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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _________ to _________
Commission File No. 0-26456
RISK CAPITAL HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 06-1424716
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 Horseneck Lane
Greenwich, Connecticut 06830
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(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (203) 862-4300
Securities registered pursuant to Section 12(b) of the Act:
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<S> <C>
Name of each Exchange
Title of Each Class on which Registered
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None None
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No _______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 27, 1997 was approximately $164,778,343 based on the
closing price on the Nasdaq National Market on that date.
As of March 27, 1997, there were 17,017,192 shares of the Registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference to the Registrant's
definitive proxy statement to be filed with respect to the Registrant's Annual
Meeting of Stockholders to be held on May 13, 1997, which proxy statement will
be filed with the Securities and Exchange Commission within 120 days of the
close of the Registrant's fiscal year ended December 31, 1996.
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RISK CAPITAL HOLDINGS, INC.
TABLE OF CONTENTS
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<CAPTION>
Item Page
<S> <C> <C>
PART I
1. Business.................................................................... 1
2. Properties.................................................................. 22
3. Legal Proceedings........................................................... 22
4. Submission of Matters to a Vote of Security Holders......................... 22
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters....... 22
6. Selected Financial Data..................................................... 23
Management's Discussion and Analysis of Financial Condition and Results of
7. Operations.................................................................. 24
8. Financial Statements and Supplementary Data................................. 30
Changes in and Disagreements with Accountants on Accounting and Financial
9. Disclosure.................................................................. 31
PART III
10. Directors and Executive Officers of the Registrant.......................... 31
11. Executive Compensation...................................................... 31
12. Security Ownership of Certain Beneficial Owners and Management.............. 31
13. Certain Relationships and Related Transactions.............................. 31
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............. 31
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS.
Certain terms used below are defined in the "Glossary of Selected Insurance
Terms" appearing on page 18.
GENERAL
THE COMPANY
Risk Capital Holdings, Inc. ("RCHI") was incorporated in March 1995 under
the laws of the State of Delaware with the objective of becoming a global
reinsurance company which integrates sound reinsurance underwriting with an
investment strategy focused on the insurance industry. RCHI believes that
reinsurance underwriting and investment skills can be mutually reinforcing and
that successfully employing such skills in an integrated manner can result in
enhanced stockholder returns. RCHI operates through its wholly owned subsidiary,
Risk Capital Reinsurance Company ("Risk Capital Reinsurance" and, together with
RCHI, unless the context otherwise requires, the "Company"), whose primary focus
is on traditional and finite risk property and casualty reinsurance treaty
coverages, including excess of loss reinsurance and quota share or proportional
reinsurance. Based upon data available from the Reinsurance Association of
America ("RAA"), Risk Capital Reinsurance is the twelfth largest United States
based broker market oriented reinsurer as measured by statutory surplus at
December 31, 1996. As of that date, Risk Capital Reinsurance had statutory
capital and surplus of $334.3 million.
In September 1995, RCHI completed an (i) initial public offering of
9,775,000 shares of its common stock, par value $.01 per share (the "Common
Stock"), and (ii) concurrent direct sales of (x) an aggregate of 6,975,625
shares of Common Stock and (y) warrants to purchase 4,451,680 shares of Common
Stock (of which 2,531,079 shares are subject to immediately exercisable
warrants) for aggregate proceeds, net of underwriting expenses, of approximately
$335.0 million (collectively, the "Offerings"). RCHI contributed $328.0 million
of such proceeds to the capital of Risk Capital Reinsurance. In November 1995,
Risk Capital Reinsurance was licensed under the insurance laws of the State of
Nebraska.
Marsh & McLennan Risk Capital Corp. ("Risk Capital Corp."), a subsidiary of
Marsh & McLennan Companies, Inc. (together with its subsidiaries, unless the
context otherwise requires, "Marsh & McLennan"), is the Company's equity
investment advisor. Risk Capital Corp. and its affiliates have successfully
invested in various newly-formed insurance and reinsurance ventures, principally
ACE Limited, EXEL Limited (including its subsidiary X.L. Insurance Company,
Ltd., "EXEL"), Mid Ocean Ltd. and Centre Reinsurance Holdings Limited. Risk
Capital Corp. is the investment advisor to The Trident Partnership L.P.
