --------------------------------------------------------------------------------
The Company has paid quarterly dividends on its common stock at a
rate of $.02 per share starting February 28, 1996. Information regarding
restrictions on the payment of dividends by CapMAC to Holdings is set forth in
Item 1 above under the heading "Insurance Regulatory Matters--Dividend
Restrictions." At March 12, 1997, there were approximately 2500 beneficial
holders of the Company's common stock.
34
<PAGE>
Item 6. Selected Financial Data.
The selected financial data set forth below should be read in
conjunction with the consolidated financial statements of the Company and the
notes thereto set forth herein, as well as the Management's Discussion and
Analysis of Financial Conditions and Results of Operations which is also set
forth herein.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
Holdings
Pro Forma (1)
Holdings for Acquisition
-------------------------------------------- ---------------
1996 1995 1994 1993 1992
-------- ------- -------- ------- ---------------
(Audited) (Unaudited)
($ in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Operating Data:
Gross premiums written $ 72,838 $57,476 $ 44,662 $24,894 $17,607
Net premiums written 57,734 41,484 33,593 21,308 13,359
Net premiums earned 40,557 29,242 23,103 17,483 12,222
Advisory and other fees 27,143 16,968 11,318 4,861 1,130
Net realized gains (losses) (1,804) 1,351 (117) 1,490 176
Net investment income 17,906 12,843 10,316 10,205 10,045
Total revenues 83,979 62,632 44,551 34,547 24,254
Total expenses 36,042 27,968 19,693 16,508 14,168
Income before income taxes and
minority interest 47,937 34,664 24,858 18,039 10,086
Net income 33,568 23,528 17,066 12,469 7,853
Primary earnings per share (2) 1.92 1.73 1.23 0.96 0.62(2)
Fully diluted earnings per share 1.89 1.65 1.23 0.96 0.62(2)
Selected Financial Statistics
- ---GAAP Basis (3):
Loss ratio 11.9% 10.7% 6.2% 5.2% 7.2%
Expense ratio 55.3 71.9 70.8 80.8 96.1
Combined ratio 67.2 82.6 77.0 86.0 103.3
- ---SAP Basis (3):
Loss ratio 0.0% 0.0% 0.0% 0.0% 0.0%
Expense ratio 56.6 77.1 81.8 112.2 141.9
Combined ratio 56.6 77.1 81.8 112.2 141.9
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------
Holdings
-------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(Audited)
($ in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total investments (4) $ 374,060 $ 329,758 $ 202,637 $ 190,428 $ 172,474
Total assets 457,234 391,273 244,404 212,992 184,693
Unearned premiums 68,262 45,767 25,905 10,062 6,038
Long term debt 15,000 15,000 15,000 15,000 15,000
Total liabilities 123,739 95,191 63,743 41,564 29,983
Stockholders' equity 310,387 276,519 180,661 171,428 154,710
Book value per share 19.38 17.86 15.38 14.72 13.34
Shares outstanding (5) 16,017,911 15,478,729 11,745,186 11,646,290 11,599,935
Selected Financial
Statistics (3)
Net Statutory P&I $23,311,000 $15,138,000 $10,838,000 $ 6,846,000 $ 4,933,000
Qualified Statutory Capital $ 260,217 $ 239,927 $ 170,477 $ 167,825 $ 163,087
Policyholders' leverage ratio 90:1 63:1 64:1 41:1 30:1
Other Data:
Adjusted book value per $ 26.98 $ 22.91 $ 19.50 $ 17.48 $ 15.82
share (6)
</TABLE>
(1) The following table presents the statements of income for (i) the
six-month period ended June 30, 1992 for Original Holdings prior to the
Acquisition; (ii) the six-month period ended December 31, 1992 for
Holdings after the Acquisition and (iii) the condensed pro forma income
statement for the year ended December 31, 1992 assuming that the
Acquisition had occurred on January 1, 1992. The pro forma information
reflects adjustments relating to (a) lower investment income due to the
reduction in the investment portfolio as a result of the Distribution made
in connection with the Acquisition; (b) higher benefits expense due to
establishment of the Employee Stock Option Plan ("ESOP"); (c) lower policy
acquisition costs due to the assumed write-off of deferred acquisition
costs at January 1, 1992 and (d) lower interest expense due to
recapitalization. The pro forma information does not purport to represent
what the results of operations would actually have been if the Acquisition
had occurred on January 1, 1992 or to be indicative of the future results
of operations of Holdings.
36
<PAGE>
<TABLE>
<CAPTION>
Holdings
Pro Forma
Original Holdings Holdings for Acquisition
January 1 - July 1 - Acquisition Year Ended
June 30, 1992 December 31, 1992 Adjustments December 31, 1992
- -----------------------------------------------------------------------------------------------------------
(Unaudited) (Audited) (Unaudited) (Unaudited)
($ in thousands)
<S> <C> <C> <C> <C>
Revenues:
Net premiums earned $ 5,969 $ 6,253 $ -- $12,222
Net investment income 7,519 4,823 (2,297) 10,045
Net realized gains -- 176 -- 176
Other income 415 1,020 376 1,811
- -----------------------------------------------------------------------------------------------------------
Total revenues 13,903 12,272 (1,921) 24,254
- -----------------------------------------------------------------------------------------------------------
Expenses:
Losses and loss adjustment
expenses 460 422 -- 882
Underwriting and operating
expenses 4,979 6,154 596 11,729
Policy acquisition costs 2,911 143 (2,686) 368
Interest expense 6,425 439 (5,676) 1,189
- -----------------------------------------------------------------------------------------------------------
Total expenses 14,775 7,158 (7,765) 14,168
- -----------------------------------------------------------------------------------------------------------
Income before income
taxes (872) 5,114 5,844 10,086
- -----------------------------------------------------------------------------------------------------------
Income taxes 1,691 1,148 2,776 2,233
- -----------------------------------------------------------------------------------------------------------
Net Income $ 819 $ 3,966 $ 3,068 $ 7,853
===========================================================================================================
</TABLE>
(2) Earnings per share ("EPS") has been computed using the modified treasury
stock method and the market value of the shares has been determined by an
independent consulting firm in connection with an annual valuation for the
ESOP, except for the market values at December 31, 1996 and 1995, which
are based on the closing market price on the New York Stock Exchange on
such dates. EPS for the six-month period ending December 31, 1992 was
$0.62.
(3) These ratios and statistics relate solely to CapMAC. The GAAP loss ratio
is losses and loss adjustment expenses incurred (inclusive of additions to
the Supplemental Loss Reserve) divided by net premiums earned. The SAP
loss ratio is losses and loss adjustment expenses incurred (exclusive of
additions to the Supplemental Loss Reserve) divided by net premiums
earned. The GAAP expense ratio is underwriting and operating expenses and
policy acquisition costs, divided by net premiums earned. The SAP expense
ratio is SAP underwriting and operating expenses, divided by net premiums
written. The combined ratio on both a GAAP and SAP basis is the sum of the
applicable loss and expense ratios.
(4) The Company changed its method of accounting for investments to adopt the
provisions of the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," on December 31, 1993.
(5) Shares outstanding do not include the common stock equivalents (i.e.,
warrants, stock options, restricted stock units and unallocated ESOP
shares).
(6) Adjusted book value per share is not based on GAAP and is not a substitute
for GAAP book value per share of Common Stock. Due to the present value of
future revenues ("PFR") embedded in CapMAC's existing book of business,
the book value per share has been adjusted to present additional
information concerning the value of CapMAC. The adjusted book value is
determined by adding to the GAAP book value the PFR per share reduced by
the deferred acquisition costs net of the related tax effects. However,
PFR is not earned until subsequent periods, and the amount actually
realized may be less than the amount estimated.
37
<PAGE>
Item 7. 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 Financial Services (Europe) Limited
("CFS (Europe)"), a subsidiary of CFS. The Company is also a lead investor in
CapMAC Asia Ltd. ("CapMAC Asia").
CapMAC insures structured asset-backed, corporate, municipal and other financial
obligations in the U.S. and international capital markets. CapMAC also provides
financial guarantee 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. ("Moody's"), Standard & Poor's Ratings Services ("S&P"), Duff &
Phelps Credit Rating Co. ("Duff & Phelps"), and Nippon Investors Service, Inc.
("Nippon"), a Japanese rating agency. Since it commenced operations, CapMAC has
issued guarantees providing credit enhancement to over $73 billion of
securities, both in the public and private capital markets.
CFS and CFS (Europe) provide advisory, consulting and structuring services to
third parties. CFS also provides various services, including underwriting,
reinsurance, marketing, data processing and other services to Holdings, CapMAC
and CFS (Europe), in connection with the operation of the business.
CapMAC Asia is a subsidiary of the Company formed for the purpose of making
investments in Asia in connection with the Company's strategy to expand its
Asian structured finance business. The Company currently owns 30.7% of the
equity of CapMAC Asia. Through its investment in CapMAC Asia and pursuant to a
shareholders' agreement among the other shareholders of CapMAC Asia, the Company
has the right to designate a majority of the board of CapMAC Asia and thereby
controls substantially all of CapMAC Asia's operations.
CapMAC Asia has invested its capital in Asia Credit Services (Pte) Ltd ("Asia
Services"), which owns all of the stock of Asian Securitization & Infrastructure
Assurance (Pte) Ltd ("ASIA Ltd"), a regional financial guarantee company located
in Singapore, rated double-A by Duff & Phelps, single-A by S&P and double-A plus
by Nippon. At December 31, 1996 and 1995, CapMAC Asia had a $33.4 million and
$30.7 million investment in Asia Services, respectively, representing 33.33% of
the outstanding shares of Asia Services. ASIA Ltd was formed to provide
guarantees of debt securities in the primary and secondary Asian fixed income
capital markets and to engage in related business activities in the Asian
capital markets and, together with Asia Services, to engage in related business
activities in the Asian capital markets and to provide technical advice and
assistance in connection with Asian securitization transactions. At December 31,
1996 and 1995, the Company's minority interest in CapMAC Asia amounted to $23.1
million and $19.6 million, respectively.
On December 19, 1995 Holdings sold 2,500,000 new shares of its common stock in
an initial public offering ("the Offering"). In conjunction with the Offering,
Holdings also sold 500,000 shares to Centre Reinsurance Limited ("Centre Re"), a
wholly-owned subsidiary of The Zurich Insurance Company in a private placement.
This investment reflects the intent of the Company and Centre Re to establish a
strategic alliance to jointly pursue the development of new financial products.
In July 1995, the Company sold 500,001 shares of common stock to ORIX USA
Corporation ("ORIX"), a subsidiary of ORIX Corporation, a leading Japanese
leasing company.
38
<PAGE>
Of the proceeds received by the Company from the Offering and the private
placements, $59 million were contributed to CapMAC.
On July 5, 1996, the Company completed a secondary public offering by some of
its stockholders of 3,737,500 shares of common stock at an offering price of $28
per share. The Company did not receive any proceeds from this offering.
Results of Operations
To illustrate the growth of the Company's business, presented below are selected
financial and statistical data for calendar years 1994, 1995 and 1996.
Selected Statistics
1996 1995 1994
-------- ------- -------
($ in thousands)
Gross premiums written $ 72,838 $57,476 $44,662
Year to year change 27% 29% 79%
Net premiums earned 40,557 29,242 23,103
Year to year change 39% 27% 32%
Advisory and other fees 27,143 16,968 11,318
Year to year change 60% 50% 127%
Net income 33,568 23,528 17,066
Year to year change 43% 38% 37%
Net par outstanding(1) ($ in millions) 19,655 12,628 9,397
Year to year change 56% 34% 68%
Gross par written(2) ($ in millions) 13,114 16,945 9,572
Year to year change (23%) 77% 90%
- --------------------------------------------------------------------------------
The data presented below are not recognized as financial statement measures
under generally accepted accounting principles ("GAAP"). However, the Company
considers these measures as meaningful indicators to assess business originated
in a given period as well as business which is outstanding as of the given date.
1996 1995 1994
-------- -------- -------
($ in thousands)
PFR written(3),(4) $110,580 $ 89,585 $50,921
Year to year change 23% 76% 33%
PFR outstanding(3) 232,669 155,411 98,059
Year to year change 50% 58% 53%
- ----------
(1) The amount of principal or other obligations guaranteed and outstanding
under an insurance policy or a reinsurance agreement, net of ceded
reinsurance.
(2) The amount of principal or other obligations guaranteed under an insurance
policy or a reinsurance agreement in a given period.
(3) CapMAC collects premiums primarily on an installment basis over the term
of the insurance policy and, to a lesser extent, on a one-time, up-front
basis at the time the insurance policy is issued. In 1996, 1995 and 1994,
premiums collected on an installment basis constituted 91%, 91% and 96%,
respectively, of net premiums earned. Due to the annuity nature of premium
income, CapMAC has an embedded future revenue stream which will be
collected
39
<PAGE>
and recognized as revenue not just 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. The
total estimated present value of future revenues, "PFR," includes
installment and up-front premiums (net of ceded premiums) and ceding
commission income contractually due to or to be earned by CapMAC in the
future under outstanding policies ("PFR outstanding"). PFR is not
recognized as a financial measure under GAAP. The determination of the
amount of PFR for a given policy is based primarily on the premium rate
specified for such policy, the contractual term of the policy and the
expected outstanding amount of the obligations insured under such policy
discounted to a present value at an assumed discount rate. The Company
believes that measuring the PFR provides useful information in evaluating
its business growth and potential future revenue during a given period.
However, the actual amount of future revenue may differ from the estimates
due to various factors such as early termination, renewal of insurance
contracts, changes in projected rates at which insured obligations are
repaid, or variations in the utilization of insured structured programs.
(4) Present value of future revenue stream, net of premiums ceded to
reinsurers, embedded in the business written in a given period, which is
expected to be recognized over the term of the book of business. A portion
of the PFR written for a given period, as reflected above, is included in
net premiums earned for such period.
Year Ended December 31, 1996 versus Year Ended December 31, 1995
The Company reported record net income of $33.6 million, a 43% increase over net
income of $23.5 million reported during 1995. Primary earnings per share and
earnings per share on a fully diluted basis were $1.92 and $1.89, respectively,
in 1996, compared to $1.73 and $1.65, respectively, during the same period in
1995. Operating earnings per share on a fully diluted basis for 1996 was $1.95,
an increase of 23% from $1.58 in 1995. Operating earnings exclude the impact of
realized capital gains and losses, net of tax. Earnings per share comparisons
between 1996 and 1995 are affected by the impact of Holdings' December 1995
initial public offering, which significantly increased the weighted average
number of shares outstanding.
Total revenues in 1996 were $84.0 million, an increase of 34% from $62.6 million
in 1995. This increase was primarily due to higher advisory fees, premiums
earned and investment income offset partially by realized capital losses.
In 1996 gross premiums written were $72.8 million, an increase of $15.3 million
or 27% from $57.5 million for the same period in 1995. This increase was
principally due to $9.6 million of premiums written with respect to
international transactions, $5.1 million of premiums written with respect to
domestic corporate transactions and $4.2 million of premiums written with
respect to domestic consumer transactions, offset by lower premiums written with
respect to the municipal business of $3.6 million. The amount of premiums ceded
to reinsurers decreased to $15.1 million in 1996 from $16.0 million in 1995. On
January 1, 1996, CapMAC reassumed the liability for all policies previously
reinsured by Winterthur Swiss Insurance Company ("Winterthur"). As a result,
CapMAC reassumed approximately $1.4 billion of principal insured by Winterthur
as of December 31, 1995. In connection with this reassumption of liability,
Winterthur commuted and returned to CapMAC unearned premiums, net of ceding
commission and Federal excise tax, of $2.0 million. Net premiums earned were
$40.6 million in 1996, an increase of 39% from $29.2 million in 1995. Unearned
premiums, representing premiums collected but not yet earned, increased by $22.5
million from December 31, 1995 to a total of $68.3 million at December 31, 1996
primarily due to large up-front premiums received from international
transactions and the reassumption of the reinsurance from Winterthur referred to
above.
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
commission expected to be received with respect to such guarantees, whereas
gross par written is based on the principal amount of guarantees issued.
Accordingly, an increase or decrease in PFR may not correspond with an increase
or decrease in gross par written. Business originated or renewed in 1996 was
estimated to generate $110.6 million of PFR, an increase of 23% over the same
period in 1995 due to higher net premium and ceding commission obtained from
certain international transactions and an increase in the weighted average life
of the guarantees issued in 1996. However, the principal amount of guarantees
issued (gross par written) was $13.1 billion in 1996 compared to $16.9 billion
in 1995, a decrease of 23%. The $16.9 billion of gross par written in 1995
40
<PAGE>
included a single master surety bond in the principal amount of $6.2 billion
that was issued with respect to a conduit formed for the purpose of funding a
diverse pool of securities. Excluding this single master surety bond from the
1995 gross par written would result in a 22% increase in 1996 gross par written
as compared to 1995.
At December 31, 1996, CapMAC had 607 policies outstanding which are expected to
generate $232.7 million of PFR, up approximately 50% from $155.4 million at
December 31, 1995 relating to 476 policies outstanding at such date. The
discount rate used for purposes of the PFR calculation was 7% at December 31,
1996 and 1995.
At December 31, 1996, net par insured and outstanding was $19.7 billion, up 56%
from $12.6 billion at December 31, 1995 as a result of an increase in consumer
receivable transactions of 49% from $7.0 billion at December 31, 1995 to $10.4
billion at December 31, 1996 and an increase in trade and corporate obligations
of 72% from $4.9 billion at December 31, 1995 to $8.4 billion at December 31,
1996. The remaining weighted average life of the insured portfolio was estimated
to be 6.4 years at December 31, 1996 versus 6.0 years at December 31, 1995.
Advisory and other fees increased 60% to $27.1 million in 1996 from $17.0
million in 1995 due to the Company's continued focus on the structuring and
financial engineering business. 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 $21.6
million in 1996, an increase of 49% from $14.5 million in 1995. Advisory fees
related to international business were $18.1 million and $12.3 million in 1996
and 1995, respectively. Advisory fees are generally earned upon the closing of
transactions. Therefore, 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. 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 $5.5 million in 1996 compared to $2.4 million in 1995, an increase of 127%
over the prior year primarily due to the increased utilization of the funding
vehicles.
Other income decreased $2.0 million from $2.2 million in 1995 to $0.2 million in
1996. In 1995, the Company recorded the sale, without recourse, of its interest
in potential future cash flows from certain transactions included in its insured
portfolio for a net amount of $2.2 million.
Net investment income was $17.9 million in 1996, an increase of 39% from $12.8
million in 1995. Average assets available for investment increased to $323.1
million in 1996 from $238.4 million in 1995. The increase was primarily due to
the investment of the proceeds of the December 1995 initial public offering and
private placement of the Company's common stock to Centre Reinsurance Limited
and the July 1995 private placement to ORIX. The average annualized pre-tax
yield on the investment portfolio increased to 5.6% in 1996 from 5.5% in 1995.
The average after-tax yield on the investment portfolio was 4.5% in 1996 and
1995. The amount of tax-exempt securities held in the Company's investment
portfolio decreased to 53% at December 31, 1996 from 57% at December 31, 1995.
Net realized capital losses in 1996 were $1.8 million as compared to $1.4
million of net realized capital gains in 1995. In the fourth quarter of 1996,
the Company recorded a pre-tax capital loss of $2.0 million 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 December 31, 1996. The Company will
continue to monitor this investment, and if any further impairment occurs, there
would be additional write-offs in the future.
Total expenses were $36.0 million in 1996, an increase of 29% from $28.0 million
in 1995. Total expenses included additions to the reserve for losses and loss
adjustment expenses, underwriting and operating expenses, policy acquisition
costs, and interest expense.
41
<PAGE>
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 $4.8 million in 1996 compared to $3.1
million in 1995. Apart from additions to the SLR the Company incurred no losses
in 1996.
Underwriting and operating expenses were $22.2 million in 1996, a 35% increase
from $16.4 million in 1995. Underwriting and operating expenses consisted of
gross underwriting and operating expenses, reduced by the deferral to future
periods of certain costs related to CapMAC's acquisition of new business
(Deferred Acquisition Costs - "DAC") and ceding commission income. Gross
underwriting and operating expenses were $40.2 million in 1996, a 19% increase
from $33.9 million in 1995. The increase in underwriting and operating expenses
was due to increased compensation costs and operating expenses, partially offset
by higher ceding commission income. Staff and benefit-related expenses,
including the discretionary bonuses to employees, constituted approximately 74%
of gross underwriting and operating expenses in 1996 compared to 73% in 1995.
The Company maintains a discretionary bonus plan under which annual bonuses of
$10.4 million and $7.8 million were awarded to employees in 1996 and 1995,
respectively. Underwriting and operating expenses deferred by CapMAC were $18.0
million and $17.5 million in 1996 and 1995, 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 $7.8 million in 1996 from $7.2 million in 1995 lags the
increase in premiums earned in the corresponding periods primarily due to the
increasing average life of the insured portfolio. Interest expense related to
the senior debt was $1.2 million in 1996 and 1995.
In 1996 and 1995, the Company had a net tax expense of $14.7 million and $11.1
million, respectively. The Company's effective tax rate was 30.7% and 32.1% for
1996 and 1995, respectively. The effective tax rates during these periods were
lower than the statutory tax rate of 35% in 1996 and 1995 primarily due to
tax-exempt interest income. As of December 31, 1996, tax-exempt interest income
of $9.7 million represented 20.0% of earnings before taxes ("EBT") compared to
$7.8 million which represented 22.5% of EBT in the prior year.
Year Ended December 31, 1995 versus Year Ended December 31, 1994
The Company reported net income of $23.5 million or $1.73 per share during 1995,
a 38% increase over net income of $17.1 million or $1.23 per share reported in
1994. Earnings per share on a fully diluted basis were $1.65 in 1995, a 34%
increase over $1.23 in 1994. Operating earnings per share on a fully diluted
basis for 1995 was $1.58, an increase of 27% from $1.24 in 1994.
Total revenues in 1995 were $62.6 million, an increase of 41% from $44.6 million
in 1994. This increase was primarily due to higher premiums earned and advisory
fees.
In 1995, gross premiums written were $57.5 million, an increase of 29% from
$44.7 million for the same period in 1994. Net premiums earned were $29.2
million in 1995, an increase of 27% from $23.1 million in 1994.
Business originated or renewed in 1995 was estimated to generate $89.5 million
of PFR, an increase of $38.6 million or 76% over the same period in 1994.
Correspondingly, the amount of guarantees issued
42
<PAGE>
(gross par written) increased from $9.6 billion in 1994 to $16.9 billion in
1995, representing an increase of 77%. At December 31, 1995, CapMAC's
outstanding policies are expected to generate $155.4 million of PFR, up
approximately 58% from $98.1 million at December 31, 1994. The discount rate
used for purposes of the PFR calculation was 7% for 1995 and 1994. Unearned
premiums, representing premiums collected but not yet earned, increased by $19.9
million from December 31, 1994 to a total of $45.8 million at December 31, 1995.
At December 31, 1995, net par insured and outstanding was $12.6 billion, up 34%
from $9.4 billion at December 31, 1994. The remaining weighted average life of
the insured portfolio was estimated to be 6.0 years at December 31, 1995 and 5.0
years at December 31, 1994.
Advisory and other fees increased 50% from $11.3 million in 1994 to $17.0
million in 1995. The increase in fees received by CFS related to the closing of
several transactions which involved extensive advisory and structuring services
provided by CFS.
Other income increased $2.3 million from $0 in 1994 to $2.3 million in 1995. The
increase was primarily due to the Company's sale without recourse in 1995 of its
interest in potential future cash flows from certain transactions included in
its insured portfolio for a net amount of $2.2 million.
Net investment income was $12.8 million in 1995 and $10.3 million in 1994.
Average assets available for investment increased from $198.0 million in 1994 to
$238.4 million in 1995. The increase was primarily due to the investment of the
proceeds of the Offering and private placements. The average annualized pre-tax
yield on the investment portfolio increased from 5.3% in 1994 to 5.5% in 1995
due to a higher interest rate environment. The average after-tax yield on the
investment portfolio increased from 4.3% in 1994 to 4.5% in 1995. Net realized
capital gains in 1995 were $1.5 million higher than 1994. The amount of
tax-exempt securities held in the Company's investment portfolio decreased from
61% at December 31, 1994 to 57% at December 31, 1995. Total expenses were $28.0
million in 1995, an increase of 42% from $19.7 million in 1994. Total expenses
included additions to the reserve for losses and loss adjustment expenses,
underwriting and operating expenses, policy acquisition costs, and interest
expense.
Corresponding to the growth in the insured portfolio, the losses and loss
adjustment expenses were $3.1 million in 1995 compared to $1.4 million in 1994.
In September 1995, CapMAC incurred its first claim on a financial guarantee
policy. Based on its current estimate, the Company expects the aggregate amount
of the claim and related loss adjustment expenses with respect to such policy
not to exceed $2.7 million, although no assurance can be given that such claims
and related expenses will not exceed that amount. Such amount was covered
through a recovery under a quota share reinsurance agreement of $0.2 million and
a reduction in the SLR of $2.5 million. The portion of the claim and related
expenses not covered under the quota share agreement is being funded through
payments to CapMAC from the Lureco Trust Account. (See - Liquidity and Capital
Resources). At December 31, 1995, the Company had a case basis loss reserve of
$0.6 million and reinsurance recoverable of $69,000.
Underwriting and operating expenses were $16.4 million in 1995, a 31% increase
from $12.5 million in 1994. Underwriting and operating expenses consisted of
gross underwriting and operating expenses, reduced by the deferral to future
periods of certain costs related to CapMAC's acquisition of new business and
ceding commission income. Gross underwriting and operating expenses were $33.9
million and $26.7 million in 1995 and 1994, respectively. The increase in
underwriting and operating expenses was due to increased compensation costs and
other operating costs offset by increased ceding commission income. Staff and
benefit-related expenses, including payment of discretionary bonuses to
employees, constituted approximately 73% of gross underwriting and operating
expenses in 1995 compared to 69% in 1994. The Company maintains a discretionary
bonus plan under which aggregate annual bonuses of $7.8 million and $5.3 million
were awarded to employees in 1995 and 1994, respectively. Underwriting and
operating expenses deferred by CapMAC were $14.1 million and $17.5 million in
1995 and 1994, respectively.
43
<PAGE>
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 from $4.5 million in 1994 to $7.2 million in 1995 relates to
the increase in premiums earned in the corresponding periods. Interest expense
related to the senior debt was $1.2 million in 1995 and 1994.
In 1995 and 1994, the Company had net tax expense of $11.1 million and $7.8
million, respectively. The Company's effective tax rate was 32.0% and 31.4% for
1995 and 1994, respectively. The effective tax rates during these periods were
lower than the statutory tax rate of 35% in 1995 and 34% in 1994 primarily due
to tax-exempt interest income. As of December 31, 1995, tax-exempt interest
income of $7.8 million represented 22.5% of EBT compared to $5.7 million which
represented 22.9% of EBT in the prior year.
Liquidity and Capital Resources
The Company and Holdings. The operations of the Company are conducted primarily
through CapMAC and CFS, wholly owned subsidiaries of Holdings. The liquidity of
Holdings both on a short-term (less than twelve months) and long-term (twelve
months or longer) basis will be dependent on several factors including
borrowings, equity issuances and dividends from CFS and CapMAC. Holdings
requires liquidity for payment of dividends to shareholders, investment in
international and other business ventures and debt service. While CFS has from
time to time paid dividends to Holdings, currently no dividends are expected to
be received by Holdings from CapMAC.
Holdings is currently committed to purchase common stock in the 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.
CapMAC, in early 1997, has 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 is licensed to
write financial guarantee insurance in the European Union member states.
During the fourth quarter of 1996, the Company incorporated a wholly owned
subsidiary, CapMAC Investment Management, Inc. ("CIM"). CIM will engage in the
funds management business and will sponsor and manage funds targeted to both
domestic and international institutional investors and high net worth
individuals. Where appropriate, CapMAC may also provide credit enhancement for
these funds. CIM is expected to be initially capitalized with $2 million and
commence operations in early 1997.
Management believes that the Company's operating liquidity needs, both on a
short-term basis and long-term basis, can be funded exclusively from its
operating cash flow. The Company has a number of sources of liquidity which it
expects to have available to pay claims and other obligations on a short- and
long-term basis: the cash flow from its written premiums, advisory fees
collected, its investment portfolio and the earnings thereon, its bank line of
credit, its reinsurance arrangements with third-party reinsurers, the capital
markets and, with respect to claims under certain circumstances, realizations
from collateral underlying its insured transactions.
The Company has no material commitments for capital expenditures, although it
has the investment commitments referred to above. The total liquidity resources
of the Company represented by its investment income, its premium and advisory
fees collections and its liquidity arrangements are, in management's opinion,
adequate to meet the Company's cash needs.
CapMAC. CapMAC's primary sources of funds are from premiums received and
earnings from its investment portfolio. Currently CapMAC's primary use of funds
is to pay operating expenses. In the event of a default by an issuer of an
insured obligation and upon exhaustion of other liquidity sources in the
transaction, such as the cash flow from any assets collateralizing such
obligations, funds from CapMAC's
44
<PAGE>
investment portfolio may be required to satisfy claims. The insurance policies
issued by CapMAC provide, in general, that payment of principal, interest and
other amounts insured by CapMAC may not be accelerated by the holder of the
obligation but are paid by CapMAC in accordance with the obligation's original
payment schedule or, at CapMAC's option, on an accelerated basis. These policy
provisions prohibiting acceleration of certain claims serve to reduce CapMAC's
liquidity requirements.
CapMAC has available a $150 million, standby corporate liquidity facility
presently scheduled to terminate in September 1999 which, if necessary, is
available (subject to satisfaction of customary drawing conditions) to provide
funds for any claim payments under its policies. Such drawing conditions include
a requirement that CapMAC maintain at least $165 million of "Tangible Net
Worth," which is defined as the difference between the market value of CapMAC's
portfolio of marketable securities plus the amount of its cash on hand and the
total liabilities and reserves of CapMAC determined in accordance with GAAP,
excluding any loans made under the liquidity facility. As of December 31, 1996,
CapMAC's Tangible Net Worth was $228.7 million. The liquidity facility is
provided by a consortium of banks headed by Bank of Montreal, as agent, which is
rated A1+ and P1 by S&P and Moody's, respectively. As of December 31, 1996,
CapMAC has never borrowed under this corporate liquidity facility.
The Company has a conservative investment strategy of investing in U.S.
government and agency obligations and securities that are rated "A" or better by
the major rating agencies. The Company has readily marketable, high quality,
fixed income securities and short-term investments in its investment portfolio.
The average contractual maturity of securities within the investment portfolio
was 6.1 years and 4.7 years at December 31, 1996 and December 31, 1995,
respectively. The average duration of the investment portfolio at December 31,
1996 and December 31, 1995 was 4.3 years and 3.5 years, respectively. At
December 31, 1996, the amortized cost of the Company's investment portfolio was
approximately $336.0 million (fair value of $339.2 million). The Company manages
its investments with the objectives of preserving its capital and claims-paying
ability, maintaining a high level of liquidity, minimizing taxes and, within
these constraints, optimizing long-term total return.
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. At December 31,
1996, the majority of CapMAC's reinsurance capacity was held by reinsurers who
were rated AA or better by S&P. CapMAC monitors the creditworthiness of all of
its reinsurers on a regular basis. In addition to its facultative and treaty
reinsurance agreements, CapMAC has a "stop-loss" reinsurance treaty with Mitsui
Marine and Fire Insurance Co., Ltd. ("Mitsui") which indemnifies CapMAC for up
to $50 million of incurred losses above $100 million. Effective January 1, 1997
the stop-loss reinsurance coverage increased to $75 million in excess of
incurred losses above $150 million increasing annually based on increases in
CapMAC's statutory qualified capital. The new stop-loss reinsurance is provided
by Mitsui, AXA Re Finance S.A. ("AXA Re"), and Munchener
Ruckversicherungs-Gesellschaft ("Munich Re").
