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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ___________________ to _____________________
Commission file number: 0-26456
RISK CAPITAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1424716
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
411 West Putnam Avenue
Greenwich, Connecticut 06830
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 861-2500
None
(Former name, former address and former fiscal year, if changed since last
report)
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 the number of shares outstanding of each of the issuer's classes of
common stock.
Class Outstanding at March 31, 1996
Common Stock. $.01 par value 16,948,625
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<PAGE>
RISK CAPITAL HOLDINGS, INC.
INDEX
PART I. Financial Information Page No.
-------------
Review Report of Independent Accountants 1
Consolidated Balance Sheet 2
March 31, 1996 and December 31, 1995
Consolidated Statement of Income 3
For the three month period ended March 31, 1996
Consolidated Statement of Changes in Stockholders' Equity 4
For the three month period ended March 31, 1996
Consolidated Statement of Cash Flows 5
For the three month period ended March 31, 1996
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis 9-12
of Financial Condition and Results of Operations
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
<PAGE>
Review Report of Independent Accountants
To the Board of Directors and Stockholders of
Risk Capital Holdings, Inc.
We have reviewed the accompanying interim consolidated balance sheet of Risk
Capital Holdings, Inc. and its subsidiary as of March 31, 1996, and the related
consolidated statements of income, of changes in stockholders' equity and of
cash flows for the period from January 1, 1996 to March 31, 1996. This financial
information is the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial information for it to be in
conformity with generally accepted accounting principles.
We previously audited in accordance with generally accepted auditing standards
the consolidated financial statements of Risk Capital Holdings, Inc. and its
subsidiary as of December 31, 1995 and for the period from June 23, 1995 (date
of inception) to December 31, 1995 (not presented herein), and in our report
dated February 15, 1996 we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated balance sheet as of December 31, 1995, is fairly
stated in all material respects in relation to the consolidated balance sheet
from which it has been derived.
Price Waterhouse LLP
New York, New York
May 1, 1996
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
<TABLE>
<CAPTION>
(unaudited)
March 31, December 31,
1996 1995 (1)
--------- ---------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities
(amortized cost: 1996, $143,400; 1995, $130,949) $ 142,794 $ 132,321
Publicly traded equity securities
(cost: 1996, $59,674; 1995, $36,009) 61,579 39,374
Privately held securities
(cost: 1996, $28,720; 1995, $18,531) 31,891 19,534
Short-term investments 120,653 155,116
--------- ---------
Total investments 356,917 346,345
Cash 978 982
Accrued investment income 2,617 2,442
Premiums receivable 4,237
Reinsurance recoverable on unearned premiums 266
Investment accounts receivable 1,686
Deferred policy acquisition costs 1,652
Other assets 1,382 1,217
========= =========
TOTAL ASSETS $ 369,735 $ 350,986
========= =========
LIABILITIES
Claims and claims expense $ 1,186
Unearned premiums 5,596
Reinsurance balances payable 304
Investment accounts payable 18,087 $ 5,895
Deferred income tax liability 1,217 1,851
Other liabilities 2,685 3,025
--------- ---------
TOTAL LIABILITIES 29,075 10,771
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value: -- --
20,000,000 shares authorized, none issued
Common stock, $.01 par value:
80,000,000 shares authorized
(1996, 16,948,625; 1995, 16,941,125
issued and outstanding) 169 169
Additional paid-in capital 338,904 338,737
Unrealized appreciation of investments, net of income tax 2,906 3,731
Deferred compensation under stock award plan (3,145) (3,441)
Retained earnings 1,826 1,019
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 340,660 340,215
--------- ---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 369,735 $ 350,986
--------- ---------
</TABLE>
(1) A convertible security with a fair value of $10.7 million and amortized cost
of $9.7 million has been reclassified from fixed maturities to privately held
securities to be consistent with the March 31, 1996 presentation.
See Notes to Consolidated Financial Statements
2
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share data)
(unaudited)
Three Months Ended
March 31, 1996
------------------
Premiums and Other Revenues
Net premiums written $7,103
Increase in unearned premiums 5,330
------------
Net premiums earned 1,773
Net investment income 3,408
Net realized investment losses (194)
------------
Total revenues 4,987
Expenses
Claims and claims expenses 1,249
Commissions and brokerage 562
Other operating expenses 2,491
------------
Total expenses 4,302
Income before income taxes 685
Federal income taxes:
Current 68
Deferred (190)
------------
Income tax benefit (122)
============
Net income $807
============
Per share data
Primary and fully diluted (1):
Net income $.05
============
Average shares outstanding 16,941,290
============
(1) Options and warrants outstanding which are considered to be common stock
equivalents were not included in the calculation of earnings per share as they
were anti-dilutive.