("Trident"), a $667.0 million investment fund capitalized by institutional
investors, including Marsh & McLennan, to invest selectively on a global basis
in the insurance and reinsurance industry.
The principal shareholders of RCHI are (i) EXEL, which beneficially owns
approximately 22.1% of the outstanding Common Stock (or 19.2% assuming the
exercise of all immediately exercisable warrants and options to purchase Common
Stock), (ii) Trident, which beneficially owns approximately 10.3% of the
outstanding Common Stock (or 16.0% assuming the exercise of all immediately
exercisable warrants and options to purchase Common Stock), and (iii) Marsh &
McLennan Risk Capital Holdings, Ltd., which beneficially owns approximately 8.2%
of the outstanding Common Stock (or 11.7% assuming the exercise of all
immediately exercisable warrants and options to purchase Common Stock).
The Company's executive offices are located at 20 Horseneck Lane,
Greenwich, Connecticut 06830 and its telephone number is (203) 862-4300.
BUSINESS STRATEGY
The Company's integrated strategic focus on reinsurance and investments in
the insurance sector is designed to allow the Company to take advantage of the
opportunities arising from the extensive changes taking place in the insurance
industry worldwide. These changes are occurring principally as a result of
increasing globalization of insurance and other markets, the need of insurers
and reinsurers to reduce costs, and unprecedented catastrophic and other losses.
Such losses in particular have affected underwriting capacity, increased demand
for financially strong insurance and reinsurance capacity, contributed to the
restructuring of insurance companies and markets, including Lloyd's of London
("Lloyd's"), and raised concerns about the
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adequacy of the capital of certain insurance companies. The Company believes
that it is in a position to capitalize on these opportunities because:
* as a new company its distribution and overhead structure, as well as its
organizational philosophy, is not encumbered with a traditional, territorial
outlook; rather the Company is positioned to respond to the functional and
global approach to the placement of insurance and reinsurance;
* a small, centralized staff is well motivated by incentive compensation and
is assisted by new information technology;
* management seeks to use both the Company's traditional and finite risk
reinsurance underwriting capacity and its investment portfolio to provide
increased capacity to insurers through the provision of reinsurance and/or
capital;
* the extensive experience and relationships of the Company's management and
Risk Capital Corp. assists in identifying and taking advantage of
underwriting and investment opportunities, respectively; and
* the Company believes that attractive underwriting opportunities are
presented to it in connection with the investment activities of the Company
and Risk Capital Corp. as the Company's equity investment advisor.
REINSURANCE UNDERWRITING
STRATEGY
The principal components of the Company's underwriting strategy are: (i)
identifying and committing the Company's underwriting capacity to those types of
reinsurance where management believes that above average underwriting results
can be achieved; (ii) promoting client loyalty by providing a full range of
sophisticated risk management products closely tailored to its clients' needs;
(iii) conserving capacity to react to changing market conditions; (iv)
soliciting business primarily through reinsurance intermediaries; (v) taking
advantage of underwriting opportunities that may arise in connection with the
equity investment activities of Risk Capital Corp.; (vi) providing reinsurance
to insurers in which the Company invests, where appropriate; (vii) maintaining a
small, highly skilled, performance-motivated staff; and (viii) maintaining a low
expense structure. The Company continues to implement this strategy throughout
the property and casualty underwriting cycle.
The Company seeks to write "large lines" (i.e., significant portions) on a
limited number of traditional and finite risk property and casualty reinsurance
treaties with a select number of insurance and reinsurance companies located
throughout the world (although the Company's principal focus is on large United
States and European-based insurance and reinsurance companies) and with select
Lloyd's Syndicates. The Company may also provide credit enhancement, time and
distance and other risk management products, the nature and demand for which
will vary over time depending on existing capacity, profitability, tax,
regulatory and accounting aspects, and other circumstances pertaining to such
products.
