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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 September 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
incorporation or organization) Identification No.)
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 September 30, 1996
----- ---------------------------------
Common Stock, $.01 par value 17,001,225
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<PAGE>
RISK CAPITAL HOLDINGS, INC.
INDEX
Page
No.
-----
PART I. Financial Information
Review Report of Independent Accountants 1
Consolidated Statement of Income 2
For the three month and nine month periods ended
September 30, 1996 and 1995
Consolidated Balance Sheet 3
September 30, 1996 and December 31, 1995
Consolidated Statement of Cash Flows 4
For the nine month period ended September 30, 1996 and 1995
Consolidated Statement of Changes in Stockholders'
Equity For the nine month
period ended September 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis 10
of Financial Condition and Results of Operations
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
<PAGE>
1177 Avenue of the Americas Telephone 212 596 7000
New York, NY 10035 Facsimile 212 596 8910
Price Waterhouse LLP [LOGO]
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 September 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 September 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.
/s/ Price Waterhouse LLP
New York, New York
October 30, 1996
<PAGE>
<TABLE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share data)
(unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
1996 1995 (1) 1996 1995 (1)
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Premiums and Other Revenues
Net premiums written $ 29,938 $ 53,509
Increase in unearned premiums (17,310) (35,270)
------------ ------------ ------------ ------------
Net premiums earned 12,628 18,239
Net investment income 3,289 $ 535 9,833 $ 535
Net realized investment gains (losses) (109) (1) 145 (1)
------------ ------------ ------------ ------------
Total revenues 15,808 534 28,217 534
Expenses
Claims and claims expenses 8,240 12,286
Commissions and brokerage 3,752 5,241
Other operating expenses 2,894 707 8,018 707
------------ ------------ ------------ ------------
Total expenses 14,886 707 25,545 707
Income (Loss) Before Income Taxes 922 (173) 2,672 (173)
Federal income taxes:
Current 600 1,477
Deferred (597) (72) (1,516) (72)
------------ ------------ ------------ ------------
Income tax expense (benefit) 3 (72) (39) (72)
------------ ------------ ------------ ------------
Net Income (Loss) $ 919 ($ 101) $ 2,711 ($ 101)
============ ============ ============ ============
Per Share Data
Primary and fully diluted:
Net income (loss) $ 0.05 ($ 0.01) $ 0.16 ($ 0.01)
============ ============ ============ ============
Operating income (loss): net income
(loss), excluding after-tax net realized
investment gains (losses) $ 0.06 ($ 0.01) $ 0.15 ($ 0.01)
============ ============ ============ ============
Average shares outstanding 16,994,948 15,845,903 16,971,827 15,845,903
============ ============ ============ ============
</TABLE>
(1) Period from June 23, 1995 (date of inception) to September 30, 1995.
See Notes to Consolidated Financial Statements
Page 2
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(in thousands except share data)
(unaudited)
September 30, December 31,
1996 1995
--------- ---------
ASSETS
Investments:
Fixed maturities $ 136,951 $ 132,321
(amortized cost: 1996, $137,417;
1995, $130,949)
Publicly traded equity securities 123,631 39,374
(cost: 1996, $117,304; 1995, $36,009)
Privately held securities 39,277 19,534
(cost: 1996, $33,656; 1995, $18,531)
Short-term investments 76,779 155,116
--------- ---------
Total investments 376,638 346,345
Cash 139 982
Accrued investment income 2,129 2,442
Premiums receivable 15,372
Reinsurance recoverable on unearned premiums 462
Funds held 615
Deferred policy acquisition costs 5,701
Other assets 2,903 1,217
--------- ---------
TOTAL ASSETS $ 403,959 $ 350,986
========= =========
LIABILITIES
Claims and claims expenses $ 11,125
Unearned premiums 35,732
Reinsurance balances payable 279
Investment accounts payable 3,458 $ 5,895
Deferred income tax liability 2,370 1,851
Other liabilities 2,728 3,025
--------- ---------
TOTAL LIABILITIES 55,692 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, 17,001,225; 1995, 16,941,125)
issued and outstanding 170 169
Additional paid-in capital 339,934 338,737
Unrealized appreciation of investments,
net of income tax 7,511 3,731
Deferred compensation under stock award plan (3,078) (3,441)
Retained earnings 3,730 1,019
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 348,267 340,215
--------- ---------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $ 403,959 $ 350,986
========= =========
See Notes to Consolidated Financial Statements
Page 3
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
September 30,
----------------------
1996 1995 (1)
--------- ---------
OPERATING ACTIVITIES
Net income (loss) $ 2,711 ($ 101)
Adjustments to reconcile net income
to net cash provided by operating activities:
Liability for claims and claims expenses, net 11,125
Unearned premiums, net 35,270
Premiums receivable (15,372)
Funds held receivable (615)
Accrued investment income 313 (427)
Reinsurance balances payable 279
Deferred policy acquisition costs (5,701)
Net realized investment (gains) losses (145) 1
Deferred tax asset (1,516) (72)
Other liabilities (65) 1,414