See Notes to Consolidated Financial Statements
3
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)
Three Months Ended
March 31, 1996
------------------
Common Stock
Balance at beginning of year $169
Issuance of common stock --
---------
Balance at end of period 169
---------
Additional Paid-in Capital
Balance at beginning of year 338,737
Restricted common stock awarded 167
---------
Balance at end of period 338,904
---------
Unrealized Appreciation (Depreciation) of Investments, Net
of Income Tax
Balance at beginning of year 3,731
Unrealized appreciation (depreciation) (825)
---------
Balance at end of period 2,906
---------
Deferred Compensation Under Stock Award Plan
Balance at beginning of year (3,441)
Restricted stock awarded (167)
Compensation expense recognized 463
---------
Balance at end of period (3,145)
---------
Retained Earnings
Balance at beginning of year 1,019
Net income 807
---------
Balance at end of period 1,826
---------
Total Stockholders' Equity
Balance at beginning of year 340,215
Restricted common stock awarded 167
Unrealized depreciation of investments, net of income tax (825)
Change in deferred compensation 296
Net income 807
=========
Balance at end of period $340,660
=========
See Notes to Consolidated Financial Statements
4
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
March 31, 1996
------------------
OPERATING ACTIVITIES
Net income $807
Adjustments to reconcile net income
to net cash provided by operating activities:
Liability for claims and claims expenses, net 1,186
Unearned premiums, net 5,330
Premiums receivable (4,237)
Accrued investment income (175)
Reinsurance balances payable 304
Deferred policy acquisition costs (1,652)
Net realized investment losses 194
Deferred tax asset (189)
Other liabilities (339)
Other items, net (608)
--------
NET CASH PROVIDED BY OPERATING ACTIVITIES 621
--------
INVESTING ACTIVITIES
Purchases of fixed maturity investments (81,622)
Sales of fixed maturity investments 79,362
Net sales of short-term investments 35,586
Purchases of equity securities (34,216)
Sales of equity securities 358
Purchases of furniture and equipment (93)
--------
NET CASH USED FOR INVESTING ACTIVITIES (625)
--------
FINANCING ACTIVITIES
Restricted common stock awarded 167
Deferred compensation on restricted stock (167)
--------
NET CASH PROVIDED BY FINANCING ACTIVITIES --
--------
Decrease in cash (4)
Cash beginning of period 982
========
Cash end of period $978
========
See Notes to Consolidated Financial Statements
5
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Risk Capital Holdings, Inc. ("RCHI"), incorporated in March 1995 under the laws
of the State of Delaware, is a holding company whose wholly owned subsidiary,
Risk Capital Reinsurance Company ("Risk Capital Reinsurance"), a Nebraska
corporation, was formed to provide capital and property and casualty reinsurance
to insurers and reinsurers either on a stand-alone basis or as part of
integrated capital solutions, on a global basis. (RCHI and Risk Capital
Reinsurance are collectively referred to herein as the "Company.") In September
1995, through its initial public offering, related exercise of the underwriters'
over-allotment option and direct sales of an aggregate of 16,750,625 shares of
RCHI's common stock, par value $.01 per share (the "Common Stock"), at $20 per
share, and the issuance of warrants, RCHI was capitalized with net proceeds of
approximately $335.0 million, of which $328.0 million was contributed to the
statutory capital of Risk Capital Reinsurance.
Class A warrants to purchase an aggregate of 2,531,079 shares of Common Stock
and Class B warrants to purchase an aggregate of 1,920,601 shares of Common
Stock were issued in connection with the direct sales. Class A warrants are
immediately exercisable at $20 per share and expire September 19, 2002. Class B
warrants are exercisable at $20 per share during the seven year period
commencing September 19, 1998, provided that the Common Stock has traded at or
above $30 per share for 20 out of 30 consecutive trading days.
