================================================================================
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 June 30, 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 June 30, 1996
----- ----------------------------
Common Stock, $.01 par value 16,993,725
================================================================================
<PAGE>
RISK CAPITAL HOLDINGS, INC.
INDEX
Page No.
--------
PART I. Financial Information
Review Report of Independent Accountants 1
Consolidated Balance Sheet 2
June 30, 1996 and December 31, 1995
Consolidated Statement of Income 3
For the three month and six month periods ended June 30, 1996
Consolidated Statement of Changes in Stockholders' Equity 4
For the six month period ended June 30, 1996
Consolidated Statement of Cash Flows 5
For the six month period ended June 30, 1996
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis 10
of Financial Condition and Results of Operations
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
<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 June 30, 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 June 30, 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
July 31, 1996
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(in thousands except share data)
<TABLE>
<CAPTION>
(unaudited)
June 30, December 31,
1996 1995
--------- ---------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities $ 136,316 $ 132,321
(amortized cost: 1996, $137,265; 1995, $130,949)
Publicly traded equity securities 84,355 39,374
(cost: 1996, $83,095; 1995, $36,009)
Privately held securities 36,056 19,534
(cost: 1996, $33,527; 1995, $18,531)
Short-term investments 86,246 155,116
--------- ---------
Total investments 342,973 346,345
Cash 5,185 982
Accrued investment income 2,416 2,442
Premiums receivable 11,302
Reinsurance recoverable on unearned premiums 253
Funds held 938
Deferred policy acquisition costs 2,221
Other assets 1,419 1,217
--------- ---------
TOTAL ASSETS $ 366,707 $ 350,986
========= =========
LIABILITIES
Claims and claims expenses $ 3,533
Unearned premiums 18,213
Reinsurance balances payable 34
Investment accounts payable 670 $ 5,895
Deferred income tax liability 1,851
Other liabilities 3,124 3,025
--------- ---------
TOTAL LIABILITIES 25,574 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, 16,993,725; 1995, 16,941,125 issued and outstanding) 170 169
Additional paid-in capital 339,804 338,737
Unrealized appreciation of investments, net of income tax 1,846 3,731
Deferred compensation under stock award plan (3,498) (3,441)
Retained earnings 2,811 1,019
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 341,133 340,215
--------- ---------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 366,707 $ 350,986
========= =========
</TABLE>
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 Six Months Ended
June 30, 1996 June 30, 1996
------------------ -----------------
Premiums and Other Revenues
Net premiums written $ 16,468 $ 23,571
Increase in unearned premiums (12,630) (17,960)
---------- ----------
Net premiums earned 3,838 5,611
Net investment income 3,136 6,544
Net realized investment gains 448 254
---------- ----------
Total revenues 7,422 12,409
---------- ----------
Expenses
Claims and claims expenses 2,797 4,046
Commissions and brokerage 927 1,489
Other operating expenses 2,633 5,124
---------- ----------
Total expenses 6,357 10,659
---------- ----------
Income Before Income Taxes 1,065 1,750
Federal income taxes:
Current 809 877
Deferred (729) (919)
---------- ----------
Income tax expense (benefit) 80 (42)
---------- ----------
Net Income $ 985 $ 1,792
========== ==========
Per Share Data
Primary and fully diluted:
Net income $ 0.06 $ 0.11
========== ==========
Average shares outstanding 16,977,790 16,959,540
========== ==========
See Notes to Consolidated Financial Statements
3
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
(unaudited)
Six Months Ended
June 30, 1996
----------------
<S> <C>
Common Stock
Balance at beginning of year $ 169
Issuance of common stock 1
---------
Balance at end of period 170
---------
Additional Paid-in Capital
Balance at beginning of year 338,737
Restricted common stock issued 1,065
Common stock issued from exercise of stock options 2
---------
Balance at end of period 339,804
---------
Unrealized Appreciation (Depreciation) of Investments,
Net of Income Tax
Balance at beginning of year 3,731
Unrealized appreciation (depreciation) (1,885)
---------
Balance at end of period 1,846
---------
Deferred Compensation Under Stock Award Plan
Balance at beginning of year (3,441)
Restricted stock issued (1,065)
Compensation expense recognized 1,008
---------
Balance at end of period (3,498)
---------
Retained Earnings
Balance at beginning of year 1,019
Net income 1,792