In 1994, CapMAC and Luxembourg European Reinsurance LURECO S.A. ("Lureco"),
entered into a Per Annum Aggregate Reinsurance Treaty (the "Lureco Treaty")
pursuant to which Lureco reinsures CapMAC for certain losses and related
expenses, including all amounts which have been incurred by CapMAC for
anticipated settlement of claims regardless of whether such amounts have been
paid by CapMAC. The Lureco Treaty provides that the annual reinsurance premium
payable by CapMAC to Lureco, after deduction of the reinsurer's fee payable to
Lureco, be deposited in a trust account (the "Lureco Trust Account") to be
applied by CapMAC, at its option, to offset losses and loss expenses incurred by
CapMAC in connection with incurred claims. Amounts on deposit in the Lureco
Trust Account which have not been applied against claims are contractually due
to CapMAC at the termination of the treaty. The agreement is renewable annually
at CapMAC's option, subject to certain conditions. The agreement was renewed for
the 1996 policy year and provides $7 million of loss coverage in excess of the
premium deposit amount of $5 million retained in the Lureco Trust Account.
Additional coverage is provided for losses incurred in excess of 200% of the net
premiums earned up to $4 million for any one agreement year. In September 1995,
claims incurred of approximately $2.5 million on an insurance policy were
applied against the Lureco Trust Account.
45
<PAGE>
At December 31, 1996, CapMAC had statutory qualified capital, which consisted of
statutory capital, unassigned surplus and contingency reserves, of $260.2
million, up from $239.9 million at December 31, 1995. CapMAC's policyholders'
leverage ratio, which is measured by the ratio of net principal and interest
insured to statutory qualified capital, was 90 to 1 at December 31, 1996 and 63
to 1 at December 31, 1995. CapMAC's claims-paying resources as defined by the
Company (which includes statutory qualified capital, PFR and stop-loss
reinsurance) stood at $542.9 million and $445.3 million at December 31, 1996 and
1995, respectively.
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 December 31,
1996, the amortized cost and fair value of the consolidated CFS portfolio was
$7.3 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 other obligations.
46
<PAGE>
Item 8. Financial Statements and Supplementary Data.
CapMAC HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 and 1994
(With Independent Auditors' Report Thereon)
47
<PAGE>
Independent Auditors' Report
The Board of Directors
CapMAC Holdings Inc.:
We have audited the accompanying consolidated balance sheets of CapMAC Holdings
Inc. and subsidiaries as of December 31, 1996 and 1995 and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CapMAC Holdings Inc.
and subsidiaries as of December 31, 1996 and 1995 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
New York, New York
January 29, 1997
48
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
ASSETS
<TABLE>
<CAPTION>
December 31 December 31
1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments:
Bonds at fair value (amortized cost $302,284 at December 31, 1996
and $210,651 at December 31, 1995) $ 305,422 215,706
Short-term investments (at amortized cost which approximates fair
value) 33,752 82,019
Investment in affiliates 34,886 32,033
- -----------------------------------------------------------------------------------------------------------
Total investments 374,060 329,758
- -----------------------------------------------------------------------------------------------------------
Cash 966 1,033
Accrued investment income 3,847 3,136
Deferred acquisition costs 45,380 35,162
Premiums receivable 5,141 3,540
Prepaid reinsurance 18,489 13,171
Other assets 9,351 5,473
- -----------------------------------------------------------------------------------------------------------
Total assets $ 457,234 391,273
===========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Unearned premiums $ 68,262 45,767
Reserve for losses and loss adjustment expenses 10,985 6,548
Ceded reinsurance 1,738 2,469
Accounts payable and other accrued expenses 15,274 11,367
Senior notes 15,000 15,000
Current income taxes 2,890 3,264
Deferred income taxes 9,590 10,776
- -----------------------------------------------------------------------------------------------------------
Total liabilities 123,739 95,191
- -----------------------------------------------------------------------------------------------------------
Minority Interest 23,108 19,563
- -----------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock - $0.01 par value per share; 20,000,000 shares are
authorized; none outstanding at December 31, 1996 and 1995 - -
Common stock - $0.01 par value per share; 50,000,000 shares are authorized;
16,425,324 and 15,966,032 shares issued December 31, 1996 and 1995; 16,425,274
and 15,965,995 shares outstanding at December 31, 1996 and 1995 164 160
Additional paid-in capital 226,428 223,400
Unrealized (depreciation) appreciation on investments, net of tax (71) 2,443
Retained earnings 89,310 57,029
Unallocated ESOP shares (5,430) (6,497)
Cumulative translation adjustment, net of tax (14) (16)
- -----------------------------------------------------------------------------------------------------------
Total stockholders' equity 310,387 276,519
- -----------------------------------------------------------------------------------------------------------
Total liabilities, minority interest, and stockholders' equity $ 457,234 391,273
===========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
49
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Consolidated Statements of Income
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Direct premiums written $ 71,752 56,541 43,598
Assumed premiums written 1,086 935 1,064
Ceded premiums written (15,104) (15,992) (11,069)
- ------------------------------------------------------------------------------------------------------------
Net premiums written 57,734 41,484 33,593
Increase in unearned premiums (17,177) (12,242) (10,490)
- ------------------------------------------------------------------------------------------------------------
Net premiums earned 40,557 29,242 23,103
Advisory and other fees 27,143 16,968 11,318
Net investment income 17,906 12,843 10,316
Net realized capital (losses) gains (1,804) 1,351 (117)
Other income (loss) 177 2,228 (69)
- ------------------------------------------------------------------------------------------------------------
Total revenues 83,979 62,632 44,551
- ------------------------------------------------------------------------------------------------------------
Expenses:
Losses and loss adjustment expenses 4,815 3,141 1,429
Underwriting and operating expenses 22,200 16,421 12,532
Policy acquisition costs 7,824 7,203 4,529
Interest expense 1,203 1,203 1,203
- ------------------------------------------------------------------------------------------------------------
Total expenses 36,042 27,968 19,693
- ------------------------------------------------------------------------------------------------------------
Income before income taxes and
minority interest 47,937 34,664 24,858
Income Taxes 14,712 11,108 7,792
- -----------------------------------------------------------------------------------------------------------
Income before minority interest 33,225 23,556 17,066
Minority interest 343 (28) -
- ------------------------------------------------------------------------------------------------------------
Net Income $ 33,568 23,528 17,066
============================================================================================================
Primary earnings per share $ 1.92 1.73 1.23
Fully diluted earnings per share $ 1.89 1.65 1.23
============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
50
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common stock:
Balance at beginning of year $ 160 123 123
Common stock issued 4 37 -
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 164 160 123
- ---------------------------------------------------------------------------------------------------------
Additional paid-in capital:
Balance at beginning of year 223,400 159,728 159,718
Issuance of common stock 3,028 63,672 10
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 226,428 223,400 159,728
- ---------------------------------------------------------------------------------------------------------
Unrealized (depreciation) appreciation
on investments, net of tax:
Balance at beginning of year 2,443 (5,522) 3,629
Unrealized (depreciation) appreciation on
investments (2,514) 7,965 (9,151)
- ---------------------------------------------------------------------------------------------------------
Balance at end of year (71) 2,443 (5,522)
- ---------------------------------------------------------------------------------------------------------
Retained earnings:
Balance at beginning of year 57,029 33,501 16,435
Net income 33,568 23,528 17,066
Dividends declared - $.08 per share (1,287) - -
- ---------------------------------------------------------------------------------------------------------
Balance at end of year 89,310 57,029 33,501
- ---------------------------------------------------------------------------------------------------------
Unallocated ESOP shares:
Balance at beginning of year (6,497) (7,169) (8,477)
Allocation of ESOP shares 1,067 672 1,308
- ---------------------------------------------------------------------------------------------------------
Balance at end of year (5,430) (6,497) (7,169)
- ---------------------------------------------------------------------------------------------------------
Cumulative translation adjustment, net
of tax:
Balance at beginning of year (16) - -
Translation adjustment 2 (16) -
- ---------------------------------------------------------------------------------------------------------
Balance at end of year (14) (16) -
- ---------------------------------------------------------------------------------------------------------
$ 310,387 276,519 180,661
Total stockholders' equity
=========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
51
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 33,568 23,528 17,066
- ---------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Reserve for losses and loss adjustment
expenses 4,437 1,357 1,429
Unearned premiums, net 22,496 19,862 15,843
Deferred acquisition costs (10,218) (10,302) (9,611)
Premiums receivable (1,601) (161) (2,103)
Accrued investment income (711) (390) (848)
Income taxes payable 1,046 3,858 5,390
Net realized capital losses (gains) 1,804 (1,351) 117
Accounts payable and other accrued expenses 3,906 1,251 3,421
Prepaid reinsurance (5,318) (7,620) (5,352)
Other, net (8,779) (1,694) 558
- ---------------------------------------------------------------------------------------------------------
Total adjustments 7,062 4,810 8,844
- ---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 40,630 28,338 25,910
- ---------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of investments (223,967) (171,940) (88,797)
Purchases of investment in affiliates (3,333) (32,016) -
Proceeds from sales of investments 57,210 53,882 42,118
Proceeds from maturities of investments 123,773 37,980 19,958
- ---------------------------------------------------------------------------------------------------------
Net cash used in investing activities (46,317) (112,094) (26,721)
- ---------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Allocation of ESOP shares 1,067 672 1,308
Net proceeds from sale of common stock - 63,699 -
Proceeds from sale of stock in
CapMAC Asia 1,892 - -
Minority interest capital contribution
to CapMAC Asia 2,123 19,535 -
Dividends paid (1,287) - -
Exercise of stock options 1,980 - -
Other, net (155) - -
- ---------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 5,620 83,906 1,308
- ---------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash (67) 150 497
Cash balance at beginning of year 1,033 883 386
- ---------------------------------------------------------------------------------------------------------
Cash balance at end of year $ 966 1,033 883
=========================================================================================================
Supplemental disclosures of cash flow
information:
Income taxes paid $ 13,570 7,106 2,345
Interest paid $ 1,128 1,128 1,128
=========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
52
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
1) Background
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 Financial Services (Europe) Ltd. ("CFS (Europe)"), a subsidiary
of CFS, and a lead investor in CapMAC Asia Ltd. ("CapMAC Asia").
CapMAC is a New York-domiciled monoline stock insurance company which
engages only in the business of financial guarantee and surety
insurance. 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 guarantee reinsurance for
structured asset-backed, corporate, municipal and other financial
obligations written by other major insurance companies.
CapMAC's claims-paying ability is rated "Aaa" by Moody's Investors
Service, Inc. ("Moody's"), "AAA" by Standard & Poor's Ratings Group
("S&P"), "AAA" by Duff & Phelps Credit Rating Co. ("Duff & Phelps"),
and "AAA" by 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.
CFS and CFS (Europe) receive fees for providing advisory, consulting
and structuring services to third parties. CFS also provides various
services, including underwriting, reinsurance, marketing, data
processing and other services to Holdings, CapMAC and CFS (Europe).
Holdings, CapMAC and CFS (Europe) pay CFS a fee for providing such
services, but not in excess of CFS' cost for such services.
In December 1995, as part of its strategy to expand into Asia, the
Company purchased 36.3% of CapMAC Asia. As of December 31, 1996, the
Company currently owns 30.7% of CapMAC Asia. CapMAC Asia has a 33.33%
investment in Asia Credit Services (Pte) Ltd ("Asia Services"). Asia
Services owns all of the stock of Asian Securitization & Infrastructure
Assurance (Pte) Ltd ("ASIA Ltd"), a regional financial guarantee
company located in Singapore. ASIA Ltd was formed to provide guarantees
of high quality debt securities in the primary and secondary Asian
fixed income capital markets and, together with Asia Services, to
engage in related business activities in the Asian capital markets and
to provide technical advice and assistance in connection with Asian
securitization transactions.
On December 19, 1995 Holdings sold 2,500,000 new shares of its common
stock in an initial public offering ("the Offering"). In conjunction
with the Offering, Holdings also sold 500,000 shares to Centre
Reinsurance Limited (Centre Re), a wholly owned subsidiary of The
Zurich Insurance Company, in a private placement (see note 16).
In July 1995, the Company sold 500,001 shares of common stock to ORIX
USA Corporation ("ORIX"), a subsidiary of ORIX Corporation, a leading
Japanese leasing company (see note 16).
53
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements
2) Significant Accounting Policies
Significant accounting policies used in the preparation of the
accompanying consolidated financial statements are as follows:
a) Basis of Presentation
The accompanying consolidated financial statements are
prepared on the basis of generally accepted accounting
principles ("GAAP") and include the accounts of Holdings and
its wholly owned subsidiaries, principally CapMAC and CFS, and
its investment in CapMAC Asia. The remaining shareholders in
CapMAC Asia are accounted for as minority interest. All
significant intercompany transactions have been eliminated in
consolidation.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Management
believes the most significant estimates relate to deferred
acquisition costs, reserve for losses and loss adjustment
expenses and disclosures of financial guarantees outstanding.
Actual results could differ from those estimates.
b) Investments
As of December 31, 1996 and 1995, all of the Company's
securities have been classified as available-for-sale.
Available-for-sale securities are recorded at fair value. Fair
value is generally based upon quoted market prices. Unrealized
holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and
are reported as a separate component of stockholders' equity
until realized. Transfers of securities between categories are
recorded at fair value at the date of transfer. A decline in
the fair value of any available-for-sale security below cost
that is deemed other than temporary is charged to earnings
resulting in the establishment of a new cost basis for the
security.
Short-term investments are those investments having a maturity
of less than one year at purchase date. Short-term investments
are carried at amortized cost which approximates fair value.
Premiums and discounts are amortized or accreted over the life
of the related security as an adjustment to yield using the
effective interest method. Dividend and interest income are
recognized when earned. Realized gains and losses are included
in earnings and are derived using the FIFO (first-in,
first-out) method for determining the cost of securities sold.
Investment in affiliates is accounted for in accordance with
the equity method of accounting. The investment in affiliates
consists of the Company's investment in Asia Services and P.T.
ABS Finance Indonesia (formerly P.T. Citimas Capital (Pte)
Ltd.) ("ABS Finance").
54
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements
c) Premium Revenue Recognition
Premiums which are payable monthly to CapMAC are reflected in
income when due, net of amounts payable to reinsurers.
Premiums which are payable quarterly, semi-annually or
annually are reflected in income, net of amounts payable to
reinsurers, on an equal monthly basis over the corresponding
policy term. Premiums that are collected as a single premium
at the inception of the policy and have a term longer than one
year are earned, net of amounts payable to reinsurers, by
allocating premium to each bond maturity based on the
principal amount and earning it straight-line over the term of
each bond maturity. For the years ended December 31, 1996 and
1995, 91% of net premiums earned were attributable to premiums
payable in installments and 9% were attributable to premiums
collected on an up-front basis.
d) Advisory Fee Revenue Recognition
CFS and CFS (Europe) collect advisory fees for advising
clients as to the most appropriate structure to use for a
given securitization transaction based on the nature of the
assets and financial objective of the customer. Advisory fees
received by CFS or CFS (Europe) are generally earned when a
transaction closes. Such amounts are non-refundable and are
for services provided prior to the close of a transaction.
e) Deferred Acquisition Costs
Certain costs incurred by CapMAC, which vary with and are
primarily related to the production of new business, are
deferred. These costs include direct and indirect expenses
related to underwriting, marketing and policy issuance, rating
agency fees and premium taxes, net of reinsurance ceding
commissions. The deferred acquisition costs are amortized over
the period in proportion to the related premium earnings. The
actual amount of premium earnings may differ from projections
due to various factors such as renewal or early termination of
insurance contracts or different run-off patterns of exposure
resulting in a corresponding change in the amortization
pattern of the deferred acquisition costs.
f) Reserve for Losses and Loss Adjustment Expenses
The reserve for losses and loss adjustment expenses consists
of a supplemental loss reserve ("SLR") and a case basis loss
reserve. The SLR is established for expected levels of losses
resulting from credit failures on currently insured issues and
reflects the estimated portion of earned premiums required to
cover those losses.
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. Case
basis loss reserves may be allocated from any SLR outstanding
at the time the case basis reserves are established.
Management believes that the current level of reserves is
adequate to cover the ultimate net cost of claims and the
related expenses with respect to financial guarantees issued
by CapMAC. The establishment of the appropriate level of loss
reserves is an
55
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements
inherently uncertain process involving estimates and
subjective judgments by management, and therefore there can be
no assurance that ultimate losses in CapMAC's insured
portfolio will not exceed the current estimate of loss
reserves.
g) Depreciation
Leasehold improvements, furniture, fixtures and electronic
data processing equipment are being amortized or depreciated
over the lease term or useful life, whichever is shorter,
using the straight-line method.
h) Income Taxes
Deferred income taxes are provided with respect to temporary
differences between the financial statement and tax basis of
assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse. The
effect on deferred tax assets and liabilities of a change in
tax rates is recognized in the period that includes the
enactment date.
i) Earnings Per Share
Earnings per share ("EPS") has been computed using the
modified treasury stock method. For periods prior to the
offering, the average market value of the shares was
determined by an independent consulting firm. Total weighted
average number of common stock and common stock equivalents
used in calculating the primary earnings per share, for the
years ended December 31, 1996, 1995 and 1994 were
approximately 17,441,000, 13,636,000 and 13,645,000,
respectively. Total weighted average number of common stock
and common stock equivalents used in calculating the fully
diluted earnings per share, for the years ended December 31,
1996, 1995 and 1994 were approximately 17,792,000, 14,337,000
and 13,645,000, respectively.
j) Accounting for Stock Issued to Employees
In October 1995, the Financial Accounting Standards Board
("FASB") issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 establishes accounting and
reporting standards for stock-based employee compensation
plans. This Statement allows companies to choose between the
"fair value based method of accounting" as defined in this
Statement and the "intrinsic value based method of accounting"
as prescribed by Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees." The
Company has elected to remain with the accounting requirements
under APB 25. The pro forma disclosures of net income and
earnings per share required by SFAS No. 123, as if the fair
value based method of accounting had been applied, are
included in note 6.
k) Reclassifications
Certain prior year balances have been reclassified to conform
to the current year presentation.
56
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements
3) Insured Portfolio
At December 31, 1996 and 1995, the principal amount of financial
obligations insured by CapMAC was $24.5 billion and $16.9 billion,
respectively, and net of reinsurance (net principal outstanding), was
$19.7 billion and $12.6 billion, respectively, with a weighted average
life of 6.4 years and 6.0 years, respectively. CapMAC's insured
portfolio was broadly diversified by geographic distribution and type
of insured obligations, with no single insured obligation in excess of
statutory single risk limits, after giving effect to any reinsurance
and collateral, which are a function of CapMAC's statutory qualified
capital (the sum of statutory capital and surplus and mandatory
contingency reserve). At December 31, 1996 and 1995, the statutory
qualified capital was approximately $260 million and $240 million,
respectively.
<TABLE>
<CAPTION>
Net Principal Outstanding
December 31, 1996 December 31, 1995
------------------- -------------------
Type of Obligations Insured ($ in millions) Amount % Amount %
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Consumer receivables $ 10,362 52.8 $ 6,959 55.1
Trade and other corporate
obligations 8,479 43.1 4,912 38.9
Municipal/government obligations 814 4.1 757 6.0
- ----------------------------------------------------------------------------------------------
Total $ 19,655 100.0 $ 12,628 100.0
==============================================================================================
</TABLE>
At December 31, 1996 and 1995, the principal and interest amount of
financial obligations insured by CapMAC was $29.8 billion and $20.3
billion, respectively, and net of reinsurance (net principal and
interest outstanding), was $23.3 billion and $15.1 billion,
respectively. At December 31, 1996, approximately 93% of CapMAC's
insured portfolio was comprised of structured asset-backed
transactions. Under these structures, a pool of assets covering at
least 100% of the principal amount guaranteed under its insurance
contract is sold or pledged to a special purpose bankruptcy remote
entity. CapMAC's primary risk from such insurance contracts is the
impairment of cash flows due to delinquency or loss on the underlying
assets. CapMAC, therefore, evaluates all the factors affecting past and
future asset performance by studying historical data on losses,
delinquencies and recoveries of the underlying assets. Each transaction
is reviewed to ensure that an appropriate legal structure is used to
protect against the bankruptcy risk of the originator of the assets.
Along with the legal structure, an additional level of first loss
protection is also created to protect against losses due to credit or
dilution. This first level of loss protection is usually available from
reserve funds, excess cash flows, overcollateralization, or recourse to
a third party. The level of first loss protection depends upon the
historical losses and dilution of the underlying assets, but is
typically several times the normal historical loss experience for the
underlying type of assets.
During 1995, the Company sold without recourse its interest in
potential cash flows from transactions included in its insured
portfolio and recognized $2,200,000 of income which has been included
in other income in the accompanying consolidated financial statements.
57
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The following entities each accounted for, through referrals and
otherwise, 10% or more of total revenues for each of the periods
presented:
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
- -------------------------- ------------------- ---------------------
% of % of % of
Name Revenues Name Revenues Name Revenues
- -------------------------- ------------------- ---------------------
Bear, Stearns & 11.8 Citicorp 11.7 Citicorp 14.3
Co. Inc.
Citicorp 10.8
4) Investments
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair value for available-for-sale securities by major
security type at December 31, 1996 and 1995 were as follows ($ in
thousands):
December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available-for-sale Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury obligations $ 4,059 10 - 4,069
Mortgage-backed securities of
U.S. government instrumentalities
and agencies 127,484 367 1,161 126,690
Obligations of states, municipalities
and political subdivisions 177,811 4,602 555 181,858
Corporate, asset-backed and other
securities 26,682 36 161 26,557
- ----------------------------------------------------------------------------------------------------
Total $ 336,036 5,015 1,877 339,174
====================================================================================================
</TABLE>
58
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available-for-sale Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury obligations $ 4,153 55 - 4,208
Mortgage-backed securities of
U.S. government instrumentalities
and agencies 110,104 313 79 110,338
Obligations of states, municipalities
and political subdivisions 166,010 4,809 82 170,737
Corporate and asset-backed
securities 12,403 45 6 12,442
- ---------------------------------------------------------------------------------------------------------
Total $ 292,670 5,222 167 297,725
=====================================================================================================
</TABLE>
The amortized cost and estimated fair value of investments in debt
securities at December 31, 1996 by contractual maturity are shown below
($ in thousands):
December 31, 1996
- --------------------------------------------------------------------------------
Amortized Estimated
Securities Available-for-sale Cost Fair Value
- --------------------------------------------------------------------------------
Due in one year or less $ 16,524 16,541
Due after one year through five years 31,821 32,815
Due after five years through ten years 76,450 78,200
Due after ten years 83,757 84,928
- --------------------------------------------------------------------------------
Sub-total 208,552 212,484
Mortgage-backed securities 127,484 126,690
- --------------------------------------------------------------------------------
Total $ 336,036 339,174
================================================================================
Actual maturities may differ from contractual maturities because
borrowers may call or prepay obligations with or without call or
prepayment penalties.
Proceeds from sales of investment securities were approximately $57.2
million, $53.9 million and $42.1 million in 1996, 1995 and 1994,
respectively. Gross realized capital gains of $772,000, $1,486,000, and
$781,000, and gross realized capital losses of $536,000, $135,000 and
$898,000 were realized on those sales for the years ended December 31,
1996, 1995 and 1994, respectively.
59
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Investments include bonds having a fair value of approximately
$3,884,000 and $3,985,000 which are on deposit at December 31, 1996 and
1995, respectively, with state regulators as required by law.
Investment income is comprised of interest and dividends, net of
related expenses, and is applicable to the following sources:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
$ in thousands December 31, 1996 December 31, 1995 December 31, 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bonds $ 16,091 11,105 9,193
Short-term investments 2,548 2,088 602
Mutual funds - (147) 705
Investment in affiliates (445) 42 -
Investment expenses (288) (245) (184)
- -----------------------------------------------------------------------------------------------------
Total $ 17,906 12,843 10,316
=====================================================================================================
</TABLE>
In 1995, the Company purchased, for approximately $11.0 million, 36.3%
of CapMAC Asia. In 1996, Holdings invested an additional $1.2 million
and sold 5.6%, or $1.9 million, of its investment in CapMAC Asia to its
employees, directors and shareholders. CapMAC Asia has a 33.33%
investment in Asia Services which amounted to $33.4 million and $30.7
million at December 31, 1996 and 1995, respectively. Asia Services owns
100% of the stock of ASIA Ltd.
In 1995, Holdings acquired three million shares of ABS Finance for
approximately $1,350,000. ABS Finance is a corporation established to
develop securitization in Indonesia for obligations that are backed by
assets originated in Indonesia or that are issued by Indonesian
entities. ABS Finance participates as a principal in the securitization
markets in Indonesia. Simultaneously with the execution of the joint
venture agreement with the other investors in ABS Finance, CFS entered
into a technical assistance agreement with ABS Finance to provide
technical and advisory assistance to ABS Finance in exchange for
certain fees. At December 31, 1996 and 1995, Holdings' investment
represents an equity interest of approximately 14.3% and 15%,
respectively, in ABS Finance. At December 31, 1996 and 1995, the
investment amounted to $1,439,000 and $1,339,000, respectively.
In 1995, Holdings entered into a strategic alliance with The Mutual
Life Assurance Company of Canada and three of its derivatives products
subsidiaries (such subsidiaries, "TMG Group"). TMG Group provides a
broad range of derivative products, including investment agreements and
long dated interest rate swaps. In addition, TMG Group provides
interest rate swaps and currency swaps. Because the obligations of TMG
Group under its derivative transactions are guaranteed by The Mutual
Life Assurance Company of Canada, TMG Group is rated AA by S&P and Aa3
by Moody's.
60
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements
In connection with the strategic alliance, Holdings was issued a
warrant to purchase 17.7% of the common stock of each of the companies
in TMG Group at an aggregate initial purchase price of $10.0 million,
as increased over time under a LIBOR-based formula. On a monthly basis,
the strike price will be adjusted upwards by a one-month LIBOR rate
until the warrants are exercised. To the extent that Holdings has not
exercised this warrant prior to February 27, 2000, TMG Group may
require that Holdings exercise the warrant, at which time Holdings
would be obligated to invest up to approximately $13.0 million in TMG
Group, which amount is based upon assuming a constant LIBOR rate of 5%.
The occurrence of certain other events involving an insolvency of TMG
Group or a change of control of the Company that has a material adverse
effect on TMG Group entitles TMG Group to require Holdings to exercise
the warrants prior to February 27, 2000. The Company values the
warrants based upon the difference between the exercise price adjusted
by the LIBOR-based formula and the estimated fair value of its
percentage share of ownership of TMG Group.
During 1996, the estimated fair value of the warrants has declined from
a loss (pre-tax) of $1.3 million at December 31, 1995 to a loss
(pre-tax) of $5.2 million at December 31, 1996. The total decrease in
the fair value of the warrants of $5.2 million (pre-tax) has been
recorded as a contra asset in "Other Assets" in the accompanying
consolidated balance sheet as of December 31, 1996. The Company
believes that a portion of this decline in value is
other-than-temporary, and accordingly, it has recorded a realized loss
(pre-tax) of $2.0 million in 1996. The remaining unrealized loss
(pre-tax) of $3.2 million is reflected as a separate component of
stockholders' equity, or $2.1 million on a net of tax basis.
The change in unrealized appreciation (depreciation) on
available-for-sale securities and warrants is included as a separate
component of stockholders' equity as shown below:
<TABLE>
<CAPTION>
Year Ended Year Ended
$ in thousands December 31, 1996 December 31, 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of year $ 2,443 (5,522)
Change in unrealized (depreciation) appreciation (3,842) 12,115
Income tax effect 1,328 (4,150)
- ----------------------------------------------------------------------------------------
Net change (2,514) 7,965
- ----------------------------------------------------------------------------------------
Balance at end of year $ (71) 2,443
========================================================================================
</TABLE>
No single issuer, except for investments in U.S. Treasury and U.S.
government agency securities, exceeds 4% and 3% of stockholders' equity
as of December 31, 1996 and 1995, respectively.
61
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5) Deferred Acquisition Costs
The following table reflects acquisition costs deferred by CapMAC and
amortized in proportion to the related premium earnings:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
$ in thousands December 31, 1996 December 31, 1995 December 31, 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 35,162 24,860 15,249
Additions 18,042 17,505 14,140
Amortization (policy
acquisition costs) (7,824) (7,203) (4,529)
- -----------------------------------------------------------------------------------------------------
Balance at end of year $ 45,380 35,162 24,860
=====================================================================================================
</TABLE>
6) Employee Benefits
The Company, through CFS, maintains an incentive compensation plan for
its employees. The plan is an annual discretionary bonus award. For the
years ended December 31, 1996, 1995 and 1994, the Company had provided
approximately $10,416,000, $7,804,000 and $5,253,000, respectively, for
the annual discretionary bonus plan. CFS also provides health and
welfare benefits to substantially all of its employees. The Company
incurred $884,000, $710,000 and $621,000 of expenses for the years
ended December 31, 1996, 1995 and 1994, respectively, for such plans.
The Company also has a defined contribution retirement plan which
allows participants to make voluntary contributions by salary reduction
pursuant to section 401(k) of the Internal Revenue Code. The Company
provides for the administrative costs for the 401(k) plan.
On June 25, 1992, certain officers of CapMAC were granted 182,633
restricted stock units ("RSU") at $13.33 a share in respect of certain
deferred compensation. On December 7, 1995, the RSU's were converted to
cash in the amount of approximately $3.7 million, and such officers
agreed to defer receipt of such cash amount in exchange for receiving
the same number of new shares of restricted stock ("RS") as the number
of RSU's such officers previously held. The RS's were granted under the
Omnibus Plan discussed in the following paragraph. The cash amount is
held by Holdings and invested in accordance with certain guidelines.
Such amount, including the investment earnings thereon amounted to $3.7
million at December 31, 1996 and will be paid to each officer upon the
occurrence of certain events but no later than December 2000.
Compensation expense related to the RS's and RSU's was approximately
$1,401,000, $1,502,000 and $132,000 for the years ended December 31,
1996, 1995 and 1994, respectively.
The Company has reserved shares for grants of different types of
awards, such as stock options, restricted stock, stock appreciation
rights, other stock-based grants or any combination of the foregoing
under the Omnibus Stock Incentive Plan ("Omnibus Plan"). Additionally,
the Company has reserved shares for stock option grants under the 1992
Stock Option Plan and the 1994 Stock Option Plan. The three
aforementioned plans are referred to collectively as the "Plans". Key
employees of the Company and its affiliates are eligible. The Company
has authorized 4,425,000 options and has 1,370,366 shares remaining and
available for grant under the Plans.
62
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The following table sets forth the activity and terms of the Plans:
<TABLE>
<CAPTION>
1992 Stock Option Plan 1994 Stock Option Plan Omnibus Plan
--------------------------- --------------------------- -----------------------------
Weighted Weighted Weighted
Options and Number Average Number Average Number Average
Restricted of Exercise of Exercise of Exercise
Stock Options Price Options Price Options & RS Price
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options
Granted 1,720,211 $13.34 195,000 $20.00 967,500 $28.93
Options
Exercised (115,534) $13.33 (10,750) $20.00 (11,250) $20.00
Options
Forfeited (6,960) $13.33 - - (3,750) $20.00
RS's Granted - - - - 182,633 -
- ---------------------------------------------------------------------------------------------------------------
Outstanding at
December 31,
1996 1,597,717 $13.34 184,250 $20.00 1,135,133 $29.07
===============================================================================================================
Available for
Grant 11,749 - - - 1,358,617 -
- ---------------------------------------------------------------------------------------------------------------
Vesting 50% in 5th year and 50% in 6th
Schedule Immediately upon the On date of grant year; Accelerated vesting based
Offering upon market value as defined in
the Omnibus Plan
- ---------------------------------------------------------------------------------------------------------------
Term 10 years 10 years 10 years
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes the options and restricted stock granted
and outstanding for each of the last three years:
<TABLE>
<CAPTION>
Year Ended
------------------------------------------------------------------------------------------------
1996 1995 1994
----------------------------- ---------------------------- -----------------------------
Weighted Weighted Weighted
Options and Number Average Number Average Number Average
Restricted of Exercise of Exercise of Exercise
Stock Options & RS Price Options & RS Price Options & RS Price
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding
at beginning
of year 2,288,884 $14.58 1,888,121 $13.95 1,701,641 $13.33
Options
Granted 769,500 $31.23 220,500 $20.00 187,500 $19.57
Options
Exercised (137,534) $14.40 - - - -
Options
Forfeited (3,750) $20.00 (2,370) $13.33 (1,020) $13.33
RS's
Granted - - 182,633 - - -
- ---------------------------------------------------------------------------------------------------------------
Outstanding
at end of
year 2,917,100 $19.27 2,288,884 $14.58 1,888,121 $13.95
===============================================================================================================
Exercisable
at end of
year 1,964,967 $14.59 1,908,251 $14.02 - -
===============================================================================================================
</TABLE>
63
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The Company applies APB 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized for its stock
options in the financial statements. As described previously, the
Company has recognized compensation expense for the restricted stock as
per APB 25. The compensation expense would be the same if the Company
had adopted SFAS No. 123. Under the fair value based method of
accounting as prescribed by SFAS No. 123, the per share
weighted-average fair value of stock options on the date of grant
during 1996 and 1995, using the Black Scholes option-pricing model, was
$11.17 and $6.13, respectively, with the following weighted-average
assumptions: 1996 - expected dividend yield 0.2%, risk-free interest
rate of 5.0%, volatility level of 0.22, and an expected life of 7
years; 1995 - expected dividend yield 0.4%, risk-free interest rate of
5.0%, volatility level of 0.23, and an expected life of 6 years.