2. GENERAL
The accompanying interim consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and in the opinion of
management, reflect all adjustments necessary (consisting of normal recurring
accruals) for a fair presentation of results for such periods. These
consolidated financial statements should be read in conjunction with the 1995
consolidated financial statements and related notes contained in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995.
3. PER SHARE DATA
Earnings per share are computed based on the weighted average number of shares
of Common Stock and Common Stock equivalents outstanding during the period using
the modified treasury stock method. Stock options and Class A and B warrants to
purchase Common Stock are considered to be common stock equivalents. The common
stock equivalents were anti-dilutive, and thus not included in the weighted
average shares outstanding.
4. INVESTMENT INFORMATION
The Company classifies all of its publicly traded fixed maturity and equity
securities as "available for sale" and accordingly, they are carried at
estimated fair value. The fair value of publicly traded fixed maturity
securities and publicly traded equity securities is estimated using quoted
market prices or dealer quotes. Short-term investments, which have a maturity of
one year or less at the date of acquisition, are carried at cost, which
approximates fair value.
All of the Company's publicly traded equity securities and privately held
securities were issued by insurance and reinsurance companies or companies
providing services to the insurance
6
<PAGE>
industry. At March 31, 1996, the publicly traded equity portfolio consisted of
14 investments ranging individually from $0.9 million to $6.3 million.
Investments in privately held securities include both equity securities and
fixed maturity convertible securities issued by privately and publicly held
companies. Privately held securities are subject to trading restrictions or are
otherwise illiquid and do not have readily ascertainable market values. The risk
of investing in such securities is generally greater than the risk of investing
in securities of widely held, publicly traded companies. Lack of a secondary
market and resale restrictions may result in the Company's inability to sell a
security at a price that would otherwise be obtainable if such restrictions did
not exist and may substantially delay the sale of a security which the Company
seeks to sell. Such investments are classified as "available for sale" and
carried at estimated fair value, except for investments in which the Company
believes it has the ability to exercise significant influence (generally defined
as investments in which the Company owns 20% or more of the outstanding common
stock of the issuer), which are reported using the equity method of accounting.
The Company periodically reviews the valuation of investments in privately held
securities with Marsh & McLennan Risk Capital Corp., its equity investment
advisor. These investments, other than those reported using the equity method of
accounting, are initially recorded at cost and will be revalued based
principally on substantive events or factors which could indicate a diminution
or appreciation in value, such as an arm's-length third party transaction
justifying an increased valuation or adverse development of a significant nature
requiring a write down.
Privately held securities consisted of the following:
<TABLE>
<CAPTION>
(In thousands)
March 31, December 31,
1996 1995
------- -------
<S> <C> <C>
Equity Securities:
Recorded based on the equity method:
Peregrine Russell Miller
Insurance Investment Fund of Asia Limited ("Asian Fund") $9,000
Recorded at fair value:
Terra Nova (Bermuda) Holdings, Ltd. ("Terra Nova") 11,028 $8,869
Venton Holdings, Ltd. ("VHL") 1,063
------- -------
Total privately held equities 21,091 8,869
Convertible security, recorded at fair value:
Mutual Risk Management Zero Coupon
Subordinated Debenture 10,800 10,665
======= =======
Total privately held securities $31,891 $19,534
======= =======
</TABLE>
At March 31, 1996, the Company's investment commitments relating to its
privately held securities were as follows:
Commitments:
<TABLE>
<CAPTION>
(In thousands)
<S> <C> <C>
Insurance Investment Group $12,000
Island Heritage Insurance Company Ltd. 4,500
Venton Holdings, Ltd. 4,200
------- -------
Total $20,700 --
======= =======
</TABLE>
7
<PAGE>
Set forth below is certain information relating to each of the investments and
commitments in privately held securities made by the Company in the first
quarter of 1996 (also including the investment in Terra Nova made in the fourth
quarter of 1995).
In March 1996, the Company acquired approximately a 45% interest in the Asian
Fund, which is a long term investment to achieve capital growth through
investments in listed and unlisted securities of insurance companies
incorporated or operating in Asia.
In October 1995, the Company acquired approximately a 4% interest in Terra Nova,
which subsequently completed an initial public offering in April 1996. Terra
Nova is the parent company of two operating insurance companies headquartered in
Bermuda and London that write property and casualty reinsurance.