The Company focuses its efforts on treaty reinsurance. The Company believes
in the value of long-term mutually profitable treaty relationships. The Company
intends to continue to establish and cultivate such long-term relationships with
its reinsureds and believes it will be assisted therein by the extensive
experience of its management and Risk Capital Corp. In addition, the Company
intends to write conservatively in terms of the Company's surplus capacity. The
Company does not currently intend for its premium-to-surplus ratio to exceed
0.7x. However, depending on business opportunities and the mix of business that
may comprise the Company's portfolio, the Company may consider underwriting at a
higher premium-to-surplus ratio. Underwriting conservatively in terms of surplus
capacity will help enable the Company to maintain underwriting capacity and
flexibility. The Company believes that these objectives should, if realized,
place the Company in a position (without being overly dependent on the
underwriting cycle) to take advantage of underwriting opportunities that are
generally only available to well-capitalized reinsurers willing to underwrite
large lines.
The Company participates at Lloyd's through the provision of whole account
quota share reinsurance to selected Lloyd's Syndicates. The Company may
participate in other ways, including through investments in Lloyd's corporate
members and/or managing agents. In 1996, the Company acquired an equity interest
in an indirect owner of a Lloyd's managing agent and corporate name. See Note 3
under the caption "Investment Information" of the accompanying Notes to
Consolidated Financial Statements of the Company.
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The Company may obtain clash and catastrophe retrocessional coverage and,
if obtained, will limit its credit risk with respect to such retrocessions
through careful analysis and selection of retrocessionaires. See
"Business--Retrocessional Arrangements" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations--Risk Retention."
The Company determines the aggregate amount of reinsurance it writes based
upon market and other factors, including its assessment of underwriting
opportunities and its premium-to-surplus ratio at the time of determination. The
Company believes that insurance companies with certain identifiable
characteristics have historically performed better than the industry throughout
the underwriting cycle and believes that the experience of the Company's
management and Risk Capital Corp. assist in focusing on such companies for
reinsurance and investment opportunities, respectively. The Company believes
that these characteristics include underwriting performance, underwriting focus
and discipline (irrespective of the underwriting cycle), ability to take
advantage of opportunities and changing circumstances in the insurance industry,
low expense ratio, specialization, ability to take a lead role in structuring
substantial insurance and reinsurance contracts, substantial capacity and
effective use of reinsurance.
The Company employs a disciplined, multi-disciplinary and highly analytical
approach to underwriting designed to specify premium that is intended to be
commensurate with the amount of its capital the Company estimates it is placing
at risk. As part of its underwriting process, the Company focuses on the
financial characteristics (including capital needs) and reputation of the
proposed cedent, the likelihood of establishing a long-term relationship with
the cedent, the geographic area in which the cedent does business, its market
share, historical loss data for the cedent and, where available, for the
industry as a whole in the relevant regions, in order to compare the cedent's
historical loss experience to industry averages.
OPERATIONS
The Company's mix of business on the basis of net premiums written for 1996
is set forth in the following table:
<TABLE>
<CAPTION>
NET PREMIUMS WRITTEN
(IN MILLIONS)
YEAR ENDED
DECEMBER 31, 1996
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<S> <C> <C>
Amount Percentage
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Property.......................... $19.4 27%
Casualty.......................... 17.6 24
Multi-line........................ 21.8 30
Specialty......................... 13.7 19
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Total............................. $72.5 100%
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</TABLE>
Approximately $32.9 million, or 45%, of net premiums written for 1996
resulted from unearned premium portfolios and other non-recurring transactions.
Included in specialty premiums written is $11.9 million from a contract pursuant
to which the Company reinsures a portion of one underlying policy for multiple
years. Such premiums will be earned over the multiple periods as the exposures
expire.
Approximately 30% of net premiums written for 1996 was from non-United
States clients which are Lloyd's Syndicates or are located in the United Kingdom
or Continental Europe.
Reinsurance is provided by the Company both on a quota share and excess of
loss basis, which in 1996 amounted to 58% and 42%, respectively, of the
Company's net premiums written. In the future, the mix of quota share and excess
of loss reinsurance will depend on market conditions and other relevant factors
and cannot be predicted with accuracy. Depending on future conditions, the
Company may also write other types of reinsurance.
For a discussion of the Company's in-force business at January 1, 1997, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Recent Industry Performance."