Had the Company determined compensation cost using the fair value based
method of accounting, as defined by SFAS No. 123, for its stock
options, the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below:
Year Ended Year Ended
($ in thousands, except per share data) December 31, 1996 December 31,1995
- -------------------------------------------------------------------------------
Net income
As reported $ 33,568 $ 23,528
Pro forma $ 32,162 $ 23,339
Earnings per share
Primary As reported $ 1.92 $ 1.73
Pro forma $ 1.86 $ 1.72
Fully diluted As reported $ 1.89 $ 1.65
Pro forma $ 1.82 $ 1.64
- -------------------------------------------------------------------------------
Pro forma net income reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income
amounts presented above because the estimated compensation cost will be
recognized over the options' vesting periods and options granted prior
to January 1, 1995 are not considered in the determination of the
compensation cost.
64
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements
7) Employee Stock Ownership Plan
On June 25, 1992, Holdings adopted an ESOP to provide its employees the
opportunity to obtain beneficial interests in the stock of Holdings
through a trust (the "ESOP Trust"). The ESOP Trust purchased 750,000
shares at $13.33 per share of Holdings' stock. The ESOP Trust financed
its purchase of common stock with a loan from Holdings in the amount of
$10 million. The ESOP loan is evidenced by a promissory note delivered
to Holdings. An amount representing unearned employee compensation,
equivalent in value to the unpaid balance of the ESOP loan, is recorded
as a deduction from stockholders' equity (unallocated ESOP shares).
CFS is required to make contributions to the ESOP Trust, which enables
the ESOP Trust to service its loan to Holdings. The ESOP expense is
calculated using the shares allocated method. Shares are released for
allocation to the participants and held in trust for the employees
based upon the ratio of the current year's principal and interest
payment to the sum of principal and interest payments estimated over
the life of the loan. As of December 31, 1996 and 1995 approximately
343,000 shares and 263,000 shares, respectively, were allocated to the
participants. Compensation expense related to the ESOP was
approximately $2,402,000, $1,588,000 and $1,407,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
65
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8) Reserve for Losses and Loss Adjustment Expenses
The reserve for losses and loss adjustment expenses consists of a case
basis loss reserve and the SLR.
In 1995, CapMAC incurred its first claim on a financial guarantee
policy. Based on its current estimate, the Company expects the
aggregate amount of claims and related expenses not to exceed $2.7
million, although no assurance can be given that such claims and
related expenses will not exceed that amount. Such loss amount was
covered through a recovery under a quota share reinsurance agreement of
$0.2 million and a reduction in the SLR of $2.5 million. The portion of
such claims and expenses not covered under the quota share agreement is
being funded through payments to CapMAC from the Lureco Trust Account
(see note 13).
The following is a summary of the activity in the case basis loss
reserve account and the components of the reserve for losses and loss
adjustment expenses ($ in thousands):
1996 1995 1994
- --------------------------------------------------------------------------------
Case basis loss reserve:
Net balance at January 1 $ 620 -- --
- --------------------------------------------------------------------------------
Incurred related to:
Current year -- 2,473 --
Prior years -- -- --
- --------------------------------------------------------------------------------
Total incurred -- 2,473 --
- --------------------------------------------------------------------------------
Paid related to:
Current year -- 1,853 --
Prior years 309 -- --
- --------------------------------------------------------------------------------
Total paid 309 1,853 --
- --------------------------------------------------------------------------------
Net balance at December 31 311 620 --
Reinsurance recoverable -- 69 --
- --------------------------------------------------------------------------------
Gross balance at December 31 311 689 --
- --------------------------------------------------------------------------------
Supplemental loss reserve:
Balance at January 1 5,859 5,191 3,762
- --------------------------------------------------------------------------------
Additions to supplemental loss reserve 4,815 3,141 1,429
Allocated to case basis reserve -- (2,473) --
- --------------------------------------------------------------------------------
Balance at December 31 10,674 5,859 5,191
- --------------------------------------------------------------------------------
Total reserve for losses and loss adjustment
expenses $10,985 6,548 5,191
================================================================================
66
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements
9) Senior Notes
On December 15, 1992, Holdings sold $15,000,000 principal amount of
7.52% Senior Notes to certain financial institutions. The Senior Notes
are due in equal annual installments of $3,750,000 beginning December
15, 1999 through December 15, 2002. Interest is payable semiannually on
the fifteenth day of June and December of each year commencing June 15,
1993.
10) Income Taxes
Pursuant to a tax sharing agreement with Holdings, CapMAC and CFS file
a consolidated U.S. Federal income tax return. Each company's annual
Federal income tax liability is determined by computing its pro rata
share of the consolidated group Federal income tax liability. CFS
(Europe) files a separate income tax return with the U.K. Inland
Revenue.
Taxes on foreign income have been provided for at the U.S. statutory
Federal income tax rate of 35% in 1996 and 1995 and at 34% in 1994. The
U.K. taxes corporate income at a 33% rate. For 1996, 1995 and 1994
income before tax for CFS (Europe) was $12.4 million, $7.5 million and
$3.1 million, respectively. The difference between the U.S. and U.K.
rates is provided to account for U.S. taxation (net of applicable
foreign tax credits) on the future repatriation of these foreign
earnings.
Total income tax expense (benefit) consists of the following:
$ in thousands Federal State & Local Foreign Total
- --------------------------------------------------------------------------------
Year Ended
December 31, 1996
- --------------------------------------------------------------------------------
Current $8,654 1,753 4,092 14,499
Deferred 992 (779) -- 213
- --------------------------------------------------------------------------------
Total $9,646 974 4,092 14,712
================================================================================
Year Ended
December 31, 1995
- --------------------------------------------------------------------------------
Current $3,814 1,529 2,580 7,923
Deferred 3,244 (59) -- 3,185
- --------------------------------------------------------------------------------
Total $7,058 1,470 2,580 11,108
================================================================================
Year Ended
December 31, 1994
- --------------------------------------------------------------------------------
Current $2,561 1,473 928 4,962
Deferred 2,868 (38) -- 2,830
- --------------------------------------------------------------------------------
Total $5,429 1,435 928 7,792
================================================================================
67
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Total income tax expense differed from the amount computed by applying
the U.S. Federal income tax rate of 35% in 1996 and 1995 and 34% in
1994:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
$ in thousands Amount % Amount % Amount %
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Expected tax expense computed
at the statutory rate $ 16,778 35.0 $ 12,132 35.0 $ 8,452 34.0
Increase (decrease) in tax
resulting from:
Tax-exempt interest (2,916) (6.0) (2,335) (6.7) (1,646) (6.6)
State and local income taxes,
net of Federal benefit 361 0.7 935 2.7 934 3.8
Other, net 489 1.0 376 1.1 52 0.2
- -----------------------------------------------------------------------------------------------------
Total income tax expense $ 14,712 30.7 $ 11,108 32.1 $ 7,792 31.4
=====================================================================================================
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax liability are as follows:
$ in thousands December 31, 1996 December 31, 1995
- --------------------------------------------------------------------------------
Deferred tax assets:
Deferred compensation $ 4,202 2,120
Loss on investment in TMG Group warrants 1,839 457
Losses and loss adjustment expenses 1,527 1,002
Unearned premiums 866 852
Other, net 108 275
- --------------------------------------------------------------------------------
Total gross deferred tax assets 8,542 4,706
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred acquisition costs 15,883 12,307
Unrealized capital gains on investments 1,091 1,769
Other, net 1,158 1,406
- --------------------------------------------------------------------------------
Total gross deferred tax liabilities 18,132 15,482
- --------------------------------------------------------------------------------
Net deferred tax liability $ 9,590 10,776
================================================================================
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized.
Management believes that the deferred tax assets will be fully realized
in the future.
68
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements
11) Insurance Regulatory Restrictions
CapMAC is subject to insurance regulatory requirements of the State of
New York and other states in which it is licensed to conduct business.
Generally, New York insurance laws require that dividends be paid from
earned surplus and restrict the amount of dividends in any year that
may be paid without obtaining approval for such dividends from the
Superintendent of Insurance to the lower of (i) net investment income
as defined or (ii) 10% of statutory surplus as of December 31 of the
preceding year. No dividends were paid by CapMAC to Holdings during the
years ended December 31, 1996, 1995 and 1994. No dividends could be
paid during these periods because CapMAC had negative earned surplus.
Statutory surplus at December 31, 1996 and 1995 was approximately
$193,726,000 and $195,018,000, respectively. Statutory surplus differs
from stockholders' equity determined under GAAP principally due to the
mandatory contingency reserve required for statutory accounting
purposes and differences in accounting for investments, deferred
acquisition costs, SLR and deferred taxes provided under GAAP.
Statutory net income was $18,737,000, $9,000,000 and $4,543,000 for the
years ended December 31, 1996, 1995 and 1994, respectively. Statutory
net income differs from net income determined under GAAP principally
due to deferred acquisition costs, SLR and deferred income taxes.
12) Commitments and Contingencies
Holdings' lease agreement for the space occupied in New York expires on
November 20, 2008. Holdings also has a lease agreement for its London
office, which expires on October 1, 2002. As of December 31, 1996,
future minimum payments under the lease agreements are as follows:
$ in thousands Payment
- --------------------------------------------------------------------------------
1997 $ 2,647
1998 2,715
1999 3,077
2000 3,152
2001 and thereafter 28,660
- --------------------------------------------------------------------------------
Total $ 40,251
================================================================================
Rent expense, commercial rent taxes and electricity for the years ended
December 31, 1996, 1995 and 1994 amounted to $2,451,000, $2,398,000 and
$2,374,000, respectively.
CapMAC has available a $150,000,000 standby corporate liquidity
facility (the "Liquidity Facility") scheduled to terminate in September
1999. The Liquidity Facility is provided by a consortium of banks,
headed by Bank of Montreal, as agent, which is rated "A-1+" and "P-1"
by S&P and Moody's, respectively. Under the Liquidity Facility, CapMAC
will be able, subject to satisfying certain conditions, to borrow funds
from time to time in order to enable it to fund any claim payments or
payments made in settlement or mitigation of claim payments under its
insurance contracts. There have been no draws under the Liquidity
Facility.
69
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Certain officers of Dillon, Read & Co. Inc. are directors of Holdings,
and receive no compensation from the Company. Dillon, Read & Co. Inc.,
which serves as investment manager for Saratoga Partners II, a
principal stockholder of the Company, received an advisory retention
fee of $200,000 in each of the years ended December 31, 1995 and 1994.
The Company is required to purchase common stock in TMG Group for
approximately $13 million no later than February 27, 2000.
Additionally, the Company has agreed, upon request of ASIA Ltd, to make
an additional investment of up to $4.9 million in Asia Services through
its affiliate CapMAC Asia.
CapMAC has agreed to make 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. This
investment is anticipated to be made in 1997.
CapMAC Investment Management, Inc. ("CIM"), a new subsidiary of
Holdings, was incorporated in Delaware in October 1996 as a registered
investment advisor. CIM will provide investment advice regarding
asset-backed structures, mortgage-backed securities, foreign and
domestic fixed income and equity securities, and other securities based
on the client's investment objectives, financial needs and goals. CIM
is expected to be initially capitalized with $2 million and will
commence operations in early 1997.
13) Reinsurance
In the ordinary course of business, CapMAC cedes exposure under various
treaty and facultative reinsurance contracts, both on a pro rata and
excess of loss basis, primarily designed to minimize losses from large
risks and protect the capital and surplus of CapMAC.
The effect of reinsurance on premiums written and earned was as
follows:
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------------------------------------------------------
1996 1995 1994
----------------------- --------------------- --------------------
$ in thousands Written Earned Written Earned Written Earned
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Direct $ 71,752 48,835 56,541 36,853 43,598 28,561
Assumed 1,086 1,508 935 761 1,064 258
Ceded (15,104) (9,786) (15,992) (8,372) (11,0699) (5,716)
- --------------------------------------------------------------------------------
Net premiums $ 57,734 40,557 41,484 29,242 33,593 23,103
=====================================================================================================
</TABLE>
The reinsurance of risk does not relieve the ceding insurer of its
original liability to its policyholders. A contingent liability exists
with respect to the aforementioned reinsurance arrangements, which may
become a liability of CapMAC in the event the reinsurers are unable to
meet obligations assumed by them under the reinsurance contracts. At
December 31, 1996 and 1995, CapMAC had ceded loss reserves of $0 and
$69,000, respectively, and had ceded unearned premiums of $18,489,000
and $13,171,000, respectively.
70
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements
In 1994, CapMAC entered into a reinsurance agreement (the "Lureco
Treaty") with Luxembourg European Reinsurance LURECO S.A. ("Lureco"), a
European-based reinsurer. The agreement is renewable annually at the
Company's option, subject to satisfying certain conditions. The
agreement reinsured and indemnified the Company for any loss incurred
by CapMAC during the agreement period up to the limits of the
agreement. The Lureco Treaty provides that the annual reinsurance
premium payable by CapMAC to Lureco, after deduction of the reinsurer's
fee payable to Lureco, be deposited in a trust account (the "Lureco
Trust Account") to be applied by CapMAC, at its option, to offset
losses and loss expenses incurred by CapMAC in connection with incurred
claims. Amounts on deposit in the Lureco Trust Account which have not
been applied against claims are contractually due to CapMAC at the
termination of the treaty.
The premium deposit amounts in the Lureco Trust Account have been
reflected as assets by CapMAC during the term of the agreement.
Premiums in excess of the deposit amounts have been recorded as ceded
premiums in the consolidated statements of income. For the 1996 policy
year, the agreement provides $7 million of loss coverage in excess of
the premium deposit amount of $5 million retained in the Lureco Trust
Account. Additional coverage is provided for losses incurred in excess
of 200% of the net premiums earned up to $4 million for any one
agreement year. In September 1995, a claim of approximately $2.5
million on an insurance policy was applied against the Lureco Trust
Account.
In addition to its capital (including statutory contingency reserves)
CapMAC has other reinsurance available to pay claims under its
insurance contracts. Effective November 30, 1995, CapMAC entered into a
Stop-loss Reinsurance Agreement with Mitsui Marine and Fire Insurance
Co. (the "Mitsui Stop-loss Agreement"). Under the Mitsui Stop-loss
Agreement, Mitsui Marine and Fire Insurance Co. ("Mitsui") will be
required to pay any losses in excess of $100 million in the aggregate
incurred by CapMAC during the term of the Mitsui Stop-loss Agreement on
the insurance policies in effect on December 1, 1995 and written during
the one-year period thereafter, up to an aggregate limit payable under
the Mitsui Stop-loss Agreement of $50 million. The Mitsui Stop-loss
Agreement has a term of seven years and is subject to early termination
by CapMAC in certain circumstances. Effective January 1, 1997 the
stop-loss reinsurance coverage increased to $75 million in excess of
incurred losses of $150 million increasing annually based on increases
in CapMAC's statutory qualified capital. The new stop-loss reinsurance
is provided by Mitsui, AXA Re Finance S.A. ("AXA Re"), and Munchener
Ruckversicherungs-Gesellschaft ("Munich Re").
Effective November 30, 1995, CapMAC canceled the quota share
reinsurance agreement with Winterthur Swiss Insurance Company
("Winterthur") pursuant to which Winterthur had the right to reinsure
on a quota share basis 10% of each policy written by CapMAC. As a
result, CapMAC reassumed approximately $1.4 billion of principal
insured by Winterthur on January 1, 1996. In connection with the
commutation, Winterthur returned $2.0 million of unearned premiums, net
of ceding commission and Federal excise tax.
71
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements
14) Foreign Operations
The Company provides advisory services in Europe through CFS (Europe).
The revenue generated from this business for the years ended December
31, 1996 and 1995 was $13.4 million and $7.8 million, respectively, and
for the period from inception of CFS (Europe) on July 14, 1994 through
December 31, 1994 was $3.1 million. The net income for the years ended
December 31, 1996 and 1995 was $8.3 million and $5.1 million,
respectively, and for the period from inception of CFS (Europe) on July
14, 1994 through December 31, 1994 was $2.0 million. The total assets
for CFS (Europe) as of December 31, 1996 and 1995 were $4.9 million and
$9.6 million, respectively.
15) Disclosures About Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 1996 and
1995. The fair value amounts were determined by the Company using
independent market information when available, and appropriate
valuation methodologies when market information was not available. Such
valuation methodologies require significant judgment and are not
necessarily indicative of the amount the Company could recognize in a
current market exchange.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
Carrying Estimated Carrying Estimated
$ in thousands Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Available-for-sale securities $ 333,991 333,991 296,426 296,426
- -----------------------------------------------------------------------------------------------------
Financial Liabilities:
Senior notes $ 15,000 14,966 15,000 15,434
- -----------------------------------------------------------------------------------------------------
Off-Balance-Sheet Instruments:
Financial guarantees outstanding $ - 219,989 - 147,840
Less: ceding commission - 65,997 - 44,352
- -----------------------------------------------------------------------------------------------------
Net financial guarantees outstanding $ - 153,992 - 103,488
=====================================================================================================
</TABLE>
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments summarized above:
Available-for-sale Securities
The fair values of fixed maturities are based upon quoted market
prices. The fair value of short-term investments approximates amortized
cost. The fair value of the warrants which is recorded as a contra
asset in "Other Assets" is determined based upon the difference between
the exercise price adjusted by the LIBOR-based formula and the
estimated fair value of the Company's percentage share of ownership of
TMG Group.
72
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Senior Notes
The fair value of senior notes is based on prices believed by
management to be currently charged for similar debt issues adjusted for
changes in interest rates and credit quality that occurred subsequent
to its issuance.
Financial Guarantees Outstanding
The fair value of financial guarantees outstanding consists of (1) the
current unearned premium reserve, net of prepaid reinsurance and (2)
the fair value of installment revenue which is derived by calculating
the present value of the estimated future cash inflow to CapMAC of
policies in force having installment premiums, net of amounts payable
to reinsurers, at a discount rate of 7% at December 31, 1996 and 1995.
The amount calculated is assumed to be equivalent to the consideration
that would be paid by CapMAC under market conditions prevailing at the
reporting dates to transfer CapMAC's financial guarantee business to a
third party under reinsurance and other agreements. Ceding commission
represents the expected amount that would be paid to CapMAC to
compensate CapMAC for originating and servicing the insurance
contracts. In constructing estimated future cash inflows, management
makes assumptions regarding prepayments for amortizing asset-backed
securities which are consistent with relevant historical experience.
For revolving programs, assumptions are made regarding program
utilization based on discussions with program users. The amount of
future installment revenue actually realized by CapMAC could be reduced
in the future due to factors such as early termination of insurance
contracts, accelerated prepayments of underlying obligations or lower
than anticipated utilization of insured structured programs, such as
commercial paper conduits. Although increases in future installment
revenue earnings due to renewals of existing insurance contracts
historically have been greater than reductions in future installment
revenue due to factors such as those described above, there can be no
assurance that future circumstances might not cause a material net
reduction in the future installment revenue.
16) Capitalization
On November 27, 1995, the Company effected a 3-for-2 common stock split
which has been reflected in the accompanying consolidated financial
statements for all periods presented.
On July 21, 1995, the Company sold 500,001 shares of common stock to
ORIX for $10.0 million, or $20 per share. In August 1995, net proceeds
of $9.0 million from such transaction were contributed to CapMAC. In
connection with the ORIX investment, the Company paid Dillon, Read &
Co. Inc. an advisory fee of $500,000.
On December 19, 1995, Holdings sold 3,710,000 shares of its common
stock at a price of $20.00 per share in the Offering. Of the 3,710,000
common shares, 2,500,000 shares were sold by the Company and 1,210,000
shares by certain existing stockholders. Proceeds to the Company, net
of underwriting and other expenses, were $45.2 million. Dillon, Read &
Co. Inc. was the managing underwriter of the Offering and has in that
capacity received $3,500,000 from the Company. Concurrent with the
Offering, the Company also issued 500,000 shares to Centre Re for a
price per share that was 5% less than the Offering price of $20 per
share. Net proceeds to the Company were $9.5 million. A portion of the
net proceeds from the Offering and the private placement in the amount
of $50.0 million was contributed to CapMAC in December 1995.
73
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements
On July 5, 1996, 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 but incurred costs of approximately $360,000.
On June 25, 1992, Holdings granted approximately 2,250,000 warrants to
non-employee stockholders of Holdings to purchase common stock at an
exercise price of $13.33 per share. The warrants expire on June 25,
1999. During 1996, 551,390 warrants were exercised. The exercise of the
warrants being cashless resulted in the issuance of 321,758 shares of
common stock.
17) Quarterly Financial Information (Unaudited)
Selected quarterly financial data for 1996 and 1995 are presented
below:
$ in thousands First Second Third Fourth Full Year
- -------------------------------------------------------------------------------
1996
Gross premiums written $15,029 18,772 17,214 21,823 72,838
Net premiums written 13,119 13,669 13,085 17,861 57,734
Net premiums earned 8,828 9,988 10,043 11,698 40,557
Advisory and other fees 9,872 5,705 5,750 5,816 27,143
Net investment income 4,111 3,808 4,485 5,502 17,906
Losses and loss adjustment
expenses 1,075 1,109 1,248 1,383 4,815
Income before income taxes
and minority interest 14,738 11,825 11,683 9,691 47,937
Net income 9,900 8,335 8,239 7,094 33,568
- -------------------------------------------------------------------------------
1995
Gross premiums written $16,992 16,669 12,306 11,509 57,476
Net premiums written 13,899 14,116 6,118 7,351 41,484
Net premiums earned 7,101 7,303 7,311 7,527 29,242
Advisory and other fees 2,286 2,869 7,239 4,574 16,968
Net investment income 2,811 3,088 3,329 3,615 12,843
Losses and loss adjustment
expenses 696 762 821 862 3,141
Income before income taxes
and minority interest 5,405 6,023 12,186 11,050 34,664
Net income 3,840 4,480 8,033 7,175 23,528
- -------------------------------------------------------------------------------
74
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
75
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant.
Certain Information relating to the Company's executive officers is set
forth under the heading "Executive officers of the registrant" in Part I of this
report. Information relating to the Company's directors is set forth under the
heading "Election of Directors" appearing in the definitive Proxy Statement for
the Company's annual meeting to be held on May 7, 1997. Such information is
incorporated herein by reference.
Item 11. Executive Compensation.
The section titled "Executive Compensation and Other Information"
appearing in the definitive Proxy Statement for the Company's annual meeting to
be held on May 7, 1997 sets forth certain information with respect to
compensation of management and such information is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The section titled "Ownership of the Company" appearing in the definitive
Proxy Statement for the Company's annual meeting to be held on May 7, 1997 sets
forth certain information with respect to the ownership of the Company's common
stock. Such information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The section titled "Certain Relationships and Related Transactions"
appearing in the definitive Proxy Statement for the Company's annual meeting to
be held on May 7, 1997 sets forth certain information with respect to certain
relationships and related transactions. Such information is incorporated herein
by reference.
76
<PAGE>
Part IV
Item 14.
(a) Financial Statements and Financial Statement Schedules and
Exhibits.
1. Financial Statements
The Registrant has included in this Form 10-K the following
consolidated financial statements of CapMAC Holdings Inc. and Subsidiaries:
Pages in Form 10-K
------------------
Independent Auditors' Report 48
Consolidated Balance Sheets
at December 31, 1996 and 1995 49
Consolidated Statements of Income
for the Years ended December 31,
1996, 1995 and 1994 50
Consolidated Statements of Stockholders' Equity
for the Years ended December 31, 1996, 1995
and 1994 51
Consolidated Statements of Cash Flows
for the Years ended December 31, 1996, 1995
and 1994 52
Notes to Consolidated Financial Statements 53-74
2. Financial Statement Schedules
Schedule Number Description of Schedule Page(s) in Form 10-K
- --------------- ----------------------- --------------------
I Summary of Investments-- 84
Other Than Investments in
Related Parties
II Condensed Financial 85-87
Information of Registrant
IV Reinsurance 88
The report of the Registrant's independent auditors with respect to the above
listed financial statement schedules is set forth on page 83 of this Report.
All other schedules are omitted because they are either inapplicable or the
required information is presented in the consolidated financial statements of
the Company or the notes thereto.
77
<PAGE>
3. Exhibits.
The following are annexed as exhibits to this Report:
Exhibit
No. Description
- --- -----------
3.1 Amended and Restated Certificate of Incorporation.(1)
3.2 Amended and Restated Bylaws.(1)
4 Specimen Common Stock Certificate.(1)
10.1 Service Agreement dated as of June 25, 1992 between CapMAC and
CapMAC Management Services Corporation (predecessor to CFS).*
10.2 Credit Agreement as amended, dated as of June 25, 1992 by and
among CapMAC, Bank of Montreal, individually and as agent,
and the banks from time to time party thereto.*
10.3 Stockholder Agreement dated as of June 9, 1992 among CapMAC
Acquisition Corp. (predecessor corporation to Holdings)
and each of the Shareholders listed on Schedule A attached
thereto, together with Amendments No. 1 and No. 2.*
10.4 Stop Loss Reinsurance Agreement dated June 25, 1992 between
CapMAC and Winterthur Swiss Reinsurance Company.*
10.5 Note Purchase Agreement dated as of December 15, 1992 between
CapMAC Holdings Inc. and the Purchasers listed on Annex 1
attached thereto.*
10.6 Subscription Agreement dated as of June 30, 1995 between Orix
USA Corporation and Holdings.*
10.7 Employment Agreement dated as of June 25, 1992 between CapMAC
Acquisition Corp. and John B. Caouette.* +
10.8 Employment Agreement dated as of June 25, 1992 between CapMAC
Acquisition Corp. and Michael L. Hein.* +
10.9 [Intentionally omitted]
10.10 Employment Agreement dated as of June 25, 1992 between CapMAC
Acquisition Corp. and Charles Jackson Lester.* +
10.11 Employment Agreement dated as of June 25, 1992 between CapMAC
Acquisition Corp. and C. Thomas Meyers.* +
10.12 Employment Agreement dated as of June 25, 1992 between CapMAC
Acquisition Corp. and Paul V. Palmer.* +
10.13 Employment Agreement dated as of June 25, 1992 between CapMAC
Acquisition Corp. and Joyce S. Richardson.* +
10.14 Employment Agreement dated as of June 25, 1992 between CapMAC
Acquisition Corp. and Ram D. Wertheim.* +
10.15 1992 Stock Option Plan of Holdings.* +
10.16 1994 Stock Option Plan of Holdings.* +
10.17 Omnibus Stock Incentive Plan.* +
10.18 CapMAC Employee Stock Ownership Plan.* +
10.19 CapMAC Employee Stock Ownership Plan Trust Agreement.* +
10.20 ESOP Loan Agreement by and between CapMAC Acquisition Corp.
(predecessor corporation to Holdings) and the ESOP Trust
dated as of June 25, 1992.* +
78
<PAGE>
10.21 Supplemental Executive Retirement Plan.* +
10.22 Subscription Agreement dated as of November 27, 1995, between
CapMAC Holdings Inc. and Centre Reinsurance Limited.*
10.23 Promissory Note of John B. Caouette dated April 24, 1996.(2) +
10.24 Stop Loss Reinsurance Agreement dated December 1, 1995 between
CapMAC and Mitsui Marine & Fire Insurance Co., Ltd.*
10.25 Amendment No. 3 to Stockholder Agreement dated as of June 9,
1992.(2)
10.26 Letter Agreement dated January 1, 1996 between CapMAC Holdings
Inc. and Winterthur Swiss Insurance Company terminating
Consumer Product and Trade Receivables Quota Share
Reinsurance Treaty, Quota Share Reinsurance Agreement and
Facultative Reinsurance Agreements.(1)
10.27 Letter dated November 30, 1995 from CapMAC to Winterthur Swiss
Insurance Company terminating the Stop Loss Reinsurance
Agreement.(1)
10.28 Deferred Compensation and Restricted Stock Agreement dated as
of December 7, 1995 between John B. Caouette and
Holdings.(1) +
10.29 Deferred Compensation and Restricted Stock Agreement dated as
of December 7, 1995 between Michael L. Hein and
Holdings.(1) +
10.30. [Intentionally omitted]
10.31 Deferred Compensation and Restricted Stock Agreement dated as
of December 7, 1995 between Charles Jackson Lester and
Holdings.(1) +
10.32 Deferred Compensation and Restricted Stock Agreement dated as
of December 7, 1995 between C. Thomas Meyers and
Holdings.(1) +
10.33 Deferred Compensation and Restricted Stock Agreement dated as
of December 7, 1995 between Paul V. Palmer and
Holdings.(1) +
10.34 Deferred Compensation and Restricted Stock Agreement dated as
of December 7, 1995 between Joyce S. Richardson and
Holdings.(1) +
10.35 Deferred Compensation and Restricted Stock Agreement dated as
of December 7, 1995 between Ram D. Wertheim and
Holdings.(1) +
10.36 Promissory Note of Ram D. Wertheim dated May 13, 1996.(2) +
10.37 Promissory Note of Paul V. Palmer dated May 13, 1996.(2) +
10.38 Fifth Amendment dated July 30, 1996 and Sixth Amendment dated
September 25, 1996 to Credit Agreement, dated June 25,
1992, among CapMAC, Bank of Montreal individually and as
agent, and the banks from time to time party thereto.(3)
10.39 Amended and Restated Stop Loss Reinsurance Agreement effective
January 1, 1997 between CapMAC and Mitsui Marine and Fire
Insurance Co., Ltd. #
10.40 Stop Loss Reinsurance Agreement effective January 1, 1997
between CapMAC and
Munchener-Ruckverischerungs-Gesellschaft. #
10.41 Stop Loss Reinsurance Agreement effective January 1, 1997
between CapMAC and AXA Re Finance S.A. #
10.42 Reinsurance Agreement effective May 15, 1996 between CapMAC
and CapMAC Assurance S.A.
10.43 Promissory Note of Paul V. Palmer dated January 13, 1997. +
11 Computation of Earnings Per Share Assuming Full Dilution.
21 Subsidiaries of Registrant.
23.1 Consent of KPMG Peat Marwick LLP
24 Powers of Attorney of Directors.
27 Financial Data Schedule.
28 Information from reports furnished to state insurance
regulatory authorities of SEC Item 601(b)(28).(4)
99 Capital Markets Assurance Corporation 1996 Financial
Statements and Report of Independent Accountants.
99(A) Press Release of Holdings dated March 20, 1997.
- ----------
79
<PAGE>
* Previously filed as an exhibit, under the same exhibit number, to the
Company's Registration Statement on Form S-1 (Reg. No. 33-98254), as such
Registration Statement has been amended, and incorporated herein by
reference.
+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K pursuant to item 14(c).
# Confidential treatment has been granted or requested for certain portions
of this document.
(1) Previously filed as an exhibit, under the same exhibit number, to the
Company's Annual Report on Form 10-K for the year ended December 31, 1995
and incorporated herein by reference.
(2) Previously filed as an exhibit, under the same exhibit number, to the
Company's Registration Statement on Form S-1 (Reg. No. 333-05211), as such
Registration Statement has been amended, and incorporated herein by
reference.
(3) Previously filed as an exhibit, under the same exhibit number, to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996 and incorporated herein by reference.
(4) Previously filed as an exhibit, under exhibit number 28.1, to the
Company's Registration Statement on Form S-8 (Registration No. 333-05429)
and incorporated herein by reference.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during 1996.