The Company has a 9.9% interest in VHL, a Bermuda-based holding company which
owns a managing agent at Lloyd's of London ("Lloyd's") and a corporate capital
vehicle at Lloyd's that provides underwriting capacity for VHL's managing agent.
VHL may call from time to time up to an aggregate of $4.2 million from the
Company to fund capital requirements at Lloyd's. The Company is a co-investor
with The Trident Partnership, L.P.
The Mutual Risk Management, Ltd. zero coupon subordinated debenture was acquired
in October 1995. The debenture has a maturity date of 2015, effective yield of
5.25% and is convertible into 217,884 shares of common stock at a price of
$43.955 per share. Mutual Risk Management, Ltd. is a publicly held Bermuda
company, providing risk management services to client companies.
The Company has a $12 million commitment to fund over the long-term, its 40%
limited partnership interest in Insurance Investment Group, L.P., a private
limited partnership of insurance companies which provides reinsurance and
capital to insurance companies.
In April 1996, the Company acquired a 33.5% economic interest (9.75% voting
interest) in Island Heritage Insurance Company, Ltd. ("Island Heritage"), a
Cayman Islands insurer which writes high value personal and commercial property
insurance in the Caribbean. Certain directors of the Company and other investors
invested in the securities of Island Heritage at the same per share price as
that paid by the Company. Messrs. Clements and Mosca are directors of Island
Heritage.
5. STATUTORY DATA
The statutory capital and surplus of Risk Capital Reinsurance at March 31, 1996
was $331.1 million and the statutory net loss for the first quarter 1996 was
$1.0 million.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
General
The Company
Risk Capital Holdings, Inc. ("RCHI") is the holding company for Risk Capital
Reinsurance Company ("Risk Capital Reinsurance"), RCHI's wholly owned subsidiary
which is domiciled in Nebraska. (RCHI and Risk Capital Reinsurance are
collectively referred to herein as the "Company.") RCHI was incorporated in
March 1995 and commenced operations during September 1995 upon completion of its
initial public offering and related exercise of the underwriters' over-allotment
option and direct sales of an aggregate of 16,750,625 shares of RCHI's common
stock, par value $.01 per share, at $20 per share, and the issuance of warrants
(collectively, the "Offerings"). RCHI received aggregate net proceeds from the
Offerings of approximately $335 million, of which $328 million was contributed
to the capital of Risk Capital Reinsurance. On November 6, 1995, Risk Capital
Reinsurance was licensed under the insurance laws of the State of Nebraska.
Recent Industry Performance
The property and casualty reinsurance industry has been highly cyclical. This
cyclicality has produced periods characterized by intense price competition due
to excessive underwriting capacity as well as periods when shortage of capacity
permitted favorable premium levels. Demand for reinsurance is influenced
significantly by underwriting results of primary property and casualty insurers
and prevailing general economic and market conditions, all of which affect
liability retention decisions of primary insurers and reinsurance premium rates.
The supply of reinsurance is related directly to prevailing prices and levels of
surplus capacity, which, in turn, may fluctuate in response to changes in rates
of return on investments being realized in the reinsurance industry. The
cyclical trends in the industry and the industry's profitability can also be
affected significantly by volatile and unpredictable developments, including
changes in the propensity of courts to grant larger awards, natural disasters
(such as catastrophic hurricanes, windstorms, earthquakes, floods and fires),
fluctuations in interest rates and other changes in the investment environment
that affect market prices of investments and the income and returns on
investments, and inflationary pressures that may tend to affect the size of
losses experienced by ceding primary insurers.
Reinsurance treaties that are placed through intermediaries are typically for
one year terms with a substantial number that are written or renew on January 1
each year. Other significant renewal dates include July 1, April 1 and October
1. The January 1 and April 1, 1996 renewal periods were marked by continuing
intensified competitive conditions in terms of premium rates and treaty terms
and conditions in both the property and casualty segments of the marketplace.
While the Company is initially somewhat disadvantaged compared to its
competition due to the preliminary start-up phase of its operations, it believes
it is well positioned to generate attractive opportunities in the marketplace
due to its substantial unencumbered capital base, experienced management team
and relationship with its equity investment advisor, as well as its strategic
focus on generating a small number of large reinsurance treaty transactions that
may also be integrated with equity investments in client companies.