---------
Balance at end of period 2,811
---------
Total Stockholders' Equity
Balance at beginning of year 340,215
Common stock issued 1,068
Change in unrealized appreciation of investments, net of income tax (1,885)
Change in deferred compensation (57)
Net income 1,792
---------
Balance at end of period $ 341,133
=========
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
June 30, 1996
----------------
OPERATING ACTIVITIES
Net income $ 1,792
Adjustments to reconcile net income
to net cash provided by operating activities:
Liability for claims and claims expenses, net 3,533
Unearned premiums, net 17,960
Premiums receivable (11,302)
Funds held receivable (938)
Accrued investment income 26
Reinsurance balances payable 34
Deferred policy acquisition costs (2,221)
Net realized investment gains (254)
Deferred tax asset (919)
Other liabilities 99
Other items, net (738)
---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,072
---------
INVESTING ACTIVITIES
Purchases of fixed maturity investments (168,771)
Sales of fixed maturity investments 156,125
Net sales of short-term investments 70,830
Purchases of equity securities (69,931)
Sales of equity securities 9,017
Purchases of furniture and equipment (142)
---------
NET CASH USED FOR INVESTING ACTIVITIES (2,872)
---------
FINANCING ACTIVITIES
Common stock issued 1,068
Deferred compensation on restricted stock (1,065)
---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3
---------
Increase in cash 4,203
Cash beginning of period 982
---------
Cash end of period $ 5,185
=========
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
6
<PAGE>
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 industry. At June 30, 1996, the publicly
traded equity portfolio consisted of 10 investments, with estimated fair values
ranging individually from $6.6 million to $10.1 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 voting
common stock of the issuer), which are reported using the equity method of
accounting.
Estimated fair value of investments in privately held securities, other than
those reported using the equity method of accounting, is initially cost until
the investments are 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. The Company
periodically reviews the valuation of investments in privately held securities
with Marsh & McLennan Risk Capital Corp., its equity investment advisor.
Privately held securities consisted of the following:
<TABLE>
<CAPTION>
(In thousands)
June 30, 1996 December 31, 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") 11,121 $ 8,869
Venton Holdings Ltd. ("VHL") 1,063
Island Heritage Insurance Company, Ltd. 4,500
Insurance Investment Group, L.P. 180
------- -------
Total privately held equities 25,864 8,869
Convertible security, recorded at fair value:
Mutual Risk Management, Ltd. ("Mutual Risk") Zero Coupon
Subordinated Debenture 10,192 10,665
======= =======
Total privately held securities $36,056 $19,534
======= =======
</TABLE>
7
<PAGE>
The Company's investment commitments relating to its privately held securities
were as follows:
(In thousands)
Commitments: June 30, December 31,
1996 1995
------- -----------
Insurance Investment Group, L.P. $11,820
Venton Holdings, Ltd. 4,190 --
======= ========
Total $16,010 --
------- --------
Set forth below is certain information relating to each of the investments and
commitments in privately held securities made by the Company during 1996 (also
including the investments in Terra Nova and Mutual Risk made in the fourth
quarter of 1995).
The Company owns an approximately 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.
The Company's investment in Terra Nova, acquired in October 1995, currently
represents a 3.6% interest in Terra Nova, which 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 approximately $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 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 is a publicly held Bermuda company, providing risk management
services to client companies.
In March 1996, the Company committed to pay $12.0 million over the long-term to
fund 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. At June 30, 1996, $180,000 had been funded
under this commitment .
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.
8
<PAGE>
Reclassification:
A convertible security with a fair value of $10.7 million and amortized cost of
$9.7 million at December 31, 1995 has been reclassified from fixed maturities to
privately held securities to be consistent with the June 30, 1996 presentation.
5. STATUTORY DATA
The statutory capital and surplus of Risk Capital Reinsurance at June 30, 1996
was $330.3 million and the statutory net loss for the three month and six month
periods ended June 30, 1996 were $0.3 million and $1.4 million, respectively.