Other items, net (1,758) (1,055)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 24,526 (240)
--------- ---------
INVESTING ACTIVITIES
Purchases of fixed maturity investments (199,355) (92,868)
Sales of fixed maturity investments 188,449
Net (purchases) sales of short-term investments 81,096 (232,377)
Purchases of equity securities (103,876) (11,201)
Sales of equity securities 9,017
Purchases of furniture and equipment (702)
--------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (25,371) (336,446)
--------- ---------
FINANCING ACTIVITIES
Net cash proceeds from initial public offering
and direct sales 323,347
Proceeds from issuance of Class B warrants 13,458
Common stock issued 1,198
Deferred compensation on restricted stock (1,196)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2 336,805
--------- ---------
Increase in cash (843) 119
Cash beginning of period 982
--------- ---------
Cash end of period $ 139 $ 119
========= =========
(1) Period from June 23, 1995 (date of inception) to September 30, 1995
See Notes to Consolidated Financial Statements
Page 4
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)
Nine Months Ended
September 30,
------------------------
1996 1995 (1)
--------- ---------
Common Stock
Balance at beginning of period $ 169
Issuance of common stock, Class A
and B warrants $ 168
Restricted common stock issued 1 1
--------- ---------
Balance at end of period 170 169
--------- ---------
Additional Paid-in Capital
Balance at beginning of period 338,737
Issuance of common stock, Class A
and B warrants 334,843
Restricted common stock issued 1,195 2,500
Common stock issued from exercise of
stock options 2
--------- ---------
Balance at end of period 339,934 337,343
--------- ---------
Unrealized Appreciation of Investments,
Net of Income Tax
Balance at beginning of period 3,731
Unrealized appreciation 3,780
--------- ---------
Balance at end of period 7,511
--------- ---------
Deferred Compensation Under Stock Award Plan
Balance at beginning of period (3,441)
Restricted common stock issued (1,196) (2,500)
Compensation expense recognized 1,559 48
--------- ---------
Balance at end of period (3,078) (2,452)
--------- ---------
Retained Earnings
Balance at beginning of period 1,019
Net income (loss) 2,711 (101)
--------- ---------
Balance at end of period 3,730 (101)
--------- ---------
Total Stockholders' Equity
Balance at beginning of period 340,215
Issuance of common stock, Class A and B
warrants 337,343
Common stock issued 1,198 169
Change in unrealized appreciation of
investments, net of income tax 3,780
Change in deferred compensation 363 (2,452)
Net income (loss) 2,711 (101)
--------- ---------
Balance at end of period $ 348,267 $ 334,959
========= =========
(1) Period from June 23, 1995 (date of inception) to September 30, 1995.
See Notes to Consolidated Financial Statements
Page 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.
6
<PAGE>
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 industry. At September 30, 1996, the
publicly traded equity portfolio consisted of 10 investments, with estimated
fair values ranging individually from $9.6 million to $15.3 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 voting
common stock of the issuer), which are reported using the equity method of
accounting. Under this method, the Company will record its proportionate share
of income or loss for such investments on a quarter lag basis.
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.
7
<PAGE>
Privately held securities consisted of the following:
(in thousands)
September 30, December 31,
1996 1995
------------- ------------
Equity Securities:
Recorded based on the equity method:
Island Heritage Insurance Company, Ltd. $ 4,426
Insurance Investment Group, L.P. 180
Recorded at fair value:
Peregrine Russell Miller Insurance Fund 8,554
of Asia Limited ("Asian Fund")
Terra Nova (Bermuda) Holdings, Ltd. 15,199 8,869
("Terra Nova")
Venton Holdings Ltd. 1,063
------- -------
Total privately held equities 29,422 8,869
Convertible security, recorded at fair value:
Mutual Risk Management, Ltd. ("Mutual 9,855 10,655
Risk") Zero Coupon Subordinated
Debenture
------- -------
Total privately held securities $39,277 $19,524
======= =======
The Company's investment commitments relating to its privately held securities
were as follows:
(In thousands)
Commitments: September 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 44% economic 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.
8
<PAGE>
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 Venton Holdings Ltd. ("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 by the Company
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. This security was sold subsequent
to September 30, 1996 at a realized gain of approximately $548,000.
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 September 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.
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 September 30, 1996
presentation.
5. STATUTORY DATA
The statutory capital and surplus of Risk Capital Reinsurance at September 30,
1996 was $334.6 million and the statutory net loss for the three month and nine
month periods ended September 30, 1996 were $3.1 million and $4.5 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
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 April 1, July 1 and October
1. The renewal periods 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
10
<PAGE>
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.