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INVESTMENTS
STRATEGY
The Company's investment goals are to support the Company's reinsurance
activities and enhance the Company's long-term profitability. The principal
components of the Company's strategy to achieve these goals include: (i)
supporting short-term liquidity requirements through cash and fixed income
investments and, if necessary, through the sale of marketable equity securities
from the Company's investment portfolio; (ii) investing a significant portion of
the Company's assets in publicly traded and privately held equity securities
principally issued by insurance and reinsurance companies and companies
providing services to the insurance industry; (iii) identifying trends and
investment opportunities in the insurance industry that could lead to superior
returns; (iv) utilizing Risk Capital Corp., an experienced insurance industry
advisor, as equity investment advisor; (v) investing in insurers to which the
Company provides reinsurance, where appropriate; and (vi) when available,
co-investing with Trident, a dedicated insurance industry private equity fund,
and an entity to which Risk Capital Corp. also provides equity investment
advisory services.
The Company intends to invest a majority of its investment portfolio in
equity securities, principally issued by insurance and reinsurance companies and
companies providing services to the insurance industry pursuant to advice from
Risk Capital Corp. The Company does not believe that the provision of
reinsurance to insureds in which the Company invests should subject the Company
to any significant additional investment risk; however, the operating
performance of an insured in which the Company also invests could affect the
Company more than an entity in which the Company only invests or to which the
Company only provides reinsurance. The Company believes that, over the long
term, a portfolio of equity securities offers a greater potential return and
growth in book value than one comprised of fixed maturity securities, and that
such a portfolio should most effectively maximize long term stockholders'
equity. The Company also believes that an equity portfolio is appropriate for
the Company because of the long-tail nature of certain of the reinsurance
business that the Company may write and the Company's anticipated conservative
premium-to-surplus ratio.
The Company has entered into an equity investment advisory agreement with
Risk Capital Corp. with respect to the management of the Company's equity
investment portfolio and a fixed income investment advisory agreement with The
Putnam Advisory Company, Inc. ("Putnam"), a subsidiary of Marsh & McLennan, with
respect to the management of the Company's fixed income securities portfolio.
Subject to investment guidelines determined, from time to time, by the
Investment/Finance Committee of the Board of Directors of the Company (the
"Investment Committee"), Putnam and Risk Capital Corp. have the authority, among
other things, to buy, sell, retain or exchange the respective type of
investments for which they have been retained. The equity investment advisory
agreement provides that, subject to general guidelines established from time to
time by the Investment Committee, the Company may not invest in, purchase or
dispose of equity securities unless such investment, purchase or disposition
(including the terms thereof) has been approved by Risk Capital Corp. Equity
securities include common stocks, preferred stocks and securities (including
debt securities) convertible into or exercisable or exchangeable for common
stocks or preferred stocks, and any similar securities or instruments, and any
debt securities that were originally issued together with any such securities or
instruments. The Company may make strategic investments without the approval of
Risk Capital Corp. Strategic investments are generally acquisitions (not being
made for resale) of securities of companies engaged in the reinsurance business
or other businesses (except an insurance business), provided that the Company
obtains operational control of such company.
Under the equity investment advisory agreement, Risk Capital Corp. receives
compensation on both public securities owned by the Company (the "Public
Portfolio") and private equity securities owned by the Company (the "Private
Portfolio"). With respect to equity securities in the Public Portfolio, the
Company pays an annual fee equal to 0.35% of the daily average of the market
prices of such securities. With respect to the Private Portfolio, the Company
pays an annual fee equal to the sum of (i) 1.5% per annum on the first $250.0
million in carrying value of securities in the Private Portfolio and (ii) 1.0%
per annum on the carrying value of such securities in the Private Portfolio that
exceeds $250.0 million. Risk Capital Corp. is also entitled to annual
compensation equal to the excess, if any, of (x) 7.5% of cumulative net realized
gains (as defined in the equity investment advisory agreement) on equity
securities in the Private Portfolio over (y) cumulative incentive compensation
previously paid in prior years on cumulative net realized gains. The agreement
provides for a minimum aggregate cash fee to Risk Capital Corp. of $500,000 per
annum through December 31, 1997. Fees
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incurred under the agreement during fiscal year 1996 and partial fiscal year
1995 were approximately $686,000 and $151,000, respectively.