80
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of New
York, State of New York, on March 27, 1997.
CAPMAC HOLDINGS INC.
By /s/ John B. Caouette
--------------------------------------
John B. Caouette
Chairman of the Board of Directors,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
registration statement has been signed by the following persons in the
capacities indicated on March 27, 1997.
Signature Title
--------- -----
Chairman of the Board of Directors,
/s/ John B. Caouette President and Chief Executive Officer
- -------------------------- (Principal Executive Officer)
John B. Caouette
/s/ Paul V. Palmer Managing Director and Chief Financial
- -------------------------- Officer (Principal Financial Officer)
Paul V. Palmer
/s/ Gerard Edward Murray
- -------------------------- Controller (Principal Accounting Officer)
Gerard Edward Murray
*
- --------------------------
Bryan A. Bowers Director
*
- --------------------------
Todd G. Cole Director
*
- --------------------------
Charles P. Durkin, Jr. Director
*
- --------------------------
David Elliman Director
*
- --------------------------
Stephen L. Green Director
81
<PAGE>
Signature Title
--------- -----
*
- --------------------------
Michael J. Horgan Director
*
- --------------------------
George Merritt Jenkins Director
*
- --------------------------
James H. Laird Director
__________________________
Dr. Rosita Leong, M.D. Director
*
- --------------------------
Robert Model Director
*
- --------------------------
Lief H. Olsen Director
*
- --------------------------
Arthur S. Penn Director
*
- --------------------------
Homer McK. Rees Director
*
__________________________
Doren W. Russler Director
*
- --------------------------
Akira Seko Director
*
- --------------------------
John T. Shea Director
/s/ Richard Yancey
- --------------------------
Richard Yancey Director
By: /s/ John B. Caouette
- --------------------------
John B. Caouette
Attorney-in-fact
82
<PAGE>
Independent Auditors' Report
The Board of Directors
CapMAC Holdings Inc.:
Under the date of January 29, 1997, we reported on the consolidated balance
sheets of CapMAC Holdings Inc. and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1996 as included in the 1996 annual report on Form 10-K. In connection with our
audits of the aforementioned consolidated financial statements, we also have
audited the related financial statement schedules as listed in the accompanying
index. These financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
New York, New York
January 29, 1997
83
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Schedule I - Summary of Investments
Other Than Investments in Related Parties
December 31, 1996
(Dollars in thousands)
Amount at which
Estimated shown in the
Type of Investment Amortized Cost Fair Value balance sheet
- --------------------------------------------------------------------------------
U.S. Treasury obligations $ 4,059 4,069 4,069
Mortgage-backed securities of U.S.
government instrumentalities and
agencies 127,484 126,690 126,690
Obligations of states, municipalities
and political subdivisions 177,811 181,858 181,858
Corporate, asset-backed securities
and other securities 26,682 26,557 26,557
- --------------------------------------------------------------------------------
Total $336,036 339,174 339,174
================================================================================
84
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Schedule II - Condensed Financial Information
of Registrant (Parent Company Only)
Condensed Balance Sheets
(Dollars in thousands, except share data)
ASSETS
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments:
Bonds at fair value (amortized cost $7,423 at December 31, 1996) $ 7,529 -
Short-term investments (at amortized cost which approximates fair
value) 9,660 8,984
Investment in affiliates 1,439 1,339
- ------------------------------------------------------------------------------------------------------------
Total investments 18,628 10,323
- ------------------------------------------------------------------------------------------------------------
Cash 205 187
Investments in subsidiaries 304,926 290,089
Deferred income taxes 4,116 491
Other assets 8,673 2,540
- ------------------------------------------------------------------------------------------------------------
Total assets $ 336,548 303,630
============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and other accrued expenses $ 11,161 12,111
Senior notes 15,000 15,000
- ------------------------------------------------------------------------------------------------------------
Total liabilities 26,161 27,111
- ------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock - $0.01 par value per share; 20,000,000 shares are
authorized; none outstanding at December 31, 1996 and 1995 - -
Common stock - $0.01 par value per share; 50,000,000 shares are
authorized; 16,425,324 and 15,966,032 shares issued December
31, 1996 and 1995; 16,425,274 and 15,965,995 shares
outstanding at December 31, 1996 and 1995 164 160
Additional paid-in capital 226,428 223,400
Unrealized (depreciation) appreciation on investments, net of tax (71) 2,443
Retained earnings 89,310 57,029
Unallocated ESOP shares (5,430) (6,497
Cumulative translation adjustment, net of tax (14) (16)
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 310,387 276,519
- ------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 336,548 303,630
============================================================================================================
</TABLE>
85
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Schedule II - Condensed Financial Information
Of Registrant (Parent Company Only)
Condensed Statements of Operations and Retained Earnings
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31,1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Net investment income $ 862 278 67
Net realized losses (2,039) (10) (50)
Other income from subsidiaries 519 626 -
Other income 17 - -
- ----------------------------------------------------------------------------------------------------------
Total revenues (641) 894 17
- ----------------------------------------------------------------------------------------------------------
Expenses:
Interest expense 1,203 1,203 1,203
Operating expenses 2,149 497 175
- ----------------------------------------------------------------------------------------------------------
Total expenses 3,352 1,700 1,378
- ----------------------------------------------------------------------------------------------------------
Loss before income taxes and equity
in undistributed net income of
subsidiaries (3,993) (806) (1,361)
Income tax (benefit) expense (1,885) 192 (471)
- ----------------------------------------------------------------------------------------------------------
Loss before equity in undistributed net
income of subsidiaries (2,108) (998) (890)
- ----------------------------------------------------------------------------------------------------------
Equity in undistributed net income
of subsidiaries 35,676 24,526 17,956
- ----------------------------------------------------------------------------------------------------------
Net Income 33,568 23,528 17,066
Retained earnings at beginning of
period 57,029 33,501 16,435
Dividends declared (1,287) - -
- ----------------------------------------------------------------------------------------------------------
Retained earnings at end of period $ 89,310 57,029 33,501
==========================================================================================================
</TABLE>
86
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Schedule II - Condensed Financial Information
Of Registrant (Parent Company Only)
Condensed Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 33,568 23,528 17,066
- ---------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Equity in undistributed net income of
subsidiaries (35,676) (24,526) (17,956)
(Decrease) increase in income taxes
payable (3,996) 170 (389)
Net realized capital loss 2,039 10 50
Other, net (9,194) 10,326 (7)
- ---------------------------------------------------------------------------------------------------------
Total adjustments (46,827) (14,020) (18,302)
- ---------------------------------------------------------------------------------------------------------
Net cash (used) provided by operating
activities (13,259) 9,508 (1,236)
- ---------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of investments (16,926) (8,897) (1,795)
Purchases of investment in affiliates - (1,350) -
Proceeds from sales of investments - 1,414 1,642
Proceeds from maturities of investments 9,083 713 130
- ---------------------------------------------------------------------------------------------------------
Net cash used by investing activities (7,843) (8,120) (23)
- ---------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Allocation of ESOP 1,067 672 1,308
Net proceeds from sale of common stock - 63,699 -
Proceeds from sale of stock in
CapMAC Asia 1,892 - -
Dividends paid (1,287) - -
Investment in subsidiaries (1,210) (70,131) -
Dividend from subsidiary 21,500 4,500 -
Exercise of stock options 1,980 - -
Other, net (2,822) - -
- ---------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing
activities 21,120 (1,260) 1,308
- ---------------------------------------------------------------------------------------------------------
Net increase in cash 18 128 49
Cash at beginning of year 187 59 10
- ---------------------------------------------------------------------------------------------------------
Cash at end of year $ 205 187 59
- ---------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow
information:
Cash paid during year for:
Income taxes $ 13,570 7,106 2,345
Interest $ 1,128 1,128 1,128
Cash received during the year for:
Income taxes $ 9,775 6,415 2,455
=========================================================================================================
</TABLE>
87
<PAGE>
CapMAC Holdings Inc. and Subsidiaries
Schedule IV- Reinsurance
(Dollars in thousands except percentages)
<TABLE>
<CAPTION>
Percentage of
Ceded to Assumed Amount
Gross Other from Other Net Assumed
Insurance Premiums Written Amount Companies Companies Amount to Net
- ---------------------------- ------- --------- --------- ------- -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1994 $43,598 $11,069 $1,064 $33,593 3.17%
Year ended December 31, 1995 $56,541 $15,992 $ 935 $41,484 2.25%
Year ended December 31, 1996 $71,752 $15,104 $1,086 $57,734 1.88%
</TABLE>
88
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation.(1)
3.2 Amended and Restated Bylaws.(1)
4 Specimen Common Stock Certificate.(1)
10.1 Service Agreement dated as of June 25, 1992 between CapMAC and
CapMAC Management Services Corporation (predecessor to CFS).*
10.2 Credit Agreement as amended, dated as of June 25, 1992 by and
among CapMAC, Bank of Montreal, individually and as agent, and
the banks from time to time party thereto.*
10.3 Stockholder Agreement dated as of June 9, 1992 among CapMAC
Acquisition Corp. (predecessor corporation to Holdings) and
each of the Shareholders listed on Schedule A attached
thereto, together with Amendments No. 1 and No. 2.*
10.4 Stop Loss Reinsurance Agreement dated June 25, 1992 between
CapMAC and Winterthur Swiss Reinsurance Company.*
10.5 Note Purchase Agreement dated as of December 15, 1992 between
CapMAC Holdings Inc. and the Purchasers listed on Annex 1
attached thereto.*
10.6 Subscription Agreement dated as of June 30, 1995 between Orix
USA Corporation and Holdings.*
10.7 Employment Agreement dated as of June 25, 1992 between CapMAC
Acquisition Corp. and John B. Caouette.* +
10.8 Employment Agreement dated as of June 25, 1992 between CapMAC
Acquisition Corp. and Michael L. Hein.* +
10.9 [Intentionally omitted]
10.10 Employment Agreement dated as of June 25, 1992 between CapMAC
Acquisition Corp. and Charles Jackson Lester.* +
10.11 Employment Agreement dated as of June 25, 1992 between CapMAC
Acquisition Corp. and C. Thomas Meyers.* +
10.12 Employment Agreement dated as of June 25, 1992 between CapMAC
Acquisition Corp. and Paul V. Palmer.* +
10.13 Employment Agreement dated as of June 25, 1992 between CapMAC
Acquisition Corp. and Joyce S. Richardson.* +
10.14 Employment Agreement dated as of June 25, 1992 between CapMAC
Acquisition Corp. and Ram D. Wertheim.* +
10.15 1992 Stock Option Plan of Holdings.* +
10.16 1994 Stock Option Plan of Holdings.* +
89
<PAGE>
10.17 Omnibus Stock Incentive Plan.* +
10.18 CapMAC Employee Stock Ownership Plan.* +
10.19 CapMAC Employee Stock Ownership Plan Trust Agreement.* +
10.20 ESOP Loan Agreement by and between CapMAC Acquisition Corp.
(predecessor corporation to Holdings) and the ESOP Trust dated
as of June 25, 1992.* +
10.21 Supplemental Executive Retirement Plan.* +
10.22 Subscription Agreement dated as of November 27, 1995, between
CapMAC Holdings Inc. and Centre Reinsurance Limited.*
10.23 Promissory Note of John B. Caouette dated April 24, 1996.(2)+
10.24 Stop Loss Reinsurance Agreement dated December 1, 1995 between
CapMAC and Mitsui Marine & Fire Insurance Co., Ltd.*
10.25 Amendment No. 3 to Stockholder Agreement dated as of June 9,
1992.(2)
10.26 Letter Agreement dated January 1, 1996 between CapMAC Holdings
Inc. and Winterthur Swiss Insurance Company terminating
Consumer Product and Trade Receivables Quota Share Reinsurance
Treaty, Quota Share Reinsurance Agreement and Facultative
Reinsurance Agreements.(1)
10.27 Letter dated November 30, 1995 from CapMAC to Winterthur Swiss
Insurance Company terminating the Stop Loss Reinsurance
Agreement.(1)
10.28 Deferred Compensation and Restricted Stock Agreement dated as
of December 7, 1995 between John B. Caouette and Holdings.(1)
+
10.29 Deferred Compensation and Restricted Stock Agreement dated as
of December 7, 1995 between Michael L. Hein and Holdings.(1) +
10.30. [Intentionally omitted]
10.31 Deferred Compensation and Restricted Stock Agreement dated as
of December 7, 1995 between Charles Jackson Lester and
Holdings.(1) +
10.32 Deferred Compensation and Restricted Stock Agreement dated as
of December 7, 1995 between C. Thomas Meyers and Holdings.(1)
+
10.33 Deferred Compensation and Restricted Stock Agreement dated as
of December 7, 1995 between Paul V. Palmer and Holdings.(1) +
10.34 Deferred Compensation and Restricted Stock Agreement dated as
of December 7, 1995 between Joyce S. Richardson and
Holdings.(1) +
10.35 Deferred Compensation and Restricted Stock Agreement dated as
of December 7, 1995 between Ram D. Wertheim and Holdings.(1) +
10.36 Promissory Note of Ram D. Wertheim dated May 13, 1996.(2) +
10.37 Promissory Note of Paul V. Palmer dated May 13, 1996.(2) +
90
<PAGE>
10.38 Fifth Amendment dated July 30, 1996 and Sixth Amendment dated
September 25, 1996 to Credit Agreement, dated June 25, 1992,
among CapMAC, Bank of Montreal individually and as agent, and
the banks from time to time party thereto.(3)
10.39 Amended and Restated Stop Loss Reinsurance Agreement effective
January 1, 1997 between CapMAC and Mitsui Marine and Fire
Insurance Co., Ltd. #
10.40 Stop Loss Reinsurance Agreement effective January 1, 1997
between CapMAC and Munchener-Ruckverischerungs-Gesellschaft. #
10.41 Stop Loss Reinsurance Agreement effective January 1, 1997
between CapMAC and AXA Re Finance S.A. #
10.42 Reinsurance Agreement effective as of May 15, 1996 between
CapMAC and CapMAC Assurance, S.A.
10.43 Promissory Note of Paul V. Palmer dated January 13, 1997.
11 Computation of Earnings Per Share Assuming Full Dilution.
21 Subsidiaries of Registrant.
23.1 Consent of KPMG Peat Marwick LLP.
24 Powers of Attorney of Directors.
27 Financial Data Schedule
28 Information from reports furnished to state insurance
regulatory authorities of SEC Item 601(b)(28).(4)
99 Capital Markets Assurance Corporation 1996 Financial
Statements and Report of Independent Accountants.
99(A) Press release of Holdings dated March 20, 1997.
- ----------
* Previously filed as an exhibit, under the same exhibit number, to the
Company's Registration Statement on Form S-1 (Reg. No. 33-98254), as such
Registration Statement has been amended, and incorporated herein by
reference.
+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K pursuant to item 14(c).
# Confidential treatment has been granted or requested for certain portions
of this document.
(1) Previously filed as an exhibit, under the same exhibit number, to the
Company's Annual Report on Form 10-K for the year ended December 31, 1995
and incorporated herein by reference.
(2) Previously filed as an exhibit, under the same exhibit number, to the
Company's Registration Statement on Form S-1 (Reg. No. 333-05211), as such
Registration Statement has been amended, and incorporated herein by
reference.
(3) Previously filed as an exhibit, under the same exhibit number, to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996 and incorporated herein by reference.
(4) Previously filed as an exhibit, under exhibit number 28.1, to the
Company's Registration Statement on Form S-8 (Registration No. 333-05429)
and incorporated herein by reference.
91
Exhibit 10.39
AMENDED AND RESTATED STOP LOSS
REINSURANCE TREATY
BY AND BETWEEN
CAPITAL MARKETS ASSURANCE CORPORATION
885 THIRD AVENUE
NEW YORK, NEW YORK 10022
AND
MITSUI MARINE & FIRE INSURANCE COMPANY, LTD.
9, KANDA SURUGADAI 3-CHOME
CHIYODA-KU, TOKYO,
JAPAN
<PAGE>
AMENDED AND RESTATED STOP LOSS REINSURANCE TREATY
(hereinafter referred to as the "Amended and Restated Agreement")
BETWEEN
CAPITAL MARKETS ASSURANCE CORPORATION
885 THIRD AVENUE
NEW YORK, NEW YORK 10022
(the "Company")
AND
MITSUI MARINE & FIRE INSURANCE COMPANY, LTD.
9, KANDA SURUGADAI 3-CHOME
CHIYODA-KU, TOKYO, JAPAN
(the "Reinsurer")
WHEREAS, the Company and the Reinsurer previously entered in to a Stop Loss
Reinsurance Treaty, dated December 1, 1995 (the "Original Agreement") and hereby
desire to amend and restate the Original Agreement.
NOW THEREFORE, In consideration of the mutual covenants and upon the terms and
conditions set forth below, the parties hereto agree as follows:
1. TERM, TERMINATION AND CANCELLATION
1.1 This Amended and Restated Agreement is effective as of 12:01 a.m. eastern
standard time (E.S.T.) January 1, 1997 and shall remain in full force and effect
until any Date of Termination, or as provided in Sections 1.2, 1.3 or 8.7.5, but
shall include any Run-Off Period. The Original Agreement shall be deemed amended
as of the effective date of this Amended and Restated Agreement such that this
Amended and Restated Agreement shall continue to provide reinsurance for the Net
Retained Lines of all Bonds written during the term of the Original Agreement in
accordance with the terms of this Amended and Restated Agreement.
1.2 Either the Company or the Reinsurer shall have the right to terminate this
Amended and Restated Agreement as of any Date of Termination, by giving at least
one hundred and eighty (180) days prior written notice to the other party of
such termination. Unless otherwise agreed between the Company and the Reinsurer,
in the event of any such termination, the Reinsurer shall continue to provide
the excess of loss reinsurance with respect to all Bonds issued prior to the
Date of Termination, including any such Bonds issued after the giving of notice
of termination and prior to the Date of Termination.
2
<PAGE>
1.3 The Company or the Reinsurer shall have the right to terminate this Amended
and Restated Agreement as of 12:01 a.m. Eastern Standard Time on any date by
their mutual written consent.
2. DEFINITION OF TERMS
For purposes of this Amended and Restated Agreement:
2.1 "Allocated Loss Adjustment Expenses" means with respect to each Bond those
costs and expenses with respect to (a) a claim under such Bond or (b) actions
taken to postpone, mitigate, defend or avoid a claim under a Bond, which are
incurred by the Company in respect of such claim or action, including but not
limited to court costs, interest upon judgments, costs to finance claims,
receivables purchases or other payments made prior to recovery, and
investigation, adjustment, asset servicing, and legal expenses chargeable to the
investigation, negotiation, settlement or defense of a claim or loss or the
protection and perfection of any subrogation or salvage rights under such Bond;
the term shall not include Unallocated Loss Adjustment Expenses.
2.2 "Attachment Point" means (I) for the period commencing on the date hereof
and ending December 31, 1997, $150,000,000 and (ii) for each calendar year
thereafter during which this Amended and Restated Agreement is in effect, the
Attachment Point at the end of the immediately preceding calendar year plus an
amount equal to fifty percent (50%) of the amount by which the Company's
Statutory Capital and Surplus has increased during such preceding calendar year
as set forth in the Company's annual statutory financial statements for such
preceding year.
2.3 "Bond" means each financial guaranty insurance policy or surety bond issued
by the Company which is in effect as of the date of this Amended and Restated
Agreement or which is issued or renewed during the term of this Amended and
Restated Agreement, including each policy assumed by the Company as reinsurer
under a facultative reinsurance agreement but excluding policies assumed under
any reinsurance agreement pursuant to which the Company, as a reinsurer,
provides reinsurance to the Reinsurer, as ceding company.
2.4 "Business Day" shall mean any day on which commercial banks are open for
business in New York, New York and Tokyo, Japan.
2.5 "Date of Termination" means any 12:01 A.M. Eastern Standard Time on any
December 31 specified in a notice of termination delivered pursuant to Section
1.2, commencing on December 31, 1997.
2.6 "Loss" means, with respect to each Bond, any amount incurred by the Company
at any time after the issuance of such Bond in settlement of any claims or in
satisfaction of any judgment in respect of such Bond.
3
<PAGE>
2.7 "Lureco Trust Account" means the trust account established in accordance
with the terms of the Per Annum Aggregate Reinsurance Treaty between the Company
and Luxembourg European Reinsurance LURECO S.A., pursuant to which the Company
deposits amounts which are applied by the Company, at its option, to offset
losses and loss expenses incurred by the Company in connection with incurred
claims.
2.8 "Net Retained Line" means, with respect to each Bond, the amount of
liability with respect to such Bond that the Company retains net for its own
account after any reinsurance, other than the reinsurance provided for in this
Amended and Restated Agreement and other than amounts payable to the Company
from the Lureco Trust Account.
2.9 "Moody's" means Moody's Investors Service, Inc.
2.10 "Proportionate Share" means 40% ($30 million of $75 million stop loss
layer).
2.11 "Run-Off Period" means, with respect to each Bond issued and outstanding on
the Date of Termination, six (6) years from such Date of Termination or the
expiration of such Bond, whichever occurs earlier.
2.12 "Standard & Poor's" means Standard & Poor's Ratings Services, a division of
McGraw-Hill Companies, Inc.
2.13 "Statutory Capital and Surplus" means the amount shown on page 3, line 26,
column 1 of the annual statutory financial statements of the Company.
2.14 "Ultimate Net Loss" means (A) the sum of (I) Losses with respect to all
Bonds issued by the Company and (ii) any Allocated Loss Adjustment Expenses
minus (B) the sum of (I) salvage and recoveries and (ii) recoveries from all
other reinsurance in effect with respect to the Bonds reinsured hereunder
(excluding amounts payable from the Lauric Trust Account), whether collectible
or not.
2.15 "Unallocated Loss Adjustment Expenses" means the ordinary office expenses
and salaries of directors, officials or employees of the Company which would
have been incurred by the Company in the ordinary course of business if the
Company had not experienced a claim under any Bond or not deemed necessary
action to postpone, mitigate or avoid a claim; but does not include such
additional expenses which are incurred by the Company as a result of such a
claim or any such action.
3 COVER AND LIMIT OF LIABILITY
3.1 This Amended and Restated Agreement is intended to provide reinsurance for
the Company with respect to the Net Retained Lines of all Bonds written during
the term of this Amended and Restated Agreement and during the term of the
Original Agreement, including any Run-Off Period.
4
<PAGE>
3.2 Subject only to the terms, conditions, exclusions and limitations hereof,
the Reinsurer hereby accepts, reinsures and indemnifies the Company for the
Proportionate Share of the Company's Ultimate Net Loss during the term of this
Amended and Restated Agreement and any extension thereof, including any run-off
period, in excess of the Attachment Point; provided, however, that the
Reinsurer's liability shall not exceed US Dollars thirty million ($30,000,000)
in the aggregate for the full term of this Amended and Restated Agreement and
any extension thereof, including any Run-Off Period.
All salvage, recoveries and other payments recovered or received
subsequent to a loss settlement under this Section 3.2 shall be applied as if
recovered or received immediately before such loss settlement, and the Company
and the Reinsurer shall make all necessary adjustments as a result thereof.
4 PREMIUMS AND COMMISSION
4.1 The Company will pay to the Reinsurer, as a reinsurance premium in respect
of the excess of loss reinsurance provided by the Reinsurer under this Amended
and Restated Agreement, the sum of __% per year on the amount of the excess of
loss reinsurance for each year (or portion thereof) during which the excess of
loss cover provided by the Company hereunder is in effect, payable in advance on
the date this Amended and Restated Agreement is executed and on each annual
anniversary of this Amended and Restated Agreement.
5 ACCOUNTS, REPORTS AND REMITTANCES
5.1 The Company shall provide a monthly report summarizing the reinsurance
exposure of the Reinsurer. In addition, the Company shall supply such
information with respect to Bonds ceded by the Company to it as may be requested
by the Reinsurer from time to time, including information with respect to
Losses, premiums, ceding commissions, Allocated Loss Adjustment Expenses and
reserves.
5.2 The Company shall furnish to the Reinsurer, within 45 days after the close
of each calendar quarter with respect to all Bonds covered under this Amended
and Restated Agreement, (i) information with respect to all Losses and all
Allocated Loss Adjustment Expenses incurred during such quarter and (ii)
information relating to any case basis reserves established during such quarter.
5.3 The Company shall provide the Reinsurer with a copy of its annual statutory
financial statements and the Reinsurer shall provide the Company with a copy of
its Annual Report, as soon as practicable after such statements and reports are
available.
5.4 The Reinsurer shall reimburse the Company in accordance with Section 5.5 for
the amount by which the paid portion (including Allocated Loss Adjustment
Expenses) of the Company's aggregate Loss with respect to Bonds outstanding on
any date exceeds the Company's aggregate loss amount set forth in Section 3.2,
up to the maximum amount set
5
<PAGE>
forth in such Section 3.2. Such reimbursement shall be provisional, subject to
adjustment when the Company's Ultimate Net Loss has been determined. To the
extent that the total amount of the Company's aggregate Loss has not been paid
in cash as of any date, the Reinsurer shall have the option to secure its
provisional obligation (subject to adjustment when the Company's Ultimate Net
Loss has been determined) under this Amended and Restated Agreement in the form
of cash advances, a letter of credit or such other form as is satisfactory to
the Company, in its sole discretion.
5.5 If the Reinsurer receives notice from the Company of payment by the Company
of a claim hereunder, the Reinsurer shall remit to the Company the amount of
such claim by wire transfer of immediately available funds in the currency
specified by the Company payable to an account specified by the Company, (i) if
such notice is received by 10:00 a.m. New York, New York time on any Business
Day, by no later than 2:00 p.m. on the same day and (ii) if such notice is
received after 10:00 a.m. New York, New York time on any Business Day, by no
later than 2:00 p.m. on the next succeeding Business Day. For purposes of
determining the amount payable by the Reinsurer hereunder, the exchange rate in
effect at the date of notice shall apply. All payments shall be made in United
States Dollars.
5.6 To the extent that the Company establishes loss reserves, claim reserves and
loss adjustment reserves for claims covered hereunder (collectively,
"Reserves"), as required by law, the Company will forward to the Reinsurer a
statement showing the proportion of such Reserves, if any, which is applicable
to the Reinsurer, and the Reinsurer shall establish such Reserves in the manner
required under the New York Insurance Law.
6. CLAIMS
The Company shall notify the Reinsurer promptly after the Company has
actual knowledge thereof, of any of the following events:
(i) any pending or threatened claim with respect to any Bond, or
(ii) any pending or threatened litigation regarding any Bond or any
underlying transaction.
Failure to provide the notice required above shall not relieve the Reinsurer of
its obligations under this Amended and Restated Agreement, unless failure to
provide such notice would increase the Reinsurer's share of such loss.
7. GENERAL PRINCIPLES OF ADMINISTRATION
7.1 The true intent of this Amended and Restated Agreement is that, except as
and only to the extent specified below, the Reinsurer shall in every case follow
the fortunes of the Company. To that end the reinsurance hereby provided shall
be subject in all respects to the same rates, terms, conditions, interpretations
and waivers, and to the same
6
<PAGE>
modifications, alternations and cancellations, as any Bond and any endorsement
thereto issued or accepted by the Company. Any change in the terms and
conditions of any Bond or any other documents related thereto, or in the
underlying transactions or obligations, shall not discharge the Reinsurer unless
the changes would entitle the Company to be discharged from its obligations
under such Bond and the Company elects to be so discharged. In no event shall
any such change relieve the Company of any obligations under such Bond at the
expense of the Reinsurer. The control and administration of claims and pursuit
of rights of salvage, recoveries, remedies, whether by subrogation or otherwise,
under or with respect to such Bond shall be the responsibility and right of the
Company, and the Reinsurer shall follow the fortunes and decisions of the
Company and abide by the settlements of Losses, incurrence of Allocated Loss
Adjustment Expenses, and pursuit of such salvage, recoveries, or remedies by the
Company.
7.2 The Reinsurer shall share, as its obligations and interests appear, in
Losses, Allocated Loss Adjustment Expenses, and recoveries or salvage, whether
pursuant to subrogation or otherwise (except for payments made under other
reinsurance agreements).
8. GENERAL CONDITIONS
8.1 Insolvency Clause
To the extent any risk or obligation is assumed by the Reinsurer
pursuant to Section 3.2 hereof, the portion of such risk or obligation, when
ascertained, shall be payable on demand of the Company at the same time as the
Company shall pay its Net Retained Line, with reasonable provision for
verification before payment, and the reinsurance shall be payable by the
Reinsurer, on the basis of the liability of the Company on the Bonds, without
diminution because of the insolvency of the Company. In the event of the
insolvency of the Company, this reinsurance shall be payable immediately upon
demand (to the extent set forth in Section 3.2) directly to the Company, or its
liquidator, receiver, administrator, conservator or statutory successor on the
basis of the liability of the Company without diminution because of the
insolvency of the Company or because the liquidator, receiver, administrator or
administrative receiver of the Company has failed to pay all or a portion of any
claim. It is agreed, however, that within a reasonable time the liquidator,
receiver, conservator or statutory successor of the Company shall give written
notice to the Reinsurer of the pendency of a claim against the Company
indicating the subject Bond reinsured by the Reinsurer. During the pendency of
such claim, the Reinsurer may investigate such claim and interpose, at its own
expense, in the proceeding where such claim is to be adjudicated, any defense or
defenses that it may deem available to the Company or its liquidator, receiver,
administrator, conservator or statutory successor. The expense thus incurred by
the Reinsurer shall be chargeable, subject to the approval of the court, against
the Company as part of the expense of conservation or liquidation to the extent
of a pro rata share of the benefit which may accrue to the Company solely as a
result of the defense undertaken by each Reinsurer.
7
<PAGE>
This reinsurance shall be payable by the Reinsurer to the Company, or
to its liquidator, receiver, administrator, conservator or statutory successor,
except (a) where this Amended and Restated Agreement (by way of an endorsement
hereto with respect to any Bond) specifically provides for another payee of this
reinsurance in the event of the insolvency of the Company and (b) where the
Reinsurer, with the consent of the payees under the Bond, has assumed the
Company's direct obligations to such payees in substitution for the obligations
of the Company to such payees.
8.2 Offset Clause
Offset shall be allowed under this Amended and Restated Agreement
between the parties with respect to any amounts due to or owed by either of them
under this Amended and Restated Agreement. In the event of insolvency, offset
will be allowed in accordance with applicable statutes.
8.3 Errors and Omissions Clause
Any inadvertent delay, omission, or error shall not be held to relieve
any party hereto from any liability which would attach to it hereunder if such
delay, omission, or error had not been made, provided such delay, omission or
error is rectified as soon as practicably possible after discovery.
8.4 Maintenance of Books and Records; Access to Records Clause
(i) Each of the Company and the Reinsurer agree to maintain books,
accounts and records with respect to the reinsurance provided hereunder that
accurately and clearly disclose the nature and detail of the reinsurance
provided hereunder.
(ii) The Reinsurer or its duly authorized representative shall, subject
to Section 8.10 hereof, have access to and the right to inspect and copy, at its
own expense, the books and records of the Company relating to this Amended and
Restated Agreement and the reinsurance hereunder at all reasonable times for the
purpose of obtaining information concerning this Amended and Restated Agreement
and the Bonds reinsured hereunder or the subject matter hereof.
8.5 Reserves
The Reinsurer shall maintain reserves with respect to its share of
outstanding Losses, unearned premium, and contingency reserves as required by
all applicable law.
8
<PAGE>
8.6 Notices
Any and all notices, requests, demands or other communications
required or permitted to be given hereunder shall be in writing and
shall be given or mailed by first class certified mail, return receipt
requested, facsimile transmission or by an overnight delivery service,
addressed to the parties at the addresses set forth below:
(i) If to the Reinsurer, to:
Mitsui Marine & Fire Insurance Company, Ltd.
9, Kanda Surugadai 3-Chome
Chiyoda-ku, Tokyo,
Japan 101-11
Attention: Mr. Haruhiko Ishiwatari
Guarantee & Credit Department
Fax: (81) 3-3291-4631
(ii) If to the Company, to:
Capital Markets Assurance Corporation
885 Third Avenue
New York, New York 10022
Attention: Reinsurance Department
Fax No.: (212) 755-5462
8.7 Exclusions, Termination and Cancellation
8.7.1 This Amended and Restated Agreement shall be subject to the exclusions and
other limitations provided in the Bonds reinsured hereunder.