For the January 1 and April 1, 1996 seasons, the Company was presented with a
total of approximately 96 reinsurance treaty opportunities with effective dates
from January 1 to April 1, 1996, of which 31 included a possible integrated
investment opportunity. The Company has bound 20 reinsurance treaties with
approximately $40.7 million of annualized premium
9
<PAGE>
revenues for property and casualty reinsurance that will be recorded as premiums
written within the next 12 to 18 months.
Results of Operations
For the three months ended March 31, 1996, the Company had consolidated net
income of approximately $0.8 million, or $0.05 per share. An after-tax realized
investment loss of $0.1 million, or $0.01 per share, was also included in net
income for the period.
The results of operations are not indicative of future financial results of the
Company. Since late September 1995, the Company has been in the early stages of
a start-up operation with a limited number of professional underwriting staff,
temporary office facilities, and one insurance license. During 1996, the Company
intends to continue to build its staff (growing to approximately 25 employees by
the end of the year), write reinsurance treaties, and locate its employees in
permanent office space with modern information systems.
Underwriting Results
Net premiums written during the first three months of 1996 were $7.1 million,
consisting of $2.2 million of casualty business, and $4.9 of property business.
Approximately 20% of the business written arises from two syndicates at Lloyd's
of London.
On a statutory basis, the first quarter combined ratio was 135.9%, reflecting an
operating expense ratio of 34.3%. This ratio could be expected to decline
relative to premiums written as additional premium revenues are generated
throughout the year. On an absolute basis, operating expenses will increase as a
result of additional costs for increased personnel, marketing activities,
introduction of employee benefit plans, additional licenses and the investment
in expanded office facilities and equipment.
Given the low level of premium volume the Company may initially generate and the
long-term nature of the casualty business which the Company seeks to write, it
is likely that earned premiums will be insufficient to cover claims costs,
acquisition costs and operating expenses, thereby resulting in underwriting
losses in 1996.
Investment Results
At March 31, 1996, approximately 74% of the Company's invested assets consisted
of fixed maturity and short-term investments. Net investment income for the
first quarter of 1996 was approximately $3.4 million. The amount of investment
income from quarter to quarter could vary and diminish as the Company continues
to employ its strategy of investing a substantial portion of its investment
portfolio in publicly traded and privately held equity securities of insurance
companies which generally yield less investment income than fixed maturity
investments. Unrealized appreciation or depreciation of such investments to the
extent that it occurs is recorded in a separate component of stockholders'
equity, net of related deferred income taxes. Gains or losses are recorded in
net income to the extent investments are sold, but the recognition of such gains
and losses is unpredictable and not indicative of future operating results.
Income Taxes
The Company's effective tax rate of 18% in the first quarter of 1996 is less
than the 35% statutory rate on pre-tax operating income due to tax exempt income
and the dividends received deductions. The gross deferred income tax benefit of
$190,000, which is an asset considered recoverable from future taxable income,
results principally from temporary differences between financial and taxable
income. Temporary differences include charges for restricted stock grants which
are not deductible for income tax purposes until vested (vesting will occur over
a five-year period), as well as charges for a portion of unearned premiums and
claims reserves.
10
<PAGE>
Investments
A significant component of the Company's investment strategy is investing a
significant portion of invested assets in publicly traded and privately held
equity securities, principally issued by insurance and reinsurance companies and
companies providing services to the insurance industry. Cash and fixed maturity
investments and, if necessary, the sale of publicly traded equity securities
will be used to support shorter-term liquidity requirements.
Because a significant portion of the Company's investment portfolio will
generally be equity securities issued by insurance and reinsurance companies and
companies providing services to the insurance industry, the equity portfolio
lacks industry diversification and will be particularly subject to the
cyclicality of the insurance industry. Unlike fixed income securities, common
stocks, including the stocks in which the Company may invest, generally are not
and will not be rated by any nationally recognized rating service. The values of
common stocks generally are more dependent on the financial condition of the
issuer and less dependent on fluctuations in interest rates than are the values
of fixed income securities. The market value of common stocks generally is
regarded as more volatile than the market value of fixed income securities. The
effects of such volatility on the Company's equity portfolio could be
exacerbated to the extent that such portfolio is concentrated in the insurance
industry and in relatively few issuers.