Under the fixed income investment advisory agreement with Putnam, the
Company pays annual fees at the following rates: 0.35% per annum on the first
$50.0 million, 0.30% per annum on the next $50.0 million, 0.20% per annum on the
next $100.0 million and 0.15% per annum on the market value of assets that
exceed $200.0 million. Fees incurred under the agreement during 1996 and 1995
were approximately $547,000 and $190,000, respectively.
Risk Capital Corp. is investment manager to Trident and, accordingly,
certain restrictions exist with respect to Risk Capital Corp.'s ability to make
investment recommendations to the Company with respect to investments which
would be suitable for both Trident and the Company. Under the Trident
partnership agreement, until the earlier of May 6, 2000 or the date on which at
least 75% of the aggregate capital of Trident has been drawn, neither Risk
Capital Corp. nor any of its affiliates may organize, or invest in, any new or
existing risk assumption entity unless Trident is first offered a reasonable
opportunity to invest in such entity. Such restrictions may also apply to the
Company. Such limitation, however, does not apply to investments in any such new
entity where the total invested capital of such entity does not exceed $10.0
million.
Pursuant to the Trident partnership agreement, where Trident has elected to
make part, but not all, of the full investment otherwise available to it, the
Company may not be offered the opportunity to participate in such investment
unless Trident first offers at least all Trident partners with capital
commitments of at least $50.0 million the right to participate in such
additional investment on a pro rata basis. Pursuant to the terms of the equity
investment advisory agreement between the Company and Risk Capital Corp., Risk
Capital Corp. has agreed that it will not invest in such opportunities, and will
not offer any such opportunities to its affiliates, without first offering the
Company an opportunity to make such investment.
Fixed income investments will be used to provide shorter-term liquidity and
current returns. The fixed income securities portfolio generally will be
invested in high quality, liquid securities, including securities issued by
United States government agencies and United States government guaranteed
securities.
Since 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 portfolio will lack
industry diversification and will be particularly subject to the cyclicality of
the insurance industry. Such cyclicality will affect the market prices of a
significant portion of the Company's investment portfolio and the income and
return on such investments, all of which could negatively affect the Company's
underwriting capacity. 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 other competitor reinsurance companies,
which tend to invest primarily in fixed income investments. 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 its competitor reinsurance companies.
OPERATIONS
At December 31, 1996, cash and invested assets totaled approximately $392.9
million, consisting of $106.3 million of cash and short-term investments, $140.4
million of publicly traded fixed maturity investments, $117.4 million of
publicly traded equity securities and $28.8 million of privately held
securities.
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The following table summarizes the Company's investments on a consolidated
basis at December 31, 1996:
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<CAPTION>
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1996
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<S> <C> <C>
ESTIMATED
FAIR VALUE PERCENT
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Cash and short-term.............................. $106,352 27%
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Fixed maturities:
U.S. government and government agencies..... 35,796 9
Municipal bonds............................. 60,041 15
Corporate bonds............................. 17,316 5
Mortgage and asset-backed securities........ 26,709 7
Foreign governments......................... 519
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Subtotal, fixed maturities................ 140,381 36
Equity securities:
Publicly traded............................. 117,360 30
Privately held.............................. 28,847 7
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Subtotal, equity securities............... 146,207 37
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Total............................... $392,940 100%
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</TABLE>
Guidelines established by the Company restrict the portion of the fixed
maturities portfolio that can be held in lower quality securities. At December
31, 1996, 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 2.2 years.
Contractual maturities of the Company's consolidated fixed maturity
securities are shown below:
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31, 1996
--------------------------------
<S> <C> <C>
AMORTIZED ESTIMATED
COST FAIR VALUE
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Available for sale:
Due in one year or less.................. $ 57,351 $ 57,386
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Due after one year through five years.... 14,514 14,567
Due after five years through 10 years.... 22,261 22,404
Due after 10 years 19,400 19,315
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Subtotal................................. 113,526 113,672
Mortgage and asset-backed securities..... 26,602 26,709
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Total............................... $140,128 $140,381
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</TABLE>
At December 31, 1996, the publicly traded equity portfolio consisted of
investments in ten publicly traded domestic insurers, reinsurers, or companies
providing services to the insurance industry. The estimated fair values of such
investments ranged individually from $1.2 million to $15.6 million.