8.7.2 The liability of the Reinsurer hereunder shall exclude all liability of
the Company arising from any consequential damages or punitive damages or
otherwise resulting or arising from the negligence or bad faith of the Company,
its employees, or agents in any negotiation for, insurance or servicing of, or
the processing of any claim under any Bond.
8.7.3 The liability of the Reinsurer hereunder shall exclude all liability
assumed by the Company as a member of any underwriting association, pool,
syndicate, or bureau.
8.7.4 The obligations and undertakings of the parties hereto with respect to any
Bond shall be canceled upon any expiration or termination of such Bond.
9
<PAGE>
8.7.5 The Company shall have the right to cancel this Amended and Restated
Agreement at any time after the occurrence of any of the following events by
giving the Reinsurer notice (A) if the Reinsurer at any time shall (i) become
insolvent, (ii) go into liquidation or rehabilitation, (iii) have a receiver
appointed, (iv) allow its policyholders' surplus as defined by the laws of New
York to fall below $75 million, (v) suffer any impairment of capital (as
determined by the Reinsurer's state of domicile), or (vi) have a Standard &
Poor's or Moody's claims paying ability rating which is lower than the Company's
rating or cease to have a Standard & Poor's or Moody's claims paying ability
rating; (B) if the performance in whole or in part of this Amended and Restated
Agreement becomes prohibited or rendered impossible or the benefit of the
reinsurance provided under this Amended and Restated Agreement is adversely
affected by any law, regulation or rating agency requirements; (C) if the
Reinsurer fails to comply with any of the terms and conditions of this Amended
and Restated Agreement of (D) if the Reinsurer exercises its right to terminate
this Amended and Restated Agreement pursuant to Section 1.2 or (E) if the
Reinsurer stops writing financial guarantee business.
So long as any event referred to in this Section 8.7.5 shall have
occurred, the Company shall have the option, exercisable through giving the
aforesaid notice, (I) to terminate the Reinsurer's interests and liability under
this Amended and Restated Agreement on a cut-off basis, warranting a definitive
and binding "no loss" statement to the Reinsurer in respect to all policies
covered hereunder; or (ii) electing the Run-Off Period, whereas the Reinsurer
will continue to cover all in-force Bonds written by the Company on or prior to
the Date of Termination, until cancellation or the natural expiration of
liability under such Bonds, but up to a maximum period of six (6) years after
the Date of Termination.
Notwithstanding the cancellation of this Amended and Restated Agreement as
herein provided, the provisions of this Amended and Restated Agreement shall
continue to apply during the run-off period to all unfinished business hereunder
to the end that all obligations and liabilities incurred by each party hereunder
prior to such termination shall be fully performed and discharged.
8.8 Confidentiality
The Reinsurer agrees that it will and will cause its employees,
affiliates, legal counsel, auditors, accountants and other agents to maintain
the confidentiality of each Bond, the reinsurance undertaken with respect to
each Bond, all underlying transactions and underlying obligations and all
certificates, reports, agreements, notices and communications of any sort
relating to any of the foregoing in its communications with third parties,
except (i) to the extent required by law, regulation or order, (ii) in respect
of any information that may be generally available to the public or become
available to the public through no fault of such person and (iii) to the extent
disclosed to any rating agency then rating the Reinsurer.
10
<PAGE>
8.9 Amendments
The terms of this Amended and Restated Agreement shall not be waived,
amended or in any way modified unless contained in an endorsement to this
Amended and Restated Agreement, executed by duly authorized representatives of
all parties.
8.10 Applicable Law
This Amended and Restated Agreement shall be governed by and construed in
accordance with the laws of New York.
8.11 Severability
Any provision of this Amended and Restated Agreement that is prohibited,
unenforceable or not authorized in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition, unenforceability
or non-authorization without invalidating the remaining provisions hereof or
affecting the validity, enforceability or legality of such provision in any
other jurisdiction.
8.12 Waiver
The failure of any party to insist on strict compliance with this Amended
and Restated Agreement, or to exercise any right or remedy hereunder, shall not
constitute a waiver of any rights contained herein nor estop the parties from
thereafter demanding full and complete compliance nor prevent the parties from
exercising such a remedy in the future.
8.13 Counterparts
This Amended and Restated Agreement may be executed simultaneously in
several counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
8.14 Headings
The headings preceding the text of the Sections of this Amended and
Restated Agreement are intended and inserted solely for the convenience of
reference and shall not affect the meaning, interpretation, construction or
effect of this Amended and Restated Agreement.
11
<PAGE>
IN WITNESS WHEREOF, the parties hereto caused this Amended and Restated
Agreement to be executed by their duly authorized officers or their
attorney(s)-in-fact and delivered as of the date first written above.
REINSURER: MITSUI FIRE & MARINE INSURANCE COMPANY, LTD.
BY: /s/ Toshiaki Egashira
---------------------------------------------
TITLE: General Manager Guarantee & Credit Department
COMPANY: CAPITAL MARKETS ASSURANCE CORPORATION
BY: /s/ Ronald F. MacDonald
---------------------------------------------
TITLE: Managing Director
12
Exhibit 10.40
STOP LOSS
REINSURANCE TREATY
BY AND BETWEEN
CAPITAL MARKETS ASSURANCE CORPORATION
AND
MUNCHENER RUCKVERSICHERUNGS - GESELLSCHAFT
107 KOENIGINSTRASSE
D-80791 MUNCHEN, GERMANY
<PAGE>
STOP LOSS
REINSURANCE TREATY
(hereinafter referred to as the "Agreement")
BETWEEN
CAPITAL MARKETS ASSURANCE CORPORATION
885 THIRD AVENUE
NEW YORK, NEW YORK 10022
(the "Company")
AND
MUNCHENER RUCKVERSICHERUNGS - GESELLSCHAFT
107 KOENIGINSTRASSE
D-80791 MUNCHEN, GERMANY
In consideration of the mutual covenants and upon the terms and
conditions set forth below, the parties hereto agree as follows:
1. TERM, TERMINATION AND CANCELLATION
1.1 This Agreement is effective as of 12:01 a.m. eastern standard time (E.S.T.)
January 1, 1997 and shall remain in full force and effect until any Date of
Termination, or as provided in Sections 1.2, 1.3 or 8.7.5, but shall include any
Run-Off Period.
1.2 Either the Company or the Reinsurer shall have the right to terminate this
Agreement as of any Date of Termination, by giving at least one hundred and
eighty (180) days prior written notice to the other party of such termination.
Unless otherwise agreed between the Company and the Reinsurer, in the event of
any such termination, the Reinsurer shall continue to provide the excess of loss
reinsurance with respect to all Bonds issued prior to the Date of Termination,
including any such Bonds issued after the giving of notice of termination and
prior to the Date of Termination.
1.3 The Company or the Reinsurer shall have the right to terminate this
Agreement as of 12:01 a.m. Eastern Standard Time on any date by their mutual
written consent.
1
<PAGE>
2. DEFINITION OF TERMS
For purposes of this Agreement:
2.1 "Allocated Loss Adjustment Expenses" means with respect to each Bond those
costs and expenses with respect to (a) a claim under such Bond or (b) actions
taken to postpone, mitigate, defend or avoid a claim under a Bond, which are
incurred by the Company in respect of such claim or action, including but not
limited to court costs, interest upon judgments, costs to finance claims,
receivables purchases or other payments made prior to recovery, and
investigation, adjustment, asset servicing, and legal expenses chargeable to the
investigation, negotiation, settlement or defense of a claim or loss or the
protection and perfection of any subrogation or salvage rights under such Bond;
the term shall not include Unallocated Loss Adjustment Expenses.
2.2 "Attachment Point" means (i) for the period commencing on the date hereof
and ending December 31, 1997, $150,000,000 and (ii) for each calendar year
thereafter during which this Agreement is in effect, the Attachment Point at the
end of the immediately preceding calendar year plus an amount equal to fifty
percent (50%) of the amount by which the Company's Statutory Capital and Surplus
has increased during such preceding calendar year as set forth on the Company's
Annual Statutory Financial Statements for such preceding year.
2.3 "Bond" means each financial guaranty insurance policy or surety bond issued
by the Company which is in effect as of the date of this Agreement or which is
issued or renewed during the term of this Agreement, including each policy
assumed by the Company as reinsurer under a facultative reinsurance agreement
but excluding policies assumed under any reinsurance agreement pursuant to which
the Company, as a reinsurer, provides reinsurance to the Reinsurer, as ceding
company.
2.4 "Business Day" shall mean any day on which commercial banks are open for
business in New York, New York.
2.5 "Date of Termination" means any 12:01 A.M. Eastern Standard Time on any
December 31 specified in a notice of termination delivered pursuant to Section
1.2, commencing on December 31, 1997.
2.6 "Loss" means, with respect to each Bond, any amount incurred by the Company
at any time after the issuance of such Bond in settlement of any claims or in
satisfaction of any judgment in respect of such Bond.
2.7 "Lureco Trust Account" means the trust account established in accordance
with the terms of the Per Annum Aggregate Reinsurance Treaty between the Company
and Luxembourg European Reinsurance LURECO S.A., pursuant to which the Company
deposits amounts which are applied by the Company, at its option, to offset
losses and loss expenses incurred by the Company in connection with incurred
claims.
2
<PAGE>
2.8 "Net Retained Line" means, with respect to each Bond, the amount of
liability with respect to such Bond that the Company retains net for its own
account after any reinsurance, other than the reinsurance provided for in this
Agreement and other than amounts payable to the Company from the Lureco Trust
Account.
2.9 "Moody's" means Moody's Investors Service, Inc.
2.10 "Proportionate Share" means 33-1/3%.
2.11 "Run-Off Period" means, with respect to each Bond issued and outstanding on
the Date of Termination, six (6) years from such Date of Termination or the
expiration of such Bond, whichever occurs earlier.
2.12 "Standard & Poor's" means Standard & Poor's Ratings Services, a division of
McGraw-Hill Companies, Inc.
2.13 "Statutory Capital and Surplus" means the amount shown on page 3, line 26,
column 1 of the annual statutory financial statements of the Company.
2.14 "Ultimate Net Loss" means the sum of (i) Losses with respect to all Bonds
issued by the Company, plus (ii) any Allocated Loss Adjustment Expenses minus
(iii) salvage and recoveries minus (iv) recoveries from all other reinsurance in
effect with respect to the Bonds reinsured hereunder (excluding amounts payable
from the Lureco Trust Account), whether collectible or not.
2.15 "Unallocated Loss Adjustment Expenses" means the ordinary office expenses
and salaries of directors, officials or employees of the Company which would
have been incurred by the Company in the ordinary course of business if the
Company had not experienced a claim under any Bond or not deemed necessary
action to postpone, mitigate or avoid a claim; but does not include such
additional expenses which are incurred by the Company as a result of such a
claim or any such action.
3 COVER AND LIMIT OF LIABILITY
3.1 This Agreement is intended to provide reinsurance for the Company with
respect to the Net Retained Lines of all Bonds written during the term of this
Agreement, includes any Run-Off Period.
3.2 Subject only to the terms, conditions, exclusions and limitations hereof,
the Reinsurer hereby accepts, reinsures and indemnifies the Company for the
Proportionate Share of the Company's Ultimate Net Loss during the term of this
Agreement and any extension thereof, including any run-off period, in excess of
the Attachment Point; provided, however, that the Reinsurer's liability shall
not exceed US Dollars twenty-five million ($25,000,000) in the aggregate for the
full term of this Agreement and any extension thereof, including any Run-Off
Period.
3
<PAGE>
All salvage, recoveries and other payments recovered or received
subsequent to a loss settlement under this Section 3.2 shall be applied as if
recovered or received immediately before such loss settlement, and the Company
and the Reinsurer shall make all necessary adjustments as a result thereof.
4 PREMIUMS AND COMMISSION
4.1 The Company will pay to the Reinsurer, as a reinsurance premium in respect
of the excess of loss reinsurance provided by the Reinsurer under this
Agreement, the sum of __% per year on the amount of the excess of loss
reinsurance for each year (or portion thereof) during which the excess of loss
cover provided by the Company hereunder is in effect, payable in advance on the
date this Agreement is executed and on each annual anniversary of this
Agreement.
5 ACCOUNTS, REPORTS AND REMITTANCES
5.1 The Company shall provide a monthly report summarizing the reinsurance
exposure of the Reinsurer. In addition, the Company shall supply such
information with respect to Bonds ceded by the Company to it as may be requested
by the Reinsurer from time to time, including information with respect to
Losses, premiums, ceding commissions, Allocated Loss Adjustment Expenses and
reserves.
5.2 The Company shall furnish to the Reinsurer, within 45 days after the close
of each calendar quarter with respect to all Bonds covered under this Agreement,
(i) information with respect to all Losses and all Allocated Loss Adjustment
Expenses incurred during such quarter and (ii) information relating to any case
basis reserves established during such quarter.
5.3 The Company shall provide the Reinsurer with a copy of its annual statutory
financial statements and the Reinsurer shall provide the Company with a copy of
its Annual Report, as soon as such statements and reports are available.
5.4 The Reinsurer shall reimburse the Company in accordance with Section 5.5 for
the amount by which the paid portion (including Allocated Loss Adjustment
Expenses) of the Company's aggregate Loss with respect to Bonds outstanding on
any date exceeds the Company's aggregate loss amount set forth in Section 3.2,
up to the maximum amount set forth in such Section 3.2. Such reimbursement shall
be provisional, subject to adjustment when the Company's Ultimate Net Loss has
been determined. To the extent that the total amount of the Company's aggregate
Loss has not been paid in cash as of any date, the Reinsurer shall have the
option to secure its provisional obligation (subject to adjustment when the
Company's Ultimate Net Loss has been determined) under this Agreement in the
form of cash advances, a letter of credit or such other form as is satisfactory
to the Company, in its sole discretion.
4
<PAGE>
5.5 If the Reinsurer receives notice from the Company of payment by the Company
of a claim hereunder, the Reinsurer shall remit to the Company the amount of
such claim by wire transfer of immediately available funds in the currency
specified by the Company payable to an account specified by the Company, (i) if
such notice is received by 10:00 a.m. New York, New York time on any Business
Day, by no later than 2:00 p.m. on the same day and (ii) if such notice is
received after 10:00 a.m. New York, New York time on any Business Day, by no
later than 2:00 p.m. on the next succeeding Business Day. For purposes of
determining the amount payable by the Reinsurer hereunder, the exchange rate in
effect at the date of notice shall apply. All payments shall be made in United
States Dollars.
5.6 To the extent that the Company establishes loss reserves, claim reserves and
loss adjustment reserves for claims covered hereunder (collectively,
"Reserves"), as required by law, the Company will forward to the Reinsurer a
statement showing the proportion of such Reserves, if any, which is applicable
to the Reinsurer, and the Reinsurer shall establish such Reserves in the manner
required under the New York Insurance Law.
6. CLAIMS
The Company shall notify the Reinsurer promptly after the Company has
actual knowledge thereof, of any of the following events:
(i) any pending or threatened claim with respect to any Bond, or
(ii) any pending or threatened litigation regarding any Bond or any
underlying transaction.
Failure to provide the notice required above shall not relieve the Reinsurer of
its obligations under this Agreement, unless failure to provide such notice
would increase the Reinsurer's share of such loss.
7. GENERAL PRINCIPLES OF ADMINISTRATION
7.1 The true intent of this Agreement is that, except as and only to the extent
specified below, the Reinsurer shall in every case follow the fortunes of the
Company. To that end the reinsurance hereby provided shall be subject in all
respects to the same rates, terms, conditions, interpretations and waivers, and
to the same modifications, alternations and cancellations, as any Bond and any
endorsement thereto issued or accepted by the Company. Any change in the terms
and conditions of any Bond or any other documents related thereto, or in the
underlying transactions or obligations, shall not discharge the Reinsurer unless
the changes would entitle the Company to be discharged from its obligations
under such Bond and the Company elects to be so discharged. In no event shall
any such change relieve the Company of any obligations under such Bond at the
expense of the Reinsurer. The control and administration of claims and pursuit
of rights of salvage, recoveries, remedies, whether by subrogation or otherwise,
under or with
5
<PAGE>
respect to such Bond shall be the responsibility and right of the Company, and
the Reinsurer shall follow the fortunes and decisions of the Company and abide
by the settlements of Losses, incurrence of Allocated Loss Adjustment Expenses,
and pursuit of such salvage, recoveries, or remedies by the Company.
7.2 The Reinsurer shall share, as its obligations and interests appear, in
Losses, Allocated Loss Adjustment Expenses, and recoveries or salvage, whether
pursuant to subrogation or otherwise (except for payments made under other
reinsurance agreements).
8. GENERAL CONDITIONS
8.1 Insolvency Clause
To the extent any risk or obligation is assumed by the Reinsurer
pursuant to Section 3.2 hereof, the portion of such risk or obligation, when
ascertained, shall be payable on demand of the Company at the same time as the
Company shall pay its Net Retained Line, with reasonable provision for
verification before payment, and the reinsurance shall be payable by the
Reinsurer, on the basis of the liability of the Company on the Bonds, without
diminution because of the insolvency of the Company. In the event of the
insolvency of the Company, this reinsurance shall be payable immediately upon
demand (to the extent set forth in Section 3.2) directly to the Company, or its
liquidator, receiver, administrator, conservator or statutory successor on the
basis of the liability of the Company without diminution because of the
insolvency of the Company or because the liquidator, receiver, administrator or
administrative receiver of the Company has failed to pay all or a portion of any
claim. It is agreed, however, that within a reasonable time the liquidator,
receiver, conservator or statutory successor of the Company shall give written
notice to the Reinsurer of the pendency of a claim against the Company
indicating the subject Bond reinsured by the Reinsurer. During the pendency of
such claim, the Reinsurer may investigate such claim and interpose, at its own
expense, in the proceeding where such claim is to be adjudicated, any defense or
defenses that it may deem available to the Company or its liquidator, receiver,
administrator, conservator or statutory successor. The expense thus incurred by
the Reinsurer shall be chargeable, subject to the approval of the court, against
the Company as part of the expense of conservation or liquidation to the extent
of a pro rata share of the benefit which may accrue to the Company solely as a
result of the defense undertaken by each Reinsurer.
6
<PAGE>
This reinsurance shall be payable by the Reinsurer to the Company, or
to its liquidator, receiver, administrator, conservator or statutory successor,
except (a) where this Agreement (by way of an endorsement hereto with respect to
any Bond) specifically provides for another payee of this reinsurance in the
event of the insolvency of the Company and (b) where the Reinsurer, with the
consent of the payees under the Bond, has assumed the Company's direct
obligations to such payees in substitution for the obligations of the Company to
such payees.
8.2 Offset Clause
Offset shall be allowed under this agreement between the parties with
respect to any amounts due to or owed by either of them under this Agreement. In
the event of insolvency, offset will be allowed in accordance with applicable
statutes.
8.3 Errors and Omissions Clause
Any inadvertent delay, omission, or error shall not be held to relieve
any party hereto from any liability which would attach to it hereunder if such
delay, omission, or error had not been made, provided such delay, omission or
error is rectified as soon as practicably possible after discovery.
8.4 Maintenance of Books and Records; Access to Records Clause
(i) Each of the Company and the Reinsurer agree to maintain books,
accounts and records with respect to the reinsurance provided hereunder that
accurately and clearly disclose the nature and detail of the reinsurance
provided hereunder.
(ii) The Reinsurer or its duly authorized representative shall, subject
to Section 8.10 hereof, have access to and the right to inspect and copy, at its
own expense, the books and records of the Company relating to this Agreement and
the reinsurance hereunder at all reasonable times for the purpose of obtaining
information concerning this Agreement and the Bonds reinsured hereunder or the
subject matter hereof.
8.5 Reserves
The Reinsurer shall maintain reserves with respect to its share of
outstanding Losses, unearned premium, and contingency reserves as required by
all applicable law.
7
<PAGE>
8.6 Notices
Any and all notices, requests, demands or other communications
required or permitted to be given hereunder shall be in writing and
shall be given or mailed by first class certified mail, return receipt
requested, facsimile transmission or by an overnight delivery service,
addressed to the parties at the addresses set forth below:
(i) If to the Reinsurer, to:
Munchener Ruckversicherungs - Gesellschaft
107 Koeniginstrasse
D-80791 Munchen, Germany
Attn: Credit and Bonding Department
Fax No.: 49-89-3891-9230
(ii) If to the Company, to:
Capital Markets Assurance Corporation
885 Third Avenue
New York, New York 10022
Attention: Reinsurance Department
Fax No.: (212) 755-5462
8.7 Exclusions, Termination and Cancellation
8.7.1 This Agreement shall be subject to the exclusions and other limitations
provided in the Bonds reinsured hereunder.
8.7.2 The liability of the Reinsurer hereunder shall exclude all liability of
the Company arising from any consequential damages or punitive damages or
otherwise resulting or arising from the negligence or bad faith of the Company,
its employees, or agents in any negotiation for, insurance or servicing of, or
the processing of any claim under any Bond.
8.7.3 The liability of the Reinsurer hereunder shall exclude all liability
assumed by the Company as a member of any underwriting association, pool,
syndicate, or bureau.
8.7.4 The obligations and undertakings of the parties hereto with respect to any
Bond shall be canceled upon any expiration or termination of such Bond.
8
<PAGE>
8.7.5 The Company shall have the right to cancel this Agreement at any time
after the occurrence of any of the following events by giving the Reinsurer
notice (A) if the Reinsurer at any time shall (i) become insolvent, (ii) go into
liquidation or rehabilitation, (iii) have a receiver appointed, (iv) allow its
policyholders' surplus as defined by the laws of New York to fall below $75
million, (v) suffer any impairment of capital (as determined by the Reinsurer's
state of domicile), or (vi) have a Standard & Poor's or Moody's claims paying
ability rating which is lower than the Company's rating or cease to have a
Standard & Poor's or Moody's claims paying ability rating; (B) if the
performance in whole or in part of this Agreement becomes prohibited or rendered
impossible or the benefit of the reinsurance provided under this agreement is
adversely affected by any law, regulation or rating agency requirements; (C) if
the Reinsurer fails to comply with any of the terms and conditions of this
Agreement of (D) if the Reinsurer exercises its right to terminate this
Agreement pursuant to Section 1.2 or (E) if the Reinsurer stops writing
financial guarantee business.
So long as any event referred to in this Section 8.7.5 shall have
occurred, the Company shall have the option, exercisable through giving the
aforesaid notice, (i) to terminate the Reinsurer's interests and liability under
this Agreement on a cut-off basis, warranting a definitive and binding "no loss"
statement to the Reinsurer in respect to all policies covered hereunder; or (ii)
electing the six (6) year run-off period, whereas the Reinsurer will continue to
cover all in-force Bonds written by the Company on or prior to the Date of
Termination, until cancellation or the natural expiration of liability under
such Bonds, but up to a maximum period of six (6) years after the Date of
Termination.
Notwithstanding the cancellation of this Agreement as herein provided, the
provisions of this Agreement shall continue to apply during the run-off period
to all unfinished business hereunder to the end that all obligations and
liabilities incurred by each party hereunder prior to such termination shall be
fully performed and discharged.
8.8 Confidentiality
The Reinsurer agrees that it will and will cause its employees,
affiliates, legal counsel, auditors, accountants and other agents to maintain
the confidentiality of each Bond, the reinsurance undertaken with respect to
each Bond, all underlying transactions and underlying obligations and all
certificates, reports, agreements, notices and communications of any sort
relating to any of the foregoing in its communications with third parties,
except (i) to the extent required by law, regulation or order, (ii) in respect
of any information that may be generally available to the public or become
available to the public through no fault of such person and (iii) to the extent
disclosed to any rating agency then rating the Reinsurer.
9
<PAGE>
8.9 Amendments
The terms of this Agreement shall not be waived, amended or in any way
modified unless contained in an endorsement to this Agreement, executed by duly
authorized representatives of all parties.
8.10 Applicable Law
This Agreement shall be governed by and construed in accordance with the
laws of New York.
8.11 Severability
Any provision of this Agreement that is prohibited, unenforceable or not
authorized in any jurisdiction shall, as to such jurisdiction, be ineffective to
the extent of such prohibition, unenforceability or non-authorization without
invalidating the remaining provisions hereof or affecting the validity,
enforceability or legality of such provision in any other jurisdiction.
8.12 Waiver
The failure of any party to insist on strict compliance with this
Agreement, or to exercise any right or remedy hereunder, shall not constitute a
waiver of any rights contained herein nor estop the parties from thereafter
demanding full and complete compliance nor prevent the parties from exercising
such a remedy in the future.
8.13 Counterparts
This Agreement may be executed simultaneously in several counterparts,
each of which shall be deemed an original and all of which together shall
constitute one and the same instrument.
8.14 Headings
The headings preceding the text of the Sections of this Agreement are
intended and inserted solely for the convenience of reference and shall not
affect the meaning, interpretation, construction or effect of this Agreement.
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto caused this Agreement to be
executed by their duly authorized officers or their attorney(s)-in-fact and
delivered as of the date first written above.
REINSURER: MUNCHENER RUCKVERSICHERUNGS - GESELLSCHAFT
BY: /s/ Oscar Schmuck
---------------------------------------------
TITLE: Deputy Member of the Executive Management
COMPANY: CAPITAL MARKETS ASSURANCE CORPORATION
BY: /s/ Ronald F. MacDonald
---------------------------------------------
TITLE: Managing Director
11
Exhibit 10.41
STOP LOSS
REINSURANCE TREATY
BY AND BETWEEN
CAPITAL MARKETS ASSURANCE CORPORATION
AND
AXA RE FINANCE S.A., SECURSAL NA MADEIRA
A BRANCH OF AXA RE FINANCE S.A.
39 RUE DE COLISEE
75008 PARIS
<PAGE>
STOP LOSS
REINSURANCE TREATY
(hereinafter referred to as the "Agreement")
BETWEEN
CAPITAL MARKETS ASSURANCE CORPORATION
885 THIRD AVENUE
NEW YORK, NEW YORK 10022
(the "Company")
AND
AXA RE FINANCE S.A., SUCURSAL NA MADEIRA
A BRANCH OF AXA RE FINANCE S.A.
AVENIDA ARRIAGA, 77 - SALA 406
9000 FUNCHAL, MADEIRA, PORTUGAL
(the "Reinsurer")
In consideration of the mutual covenants and upon the terms and
conditions set forth below, the parties hereto agree as follows:
1. TERM, TERMINATION AND CANCELLATION
1.1 This Agreement is effective as of 12:01 a.m. eastern standard time (E.S.T.)
January 1, 1997 and shall remain in full force and effect until any Date of
Termination, or as provided in Sections 1.2, 1.3 or 8.7.5, but shall include any
Run-Off Period.
1.2 Either the Company or the Reinsurer shall have the right to terminate this
Agreement as of any Date of Termination, by giving at least one hundred and
eighty (180) days prior written notice to the other party of such termination.
Unless otherwise agreed between the Company and the Reinsurer, in the event of
any such termination, the
2
<PAGE>
Reinsurer shall continue to provide the excess of loss reinsurance with respect
to all Bonds issued prior to the Date of Termination, including any such Bonds
issued after the giving of notice of termination and prior to the Date of
Termination.
1.3 The Company or the Reinsurer shall have the right to terminate this
Agreement as of 12:01 a.m. Eastern Standard Time on any date by their mutual
written consent.
3
<PAGE>
2. DEFINITION OF TERMS
For purposes of this Agreement:
2.1 "Allocated Loss Adjustment Expenses" means with respect to each Bond those
costs and expenses with respect to (a) a claim under such Bond or (b) actions
taken to postpone, mitigate, defend or avoid a claim under a Bond, which are
incurred by the Company in respect of such claim or action, including but not
limited to court costs, interest upon judgments, costs to finance claims,
receivables purchases or other payments made prior to recovery, and
investigation, adjustment, asset servicing, and legal expenses chargeable to the
investigation, negotiation, settlement or defense of a claim or loss or the
protection and perfection of any subrogation or salvage rights under such Bond;
the term shall not include Unallocated Loss Adjustment Expenses.
2.2 "Attachment Point" means (i) for the period commencing on the date hereof
and ending December 31, 1997, $150,000,000 and (ii) for each calendar year
thereafter during which this Agreement is in effect, the Attachment Point at the
end of the immediately preceding calendar year plus an amount equal to fifty
percent (50%) of the amount by which the Company's Statutory Capital and Surplus
has increased during such preceding calendar year as set forth on the Company's
Annual Statutory Financial Statements for such preceding year.
2.3 "Bond" means each financial guaranty insurance policy or surety bond issued
by the Company which is in effect as of the date of this Agreement or which is
issued or renewed during the term of this Agreement, including each policy
assumed by the Company as reinsurer under a facultative reinsurance agreement
but excluding policies assumed under any reinsurance agreement pursuant to which
the Company, as a reinsurer, provides reinsurance to the Reinsurer, as ceding
company.
2.4 "Business Day" shall mean any day on which commercial banks are open for
business in New York, New York.
2.5 "Date of Termination" means any 12:01 A.M. Eastern Standard Time on any
December 31 specified in a notice of termination delivered pursuant to Section
1.2, commencing on December 31, 1997.
2.6 "Loss" means, with respect to each Bond, any amount incurred by the Company
at any time after the issuance of such Bond in settlement of any claims or in
satisfaction of any judgment in respect of such Bond.
2.7 "Lureco Trust Account" means the trust account established in accordance
with the terms of the Per Annum Aggregate Reinsurance Treaty between the Company
and Luxembourg European Reinsurance LURECO S.A., pursuant to which the Company
deposits amounts which are applied by the Company, at its option, to offset
losses and loss expenses incurred by the Company in connection with incurred
claims.
4
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2.8 "Net Retained Line" means, with respect to each Bond, the amount of
liability with respect to such Bond that the Company retains net for its own
account after any reinsurance, other than the reinsurance provided for in this
Agreement and other than amounts payable to the Company from the Lureco Trust
Account.
2.9 "Moody's" means Moody's Investors Service, Inc.
2.10 "Proportionate Share" means 26.67%.
2.11 "Run-Off Period" means, with respect to each Bond issued and outstanding on
the Date of Termination, six (6) years from such Date of Termination or the
expiration of such Bond, whichever occurs earlier.
2.12 "Standard & Poor's" means Standard & Poor's Ratings Services, a division of
McGraw-Hill Companies, Inc.
2.13 "Statutory Capital and Surplus" means the amount shown on page 3, line 26,
column 1 of the annual statutory financial statements of the Company.
2.14 "Ultimate Net Loss" means the sum of (i) Losses with respect to all Bonds
issued by the Company, plus (ii) any Allocated Loss Adjustment Expenses minus
(iii) salvage and recoveries minus (iv) recoveries from all other reinsurance in
effect with respect to the Bonds reinsured hereunder (excluding amounts payable
from the Lureco Trust Account), whether collectible or not.
2.15 "Unallocated Loss Adjustment Expenses" means the ordinary office expenses
and salaries of directors, officials or employees of the Company which would
have been incurred by the Company in the ordinary course of business if the
Company had not experienced a claim under any Bond or not deemed necessary
action to postpone, mitigate or avoid a claim; but does not include such
additional expenses which are incurred by the Company as a result of such a
claim or any such action.
3 COVER AND LIMIT OF LIABILITY
3.1 This Agreement is intended to provide reinsurance for the Company with
respect to the Net Retained Lines of all Bonds written during the term of this
Agreement, includes any Run-Off Period.
3.2 Subject only to the terms, conditions, exclusions and limitations hereof,
the Reinsurer hereby accepts, reinsures and indemnifies the Company for the
Proportionate Share of the Company's Ultimate Net Loss during the term of this
Agreement and any extension thereof, including any run-off period, in excess of
the Attachment Point; provided, however, that the Reinsurer's liability shall
not exceed US Dollars twenty million ($20,000,000) in the aggregate for the full
term of this Agreement and any extension thereof, including any Run-Off Period.
5
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All salvage, recoveries and other payments recovered or received
subsequent to a loss settlement under this Section 3.2 shall be applied as if
recovered or received immediately before such loss settlement, and the Company
and the Reinsurer shall make all necessary adjustments as a result thereof.