From January 1, 1996 through the October 1, 1996 renewal season, the Company was
presented with a total of approximately 209 reinsurance treaty opportunities
with effective dates from January 1 to October 1, 1996, of which approximately
one-quarter included a possible integrated investment opportunity. The Company
has bound 38 reinsurance treaties with approximately $85.0 million of annualized
net premiums written 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 nine months ended September 30, 1996, the Company had consolidated net
income of approximately $2.7 million, or $0.16 per share. An after-tax realized
investment gain 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 for the nine month and three month periods ended September
30, 1996 were as follows:
(in millions)
Nine Months Ended Three Months Ended
September 30, 1996 September 30, 1996
------------------ ------------------
Property $ 12.4 $ 5.9
Casualty 11.3 5.8
Multiline 18.7 17.2
Specialty 11.1 1.0
------ ------
$ 53.5 $ 29.9
====== ======
Included in specialty premiums written for the nine month period 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. Included in the multiline
11
<PAGE>
premiums for the nine month and three month periods ended September 30, 1996 is
$16.3 million from the assumption of an unearned premium portfolio transfer,
effective July 1, 1996, covering homeowners' business. Approximately 54% and 57%
of net premiums written resulted from unearned premium portfolios and other
non-recurring transactions for the nine month and three month periods ended
September 30, 1996, respectively. Approximately 32% of net premiums written for
the first nine months of 1996 was from non-U.S. clients. 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.
On a statutory basis, the combined ratios for the nine month and three month
periods ended September 30, 1996 were as follows:
Nine Months Ended Three Months Ended
September 30, 1996 September 30, 1996
------------------ ------------------
Claims and claims expense ratio 67.4% 65.2%
Commissions and brokerage ratio 20.4% 24.2%
Operating expense ratio 14.7% 9.5%
------ ------
Statutory combined ratio 102.5% 98.9%
====== ======
The operating expense rates component of the statutory composite ratios for the
nine month and three month periods ended September 30, 1996 were decreased by
17.3% and 12.7%, respectively, as a result of unearned premium portfolios and
other non-recurring transactions.
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 continued
underwriting losses in 1996.
Investment Results
At September 30, 1996, approximately 57% of the Company's invested assets
consisted of fixed maturity and short-term investments. Net investment income
for the first nine months of 1996 was approximately $9.8 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.
12
<PAGE>
Income Taxes
The Company's effective tax rate of (1.5%) in the first nine 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 approximately $1.5 million, 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.
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
13
<PAGE>
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 September 30, 1996, cash and invested assets totaled approximately $376.8
million, consisting of $76.9 million of cash and short-term investments, $137.0
million of publicly traded fixed maturity investments, $123.6 million of
publicly traded equity securities, and $39.3 million of privately held
securities.
During the first nine months of 1996, the Company allocated approximately $79.3
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 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 September 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 $9.6 million to $15.3 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 3.1 years.
The Company's pre-tax and net of tax investment yields in the first nine months
of 1996 were 3.8% and 2.8%, 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
14
<PAGE>
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 nine months of 1996
was $24.5 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 September 30, 1996, the Company's consolidated stockholders' equity totaled
$348.3 million, or $20.48 per share. At such date, statutory surplus of Risk
Capital Reinsurance was $334.6 million. Based on data available as of June 30,
1996 from the Reinsurance Association of
15
<PAGE>
America, Risk Capital Reinsurance is the tenth largest domestic broker market
oriented reinsurer as measured by statutory surplus.
16
<PAGE>
PART II. OTHER INFORMATION
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 September 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: November 12, 1996 MARK D. MOSCA
President
/s/ PAUL J. MALVASIO
------------------------------
Date: November 12, 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
1177 Avenue of the Americas Telephone 212 596 7000
New York, NY 10035 Facsimile 212 596 8910
Price Waterhouse LLP [LOGO]
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 October 30, 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 October 30, 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.
/s/ Price Waterhouse LLP
New York, New York
November 12, 1996
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
RISK CAPITAL HOLDINGS, INC
Article 7 of Regulation S-X
Insurance Companies
Nine month period ended September 30, 1996
(Dollars in thousands, except per share amounts)
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 136,951
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 162,908
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 376,638
<CASH> 139
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 5,701
<TOTAL-ASSETS> 403,959
<POLICY-LOSSES> 11,125
<UNEARNED-PREMIUMS> 35,732
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0
0
<COMMON> 0
<OTHER-SE> 348,267
<TOTAL-LIABILITY-AND-EQUITY> 403,959
18,239
<INVESTMENT-INCOME> 9,833
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<UNDERWRITING-OTHER> 8,018
<INCOME-PRETAX> 2,672
<INCOME-TAX> (39)
<INCOME-CONTINUING> 2,711
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,711
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 1,161
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<RESERVE-CLOSE> 11,125
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