See Note 3 under the caption "Investment Information" of the accompanying
Notes to Consolidated Financial Statements of the Company for certain
information regarding the Company's publicly traded and privately held
securities and their carrying values, and commitments made by the Company
relating to its privately held securities. 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.
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.
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MARKETING
The Company obtains substantially all of its reinsurance business through
intermediaries representing the cedent in negotiations for the purchase of
reinsurance. The process of effecting a brokered reinsurance placement typically
begins when a cedent enlists the aid of an intermediary in structuring a
reinsurance program. Often the intermediary will consult with one or more lead
reinsurers as to the pricing and contract terms of the reinsurance protection
being sought. Once the cedent has approved the terms quoted by the lead
reinsurer, the intermediary will offer participation to qualified reinsurers
until the program is fully subscribed to by reinsurers at terms agreed to by all
parties.
By working through intermediaries to originate its business, the Company
need not maintain a substantial sales organization which, during periods of
reduced premium volume, would comprise a significant and non-productive part of
overhead. In addition, management believes that submissions from the
intermediary market are more numerous and diverse, including certain targeted
specialty coverages, than would be available through a salaried sales
organization and that the Company is able to exercise greater selectivity than
would be possible in dealing directly with cedents.
The Company pays commissions to intermediaries based on negotiated
percentages of the premium it writes. Direct writers of reinsurance typically
incur higher fixed costs that are included in their underwriting expenses.
Reinsurers using intermediaries can lower these costs during a downturn by
writing less business and incurring lower brokerage costs. Intermediaries do not
generally have the authority to bind the Company with respect to reinsurance
agreements nor does the Company commit in advance to accept any portion of the
business that intermediaries submit to it. Reinsurance business from any cedent,
whether new or renewal, is generally subject to acceptance by the Company.
In 1996, U.S. Re Corporation ("U.S. Re"), Faugere & Jutheau and AON
Reinsurance, Inc. accounted for approximately 27.7%, 13.7% and 12.1%,
respectively, of the Company's net premiums written. In 1996, U.S. Re, Balis &
Company, Inc. ("Balis") and Minet Re accounted for approximately 37.1%, 12.4%
and 10.1%, respectively, of the Company's net premiums earned. The Company does
not believe that the loss of such business would have a long-term material
adverse effect due to the Company's competitive position within the broker
reinsurance market and the availability of business from other intermediaries.
Balis is an affiliate of Marsh & McLennan. The terms relating to the Company's
intermediary arrangements with Balis have been negotiated on an arm's-length
basis.
In addition to investment opportunities arising from the activities of Risk
Capital Corp. as the Company's equity investment advisor, the Company is
provided with investment opportunities by reinsurance brokers and traditional
financing sources, including investment banking firms, venture capital firms and
other banking and financing sources, both acting as principal investors and
intermediaries. Underwriting opportunities may arise from such sources in
connection with the Company's investment activities as part of integrated
transactions.
RETROCESSIONAL ARRANGEMENTS
The Company will evaluate its retrocessional requirements periodically in
relation to many factors, including its surplus capacity, gross line capacity
and changing market conditions. Other than the Company's participation in
"common account" retrocessional arrangements for certain reinsurance treaties,
the Company currently does not maintain retrocessional arrangements on a per
risk or per treaty basis, or for the purpose of limiting its exposure with
respect to catastrophe losses or unusual accumulations of losses resulting from
a single occurrence involving two or more reinsured policies. The Company
believes that such exposures are currently adequately managed through
appropriate terms and conditions and pricing of reinsurance contracts. Common
account retrocessional arrangements reduce the effect of individual or aggregate
losses to all participating companies with respect to a reinsurance treaty,
including the cedent.
For a discussion regarding the Company's risk management policies, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations--Risk Retention."
Reinsurance companies enter into retrocessional arrangements for many of
the same reasons primary insurers seek reinsurance, including reducing the
effect of individual or aggregate losses and increasing premium writings and
risk capacity without requiring additional capital. Retrocessional arrangements
would not relieve the Company from its obligations to the insurers and
reinsurers from whom it assumes business. The failure of
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retrocessionaires to honor their obligations could result in losses to the
Company. The Company will limit its credit risk with respect to retrocessional
arrangements through careful analysis and selection of retrocessionaires. The
evaluation process will involve financial analysis of current audited financial
data and comparative analysis of such data in accordance with guidelines
established by the Company.