4 PREMIUMS AND COMMISSION
4.1 The Company will pay to the Reinsurer, as a reinsurance premium in respect
of the excess of loss reinsurance provided by the Reinsurer under this
Agreement, the sum of __% per year on the amount of the excess of loss
reinsurance for each year (or portion thereof) during which the excess of loss
cover provided by the Company hereunder is in effect, payable in advance on the
date this Agreement is executed and on each annual anniversary of this
Agreement.
5 ACCOUNTS, REPORTS AND REMITTANCES
5.1 The Company shall provide a monthly report summarizing the reinsurance
exposure of the Reinsurer. In addition, the Company shall supply such
information with respect to Bonds ceded by the Company to it as may be requested
by the Reinsurer from time to time, including information with respect to
Losses, premiums, ceding commissions, Allocated Loss Adjustment Expenses and
reserves.
5.2 The Company shall furnish to the Reinsurer, within 45 days after the close
of each calendar quarter with respect to all Bonds covered under this Agreement,
(i) information with respect to all Losses and all Allocated Loss Adjustment
Expenses incurred during such quarter and (ii) information relating to any case
basis reserves established during such quarter.
5.3 The Company shall provide the Reinsurer with a copy of its annual statutory
financial statements and the Reinsurer shall provide the Company with a copy of
its Annual Report, as soon as such statements and reports are available.
5.4 The Reinsurer shall reimburse the Company in accordance with Section 5.5 for
the amount by which the paid portion (including Allocated Loss Adjustment
Expenses) of the Company's aggregate Loss with respect to Bonds outstanding on
any date exceeds the Company's aggregate loss amount set forth in Section 3.2,
up to the maximum amount set forth in such Section 3.2. Such reimbursement shall
be provisional, subject to adjustment when the Company's Ultimate Net Loss has
been determined. To the extent that the total amount of the Company's aggregate
Loss has not been paid in cash as of any date, the Reinsurer shall have the
option to secure its provisional obligation (subject to adjustment when the
Company's Ultimate Net Loss has been determined) under this Agreement in the
form of cash advances, a letter of credit or such other form as is satisfactory
to the Company, in its sole discretion.
6
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5.5 If the Reinsurer receives notice from the Company of payment by the Company
of a claim hereunder, the Reinsurer shall remit to the Company the amount of
such claim by wire transfer of immediately available funds in the currency
specified by the Company payable to an account specified by the Company, (i) if
such notice is received by 10:00 a.m. New York, New York time on any Business
Day, by no later than 2:00 p.m. on the same day and (ii) if such notice is
received after 10:00 a.m. New York, New York time on any Business Day, by no
later than 2:00 p.m. on the next succeeding Business Day. For purposes of
determining the amount payable by the Reinsurer hereunder, the exchange rate in
effect at the date of notice shall apply. All payments shall be made in United
States Dollars.
5.6 To the extent that the Company establishes loss reserves, claim reserves and
loss adjustment reserves for claims covered hereunder (collectively,
"Reserves"), as required by law, the Company will forward to the Reinsurer a
statement showing the proportion of such Reserves, if any, which is applicable
to the Reinsurer, and the Reinsurer shall establish such Reserves in the manner
required under the New York Insurance Law.
6. CLAIMS
The Company shall notify the Reinsurer promptly after the Company has
actual knowledge thereof, of any of the following events:
(i) any pending or threatened claim with respect to any Bond, or
(ii) any pending or threatened litigation regarding any Bond or any
underlying transaction.
Failure to provide the notice required above shall not relieve the Reinsurer of
its obligations under this Agreement, unless failure to provide such notice
would increase the Reinsurer's share of such loss.
7. GENERAL PRINCIPLES OF ADMINISTRATION
7.1 The true intent of this Agreement is that, except as and only to the extent
specified below, the Reinsurer shall in every case follow the fortunes of the
Company. To that end the reinsurance hereby provided shall be subject in all
respects to the same rates, terms, conditions, interpretations and waivers, and
to the same modifications, alternations and cancellations, as any Bond and any
endorsement thereto issued or accepted by the Company. Any change in the terms
and conditions of any Bond or any other documents related thereto, or in the
underlying transactions or obligations, shall not discharge the Reinsurer unless
the changes would entitle the Company to be discharged from its obligations
under such Bond and the Company elects to be so discharged. In no event shall
any such change relieve the Company of any obligations under such Bond at the
expense of the Reinsurer. The control and administration of claims and pursuit
of rights of salvage, recoveries, remedies, whether by subrogation or otherwise,
under or with
7
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respect to such Bond shall be the responsibility and right of the Company, and
the Reinsurer shall follow the fortunes and decisions of the Company and abide
by the settlements of Losses, incurrence of Allocated Loss Adjustment Expenses,
and pursuit of such salvage, recoveries, or remedies by the Company.
7.2 The Reinsurer shall share, as its obligations and interests appear, in
Losses, Allocated Loss Adjustment Expenses, and recoveries or salvage, whether
pursuant to subrogation or otherwise (except for payments made under other
reinsurance agreements).
8. GENERAL CONDITIONS
8.1 Insolvency Clause
To the extent any risk or obligation is assumed by the Reinsurer
pursuant to Section 3.2 hereof, the portion of such risk or obligation, when
ascertained, shall be payable on demand of the Company at the same time as the
Company shall pay its Net Retained Line, with reasonable provision for
verification before payment, and the reinsurance shall be payable by the
Reinsurer, on the basis of the liability of the Company on the Bonds, without
diminution because of the insolvency of the Company. In the event of the
insolvency of the Company, this reinsurance shall be payable immediately upon
demand (to the extent set forth in Section 3.2) directly to the Company, or its
liquidator, receiver, administrator, conservator or statutory successor on the
basis of the liability of the Company without diminution because of the
insolvency of the Company or because the liquidator, receiver, administrator or
administrative receiver of the Company has failed to pay all or a portion of any
claim. It is agreed, however, that within a reasonable time the liquidator,
receiver, conservator or statutory successor of the Company shall give written
notice to the Reinsurer of the pendency of a claim against the Company
indicating the subject Bond reinsured by the Reinsurer. During the pendency of
such claim, the Reinsurer may investigate such claim and interpose, at its own
expense, in the proceeding where such claim is to be adjudicated, any defense or
defenses that it may deem available to the Company or its liquidator, receiver,
administrator, conservator or statutory successor. The expense thus incurred by
the Reinsurer shall be chargeable, subject to the approval of the court, against
the Company as part of the expense of conservation or liquidation to the extent
of a pro rata share of the benefit which may accrue to the Company solely as a
result of the defense undertaken by each Reinsurer.
8
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This reinsurance shall be payable by the Reinsurer to the Company, or
to its liquidator, receiver, administrator, conservator or statutory successor,
except (a) where this Agreement (by way of an endorsement hereto with respect to
any Bond) specifically provides for another payee of this reinsurance in the
event of the insolvency of the Company and (b) where the Reinsurer, with the
consent of the payees under the Bond, has assumed the Company's direct
obligations to such payees in substitution for the obligations of the Company to
such payees.
8.2 Offset Clause
Offset shall be allowed under this agreement between the parties with
respect to any amounts due to or owed by either of them under this Agreement. In
the event of insolvency, offset will be allowed in accordance with applicable
statutes.
8.3 Errors and Omissions Clause
Any inadvertent delay, omission, or error shall not be held to relieve
any party hereto from any liability which would attach to it hereunder if such
delay, omission, or error had not been made, provided such delay, omission or
error is rectified as soon as practicably possible after discovery.
8.4 Maintenance of Books and Records; Access to Records Clause
(i) Each of the Company and the Reinsurer agree to maintain books,
accounts and records with respect to the reinsurance provided hereunder that
accurately and clearly disclose the nature and detail of the reinsurance
provided hereunder.
(ii) The Reinsurer or its duly authorized representative shall, subject
to Section 8.10 hereof, have access to and the right to inspect and copy, at its
own expense, the books and records of the Company relating to this Agreement and
the reinsurance hereunder at all reasonable times for the purpose of obtaining
information concerning this Agreement and the Bonds reinsured hereunder or the
subject matter hereof.
8.5 Reserves
The Reinsurer shall maintain reserves with respect to its share of
outstanding Losses, unearned premium, and contingency reserves as required by
all applicable law.
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8.6 Notices
Any and all notices, requests, demands or other communications
required or permitted to be given hereunder shall be in writing and
shall be given or mailed by first class certified mail, return receipt
requested, facsimile transmission or by an overnight delivery service,
addressed to the parties at the addresses set forth below:
(i) If to the Reinsurer, to:
AXA Re Finance S.A, SECURSAL NA MADEIRA
a branch of AXA Re Finance S.A.
39 Rue de Colisee
75008 Paris, France
Fax No.: 33-1-40-75 56 32
(ii) If to the Company, to:
Capital Markets Assurance Corporation
885 Third Avenue
New York, New York 10022
Attention: Reinsurance Department
Fax No.: (212) 755-5462
8.7 Exclusions, Termination and Cancellation
8.7.1 This Agreement shall be subject to the exclusions and other limitations
provided in the Bonds reinsured hereunder.
8.7.2 The liability of the Reinsurer hereunder shall exclude all liability of
the Company arising from any consequential damages or punitive damages or
otherwise resulting or arising from the negligence or bad faith of the Company,
its employees, or agents in any negotiation for, insurance or servicing of, or
the processing of any claim under any Bond.
8.7.3 The liability of the Reinsurer hereunder shall exclude all liability
assumed by the Company as a member of any underwriting association, pool,
syndicate, or bureau.
8.7.4 The obligations and undertakings of the parties hereto with respect to any
Bond shall be canceled upon any expiration or termination of such Bond.
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8.7.5 The Company shall have the right to cancel this Agreement at any time
after the occurrence of any of the following events by giving the Reinsurer
notice (A) if the Reinsurer at any time shall (i) become insolvent, (ii) go into
liquidation or rehabilitation, (iii) have a receiver appointed, (iv) allow its
policyholders' surplus as defined by the laws of New York to fall below $75
million, (v) suffer any impairment of capital (as determined by the Reinsurer's
state of domicile), or (vi) have a Standard & Poor's or Moody's claims paying
ability rating which is lower than the Company's rating or cease to have a
Standard & Poor's or Moody's claims paying ability rating; (B) if the
performance in whole or in part of this Agreement becomes prohibited or rendered
impossible or the benefit of the reinsurance provided under this agreement is
adversely affected by any law, regulation or rating agency requirements; (C) if
the Reinsurer fails to comply with any of the terms and conditions of this
Agreement of (D) if the Reinsurer exercises its right to terminate this
Agreement pursuant to Section 1.2 or (E) if the Reinsurer stops writing
financial guarantee business.
So long as any event referred to in this Section 8.7.5 shall have
occurred, the Company shall have the option, exercisable through giving the
aforesaid notice, (i) to terminate the Reinsurer's interests and liability under
this Agreement on a cut-off basis, warranting a definitive and binding "no loss"
statement to the Reinsurer in respect to all policies covered hereunder; or (ii)
electing the six (6) year run-off period, whereas the Reinsurer will continue to
cover all in-force Bonds written by the Company on or prior to the Date of
Termination, until cancellation or the natural expiration of liability under
such Bonds, but up to a maximum period of six (6) years after the Date of
Termination.
Notwithstanding the cancellation of this Agreement as herein provided, the
provisions of this Agreement shall continue to apply during the run-off period
to all unfinished business hereunder to the end that all obligations and
liabilities incurred by each party hereunder prior to such termination shall be
fully performed and discharged.
8.8 Confidentiality
The Reinsurer agrees that it will and will cause its employees,
affiliates, legal counsel, auditors, accountants and other agents to maintain
the confidentiality of each Bond, the reinsurance undertaken with respect to
each Bond, all underlying transactions and underlying obligations and all
certificates, reports, agreements, notices and communications of any sort
relating to any of the foregoing in its communications with third parties,
except (i) to the extent required by law, regulation or order, (ii) in respect
of any information that may be generally available to the public or become
available to the public through no fault of such person and (iii) to the extent
disclosed to any rating agency then rating the Reinsurer.
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8.9 Amendments
The terms of this Agreement shall not be waived, amended or in any way
modified unless contained in an endorsement to this Agreement, executed by duly
authorized representatives of all parties.
8.10 Applicable Law
This Agreement shall be governed by and construed in accordance with the
laws of New York.
8.11 Severability
Any provision of this Agreement that is prohibited, unenforceable or not
authorized in any jurisdiction shall, as to such jurisdiction, be ineffective to
the extent of such prohibition, unenforceability or non-authorization without
invalidating the remaining provisions hereof or affecting the validity,
enforceability or legality of such provision in any other jurisdiction.
8.12 Waiver
The failure of any party to insist on strict compliance with this
Agreement, or to exercise any right or remedy hereunder, shall not constitute a
waiver of any rights contained herein nor estop the parties from thereafter
demanding full and complete compliance nor prevent the parties from exercising
such a remedy in the future.
8.13 Counterparts
This Agreement may be executed simultaneously in several counterparts,
each of which shall be deemed an original and all of which together shall
constitute one and the same instrument.
8.14 Headings
The headings preceding the text of the Sections of this Agreement are
intended and inserted solely for the convenience of reference and shall not
affect the meaning, interpretation, construction or effect of this Agreement.
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IN WITNESS WHEREOF, the parties hereto caused this Agreement to be
executed by their duly authorized officers or their attorney(s)-in-fact and
delivered as of the date first written above.
REINSURER: AXA RE FINANCE S.A., SECURSAL NA MADEIRA
a branch of AXA RE FINANCE S.A.
BY: /s/ Chistopher Renia
------------------------------------------
TITLE: Vice President
COMPANY: CAPITAL MARKETS ASSURANCE CORPORATION
BY: /s/ Arthur Kuypers
------------------------------------------
TITLE: Vice President
13
Exhibit 10.42
QUOTA SHARE AND STOP LOSS
REINSURANCE TREATY
(hereinafter referred to as this Agreement)
BETWEEN:
CapMAC Assurance S.A.
112, avenue Kleber
75784 Paris Cedex 16
(the "Company")
AND
Capital Markets Assurance Corporation
885 Third Avenue
New York, New York 10022
(the "Reinsurer")
In consideration of the mutual covenants and upon the terms and conditions set
forth below, the parties hereto agree as follows:
1. TERM
This Agreement is effective as of 12 a.m. 15 May 1996 and shall remain in full
force and effect until terminated as provided in Section 8.7 hereof.
2. DEFINITION OF TERMS
For purposes of this Agreement:
2.1 - "Allocated Loss Adjustment Expenses" means with respect to each Bond
those costs and expenses with respect to
(a) a claim under such Bond or
(b) actions taken to postpone, mitigate, defend or avoid a claim
under a Bond, which are incurred by the Company in respect of such
claim or action, including but not limited to court costs, interest
upon judgements, costs to finance claims, receivables purchases or
other
<PAGE>
payments made prior to recovery, and investigation, adjustment,
asset servicing, and legal expenses chargeable to the investigation,
negotiation, settlement or defense of a claim or loss or the
protection and perfection of any subrogation or salvage rights under
such Bond; the term shall not include Unallocated Loss Adjustment
Expenses.
2.2 - "Bond" means each financial guaranty insurance policy or surety bond
issued by the Company while this Agreement is in effect, and each
reinsurance agreement entered into by the Company while this Agreement is
in effect pursuant to which the Company acts as a reinsurer (except for
any reinsurance agreement pursuant to which the Company, as a reinsurer,
provides reinsurance to the Reinsurer as ceding company), in each case
only with respect to risks that may be insured by a financial guaranty
insurance company under Sections 69.01 and 69.04 of the New York Insurance
Law.
2.3 - "Business Day" shall mean any day on which commercial banks are open
for business in Paris and in New York.
2.4 - "Loss" means, with respect to each Bond, any amount incurred by the
Company at any time after the issuance of such Bond in settlement of any
claims or in satisfaction of any judgment in respect of such Bond.
2.5 - "Net Retained Line" means, with respect to each Bond, the amount of
liability with respect to such Bond that the Company retains net for its
own account after any reinsurance, other than the reinsurance provided for
in this Agreement.
2.6 - "Proportionate Share" means for purposes of determining the
Reinsurer's share of premiums, Losses, Allocated Loss Adjustment Expenses
and recoveries or salvage, ninety five percent (95%).
2.7 - "Ultimate Net Loss" means the sum of (i) Losses with respect to all
Bonds issued by the Company, plus (ii) any Allocated Loss Adjustment
Expenses minus (iii) salvage and recoveries minus (iv) recoveries from all
other reinsurance in effect with respect to the Bonds reinsured hereunder,
whether collectible or not.
2.8 - "Unallocated Loss Adjustment Expenses" means the ordinary office
expenses and salaries of directors, officials or employees of the Company
which would have been incurred by the Company in the ordinary course of
business if the Company had not experienced a claim under any Bond or not
deemed necessary action to postpone, mitigate or avoid a claim; but does
not include such additional expenses which are incurred by the Company as
a result of such a claim or any such action.
2.10 - "Underlying obligations(s)" means with respect to each Bond the
obligations of parties to an underlying transaction, the performance of
which such Bond secures or guarantees.
3. COVER AND LIMIT OF LIABILITY
3.1 - Subject only to the terms, conditions, exclusions and limitations
hereof and, with respect to each Bond, the terms, conditions, exclusions
and limitations of such Bond, the Reinsurer hereby accepts, reinsures and
indemnifies the Company for its Proportionate Share of any Loss the
Company may incur in respect of its Net Retained Line of any Bond, whether
such Loss occurs
<PAGE>
during or after the expiration or termination of this Agreement.
In addition, the Reinsurer shall be liable to the Company for its
Proportionate Share of Allocated Loss Adjustment Expenses, but shall not
be liable to the Company for Unallocated Loss Adjustment Expenses.
If any claim by the Company pursuant to this Section 3.1 is in a currency
other than the currency in which the Loss or Loss Adjustment Expense is
payable, the amount payable by the Reinsurer shall be determined by using
the exchange rate in effect at the date of notice given pursuant to
Section 5.2.
3.2 - In addition to the reinsurance provided in Section 3.1 hereof,
subject only to the terms, conditions, exclusions and limitations hereof,
the Reinsurer hereby accepts, reinsures and indemnifies the Company for
the Company's Ultimate Net Loss in each calendar year during which this
Agreement is in effect in excess of the greater of
(i) 2.5 million Francs and
(ii) an amount equal to 5% of the paid up capital and reserves of
the Company as of (x) in the case of the initial calendar year
during which this Agreement is in effect, the date on which
this Agreement becomes effective and (y) in the case of each
subsequent calendar year during which this Agreement is in
effect, the last day of the preceding calendar year,
provided that the Reinsurer's liability under this Section 3.2 shall not
exceed $10 million in the aggregate in any such calendar year.
If any claim by the Company pursuant to this Section 3.2 is in a currency
other than French Francs, the amount payable by the Reinsurer shall be
determined by using the exchange rate in effect at the date of notice
given pursuant to Section 5.2.
All salvage, recoveries and other payments recovered or received
subsequent to a loss settlement under this Section 3.2 shall be applied as
if recovered or received immediately before such loss settlement, and the
Company and the Reinsurer shall make all necessary adjustments as a result
thereof.
<PAGE>
4. PREMIUMS AND COMMISSION
4.1 - The Company will pay to the Reinsurer out of premiums received by it
in respect of the Net Retained Line of each Bond, as a reinsurance premium
in respect of the quota share reinsurance provided by the Reinsurer under
Section 3.1 hereof, for the period beginning on the date of issuance of
such Bond and ending on the earlier of:
(i) the date on which such Bond expires by its terms and
(ii) the date on which the Company reassumes the liability with
respect to such Bond from the Reinsurer pursuant to Section
8.7.2 hereof,
the Reinsurer's Proportionate Share of such premiums.
4.2 - The Reinsurer will allow the Company a ceding commission of 30% on
all ceded reinsurance premiums paid to it hereunder. Any reinsurance
premium, or portion thereof, returned for any reason whatsoever to the
Company by the Reinsurer will be returned net of the ceding commission.
4.3 - The Company will pay to the Reinsurer, as a reinsurance premium in
respect of the excess of loss reinsurance provided by the Reinsurer under
Section 3.2 hereof, the sum of .50% per year on the amount of excess of
loss reinsurance for each year (or portion thereof) during which the
excess of loss cover provided to the Company hereunder is in effect,
payable in advance on the date this Agreement is executed and on each
annual anniversary of this Agreement.
5. ACCOUNTS, REPORTS AND REMITTANCES
5.1 - The Company shall furnish to the Reinsurer an account of the
reinsurance of all Bonds ceded to and assumed by the Reinsurer under this
Agreement, including information with respect to Losses, premiums, ceding
commissions, Allocated Loss Adjustment Expenses and reserves, as may be
requested by the Reinsurer from time to time.
5.2 - If the Reinsurer receives notice from the Company of payment by the
Company of a Loss or Allocated Loss Adjustment Expense in respect of a
Bond reinsured by the Reinsurer pursuant to Section 3.1 hereof or of a
claim under the excess of loss reinsurance provided in Section 3.2, the
Reinsurer shall remit to the Company its Proportionate Share of such Loss
or Allocated Loss Adjustment Expense or the amount of such claim as
outlined in Section 3.2, as the case may be, by wire transfer of
immediately available funds in the currency specified by the Company
payable to an account specified by the Company, (i) if such notice is
received by 8 a.m. New York, New York time on any Business Day, by no
later than 3 p.m. on the same day and (ii) if such notice is received
after 8 a.m. New York, New York time on any Business Day, by no later than
3 p.m. on the next succeeding Business Day.
5.3 - No later than the last day of each calendar month during which any
Bond is reinsured hereunder or such other time as the Company and the
Reinsurer may agree from time to time, the Company shall pay to the
Reinsurer the Reinsurer's Proportionate Share of premiums and recoveries
and salvage received by the Company during such month with respect to such
Bond.
<PAGE>
6. NOTICE OF CLAIMS
The Company shall notify the Reinsurer promptly after the Company has
actual knowledge thereof, of any of the following events:
(i) any pending or threatened claim with respect to any Bond, or
(ii) any pending or threatened litigation regarding any Bond or any
underlying transaction.
Failure to provide the notice required above shall not relieve the
Reinsurer of its obligations under this Agreement.
7. GENERAL PRINCIPLES OF ADMINISTRATION
7.1 - The true intent of this Agreement is that, except as and only to the
extent specified below, the Reinsurer shall in every case follow the
fortunes of the Company. To that end the reinsurance hereby provided shall
be subject in all respects to the same rates, terms, conditions,
interpretations and waivers, and to the same modifications, alternations
and cancellations, as any Bond and any endorsement thereto issued or
accepted by CapMAC Assurance S.A. Any change in the terms and conditions
of any Bond or any other documents related thereto, or in the underlying
transactions or obligations, shall not discharge the Reinsurer unless the
changes would entitle the Company to be discharged from its obligations
under such Bond and the Company elects to be so discharged. In no event
shall any such change relieve the Company of any obligations under such
Bond at the expense of the Reinsurer.
The control and administration of claims and pursuit of rights of salvage,
recoveries, remedies, whether by subrogation or otherwise, under or with
respect to such Bond shall be the responsibility and right of the Company,
and the Reinsurer shall follow the fortunes and decisions of the Company
and abide by the settlements of Losses, incurrence of Allocated Loss
Adjustment Expenses, and pursuit of such salvage, recoveries, or remedies
by the Company.
7.2 - The Reinsurer shall share, as its obligations and interests appear,
in Losses, Allocated Loss Adjustment Expenses, and recoveries or salvage,
whether pursuant to subrogation or otherwise (except for payments made
under other reinsurance agreements).
8. GENERAL CONDITIONS
8.1 Insolvency Clause
In the event of the insolvency of the Company, this reinsurance shall be
payable directly to the Company, or its liquidator, receiver,
administrator or administrative receiver on the basis of the liability of
the Company without diminution because of the insolvency of the Company or
because the liquidator, receiver, administrator or administrative receiver
of the Company has failed to pay all or a portion of any claim.
It is agreed, however, that within a reasonable time the liquidator,
receiver, administrator or
<PAGE>
administrative receiver of the Company shall give written notice to each
Reinsurer of the pendency of a claim against the Company indicating the
subject Bond reinsured by such Reinsurer.
During the pendency of such claim, each Reinsurer may investigate such
claim and interpose, at its own expense, in the proceeding where such
claim is to be adjudicated, any defense or defenses that it may deem
available to the Company or its liquidator, receiver, administrator or
administrative receiver.
This reinsurance shall be payable by the Reinsurer to the Company, or to
its liquidator, receiver, administrator or administrative receiver, except
(a) where this Agreement (by way of an endorsement hereto with respect to
any Bond) specifically provides for another payee of this reinsurance in
the event of the insolvency of the Company and (b) where the Reinsurer,
with the consent of the payees under the Bond, has assumed the Company's
direct obligations to such payees in substitution for the obligations of
the Company to such payees. Any reinsurance payable by the Reinsurer to
another payee in accordance with the provisions of clauses (a) and (b) of
the preceding sentence shall not be deemed a "Loss with respect to a Bond"
for purposes of clause (i) of the definition of "Ultimate Net Loss".
8.2 Offset Clause
Offset shall be allowed under this agreement between the parties with
respect to any amounts due to or owed by either of them under this
Agreement. In the event of the insolvency of a party hereto, offsets shall
be allowed only in accordance with the provisions of Section 74.27 of the
New York Insurance Law, inasmuch as it does not conflict with French law
n(degree)85-98 of 25 January 1985 dealing with the judicial processes of
administration and liquidation in insolvency situations.
8.3 Errors and Omissions Clause
Any inadvertent delay, omission, or error shall not be held to relieve any
party hereto from any liability which would attach to it hereunder if such
delay, omission, or error had not been made, provided such delay, omission
or error is rectified as soon as practicably possible after discovery.
8.4 Maintenance of Books and Records; Access to Records Clause
(i) Each of the Company and the Reinsurer agree to maintain books,
accounts and records with respect to the reinsurance provided
hereunder that accurately and clearly disclose the nature and detail
of the reinsurance provided hereunder.
(ii) The Reinsurer or its duly authorized representative shall, subject
to Section 8.8 hereof, have access to and the right to inspect and
copy, at its own expense, the books and records of the Company
relating to this Agreement and the reinsurance hereunder at all
reasonable times for the purpose of obtaining information concerning
this Agreement and the Bonds reinsured hereunder or the subject
matter hereof.
8.5 Reserves
The Reinsurer shall maintain reserves with respect to its share of
outstanding Losses, unearned premium, and contingency reserves as required
by all applicable law.
<PAGE>
8.6 Notices
Any and all notices, requests, demands or other communications required or
permitted to be given hereunder shall be in writing and shall be given or
mailed by first class certified mail, return receipt requested, facsimile
transmission or by an overnight delivery service, addressed to the parties
at the addresses set forth below:
- if to the Company, to:
CapMAC Assurance S.A.
112, avenue Kleber
75784 Paris Cedex 16
Fax No.: (1) 47 55 74 26
- if to the Reinsurer, to:
Capital Markets Assurance Corporation
885 Third Avenue
New York, New York 10022
Attention: Reinsurance Department
Fax No.: (212) 755-5462
8.7 Exclusions, Termination and Cancellation
8.7.1 This Agreement shall be subject to the exclusions and other
limitations provided in the Bonds reinsured hereunder.
8.7.2 The Company and the Reinsurer shall have the right to terminate
the quota share reinsurance provided under Section 3.1 and/or the
excess of loss reinsurance provided under Section 3.2 hereof by
mutual written consent. Unless otherwise agreed between the
Company and the Reinsurer, in the event of any such termination,
the Reinsurer shall continue to cover and reinsure pursuant to
Section 3.1 its Proportionate Share of all Bonds issued prior to
the time and date of such termination, including any such Bonds
issued after the giving of notice of termination and prior to the
effective time and date of termination, until the expiration of
such Bonds in accordance with their terms.
8.7.3 The obligations and undertakings of the parties hereto with
respect to any Bond shall be canceled upon any expiration or
termination of such Bond.
8.8 Confidentiality
The Reinsurer agrees that it will and will cause its employees,
affiliates, legal counsel, auditors, accountants and other agents to
maintain the confidentiality of each Bond, the reinsurance undertaken with
respect to each Bond, all underlying transactions and underlying
obligations and all certificates, reports, agreements, notices and
communications of any sort relating to any of the foregoing in its
communications with third parties, except (i) to the extent required by
law, regulation or order, (ii) in respect of any information that may be
generally available to the public or become available to the public
through no fault of such person and (iii) to the extent disclosed to any
rating agency then rating the Reinsurer.
<PAGE>
8.9 Amendments
The terms of this Agreement shall not be waived, amended or in any way
modified unless (i) the Reinsurer shall have obtained confirmation from
the Superintendent of Insurance of the State of New York of
non-disapproval of such waiver, amendment or modification, (ii) such
waiver, amendment or modification shall be contained in an endorsement to
this Agreement, executed by duly authorized representatives of all parties
and (iii) Standard & Poor's Ratings Services and any other rating agency
that then assigns a rating to the Company's claims paying ability or
financial strength confirms that any such amendment, modification or
waiver would not adversely affect the level of such ratings then assigned
to the Company.
8.10 Arbitration Clause
All disputes arising under or in connection with this Agreement, other
than claims for rescission or reformation of this Agreement, shall be
submitted to the American Arbitration Association under its then
prevailing commercial arbitration rules. Any party seeking arbitration
hereunder (the "Claimant") of any dispute shall initiate such arbitration
by the delivery of a written notice of demand for arbitration to the other
party (the "Respondent") within a reasonable time after the dispute has
arisen. The arbitration will be held before a panel (the "Panel") of three
(3) arbitrators in New York, New York, U.S.A. Each party shall choose one
(1) arbitrator and the two (2) party-selected arbitrators shall select a
third arbitrator who will serve as Chairman of the Panel.
If the Respondent fails to appoint its arbitrator within sixty (60) days
after being requested to do so by the Claimant, the then incumbent
Regional Director of the American Arbitration Association in New York, New
York or his delegate shall appoint the second arbitrator. If the two
arbitrators fail to agree upon the appointment of the third arbitrator
within sixty (60) days after their nominations, each of them shall name
three candidates, two of whom may be rejected by the other and the
selection of the third arbitrator from the two remaining candidates shall
be made by the then incumbent Regional Director of the American
Arbitration Association in New York, New York or his delegate.
All arbitrators will be active or retired disinterested officers of
insurance or reinsurance companies, commercial banks or other financial
institutions not under the control of, controlling, or under common
control with, either party to this Agreement, and shall be knowledgeable
about the financial guaranty insurance business and accounts receivable
financing.
The Claimant shall submit its pre-hearing brief to the Panel within forty
five (45) days from appointment of the third arbitrator. The Respondent
shall submit its brief within forty five (45) days thereafter and the
Claimant may submit a reply brief within thirty (30) days after filing of
the Respondent's brief. The periods of time may be extended by unanimous
consent in writing of the Panel. The rules and procedures for pre-hearing
investigations shall be established by the Panel.
The Panel shall make its decision giving regard to the custom and usage of
the insurance and reinsurance business. The Panel shall issue its decision
in writing based upon a hearing in which evidence may be introduced
without following the strict rules of evidence but in which
cross-examination and rebuttal shall be allowed. At such hearing, the
Reinsurer shall have the right to be represented by counsel of its own
choice. The Panel shall make its decision within sixty (60) days following
the termination of the hearings unless the parties consent to an
extension. The majority decision of the Panel, upon delivery thereof to
the parties, shall be final and binding upon all parties
<PAGE>
to the proceeding.
To the extent allowed by applicable law, any arbitral award hereunder and
any judgment thereon shall bear interest at the rate equal from time to
time to the rate publicly announced by Citibank, N.A. from time to time as
its prime rate plus two percent (2%). Any such award shall be payable in
United States Dollars in New York, New York.
To the extent any rules or procedures necessary to conduct such
arbitration are not specified by this arbitration clause, the Commercial
Arbitration Rules of the American Arbitration Association and the
Convention on Recognition and Enforcement of Foreign Arbitral Awards (June
10, 1958) shall be used as guidelines in fashioning such rules or
procedures. The Company and the Reinsurer shall each bear the expenses of
its own arbitrator and its own counsel and shall jointly bear with the
other party the expenses of the third arbitrator. The remaining costs of
the arbitration proceeding shall be allocated by the Panel.