9
<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 $335.0 million, of which $328.0 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
cyclically 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 April 1, July 1 and October
1. The renewal periods thus far in 1996 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.
10
<PAGE>
Through the July 1, 1996 renewal season, the Company was presented with a total
of approximately 159 reinsurance treaty opportunities with effective dates from
January 1 to July 1, 1996, of which approximately one-quarter included a
possible integrated investment opportunity. The Company has bound 31 reinsurance
treaties with approximately $75.0 million of annualized premium revenues for
property, casualty, multiline and specialty reinsurance that will be recorded as
premiums written within the next 12 to 18 months. Of this amount, approximately
one-third is from unearned premium portfolios assumed or other one-time
transactions which are non-renewable.
Results of Operations
For the six months ended June 30, 1996, the Company had consolidated net income
of approximately $1.8 million, or $0.11 per share. An after-tax realized
investment gain of $0.2 million, or $0.02 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 six months of 1996 were $23.6 million, as
follows:
(In millions)
-------------
Property $ 6.5
Casualty 5.5
Multiline 1.5
Specialty 10.1
-------
$23.6
=======
Included in specialty premiums written is the entire premium of $9.5 million
from a contract pursuant to which the Company reinsures a portion of one
underlying policy for multiple years covering the launching of commercial
satellites. Such premium will be earned over the multiple year periods as the
exposures expire. Approximately 56% of net premiums written for the first six
months of 1996 was from non-U.S. clients. Excluding the premium from the
multiple year contract, 25% of net premiums written for such period was from
non-U.S. clients, reflecting business arising from four syndicates at Lloyd's of
London. Unhedged monetary assets and liabilities in foreign currencies are
translated at the exchange rate in effect at the balance sheet date with the
resulting foreign exchange gains and losses recognized in income, which may be
material.
11
<PAGE>
On a statutory basis, the combined ratios for 1996 were as follows:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended Three Months Ended
June 30, 1996 June 30, 1996 March 31, 1996
---------------- ------------------ ------------------
<S> <C> <C> <C>
Claims and claims expense ratio 72.1% 72.9% 70.4%
Commissions and brokerage ratio 15.7% 9.1% 31.2%
Operating expense ratio 21.3% 15.6% 34.3%
---------------- ------------------ ------------------
Statutory combined ratio 109.1% 97.6% 135.9%
================ ================== ==================
</TABLE>
Excluding premiums written from the multiple year contract, the statutory
combined ratios for the three month and six month periods ended June 30, 1996
were 132.0% and 134.5%, respectively, reflecting a "start-up" operating expense
ratio that is expected to decline 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 June 30, 1996, approximately 65% of the Company's invested assets consisted
of fixed maturity and short-term investments. Net investment income for the
first six months of 1996 was approximately $6.5 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 (2.4%) in the first six months 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 $919,000, 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 of
existing restricted stock grants will occur over a five-year period), as well as
charges for a portion of unearned premiums and claims reserves.
12
<PAGE>
Investments
A principal component of the Company's investment strategy is investing a
significant portion of invested assets in publicly traded and privately held
equity securities, primarily 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
cyclically of the insurance industry. Unlike fixed income securities, equity
securities such as common stocks, including the equity securities in which the
Company may invest, generally are not and will not be rated by any nationally
recognized rating service. The values of equity securities 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 equity securities 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 securities issued by public companies
that 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 June 30, 1996, cash and invested assets totaled approximately $348.2 million,
consisting of $91.4 million of cash and short-term investments, $136.3 million
of publicly traded fixed maturity investments, $84.4 million of publicly traded
equity securities, and $36.1 million of privately held securities.
During the first six months of 1996, the Company allocated approximately $45.3
million from its short term portfolio to publicly traded equity securities, and
an additional $14.9 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
13
<PAGE>
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 June 30, 1996, the publicly traded equity portfolio consisted of investments
in 10 publicly traded domestic insurers, reinsurers, or companies providing
services to the insurance industry. The estimated fair values of such
investments ranged individually from $6.6 million to $10.1 million. The fixed
maturity and short-term investments were all rated investment grade by 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 six months
of 1996 were 3.9% and 2.9%, 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 has not invested 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
14
<PAGE>
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 six months of 1996
was $7.1 million, 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 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 June 30, 1996, the Company's consolidated stockholders' equity totaled $341.1
million, or $20.07 per share. At such date, statutory surplus of Risk Capital
Reinsurance was $330.3 million, ranking it as the eighth largest domestic
broker-market oriented reinsurer as measured by statutory surplus (based on data
available as of March 31, 1996 from the Reinsurance Association of America).