As the Company's investment strategy is to invest a significant portion of its
investment portfolio in equity securities, its investment income in any fiscal
period may be smaller, as a percentage of investments, and less predictable than
that of other insurance companies, and net realized and unrealized gains
(losses) on investments may have a greater effect on the Company's results of
operations or stockholders' equity at the end of any fiscal period than other
insurance and/or reinsurance companies. Because the realization of gains and
losses on equity investments is not generally predictable, such gains and losses
may differ significantly from period to period.
Investments included in the Company's private portfolio include securities
issued by privately held companies and by public companies, which securities are
generally restricted as to resale or are otherwise illiquid and do not have
readily ascertainable market values. The risk of investing in such securities is
generally greater than the risk of investing in securities of widely held,
publicly traded companies. Lack of a secondary market and resale restrictions
may result in the Company's inability to sell a security at a price that would
otherwise be obtainable if such restrictions did not exist and may substantially
delay the sale of a security the Company seeks to sell.
At March 31, 1996, cash and invested assets totaled approximately $357.9
million, consisting of $121.6 million of cash and short-term investments, $142.8
million of publicly traded fixed maturity investments, $61.6 million of publicly
traded equity securities, and $31.9 million of privately held securities.
During the first quarter of 1996, the Company allocated approximately $24
million from its short term portfolio to publicly traded equity securities, and
an additional $10 million to fund investments in privately held securities. See
Note 4 under the caption "Investment Information" of the accompanying Notes to
Consolidated Financial Statements for certain information regarding the
Company's privately held securities and their carrying values, and commitments
made by the Company relating to its privately held securities. During the
remainder of 1996 and over the long-term, the Company intends to continue to
allocate a substantial portion of its cash and short-term investments into
publicly traded and privately held equity securities, subject to market
conditions and opportunities in the marketplace.
At March 31, 1996, the publicly traded equity portfolio consisted of investments
in 14 publicly traded domestic insurers, with investment amounts ranging
individually from $0.9 million to $6.3 million. The fixed maturity and
short-term investments were all rated investment grade by
11
<PAGE>
Moody's Investors Service, Inc. or Standard & Poor's Corporation and have an
average quality rating of AA and an average duration of approximately 2.1 years.
The Company's pre-tax and net of tax investment yields in the first quarter of
1996 were 4.1% and 3.1%, respectively. Assuming a stable interest rate
environment, the Company anticipates such yields to moderately decline as funds
invested in short-term securities are allocated into equity securities.
The Company does not currently invest in derivative financial instruments such
as futures, forward contracts, swaps, or options or other financial instruments
with similar characteristics such as interest rate caps or floors and fixed-rate
loan commitments.
Liquidity and Capital Resources
RCHI is a holding company and has no significant operations or assets other than
its ownership of all of the capital stock of Risk Capital Reinsurance, whose
primary and predominant business activity is providing capital and/or
reinsurance to insurance and reinsurance companies and making investments in
insurance-related companies. RCHI will rely on cash dividends and distributions
from Risk Capital Reinsurance to pay cash dividends to stockholders of RCHI and
to pay any operating expense that RCHI may incur. There are currently no
contractual restrictions on the payment of dividends or the making of
distributions by Risk Capital Reinsurance to RCHI. The payment of dividends by
RCHI will be dependent upon the ability of Risk Capital Reinsurance to provide
funds to RCHI. The ability of Risk Capital Reinsurance to pay dividends or make
distributions to RCHI is dependent upon its ability to achieve satisfactory
underwriting and investment results and to meet certain statutory and regulatory
standards, including those of the State of Nebraska.
Current Nebraska insurance laws provide that, without prior approval of the
Nebraska Director of Insurance (the "Nebraska Director"), Risk Capital
Reinsurance cannot pay a dividend or make a distribution (together with other
dividends or distributions paid during the preceding 12 months) that exceeds the
greater of (i) 10% of statutory surplus as of the preceding December 31 or (ii)
statutory net income from operations from the preceding calendar year not
including realized capital gains. Net income (exclusive of realized capital
gains) not previously distributed or paid as dividends from the preceding two
calendar years may be carried forward for dividends and distribution purposes.
Any proposed dividend or distribution in excess of such amount is called an
"extraordinary" dividend or distribution and may not be paid until either it has
been approved, or a 30 day waiting period has passed during which it has not
been disapproved, by the Nebraska Director. Prior to amendments adopted in March
1996, dividends or distributions were deemed "extraordinary" if they exceeded
the lesser, rather than greater, of the above limitations. Notwithstanding the
foregoing, any distribution that is a dividend and that is in excess of Risk
Capital Reinsurance's unassigned funds, exclusive of any surplus arising from
unrealized capital gains or revaluation of assets, will be deemed an
"extraordinary" dividend subject to the foregoing requirements.