The parties consent to the jurisdiction of the Supreme Court of the State
of New York, County of New York, and of the United States District Court
for the Southern District of New York, for all purposes in connection with
such arbitration, including without limitation any application to compel
arbitration or to confirm any arbitration award.
The parties consent that any process or notice of motion or other
application to either of said Courts, and any paper in connection with
arbitration, may be served by certified mail, return receipt requested, or
by personal service or in such other manner as may be permissible under
the rules of the applicable court or board of arbitration, provided a
reasonable time for appearances is allowed.
Such service upon the Company shall be directed to the Company, in care of
the Company's President. Such service upon the Reinsurer shall be directed
to the Reinsurer in care of its General Counsel.
8.11 Applicable Law
This Agreement shall be governed by and construed in accordance with the
laws of the French Republic.
8.12 Severability
Any provision of this Agreement that is prohibited, unenforceable or not
authorized in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition, unenforceability or
non-authorization without invalidating the remaining provisions hereof or
affecting the validity, enforceability or legality of such provision in
any other jurisdiction.
8.13 Waiver
The failure of any party to insist on strict compliance with this
Agreement, or to exercise any right or remedy hereunder, shall not
constitute a waiver of any rights contained herein nor estop the parties
from thereafter demanding full and complete compliance nor prevent the
parties from exercising such a remedy in the future.
8.14 Counterparts
<PAGE>
This Agreement may be executed simultaneously in several counterparts,
each of which shall be deemed an original and all of which together shall
constitute one and the same instrument.
8.15 Headings
The headings preceding the text of the Sections of this Agreement are
intended and inserted solely for the convenience of reference and shall
not affect the meaning, interpretation, construction or effect of this
Agreement.
/s/ Charles Jackson Lester Date: 15 May 1996
- --------------------------
Charles Jackson Lester
CapMAC Assurance SA
/s/ Ram D. Wertheim Date: 15 May 1996
- -------------------
Ram D Wertheim
Capital Markets Assurance Corporation
Exhibit 10.43
PROMISSORY NOTE
$85,000 New York, New York
January 13, 1997
1. FOR VALUE RECEIVED, the undersigned, Paul Palmer (the "Borrower") , agrees to
pay to the order of CapMAC Financial Services, Inc. (the "Lender") at 885 Third
Avenue, New York, New York 10022 or such other place as may be designated by the
Lender from time to time, in lawful money of the United States of America and in
immediately available funds, the principal amount of Eighty FiveThousand Dollars
($85,000) together with interest on the unpaid portion of such principal amount
from the date hereof until due and payable (whether at the stated maturity
thereof, by acceleration or otherwise) at the per annum rate equal to 6.90%.
2. Interest on this Note will be payable annually concurrently with the payment
of an annual bonus to the Borrower and, if no bonus is paid to the Borrower in
any calender year, then interest on this Note shall be payable by the Borrower
on the last business day of such year. The Lender (or any affiliate of the
Lender) shall be entitled to deduct from any bonus or other compensation payable
to the Borrower the amount of interest due hereon that is not paid by the
Borrower when due. Interest shall be calculated on the basis of a year of 365
days for the actual number of days elapsed.
3. The principal amount of this Note shall become payable in full on the earlier
of (i) January 13, 2002, (ii) the date of the Borrower's Termination of
Employment for reasons other than death or disability and (iii) 90 days after
the date of the Borrower's Termination of Employment due to death or disability.
As used herein, "Termination of Employment" shall mean any termination of
employment, whether voluntary or involuntary and with or without cause,
including death or permanent disability. This Note shall become due and payable
(i) within five days after notice by the Lender to the Borrower of any default
by the Borrower of the Borrower's obligations hereunder and (ii) immediately
upon the filing by or against the Borrower of any bankruptcy petition for
protection under the bankruptcy laws of United States or any state thereof.
4. The principal amount of this Note may be prepaid in whole or in part at any
time.
5. Upon the maturity of this Note (whether at the stated maturity thereof, by
acceleration or otherwise), the Lender (or any of its affiliates) shall be
entitled to apply any amounts due (including, without limitation, any severance
payments) by the Lender (or any affiliate of the Lender) to the Borrower to the
payment of any accrued and unpaid interest and any outstanding principal of this
Note and of any other Notes issued by the Borrower to the Lender under the
CapMAC Financial Services Executive Loan Program (the "Loan Program") in the
inverse order of the maturity of such Notes, and the Borrower shall be liable
for the payment of any remaining
<PAGE>
accrued interest and unpaid principal of this Note and any such other Notes.
6. The Borrower hereby agrees that as long as any amount is outstanding under
this Note, the Borrower shall (i) not pledge any of his stock in CapMAC Holdings
Inc., including any stock issuable to the Borrower upon the exercise of any
stock options ("Stock"), to secure any indebtedness or other payment obligation
and (ii) apply the proceeds of the sale of any Stock to repay the unpaid
principal amount of this Note and of any other Note issued by the Borrower under
the Loan Program, such payment to be applied to repay such Notes in the order
specified by the Borrower or, if the Borrower does not specify how such payment
is to be applied, in the inverse order of the maturity of all Notes issued by
the Borrower under the Loan Program.
7. If any payment on this Note becomes due and payable on a day other than a
business day the maturity thereof shall be extended to the next succeeding
business day, and with respect to payments of principal, interest thereon shall
be payable at the then applicable rate during such extension.
IN WITNESS WHEREOF, the Borrower has duly executed and delivered this Note to
the Lender
By: /s/ Paul Palmer
-------------------
Paul Palmer
Accepted and Agreed:
CapMAC FINANCIAL SERVICES, INC.
By: /s/ Ram D. Wertheim
--------------------------------------
Title: Managing Director and General Counsel
Exhibit 11(A)
CapMAC Holdings Inc. and Subsidiaries
Computation of Per Share Earnings
(Dollars in thousands except share data)
Twelve Months Ended
December 31
1996 1995
- --------------------------------------------------------------------------------
Modified Treasury Stock Method E.P.S. - Fully Diluted
Net income $33,568 $23,528
Savings (expense) on debt prepayment -- --
Compensation expense -- 129
Interest earned on investments -- --
- --------------------------------------------------------------------------------
Adjusted net income $33,568 $23,657
- --------------------------------------------------------------------------------
Average number of common shares outstanding 15,646 12,255
Assumed exercise of dilutive stock options 2,146 2,082
- --------------------------------------------------------------------------------
Fully diluted number of shares 17,792 14,337
- --------------------------------------------------------------------------------
Earnings per share assuming full dilution $ 1.89 $ 1.65
- --------------------------------------------------------------------------------
Common stock equivalents 4,413 4,336
Proceeds from exercise of all equivalents $75,082 $56,639
Purchase of treasury stock 2,267 2,254
Market value per share $ 33.13 $ 25.13
- --------------------------------------------------------------------------------
As of December 31, 1996 approximately 4,413,000 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 $75.1
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 $33.125 per share
on December 31, 1996. The dilution would be the equivalent of approximately
2,146,000 shares.
Exhibit 11(B)
CapMAC Holdings Inc. and Subsidiaries
Computation of Per Share Earnings
(Dollars in thousands except share data)
Twelve Months Ended
December 31
1996 1995
- --------------------------------------------------------------------------------
Modified Treasury Stock Method E.P.S. - Primary
Net income $33,568 $23,528
Savings (expense) on debt payment -- --
Compensation expense -- 129
Interest earned on investments -- --
- --------------------------------------------------------------------------------
Adjusted net income $33,568 $23,657
- --------------------------------------------------------------------------------
Average number of common shares outstanding 15,646 12,255
Assumed exercise of dilutive stock options 1,795 1,381
- --------------------------------------------------------------------------------
Fully diluted number of shares 17,441 13,636
- --------------------------------------------------------------------------------
Earnings per share assuming full dilution $ 1.92 $ 1.73
- --------------------------------------------------------------------------------
Common stock equivalents 4,413 4,336
Proceeds from exercise of all equivalents $75,082 $56,639
Purchase of treasury stock 2,618 2,956
Average market value per share $ 28.68 $ 19.16
- --------------------------------------------------------------------------------
As of December 31, 1996 approximately 4,413,000 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 $75.1
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 $28.68 per
share for twelve months ended December 31, 1996. The dilution would be the
equivalent of approximately 1,795,000 shares.
Exhibit 21
Subsidiaries of CapMAC Holdings Inc.
Capital Markets Assurance New York Capital Markets Assurance
Corporation Corporation; CapMAC
CapMAC Financial Services, Delaware CapMAC Financial Services,
Inc. Inc.
CapMAC Financial Services United Kingdom CapMAC Financial Services
(Europe) Ltd. (Europe) Ltd.
CapMAC Asia Ltd. Bermuda CapMAC Asia Ltd.
CapMAC Assurance S.A. France CapMAC Assurance S.A.
CapMAC Investment Delaware CapMAC Investment
Management, Inc. Management, Inc.
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
CapMAC Holdings Inc.:
We consent to the incorporation by reference in the registration statement (No.
333-05429) on Form S-8 of CapMAC Holdings Inc. of our reports dated January 29,
1997, relating to the consolidated balance sheets of CapMAC Holdings Inc. and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1996, and all related schedules,
which reports appears in the December 31, 1996, annual report on Form 10-K of
CapMAC Holdings Inc.
/s/ KPMG Peat Marwick LLP
New York, New York
March 24, 1997
POWER OF ATTORNEY
The undersigned, a director of CapMAC Holdings Inc. (the "Company"),
does hereby constitute and appoint each and any of John B. Caouette, Ram D.
Wertheim and Paul V. Palmer, as my true and lawful attorney and agent, with full
power of substitution and resubstitution, to do any and all acts and things in
my name and behalf in any and all capacities and to execute any and all
instruments for us in my name in any and all capacities, which attorney and
agent may deem necessary or advisable to enable the Company to comply with the
Securities Exhange Act of 1934, as amended, and any rules, regulations, and
requirements of the Securities and Exchange Commission (the "Commission"), in
connection with the filing with the Commission of a report on Form 10-K with
respect to the Company for the year ended December 31, 1996, including
specifically, but without limitation, power and authority to sign for me in my
name in my capacity as a director of the Company, including all amendments, if
any, to such report on Form 10-K; and I do hereby ratify and confirm all that
said attorney and agent, or his substitute, shall do or cause to be done by
virtue thereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 27th day of March, 1997.
/s/ Bryan A. Bowers
-------------------
Bryan A. Bowers
<PAGE>
POWER OF ATTORNEY
The undersigned, a director of CapMAC Holdings Inc. (the "Company"),
does hereby constitute and appoint each and any of John B. Caouette, Ram D.
Wertheim and Paul V. Palmer, as my true and lawful attorney and agent, with full
power of substitution and resubstitution, to do any and all acts and things in
my name and behalf in any and all capacities and to execute any and all
instruments for us in my name in any and all capacities, which attorney and
agent may deem necessary or advisable to enable the Company to comply with the
Securities Exhange Act of 1934, as amended, and any rules, regulations, and
requirements of the Securities and Exchange Commission (the "Commission"), in
connection with the filing with the Commission of a report on Form 10-K with
respect to the Company for the year ended December 31, 1997, including
specifically, but without limitation, power and authority to sign for me in my
name in my capacity as a director of the Company, including all amendments, if
any, to such report on Form 10-K; and I do hereby ratify and confirm all that
said attorney and agent, or his substitute, shall do or cause to be done by
virtue thereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 27th day of March, 1997.
/s/ Todd G. Cole
----------------
Todd G. Cole
<PAGE>
POWER OF ATTORNEY
The undersigned, a director of CapMAC Holdings Inc. (the "Company"),
does hereby constitute and appoint each and any of John B. Caouette, Ram D.
Wertheim and Paul V. Palmer, as my true and lawful attorney and agent, with full
power of substitution and resubstitution, to do any and all acts and things in
my name and behalf in any and all capacities and to execute any and all
instruments for us in my name in any and all capacities, which attorney and
agent may deem necessary or advisable to enable the Company to comply with the
Securities Exhange Act of 1934, as amended, and any rules, regulations, and
requirements of the Securities and Exchange Commission (the "Commission"), in
connection with the filing with the Commission of a report on Form 10-K with
respect to the Company for the year ended December 31, 1996, including
specifically, but without limitation, power and authority to sign for me in my
name in my capacity as a director of the Company, including all amendments, if
any, to such report on Form 10-K; and I do hereby ratify and confirm all that
said attorney and agent, or his substitute, shall do or cause to be done by
virtue thereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 27th day of March, 1997.
/s/ Charles P. Durkin, Jr.
--------------------------
Charles P. Durkin, Jr.
<PAGE>
POWER OF ATTORNEY
The undersigned, a director of CapMAC Holdings Inc. (the "Company"),
does hereby constitute and appoint each and any of John B. Caouette, Ram D.
Wertheim and Paul V. Palmer, as my true and lawful attorney and agent, with full
power of substitution and resubstitution, to do any and all acts and things in
my name and behalf in any and all capacities and to execute any and all
instruments for us in my name in any and all capacities, which attorney and
agent may deem necessary or advisable to enable the Company to comply with the
Securities Exhange Act of 1934, as amended, and any rules, regulations, and
requirements of the Securities and Exchange Commission (the "Commission"), in
connection with the filing with the Commission of a report on Form 10-K with
respect to the Company for the year ended December 31, 1996, including
specifically, but without limitation, power and authority to sign for me in my
name in my capacity as a director of the Company, including all amendments, if
any, to such report on Form 10-K; and I do hereby ratify and confirm all that
said attorney and agent, or his substitute, shall do or cause to be done by
virtue thereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 27th day of March, 1997.
/s/ David Elliman
-----------------
David Elliman
<PAGE>
POWER OF ATTORNEY
The undersigned, a director of CapMAC Holdings Inc. (the "Company"),
does hereby constitute and appoint each and any of John B. Caouette, Ram D.
Wertheim and Paul V. Palmer, as my true and lawful attorney and agent, with full
power of substitution and resubstitution, to do any and all acts and things in
my name and behalf in any and all capacities and to execute any and all
instruments for us in my name in any and all capacities, which attorney and
agent may deem necessary or advisable to enable the Company to comply with the
Securities Exhange Act of 1934, as amended, and any rules, regulations, and
requirements of the Securities and Exchange Commission (the "Commission"), in
connection with the filing with the Commission of a report on Form 10-K with
respect to the Company for the year ended December 31, 1996, including
specifically, but without limitation, power and authority to sign for me in my
name in my capacity as a director of the Company, including all amendments, if
any, to such report on Form 10-K; and I do hereby ratify and confirm all that
said attorney and agent, or his substitute, shall do or cause to be done by
virtue thereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 27th day of March, 1997.
/s/ Stephen L. Green
--------------------
Stephen L. Green
<PAGE>
POWER OF ATTORNEY
The undersigned, a director of CapMAC Holdings Inc. (the "Company"),
does hereby constitute and appoint each and any of John B. Caouette, Ram D.
Wertheim and Paul V. Palmer, as my true and lawful attorney and agent, with full
power of substitution and resubstitution, to do any and all acts and things in
my name and behalf in any and all capacities and to execute any and all
instruments for us in my name in any and all capacities, which attorney and
agent may deem necessary or advisable to enable the Company to comply with the
Securities Exhange Act of 1934, as amended, and any rules, regulations, and
requirements of the Securities and Exchange Commission (the "Commission"), in
connection with the filing with the Commission of a report on Form 10-K with
respect to the Company for the year ended December 31, 1996, including
specifically, but without limitation, power and authority to sign for me in my
name in my capacity as a director of the Company, including all amendments, if
any, to such report on Form 10-K; and I do hereby ratify and confirm all that
said attorney and agent, or his substitute, shall do or cause to be done by
virtue thereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 27th day of March, 1997.
/s/ Michael J. Horgan
---------------------
Michael J. Horgan
<PAGE>
POWER OF ATTORNEY
The undersigned, a director of CapMAC Holdings Inc. (the "Company"),
does hereby constitute and appoint each and any of John B. Caouette, Ram D.
Wertheim and Paul V. Palmer, as my true and lawful attorney and agent, with full
power of substitution and resubstitution, to do any and all acts and things in
my name and behalf in any and all capacities and to execute any and all
instruments for us in my name in any and all capacities, which attorney and
agent may deem necessary or advisable to enable the Company to comply with the
Securities Exhange Act of 1934, as amended, and any rules, regulations, and
requirements of the Securities and Exchange Commission (the "Commission"), in
connection with the filing with the Commission of a report on Form 10-K with
respect to the Company for the year ended December 31, 1996, including
specifically, but without limitation, power and authority to sign for me in my
name in my capacity as a director of the Company, including all amendments, if
any, to such report on Form 10-K; and I do hereby ratify and confirm all that
said attorney and agent, or his substitute, shall do or cause to be done by
virtue thereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 27th day of March, 1997.
/s/ George Merritt Jenkins
--------------------------
George Merritt Jenkins
<PAGE>
POWER OF ATTORNEY
The undersigned, a director of CapMAC Holdings Inc. (the "Company"),
does hereby constitute and appoint each and any of John B. Caouette, Ram D.
Wertheim and Paul V. Palmer, as my true and lawful attorney and agent, with full
power of substitution and resubstitution, to do any and all acts and things in
my name and behalf in any and all capacities and to execute any and all
instruments for us in my name in any and all capacities, which attorney and
agent may deem necessary or advisable to enable the Company to comply with the
Securities Exhange Act of 1934, as amended, and any rules, regulations, and
requirements of the Securities and Exchange Commission (the "Commission"), in
connection with the filing with the Commission of a report on Form 10-K with
respect to the Company for the year ended December 31, 1996, including
specifically, but without limitation, power and authority to sign for me in my
name in my capacity as a director of the Company, including all amendments, if
any, to such report on Form 10-K; and I do hereby ratify and confirm all that
said attorney and agent, or his substitute, shall do or cause to be done by
virtue thereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 27th day of March, 1997.
/s/ James H. Laird
--------------------------
James H. Laird
<PAGE>
POWER OF ATTORNEY
The undersigned, a director of CapMAC Holdings Inc. (the "Company"),
does hereby constitute and appoint each and any of John B. Caouette, Ram D.
Wertheim and Paul V. Palmer, as my true and lawful attorney and agent, with full
power of substitution and resubstitution, to do any and all acts and things in
my name and behalf in any and all capacities and to execute any and all
instruments for us in my name in any and all capacities, which attorney and
agent may deem necessary or advisable to enable the Company to comply with the
Securities Exhange Act of 1934, as amended, and any rules, regulations, and
requirements of the Securities and Exchange Commission (the "Commission"), in
connection with the filing with the Commission of a report on Form 10-K with
respect to the Company for the year ended December 31, 1996, including
specifically, but without limitation, power and authority to sign for me in my
name in my capacity as a director of the Company, including all amendments, if
any, to such report on Form 10-K; and I do hereby ratify and confirm all that
said attorney and agent, or his substitute, shall do or cause to be done by
virtue thereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this __th day of March, 1997.
______________________________
Dr. Rosita Leong, M.D.
<PAGE>
POWER OF ATTORNEY
The undersigned, a director of CapMAC Holdings Inc. (the "Company"),
does hereby constitute and appoint each and any of John B. Caouette, Ram D.
Wertheim and Paul V. Palmer, as my true and lawful attorney and agent, with full
power of substitution and resubstitution, to do any and all acts and things in
my name and behalf in any and all capacities and to execute any and all
instruments for us in my name in any and all capacities, which attorney and
agent may deem necessary or advisable to enable the Company to comply with the
Securities Exhange Act of 1934, as amended, and any rules, regulations, and
requirements of the Securities and Exchange Commission (the "Commission"), in
connection with the filing with the Commission of a report on Form 10-K with
respect to the Company for the year ended December 31, 1996, including
specifically, but without limitation, power and authority to sign for me in my
name in my capacity as a director of the Company, including all amendments, if
any, to such report on Form 10-K; and I do hereby ratify and confirm all that
said attorney and agent, or his substitute, shall do or cause to be done by
virtue thereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 27th day of March, 1997.
/s/ Robert Model
----------------
Robert Model
<PAGE>
POWER OF ATTORNEY
The undersigned, a director of CapMAC Holdings Inc. (the "Company"),
does hereby constitute and appoint each and any of John B. Caouette, Ram D.
Wertheim and Paul V. Palmer, as my true and lawful attorney and agent, with full
power of substitution and resubstitution, to do any and all acts and things in
my name and behalf in any and all capacities and to execute any and all
instruments for us in my name in any and all capacities, which attorney and
agent may deem necessary or advisable to enable the Company to comply with the
Securities Exhange Act of 1934, as amended, and any rules, regulations, and
requirements of the Securities and Exchange Commission (the "Commission"), in
connection with the filing with the Commission of a report on Form 10-K with
respect to the Company for the year ended December 31, 1996, including
specifically, but without limitation, power and authority to sign for me in my
name in my capacity as a director of the Company, including all amendments, if
any, to such report on Form 10-K; and I do hereby ratify and confirm all that
said attorney and agent, or his substitute, shall do or cause to be done by
virtue thereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 27th day of March, 1997.
/s/ Lief H. Olsen
-----------------
Lief H. Olsen
<PAGE>
POWER OF ATTORNEY
The undersigned, a director of CapMAC Holdings Inc. (the "Company"),
does hereby constitute and appoint each and any of John B. Caouette, Ram D.
Wertheim and Paul V. Palmer, as my true and lawful attorney and agent, with full
power of substitution and resubstitution, to do any and all acts and things in
my name and behalf in any and all capacities and to execute any and all
instruments for us in my name in any and all capacities, which attorney and
agent may deem necessary or advisable to enable the Company to comply with the
Securities Exhange Act of 1934, as amended, and any rules, regulations, and
requirements of the Securities and Exchange Commission (the "Commission"), in
connection with the filing with the Commission of a report on Form 10-K with
respect to the Company for the year ended December 31, 1996, including
specifically, but without limitation, power and authority to sign for me in my
name in my capacity as a director of the Company, including all amendments, if
any, to such report on Form 10-K; and I do hereby ratify and confirm all that
said attorney and agent, or his substitute, shall do or cause to be done by
virtue thereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 27th day of March, 1997.
/s/ Arthur S. Penn
------------------
Arthur S. Penn
<PAGE>
POWER OF ATTORNEY
The undersigned, a director of CapMAC Holdings Inc. (the "Company"),
does hereby constitute and appoint each and any of John B. Caouette, Ram D.
Wertheim and Paul V. Palmer, as my true and lawful attorney and agent, with full
power of substitution and resubstitution, to do any and all acts and things in
my name and behalf in any and all capacities and to execute any and all
instruments for us in my name in any and all capacities, which attorney and
agent may deem necessary or advisable to enable the Company to comply with the
Securities Exhange Act of 1934, as amended, and any rules, regulations, and
requirements of the Securities and Exchange Commission (the "Commission"), in
connection with the filing with the Commission of a report on Form 10-K with
respect to the Company for the year ended December 31, 1996, including
specifically, but without limitation, power and authority to sign for me in my
name in my capacity as a director of the Company, including all amendments, if
any, to such report on Form 10-K; and I do hereby ratify and confirm all that
said attorney and agent, or his substitute, shall do or cause to be done by
virtue thereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 27th day of March, 1997.
/s/ Homer Mck. Rees
-------------------
Homer McK. Rees
<PAGE>
POWER OF ATTORNEY
The undersigned, a director of CapMAC Holdings Inc. (the "Company"),
does hereby constitute and appoint each and any of John B. Caouette, Ram D.
Wertheim and Paul V. Palmer, as my true and lawful attorney and agent, with full
power of substitution and resubstitution, to do any and all acts and things in
my name and behalf in any and all capacities and to execute any and all
instruments for us in my name in any and all capacities, which attorney and
agent may deem necessary or advisable to enable the Company to comply with the
Securities Exhange Act of 1934, as amended, and any rules, regulations, and
requirements of the Securities and Exchange Commission (the "Commission"), in
connection with the filing with the Commission of a report on Form 10-K with
respect to the Company for the year ended December 31, 1996, including
specifically, but without limitation, power and authority to sign for me in my
name in my capacity as a director of the Company, including all amendments, if
any, to such report on Form 10-K; and I do hereby ratify and confirm all that
said attorney and agent, or his substitute, shall do or cause to be done by
virtue thereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 27th day of March, 1997.
/s/ Doren W. Russler
--------------------
Doren W. Russler
<PAGE>
POWER OF ATTORNEY
The undersigned, a director of CapMAC Holdings Inc. (the "Company"),
does hereby constitute and appoint each and any of John B. Caouette, Ram D.
Wertheim and Paul V. Palmer, as my true and lawful attorney and agent, with full
power of substitution and resubstitution, to do any and all acts and things in
my name and behalf in any and all capacities and to execute any and all
instruments for us in my name in any and all capacities, which attorney and
agent may deem necessary or advisable to enable the Company to comply with the
Securities Exhange Act of 1934, as amended, and any rules, regulations, and
requirements of the Securities and Exchange Commission (the "Commission"), in
connection with the filing with the Commission of a report on Form 10-K with
respect to the Company for the year ended December 31, 1996, including
specifically, but without limitation, power and authority to sign for me in my
name in my capacity as a director of the Company, including all amendments, if
any, to such report on Form 10-K; and I do hereby ratify and confirm all that
said attorney and agent, or his substitute, shall do or cause to be done by
virtue thereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 27th day of March, 1997.
/s/ Akira Seko
--------------
Akira Seko
<PAGE>
POWER OF ATTORNEY
The undersigned, a director of CapMAC Holdings Inc. (the "Company"),
does hereby constitute and appoint each and any of John B. Caouette, Ram D.
Wertheim and Paul V. Palmer, as my true and lawful attorney and agent, with full
power of substitution and resubstitution, to do any and all acts and things in
my name and behalf in any and all capacities and to execute any and all
instruments for us in my name in any and all capacities, which attorney and
agent may deem necessary or advisable to enable the Company to comply with the
Securities Exhange Act of 1934, as amended, and any rules, regulations, and
requirements of the Securities and Exchange Commission (the "Commission"), in
connection with the filing with the Commission of a report on Form 10-K with
respect to the Company for the year ended December 31, 1996, including
specifically, but without limitation, power and authority to sign for me in my
name in my capacity as a director of the Company, including all amendments, if
any, to such report on Form 10-K; and I do hereby ratify and confirm all that
said attorney and agent, or his substitute, shall do or cause to be done by
virtue thereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this 27th day of March, 1997.
/s/ John T. Shea
----------------
John T. Shea
<PAGE>
POWER OF ATTORNEY
The undersigned, a director of CapMAC Holdings Inc. (the "Company"),
does hereby constitute and appoint each and any of John B. Caouette, Ram D.
Wertheim and Paul V. Palmer, as my true and lawful attorney and agent, with full
power of substitution and resubstitution, to do any and all acts and things in
my name and behalf in any and all capacities and to execute any and all
instruments for us in my name in any and all capacities, which attorney and
agent may deem necessary or advisable to enable the Company to comply with the
Securities Exhange Act of 1934, as amended, and any rules, regulations, and
requirements of the Securities and Exchange Commission (the "Commission"), in
connection with the filing with the Commission of a report on Form 10-K with
respect to the Company for the year ended December 31, 1996, including
specifically, but without limitation, power and authority to sign for me in my
name in my capacity as a director of the Company, including all amendments, if
any, to such report on Form 10-K; and I do hereby ratify and confirm all that
said attorney and agent, or his substitute, shall do or cause to be done by
virtue thereof.
IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney
to be executed as of this __th day of March, 1997.
______________________
Richard Yancey
CAPITAL MARKETS ASSURANCE CORPORATION
FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 and 1994
(With Independent Auditors' Report Thereon)
<PAGE>
Independent Auditors' Report
The Board of Directors
Capital Markets Assurance Corporation:
We have audited the accompanying balance sheets of Capital Markets Assurance
Corporation as of December 31, 1996 and 1995 and the related statements of
income, stockholder's equity and cash flows for each of the years in the
three-year period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Capital Markets Assurance
Corporation as of December 31, 1996 and 1995 and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 1996 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
January 29, 1997
<PAGE>
Capital Markets Assurance Corporation
Balance Sheets
(Dollars in thousands, except per share data)
ASSETS
December 31 December 31
1996 1995
- --------------------------------------------------------------------------------
Investments:
Bonds at fair value (amortized cost $294,861 at
December 31, 1996 and $210,651 at December 31, 1995) $297,893 215,706
Short-term investments (at amortized cost which
approximates fair value) 16,810 68,646
- --------------------------------------------------------------------------------
Total investments 314,703 284,352
- --------------------------------------------------------------------------------
Cash 371 344
Accrued investment income 3,807 3,136
Deferred acquisition costs 45,380 35,162
Premiums receivable 5,141 3,540
Prepaid reinsurance 18,489 13,171
Other assets 6,424 3,428
- --------------------------------------------------------------------------------
Total assets $394,315 343,133
================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums $ 68,262 45,767
Reserve for losses and loss adjustment expenses 10,985 6,548
Ceded reinsurance 1,738 2,469
Accounts payable and other accrued expenses 8,019 10,844
Current income taxes 679 136
Deferred income taxes 15,139 11,303
- --------------------------------------------------------------------------------
Total liabilities 104,822 77,067
- --------------------------------------------------------------------------------
Stockholder's Equity:
Common stock - $1.00 par value per share; 15,000,000
shares are authorized, issued and outstanding at
December 31, 1996 and 1995 15,000 15,000
Additional paid-in capital 208,475 205,808
Unrealized appreciation on investments, net of tax 1,970 3,286
Retained earnings 64,048 41,972
- --------------------------------------------------------------------------------
Total stockholder's equity 289,493 266,066
- --------------------------------------------------------------------------------
Total liabilities and stockholder's equity $394,315 343,133
================================================================================
See accompanying notes to financial statements.
<PAGE>
Capital Markets Assurance Corporation
Statements of Income
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31,1995 December 31, 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Direct premiums written $ 71,752 56,541 43,598
Assumed premiums written 1,086 935 1,064
Ceded premiums written (15,104) (15,992) (11,069)
- ---------------------------------------------------------------------------------------------
Net premiums written 57,734 41,484 33,593
Increase in unearned premiums (17,177) (12,242) (10,490)
- ---------------------------------------------------------------------------------------------
Net premiums earned 40,557 29,242 23,103
Net investment income 16,992 11,953 10,072
Net realized capital gains 236 1,301 92
Other income 146 2,273 120
- ---------------------------------------------------------------------------------------------
Total revenues 57,931 44,769 33,387
- ---------------------------------------------------------------------------------------------
Expenses:
Losses and loss adjustment expenses 4,815 3,141 1,429
Underwriting and operating expenses 14,613 13,808 11,833
Policy acquisition costs 7,824 7,203 4,529
- ---------------------------------------------------------------------------------------------
Total expenses 27,252 24,152 17,791
- ---------------------------------------------------------------------------------------------
Income before income taxes 30,679 20,617 15,596
- ---------------------------------------------------------------------------------------------
Income Taxes:
Current income tax 5,235 2,113 865
Deferred income tax 3,368 3,102 2,843
- ---------------------------------------------------------------------------------------------
Total income taxes 8,603 5,215 3,708
- ---------------------------------------------------------------------------------------------
Net Income $ 22,076 15,402 11,888
=============================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Capital Markets Assurance Corporation
Statements of Stockholder's Equity
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31,1996 December 31, 1995 December 31, 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common stock:
Balance at beginning of year $ 15,000 15,000 15,000
- ---------------------------------------------------------------------------------------------
Balance at end of year 15,000 15,000 15,000
- ---------------------------------------------------------------------------------------------
Additional paid-in capital:
Balance at beginning of year 205,808 146,808 146,808
Capital contribution 2,667 59,000 --
- ---------------------------------------------------------------------------------------------
Balance at end of year 208,475 205,808 146,808
- ---------------------------------------------------------------------------------------------
Unrealized appreciation (depreciation)
on investments, net of tax:
Balance at beginning of year 3,286 (5,499) 3,600
Unrealized appreciation (depreciation)
on investments (1,316) 8,785 (9,099)
- ---------------------------------------------------------------------------------------------
Balance at end of year 1,970 3,286 (5,499)
- ---------------------------------------------------------------------------------------------
Retained earnings:
Balance at beginning of year 41,972 26,570 14,682
Net income 22,076 15,402 11,888
- ---------------------------------------------------------------------------------------------
Balance at end of year 64,048 41,972 26,570
- ---------------------------------------------------------------------------------------------
Total stockholder's equity $ 289,493 266,066 182,879
=============================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Capital Markets Assurance Corporation
Statements of Cash Flows
(Dollar in thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 22,076 15,402 11,888
- ---------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Reserve for losses and loss adjustment
expenses 4,437 1,357 1,429
Unearned premiums, net 22,496 19,862 15,843
Deferred acquisition costs (10,218) (10,302) (9,611)
Premiums receivable (1,601) (161) (2,103)
Accrued investment income (671) (390) (848)
Income taxes payable 3,911 3,621 2,611
Net realized capital gains (236) (1,301) (92)
Accounts payable and other accrued
expenses 1,020 472 3,726
Prepaid reinsurance (5,318) (7,620) (5,352)
Other, net (3,396) 992 689
- ---------------------------------------------------------------------------------------------------------
Total adjustments 10,424 6,530 6,292
- ---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 32,500 21,932 18,180
- ---------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of investments (199,989) (158,830) (77,980)
Proceeds from sales of investments 57,210 49,354 39,967
Proceeds from maturities of investments 110,306 28,803 19,665
- ---------------------------------------------------------------------------------------------------------
Net cash used in investing activities (32,473) (80,673) (18,348)
- ---------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Capital contribution -- 59,000 --
- ---------------------------------------------------------------------------------------------------------
Net cash provided by financing activities -- 59,000 --
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 27 259 (168)
Cash balance at beginning of year 344 85 253
- ---------------------------------------------------------------------------------------------------------
Cash balance at end of year $ 371 344 85
=========================================================================================================
Supplemental disclosure of cash flow
information:
Income taxes paid $ 4,525 1,450 1,063
=========================================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
December 31, 1996 and 1995
1) Background
Capital Markets Assurance Corporation ("CapMAC" or "the Company") is a
New York-domiciled monoline stock insurance company which engages only
in the business of financial guarantee and surety insurance. CapMAC is
a wholly owned subsidiary of CapMAC Holdings Inc. ("Holdings"). CapMAC
is licensed in all 50 states in addition to the District of Columbia,
the Commonwealth of Puerto Rico and the territory of Guam. CapMAC
insures structured asset-backed, corporate, municipal and other
financial obligations in the U.S. and international capital markets.