15
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The 1995 Annual Meeting of Shareholders ("Annual Meeting") of Risk Capital
Holdings, Inc. ("RCHI") was held on May 21,1996.
(b) Proxies for the Annual Meeting were solicited pursuant to Regulation 14
under the Securities Exchange Act of 1934, as amended. There was no
solicitation in opposition to management's nominees as listed in RCHI's
Proxy Statement, dated April 8, 1996.
(c) The shareholders of RCHI re-elected the Class I Directors of RCHI to hold
office until the 1999 annual meeting of shareholders and until their
successors are elected and qualified. Set forth below are the number of
votes cast for and withheld for each such Director:
Election of Directors
FOR WITHHELD
--- --------
Mark N. Williamson 15,322,086 56,700
Philip L. Wroughton 15,320,086 58,700
At the Annual Meeting, the shareholders also approved (i) RCHI's 1995
Employee Stock Purchase Plan and (ii) RCHI's 1995 Long Term Incentive and
Share Award Plan and (iii) ratified the selection of Price Waterhouse LLP
as independent accountants for the fiscal year ending December 31, 1996.
Set forth below are the voting results for such proposals:
Approval of RCHI's 1995 Employee Stock Purchase Plan
FOR AGAINST ABSTAIN
--- ------- -------
14,472,536 797,800 17,350
Approval of RCHI's 1995 Long Term Incentive and Share Award Plan
FOR AGAINST ABSTAIN
--- ------- -------
12,188,986 3,071,750 20,250
Ratification of Selection of Price Waterhouse LLP as Independent
Accountants
FOR AGAINST ABSTAIN
--- ------- -------
15,372,436 650 5,700
16
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit No. Description
----------- -----------
15 Accountants' Awareness Letter and Limitation of Liability
(regarding unaudited interim financial information)
27 Financial Data Schedule
(b) Reports on Form 8-K.
There were no reports filed on Form 8-K for the three month period ended
June 30, 1996.
Omitted from this Part II are items which are inapplicable or to which the
answer is negative for the period covered.
17
<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: August 13, 1996 MARK D. MOSCA
President
/s/ PAUL J. MALVASIO
--------------------------------
Date: August 13, 1996 PAUL J. MALVASIO
Chief Financial Officer
18
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
15 Accountants' Awareness Letter and Limitation of Liability
(regarding unaudited interim financial information)
27 Financial Data Schedule
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 July 31, 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 July 31, 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
August 13, 1996
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
RISK CAPTIAL HOLDINGS, INC
Article 7 of Regulation S-X
Insurance Companies
Six month period ended June 30, 1996
(Dollars in thousands, except per share amounts)
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM
BALANCE SHEET OF RISK CAPITAL HOLDINGS, INC. AND ITS SUBSIDIARY AS OF
JUNE 30, 1996 AND THE RELATED CONSOLIDATED STATEMENT OF INCOME, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 136,316
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 120,411
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 342,973
<CASH> 5,185
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,221
<TOTAL-ASSETS> 366,707
<POLICY-LOSSES> 3,533
<UNEARNED-PREMIUMS> 18,213
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 0
<OTHER-SE> 341,133
<TOTAL-LIABILITY-AND-EQUITY> 366,707
5,611
<INVESTMENT-INCOME> 6,544
<INVESTMENT-GAINS> 254
<OTHER-INCOME> 0
<BENEFITS> 4,046
<UNDERWRITING-AMORTIZATION> 1,489
<UNDERWRITING-OTHER> 5,124
<INCOME-PRETAX> 1,750
<INCOME-TAX> (42)
<INCOME-CONTINUING> 1,792
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,792
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 514
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 3,533
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