Net cash flow provided by operating activities in the first quarter of 1996 was
$621,000, consisting principally of investment income and premiums received,
offset by operating expenses.
The primary sources of liquidity for Risk Capital Reinsurance are net cash flow
from the operating activities of Risk Capital Reinsurance, principally premiums
received, the receipt of dividends and interest on investments and proceeds from
the sale or maturity of investments. The Company's cash flow will also be
affected by claims payments, some of which could be large. Therefore, the
Company's cash flow could fluctuate significantly from period to period.
The Company does not currently have any material commitments for any capital
expenditures over the next 12 months other than in connection with the further
development of the Company's infrastructure including personnel, systems, and
office facilities. The Company expects that its financing and operational needs
for the foreseeable future will be met by the
12
<PAGE>
Company's balance of cash and short-term investments, as well as by funds
generated from operations. However, no assurance can be given that the Company
will be successful in the implementation of its business strategy.
At March 31, 1996, the Company's consolidated stockholders' equity totaled
$340.7 million, or $20.10 per share. At such date, statutory surplus of Risk
Capital Reinsurance was $331.1 million, ranking it as the eighth largest
domestic broker-market oriented reinsurer as measured by statutory surplus
(based on data available as of December 31, 1995 from the Reinsurance
Association of America).
13
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
15 Accountants' Awareness Letter and Limitation of Liability
(regarding unaudited interim financial information)
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
There were no reports filed on Form 8-K for the period ended March 31,
1996.
Omitted from this Part II are items which are inapplicable or to which
the answer is negative for the period covered.
14
<PAGE>
SIGNATURES
================================================================================
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RISK CAPITAL HOLDINGS, INC.
------------------------------------
(Registrant)
/s/ Mark D. Mosca
------------------------------------
Date: May 13, 1996 MARK D. MOSCA
President
/s/ Paul J. Malvasio
------------------------------------
Date: May 13, 1996 PAUL J. MALVASIO
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- - ------- -----------
<S> <C>
15 Accountants' Awareness Letter and Limitation of Liability
(regarding unaudited interim financial information)
27 Financial Data Schedule
</TABLE>
Exhibit 15
Accountants' Awareness Letter and Limitation of Liability
We are aware of the incorporation by reference in the Registration Statement on
Form S-8 (Registration No. 33-99974) of Risk Capital Holdings, Inc. of our
report dated May 1, 1996 (issued pursuant to the provisions of Statement on
Auditing Standards No. 71) appearing in this Form 10-Q. We are also aware of our
responsibilities under the Securities Act of 1933.
We are not subject to the liability provisions of section 11 of the Securities
Act of 1933 for our report dated May 1, 1996 (issued pursuant to the provisions
of Statement on Auditing Standards No. 71) on the unaudited interim consolidated
financial information of Risk Capital Holdings, Inc. because our report is not a
"report" or a "part" of the Registration Statement on Form S-8 (Registration No.
33-99974) prepared or certified by us within the meaning of sections 7 and 11 of
the Securities Act of 1933.
Price Waterhouse LLP
New York, New York
May 13, 1996
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
RISK CAPITAL HOLDINGS, INC
Article 7 of Regulation S-X
Insurance Companies
Three month period ended March 31, 1996 ( Dollars in thousands, except
per share amounts )
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 142,794
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 93,470
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 356,917
<CASH> 978
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 1,652
<TOTAL-ASSETS> 369,735
<POLICY-LOSSES> 1,186
<UNEARNED-PREMIUMS> 5,596
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 0
<OTHER-SE> 340,660
<TOTAL-LIABILITY-AND-EQUITY> 369,735
1,773
<INVESTMENT-INCOME> 3,408
<INVESTMENT-GAINS> (194)
<OTHER-INCOME> 0
<BENEFITS> 1,249
<UNDERWRITING-AMORTIZATION> 562
<UNDERWRITING-OTHER> 2,491
<INCOME-PRETAX> 685
<INCOME-TAX> (122)
<INCOME-CONTINUING> 807
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 807
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 63
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 1,186
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