CapMAC also provides financial guarantee reinsurance for structured
asset-backed, corporate, municipal and other financial obligations
written by other major insurance companies.
CapMAC's claims-paying ability is rated "Aaa" by Moody's Investors
Service, Inc. ("Moody's"), "AAA" by Standard & Poor's Ratings Group
("S&P"), "AAA" by Duff & Phelps Credit Rating Co. ("Duff & Phelps"),
and "AAA" by 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) Significant Accounting Policies
Significant accounting policies used in the preparation of the
accompanying financial statements are as follows:
a) Basis of Presentation
The accompanying financial statements are prepared on the
basis of generally accepted accounting principles ("GAAP").
Such accounting principles differ from statutory reporting
practices used by insurance companies in reporting to state
regulatory authorities.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Management believes the most
significant estimates relate to deferred acquisition costs,
reserve for losses and loss adjustment expenses and
disclosures of financial guarantees outstanding. Actual
results could differ from those estimates.
b) Investments
As of December 31, 1996 and 1995, all of the Company's
securities have been classified as available-for-sale.
Available-for-sale securities are recorded at fair value. Fair
value is generally based upon quoted market prices. Unrealized
holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and
are reported as a separate component of stockholder's equity
until realized. Transfers of securities between categories are
recorded at fair value at the date of transfer. A decline in
the fair value of any available-for-sale security below cost
that is deemed other than temporary is charged to earnings
resulting in the establishment of a new cost basis for the
security.
1
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
Short-term investments are those investments having a maturity
of less than one year at purchase date. Short-term investments
are carried at amortized cost which approximates fair value.
Premiums and discounts are amortized or accreted over the life
of the related security as an adjustment to yield using the
effective interest method. Dividend and interest income are
recognized when earned. Realized gains and losses are included
in earnings and are derived using the FIFO (first-in,
first-out) method for determining the cost of securities sold.
c) Premium Revenue Recognition
Premiums which are payable monthly to CapMAC are reflected in
income when due, net of amounts payable to reinsurers.
Premiums which are payable quarterly, semi-annually or
annually are reflected in income, net of amounts payable to
reinsurers, on an equal monthly basis over the corresponding
policy term. Premiums that are collected as a single premium
at the inception of the policy and have a term longer than one
year are earned, net of amounts payable to reinsurers, by
allocating premium to each bond maturity based on the
principal amount and earning it straight-line over the term of
each bond maturity. For the years ended December 31, 1996 and
1995, 91% of net premiums earned were attributable to premiums
payable in installments and 9% were attributable to premiums
collected on an up-front basis.
d) Deferred Acquisition Costs
Certain costs incurred by CapMAC, which vary with and are
primarily related to the production of new business, are
deferred. These costs include direct and indirect expenses
related to underwriting, marketing and policy issuance, rating
agency fees and premium taxes, net of reinsurance ceding
commissions. The deferred acquisition costs are amortized over
the period in proportion to the related premium earnings. The
actual amount of premium earnings may differ from projections
due to various factors such as renewal or early termination of
insurance contracts or different run-off patterns of exposure
resulting in a corresponding change in the amortization
pattern of the deferred acquisition costs.
e) Reserve for Losses and Loss Adjustment Expenses
The reserve for losses and loss adjustment expenses consists
of a supplemental loss reserve ("SLR") and a case basis loss
reserve. The SLR is established for expected levels of losses
resulting from credit failures on currently insured issues and
reflects the estimated portion of earned premiums required to
cover those losses.
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. Case
basis loss reserves may be allocated from any SLR outstanding
at the time the case basis reserves are established.
2
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
Management believes that the current level of reserves is
adequate to cover the ultimate net cost of claims and the
related expenses with respect to financial guarantees issued
by CapMAC. The establishment of the appropriate level of loss
reserves is an inherently uncertain process involving
estimates and subjective judgments by management, and
therefore there can be no assurance that ultimate losses in
CapMAC's insured portfolio will not exceed the current
estimate of loss reserves.
f) Depreciation
Leasehold improvements, furniture, fixtures and electronic
data processing equipment are being amortized or depreciated
over the lease term or useful life, whichever is shorter,
using the straight-line method.
g) Income Taxes
Deferred income taxes are provided with respect to temporary
differences between the financial statement and tax basis of
assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse. The
effect on deferred tax assets and liabilities of a change in
tax rates is recognized in the period that includes the
enactment date.
3
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
3) Insured Portfolio
At December 31, 1996 and 1995, the principal amount of financial
obligations insured by CapMAC was $24.5 billion and $16.9 billion,
respectively, and net of reinsurance (net principal outstanding), was
$19.7 billion and $12.6 billion, respectively, with a weighted average
life of 6.4 years and 6.0 years, respectively. CapMAC's insured
portfolio was broadly diversified by geographic distribution and type
of insured obligations, with no single insured obligation in excess of
statutory single risk limits, after giving effect to any reinsurance
and collateral, which are a function of CapMAC's statutory qualified
capital (the sum of statutory capital and surplus and mandatory
contingency reserve). At December 31, 1996 and 1995, the statutory
qualified capital was approximately $260 million and $240 million,
respectively.
Net Principal Outstanding
December 31, 1996 December 31, 1995
----------------- -----------------
Type of Obligations Insured Amount % Amount %
($ in millions)
- --------------------------------------------------------------------------------
Consumer receivables $ 10,362 52.8 $ 6,959 55.1
Trade and other corporate
obligations 8,479 43.1 4,912 38.9
Municipal/government obligations 814 4.1 757 6.0
- --------------------------------------------------------------------------------
Total $ 19,655 100.0 $ 12,628 100.0
================================================================================
At December 31, 1996 and 1995, the principal and interest amount of
financial obligations insured by CapMAC was $29.8 billion and $20.3
billion, respectively, and net of reinsurance (net principal and
interest outstanding) was $23.3 billion and $15.1 billion,
respectively. At December 31, 1996, approximately 93% of CapMAC's
insured portfolio was comprised of structured asset-backed
transactions. Under these structures, a pool of assets covering at
least 100% of the principal amount guaranteed under its insurance
contract is sold or pledged to a special purpose bankruptcy remote
entity. CapMAC's primary risk from such insurance contracts is the
impairment of cash flows due to delinquency or loss on the underlying
assets. CapMAC, therefore, evaluates all the factors affecting past and
future asset performance by studying historical data on losses,
delinquencies and recoveries of the underlying assets. Each transaction
is reviewed to ensure that an appropriate legal structure is used to
protect against the bankruptcy risk of the originator of the assets.
Along with the legal structure, an additional level of first loss
protection is also created to protect against losses due to credit or
dilution. This first level of loss protection is usually available from
reserve funds, excess cash flows, overcollateralization, or recourse to
a third party. The level of first loss protection depends upon the
historical losses and dilution of the underlying assets, but is
typically several times the normal historical loss experience for the
underlying type of assets.
During 1995, the Company sold without recourse its interest in
potential cash flows from transactions included in its insured
portfolio and recognized $2,200,000 of income which has been included
in other income in the accompanying financial statements.
The following entities each accounted for, through referrals and
otherwise, 10% or more of total revenues for each of the periods
presented:
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
-------------------- -------------------- --------------------
% of % of % of
Revenues Revenues Revenues
-------------------- -------------------- --------------------
Citicorp 14.5 15.2 16.3
4
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
4) Investments
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair value for available-for-sale securities by major
security type at December 31, 1996 and 1995 were as follows ($ in
thousands):
<TABLE>
<CAPTION>
December 31, 1996
- ----------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available-for-sale Cost Gains Losses Value
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury obligations $ 4,059 10 - 4,069
Mortgage-backed securities of
U.S. government instrumentalities
and agencies 109,436 265 1,160 108,541
Obligations of states, municipalities
and political subdivisions 177,811 4,602 555 181,858
Corporate and asset-backed
securities 20,365 23 153 20,235
- ----------------------------------------------------------------------------------------
Total $311,671 4,900 1,868 314,703
========================================================================================
December 31, 1995
- ----------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available-for-sale Cost Gains Losses Value
- ----------------------------------------------------------------------------------------
U.S. Treasury obligations $ 4,153 55 - 4,208
Mortgage-backed securities of
U.S. government instrumentalities
and agencies 100,628 313 79 100,862
Obligations of states, municipalities
and political subdivisions 166,010 4,809 82 170,737
Corporate and asset-backed
securities 8,506 45 6 8,545
- ----------------------------------------------------------------------------------------
Total $279,297 5,222 167 284,352
========================================================================================
</TABLE>
5
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
The amortized cost and estimated fair value of investments in debt
securities at December 31, 1996 by contractual maturity are shown below
($ in thousands):
December 31, 1996
- --------------------------------------------------------------------------------
Amortized Estimated
Securities Available-for-sale Cost Fair Value
- --------------------------------------------------------------------------------
Due in one year or less $ 11,627 11,644
Due after one year through five years 31,821 32,815
Due after five years through ten years 76,450 78,200
Due after ten years 82,337 83,503
- --------------------------------------------------------------------------------
Sub-total 202,235 206,162
Mortgage-backed securities 109,436 108,541
- --------------------------------------------------------------------------------
Total $ 311,671 314,703
================================================================================
Actual maturities may differ from contractual maturities because
borrowers may call or prepay obligations with or without call or
prepayment penalties.
Proceeds from sales of investment securities were approximately $57.2
million, $49.3 million and $39.9 million in 1996, 1995 and 1994,
respectively. Gross realized capital gains of $772,000, $1,320,000 and
$714,000, and gross realized capital losses of $536,000, $19,000 and
$622,000 were realized on those sales for the years ended December 31,
1996, 1995 and 1994, respectively.
Investments include bonds having a fair value of approximately
$3,884,000 and $3,985,000 which are on deposit at December 31, 1996 and
1995, respectively, with state regulators as required by law.
Investment income is comprised of interest and dividends, net of
related expenses, and is applicable to the following sources:
Year Ended Year Ended Year Ended
$ in thousands December 31, 1996 December 31, 1995 December 31, 1994
- -------------------------------------------------------------------------------
Bonds $ 15,726 11,105 9,193
Short-term investments 1,534 1,245 484
Mutual funds - (162) 579
Investment expenses (268) (235) (184)
- -------------------------------------------------------------------------------
Total $ 16,992 11,953 10,072
===============================================================================
6
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
The change in unrealized appreciation (depreciation) on
available-for-sale securities is included as a separate component of
stockholder's equity as shown below:
Year Ended Year Ended
$ in thousands December 31, 1996 December 31, 1995
- -------------------------------------------------------------------------------
Balance at beginning of year $ 3,286 (5,499)
Change in unrealized
(depreciation) appreciation (2,024) 13,386
Income tax effect 708 (4,601)
- --------------------------------------------------------------------------------
Net change (1,316) 8,785
- -------------------------------------------------------------------------------
Balance at end of year $ 1,970 3,286
===============================================================================
No single issuer, except for investments in U.S. Treasury and U.S.
government agency securities, exceeds 2% of stockholder's equity as of
December 31, 1996 and 1995, respectively.
5) Deferred Acquisition Costs
The following table reflects acquisition costs deferred by CapMAC and
amortized in proportion to the related premium earnings:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
$ in thousands December 31, 1996 December 31, 1995 December 31, 1994
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $35,162 24,860 15,249
Additions 18,042 17,505 14,140
Amortization (policy
acquisition costs) (7,824) (7,203) (4,529)
- ------------------------------------------------------------------------------------
Balance at end of year $45,380 35,162 24,860
====================================================================================
</TABLE>
6) Employee Benefits
CapMAC has a service agreement with CapMAC Financial Services, Inc.
("CFS"). Under the service agreement, CFS has agreed to provide various
services, including underwriting, reinsurance, marketing, data
processing and other services to CapMAC in connection with the
operation of CapMAC's insurance business. CapMAC pays CFS a fee for
providing such services, but not in excess of CFS's cost for such
services. CFS incurred, on behalf of CapMAC, total compensation
expenses, excluding bonuses, of $13,374,000, $13,484,000 and
$11,081,000 in 1996, 1995 and 1994, respectively.
The Company, through CFS, maintains an incentive compensation plan for
its employees. The plan is an annual discretionary bonus award. For the
years ended December 31, 1996, 1995 and 1994, the Company had provided
approximately $8,810,000, $7,804,000 and $5,253,000, respectively, for
the plan. CFS also provides health and welfare benefits to
substantially all of its employees. The Company incurred $551,943,
$598,530, and $562,508 of expense for the years ended December 31,
1996, 1995 and 1994, respectively, for such plan. The Company also has
a defined contribution retirement plan which allows participants to
make voluntary contributions by salary reduction pursuant to section
401 (k) of the Internal Revenue Code. The Company provides for the
administrative cost for the 401 (k) plan.
7
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
On June 25, 1992, certain officers of CapMAC were granted 182,633
restricted stock units ("RSU") at $13.33 a share in respect of certain
deferred compensation. On December 7, 1995, the RSU's were converted to
cash in the amount of approximately $3.7 million, and such officers
agreed to defer receipt of such cash amount in exchange for receiving
the same number of new shares of restricted stock of Holdings as the
number of RSU's such officers previously held. During 1995 and 1994,
the expense was $1.3 million and $0.1 million, respectively. During
1996, Holdings assumed the liability of $3.7 million less the related
deferred tax asset of $1.1 million as capital contribution. The cash
amount is held by Holdings and invested in accordance with certain
guidelines. Such amount, including the investment earnings thereon,
will be paid to each officer upon the occurrence of certain events but
no later than December 2000.
7) Employee Stock Ownership Plan
Holdings maintains an Employee Stock Ownership Plan ("ESOP") to provide
its employees the opportunity to obtain beneficial interests in the
stock of Holdings through a trust (the "ESOP Trust"). Compensation
expense related to the ESOP and allocated to CapMAC was approximately
$2,764,000, $2,087,000 and $2,086,000 for the years ended December 31,
1996, 1995 and 1994, respectively.
8
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
8) Reserve for Losses and Loss Adjustment Expenses
The reserve for losses and loss adjustment expenses consists of a case
basis loss reserve and the SLR.
In 1995, CapMAC incurred its first claim on a financial guarantee
policy. Based on its current estimate, the Company expects the
aggregate amount of claims and related expenses not to exceed $2.7
million, although no assurance can be given that such claims and
related expenses will not exceed that amount. Such loss amount was
covered through a recovery under a quota share reinsurance agreement of
$0.2 million and a reduction in the SLR of $2.5 million. The portion of
such claims and expenses not covered under the quota share agreement is
being funded through payments to CapMAC from the Lureco Trust Account
(see note 12).
The following is a summary of the activity in the case basis loss
reserve account and the components of the reserve for losses and loss
adjustment expenses ($ in thousands):
1996 1995 1994
- --------------------------------------------------------------------------------
Case basis loss reserve:
Net balance at January 1 $ 620 - -
- --------------------------------------------------------------------------------
Incurred related to:
Current year - 2,473 -
Prior years - - -
- --------------------------------------------------------------------------------
Total incurred - 2,473 -
- --------------------------------------------------------------------------------
Paid related to:
Current year - 1,853 -
Prior years 309 - -
- --------------------------------------------------------------------------------
Total paid 309 1,853 -
- --------------------------------------------------------------------------------
Net balance at December 31 311 620 -
Reinsurance recoverable - 69 -
- --------------------------------------------------------------------------------
Gross balance at December 31 311 689 -
- --------------------------------------------------------------------------------
Supplemental loss reserve
Balance at January 1 5,859 5,191 3,762
- --------------------------------------------------------------------------------
Additions to supplemental loss reserve 4,815 3,141 1,429
Allocated to case basis reserve - (2,473) -
- --------------------------------------------------------------------------------
Balance at December 31 10,674 5,859 5,191
- --------------------------------------------------------------------------------
Total reserve for losses and loss adjustment
expenses $10,985 6,548 5,191
================================================================================
9
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
9) Income Taxes
Pursuant to a tax sharing agreement with Holdings, the Company is
included in Holdings' consolidated U.S. Federal income tax return. The
Company's annual Federal income tax liability is determined by
computing its pro rata share of the consolidated group Federal income
tax liability.
Total income tax expense differed from the amount computed by applying
the U.S. Federal income tax rate of 35% in 1996 and 1995 and 34% in
1994:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1996 December 31, 1995 December 31, 1994
$ in thousands Amount % Amount % Amount %
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Expected tax expense computed
at the statutory rate $ 10,738 35.0 $7,216 35.0 $5,303 34.0
Increase (decrease) in tax
resulting from:
Tax-exempt interest (2,916) (9.5) (2,335) (11.3) (1,646) (10.6)
Other, net 781 2.5 334 1.6 51 0.4
- -----------------------------------------------------------------------------------------------------
Total income tax expense $ 8,603 28.0 $5,215 25.3 $3,708 23.8
=====================================================================================================
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred Federal income tax liability are as follows:
$ in thousands December 31, 1996 December 31, 1995
- --------------------------------------------------------------------------------
Deferred tax assets:
Deferred compensation $ 200 1,901
Losses and loss adjustment expenses 1,527 1,002
Unearned premiums 866 852
Other, net 96 98
- --------------------------------------------------------------------------------
Total gross deferred tax assets 2,689 3,853
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Deferred acquisition costs 15,883 12,307
Unrealized capital gains on investments 1,061 1,769
Other, net 884 1,080
- --------------------------------------------------------------------------------
Total gross deferred tax liabilities 17,828 15,156
- --------------------------------------------------------------------------------
Net deferred tax liability $ 15,139 11,303
================================================================================
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized.
Management believes that the deferred tax assets will be fully realized
in the future.
10
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
10) Insurance Regulatory Restrictions
CapMAC is subject to insurance regulatory requirements of the State of
New York and other states in which it is licensed to conduct business.
Generally, New York insurance laws require that dividends be paid from
earned surplus and restrict the amount of dividends in any year that
may be paid without obtaining approval for such dividends from the
Superintendent of Insurance to the lower of (i) net investment income
as defined or (ii) 10% of statutory surplus as of December 31 of the
preceding year. No dividends were paid by CapMAC to Holdings during the
years ended December 31, 1996, 1995 and 1994. No dividends could be
paid during these periods because CapMAC had negative earned surplus.
Statutory surplus at December 31, 1996 and 1995 was approximately
$193,726,000 and $195,018,000, respectively. Statutory surplus differs
from stockholder's equity determined under GAAP principally due to the
mandatory contingency reserve required for statutory accounting
purposes and differences in accounting for investments, deferred
acquisition costs, SLR and deferred taxes provided under GAAP.
Statutory net income was $18,737,000, $9,000,000 and $4,543,000 for the
years ended December 31, 1996, 1995 and 1994, respectively. Statutory
net income differs from net income determined under GAAP principally
due to deferred acquisition costs, SLR and deferred income taxes.
11) Commitments and Contingencies
The Company's lease agreement for the space occupied in New York
expires on November 20, 2008. CapMAC has a lease agreement for its
London office, which expires on October 1, 2002. As of December 31,
1996, future minimum payments under the lease agreements are as
follows:
$ in thousands Payment
---------------------------------------------------------------------
1997 $ 2,647
1998 2,715
1999 3,077
2000 3,152
2001 and thereafter 28,660
---------------------------------------------------------------------
Total $ 40,251
=====================================================================
Rent expense, commercial rent taxes and electricity for the years ended
December 31, 1996, 1995 and 1994 amounted to $1,618,000, $1,939,000 and
$2,243,000, respectively.
CapMAC has available a $150,000,000 standby corporate liquidity
facility (the "Liquidity Facility") scheduled to terminate in September
1999. The Liquidity Facility is provided by a consortium of banks,
headed by Bank of Montreal, as agent, which is rated "A-1+" and "P- 1"
by S&P and Moody's, respectively. Under the Liquidity Facility, CapMAC
will be able, subject to satisfying certain conditions, to borrow funds
from time to time in order to enable it to fund any claim payments or
payments made in settlement or mitigation of claim payments under its
insurance contracts. There have been no draws under the Liquidity
Facility.
CapMAC has agreed to make 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. This
investment is anticipated to be made in 1997.
11
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
12) Reinsurance
In the ordinary course of business, CapMAC cedes exposure under various
treaty and facultative reinsurance contracts, both on a pro rata and
excess of loss basis, primarily designed to minimize losses from large
risks and protect the capital and surplus of CapMAC.
The effect of reinsurance on premiums written and earned was as
follows:
<TABLE>
<CAPTION>
Years Ended December 31
1996 1995 1994
------------------- ------------------- --------------------
$ in thousands Written Earned Written Earned Written Earned
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Direct $ 71,752 48,835 56,541 36,853 43,598 28,561
Assumed 1,086 1,508 935 761 1,064 258
Ceded (15,104) (9,786) (15,992) (8,372) (11,069) (5,716)
- ----------------------------------------------------------------------------------
Net premiums $ 57,734 40,557 41,484 29,242 33,593 23,103
==================================================================================
</TABLE>
The reinsurance of risk does not relieve the ceding insurer of its
original liability to its policyholders. A contingent liability exists
with respect to the aforementioned reinsurance arrangements, which may
become a liability of CapMAC in the event the reinsurers are unable to
meet obligations assumed by them under the reinsurance contracts. At
December 31, 1996 and 1995, CapMAC had ceded loss reserves of $0 and
$69,000, respectively, and had ceded unearned premiums of $18,489,000
and $13,171,000, respectively.
In 1994, CapMAC entered into a reinsurance agreement (the "Lureco
Treaty") with Luxembourg European Reinsurance LURECO S.A. ("Lureco"), a
European-based reinsurer. The agreement is renewable annually at the
Company's option, subject to satisfying certain conditions. The
agreement reinsured and indemnified the Company for any loss incurred
by CapMAC during the agreement period up to the limits of the
agreement. The Lureco Treaty provides that the annual reinsurance
premium payable by CapMAC to Lureco, after deduction of the reinsurer's
fee payable to Lureco, be deposited in a trust account (the "Lureco
Trust Account") to be applied by CapMAC, at its option, to offset
losses and loss expenses incurred by CapMAC in connection with incurred
claims. Amounts on deposit in the Lureco Trust Account which have not
been applied against claims are contractually due to CapMAC at the
termination of the treaty.
The premium deposit amounts in the Lureco Trust Account have been
reflected as assets by CapMAC during the term of the agreement.
Premiums in excess of the deposit amounts have been recorded as ceded
premiums in the statements of income. For the 1996 policy year, the
agreement provides $7 million of loss coverage in excess of the premium
deposit amount of $5 million retained in the Lureco Trust Account.
Additional coverage is provided for losses incurred in excess of 200%
of the net premiums earned up to $4 million for any one agreement year.
In September 1995, a claim of approximately $2.5 million on an
insurance policy was applied against the Lureco Trust Account.
12
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
In addition to its capital (including statutory contingency reserves),
CapMAC has other reinsurance available to pay claims under its
insurance contracts. Effective November 30, 1995, CapMAC entered into a
Stop-loss Reinsurance Agreement with Mitsui Marine and Fire Insurance
Co. (the "Mitsui Stop-loss Agreement"). Under the Mitsui Stop-loss
Agreement, Mitsui Marine and Fire Insurance Co. ("Mitsui") will be
required to pay any losses in excess of $100 million in the aggregate
incurred by CapMAC during the term of the Mitsui Stop-loss Agreement on
the insurance policies in effect on December 1, 1995 and written during
the one-year period thereafter, up to an aggregate limit payable under
the Mitsui Stop-loss Agreement of $50 million. The Mitsui Stop-loss
Agreement has a term of seven years and is subject to early termination
by CapMAC in certain circumstances. Effective January 1, 1997 the
stop-loss reinsurance coverage increased to $75 million in excess of
incurred losses of $150 million increasing annually based on increases
in CapMAC's statutory qualified capital. The new stop-loss reinsurance
is provided by Mitsui, AXA Re Finance S.A. ("AXA Re") and Munchener
Ruckversicherungs-Gesellschaft ("Munich Re").
On November 30, 1995, CapMAC canceled the quota share reinsurance
agreement with Winterthur Swiss Insurance Company ("Winterthur")
pursuant to which Winterthur had the right to reinsure on a quota share
basis 10% of each policy written by CapMAC. As a result, CapMAC
reassumed approximately $1.4 billion of principal insured by Winterthur
on January 1, 1996. In connection with the commutation, Winterthur
returned $2.0 million of unearned premiums, net of ceding commission
and Federal excise tax.
13) Disclosures About Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 1996 and
1995. The fair value amounts were determined by the Company using
independent market information when available, and appropriate
valuation methodologies when market information was not available. Such
valuation methodologies require significant judgment and are not
necessarily indicative of the amount the Company could recognize in a
current market exchange.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
Carrying Estimated Carrying Estimated
$ in thousands Amount Fair Value Amount Fair Value
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Available-for-sale securities $314,703 314,703 284,352 284,352
- ----------------------------------------------------------------------------------------
Off-Balance-Sheet Instruments:
Financial guarantees outstanding $ -- 219,989 -- 147,840
Less: ceding commission -- 65,997 -- 44,352
- ----------------------------------------------------------------------------------------
Net financial guarantees outstanding $ -- 153,992 103,488
========================================================================================
</TABLE>
13
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments summarized above:
Available-for-sale Securities
The fair values of fixed maturities are based upon quoted market
prices. The fair value of short-term investments approximates amortized
cost.
Financial Guarantees Outstanding
The fair value of financial guarantees outstanding consists of (1) the
current unearned premium reserve, net of prepaid reinsurance and (2)
the fair value of installment revenue which is derived by calculating
the present value of the estimated future cash inflow to CapMAC of
policies in force having installment premiums, net of amounts payable
to reinsurers, at a discount rate of 7% at December 31, 1996 and 1995.
The amount calculated is assumed to be equivalent to the consideration
that would be paid by CapMAC under market conditions prevailing at the
reporting dates to transfer CapMAC's financial guarantee business to a
third party under reinsurance and other agreements. Ceding commission
represents the expected amount that would be paid to CapMAC to
compensate CapMAC for originating and servicing the insurance
contracts. In constructing estimated future cash inflows, management
makes assumptions regarding prepayments for amortizing asset-backed
securities which are consistent with relevant historical experience.
For revolving programs, assumptions are made regarding program
utilization based on discussions with program users. The amount of
future installment revenue actually realized by the Company could be
reduced in the future due to factors such as early termination of
insurance contracts, accelerated prepayments of underlying obligations
or lower than anticipated utilization of insured structured programs,
such as commercial paper conduits. Although increases in future
installment revenue earnings due to renewals of existing insurance
contracts historically have been greater than reductions in future
installment revenue due to factors such as those described above, there
can be no assurance that future circumstances might not cause a
material net reduction in the future installment revenue.
14) Capitalization
In 1995, $59.0 million of the proceeds received by Holdings from the
sale of shares in connection with an initial public offering and
private placements were contributed to CapMAC.
Exhibit 99(A)
N E W S R E L E A S E
For immediate release
Contact: Mary Bergo Vermylen
(212-891-6719)
New York, March 20, 1997 -- CapMAC Holdings Inc. (NYSE: KAP) today announced
that net operating earnings for the first quarter of 1997 will be lower than
some expectations and less than the prior year's first quarter. The primary
reason is that advisory and other fees will be less than the record level of
advisory and other fees during the first quarter of 1996. CapMAC Holdings
estimates first quarter 1997 fully diluted operating earnings will be
approximately $0.30 to $0.33 a share. Fee income for the first quarter is
expected to be between $3.0 and $4.0 million. "As we have always emphasized to
our shareholders, we cannot predict the level of fee income from quarter to
quarter," said John B. Caouette, Chairman and Chief Executive Officer of CapMAC
Holdings. He stated further, "However, we have no reason to change our outlook
regarding CapMAC Holdings' performance for the year as a whole. Our portfolio
continues to perform well, our pipeline remains strong, and we continue to build
our business for the future."
In addition, the Company announced that it expects to realize a non-operating
charge of approximately $3.5 to $4.0 million to earnings reflecting a further
write-down of its remaining $9.0 million investment in TMG Group, a derivatives
subsidiary of The Mutual Life Group of Canada ("The Mutual Group"). CapMAC
Holdings is a minority investor in TMG Group. The Mutual Group is currently
recapitalizing TMG Group, which will significantly reduce CapMAC Holdings'
equity interest in this company. In the fourth quarter of 1996, CapMAC Holdings
realized a $2.0 million capital loss on this investment. The $3.5 to $4.0
million write-off will be partially offset by $2 million of securities gains
realized on the Company's securities portfolio. The net effect will reduce first
quarter fully diluted non-operating earnings by approximately $0.06 a share.
After this write-off, CapMAC Holdings' remaining investment in TMG Group will be
approximately $5.0 million. Mr. Caouette said, "I would emphasize that our
investment in TMG Group has nothing whatsoever to do with the outlook for CapMAC
Holdings' basic business of credit enhancement and financial structuring, which
remains quite strong."
CapMAC Holdings Inc., through its subsidiaries, provides financial guarantee
insurance, principally in the domestic and international structured finance and
asset-backed markets; advisory and structuring services in connection with
structured and asset-backed financings; investment management; and access to
funding for its customers through third-party owned and managed securitization
funding vehicles.
# # #
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CAPMAC
HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS FOR THE YEAR ENDING
DECEMBER 31, 1996 AND THE CONSOLIDATED STATEMENTS OF INCOME, STOCKHOLDERS'
EQUITY AND CASH FLOWS, FOR THE YEAR THEN ENDED AND THE NOTES THERETO AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 339174
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 374060
<CASH> 966
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 45380
<TOTAL-ASSETS> 457234
<POLICY-LOSSES> 10985
<UNEARNED-PREMIUMS> 68262
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 15000
0
0
<COMMON> 164
<OTHER-SE> 310223
<TOTAL-LIABILITY-AND-EQUITY> 457234
40557
<INVESTMENT-INCOME> 17906
<INVESTMENT-GAINS> (1804)
<OTHER-INCOME> 27320
<BENEFITS> 4815
<UNDERWRITING-AMORTIZATION> 7824
<UNDERWRITING-OTHER> 22200
<INCOME-PRETAX> 47937
<INCOME-TAX> 14712
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33568
<EPS-PRIMARY> 1.92
<EPS-DILUTED> 1.89
<RESERVE-OPEN> 6548
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 10985
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