CLAIMS ADMINISTRATION
Claims are managed by the Company's professional claims staff whose
responsibilities include the review of initial loss reports, creation of claim
files, determination of whether further investigation is required, establishment
and adjustment of case reserves and payment of claims. In addition, the claims
staff conducts comprehensive claims audits of both specific claims and overall
claims procedures at the offices of selected ceding companies. In certain
instances, a claims audit may be performed prior to assuming reinsurance
business or entering in an investment transaction as part of a comprehensive
risk evaluation process.
RESERVES FOR UNPAID CLAIMS AND CLAIMS EXPENSES
As a reinsurance company, the Company is required to establish and maintain
reserves to cover its estimated ultimate liability for unpaid claims and claims
expenses with respect to reported and unreported claims incurred as of the end
of each accounting period (net of estimated related salvage and subrogation
claims and retrocession recoverables (if any) of the Company). These reserves
are estimates involving actuarial and statistical projections at a given time of
what the Company expects the ultimate settlement and administration of claims to
cost based on facts and circumstances then known, predictions of future events,
estimates of future trends in claims severity and other variable factors such as
inflation and new concepts of liability. For certain types of claims, it may
over time be necessary to revise estimated potential loss exposure and,
therefore, the Company's unpaid claims and claims expense reserves. The inherent
uncertainties of estimating claims and claims expense reserves are exacerbated
for reinsurers by the significant periods of time (the "tail") that often elapse
between the occurrence of an insured claim, the reporting of the claim to the
primary insurer and, ultimately, to the reinsurer, and the primary insurer's
payment of that claim and subsequent indemnification by the reinsurer. As a
consequence, actual claims and claims expenses paid may deviate, perhaps
substantially, from estimates reflected in the Company's reserves in its
financial statements. The estimation of reserves by new reinsurers, such as the
Company, may be less reliable than the reserve estimations of a reinsurer with
an established volume of business and loss history. To the extent reserves prove
to be inadequate, the Company may have to augment such reserves and incur a
charge to earnings. Such a development could result in a material charge to
earnings or stockholders' equity in future periods.
When a claim is reported to an insurance company that cedes business to the
Company, its claims personnel establish a "case reserve" for the estimated
amount of the ultimate payment. The estimate reflects the informed judgment of
such personnel based on general insurance reserving practices and on the
experience and knowledge of such personnel regarding the nature and value of the
specific type of claim. The Company, in turn, typically establishes a case
reserve when it receives a notice of a claim from the ceding company. Such
reserves are based on an independent evaluation by the Company, taking into
consideration coverage, liability, severity of injury or damage, jurisdiction,
the Company's assessment of the ceding company's ability to evaluate and handle
the claim and the amount of reserves recommended by the ceding company. Case
reserves are adjusted periodically by the Company based on subsequent
developments and audits of ceding companies.
In accordance with industry practice, the Company maintains incurred but
not reported ("IBNR") reserves. Such reserves are established to provide for
future case reserves and loss payments on incurred claims which have not yet
been reported to an insurer or reinsurer. In calculating its IBNR reserves, the
Company uses generally accepted actuarial reserving techniques that take into
account quantitative loss experience data, together, where appropriate, with
qualitative factors. IBNR reserves are based on loss experience of the Company
and the industry, and are grouped both by class of business and by accident
year. IBNR reserves are also adjusted to take into account certain factors such
as changes in the volume of business written, reinsurance contract terms and
conditions, the mix of business, claims processing and inflation that can be
expected to affect the Company's liability for losses over time.
-8 -
<PAGE>
The reconciliation of claims and claims expense reserves for the year ended
December 31, 1996 is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEAR ENDED
DECEMBER 31, 1996
-----------------
<S> <C>
At beginning of year:
Gross claims and claim expense reserves --
Reinsurance recoverables --
-----------------
Net claims and claims expense reserves --
Net claims and claims expenses incurred relating to:
Current year $24,079
Prior year --
-----------------
Total 24,079
Net paid claims and claims expenses incurred relating
to:
Current year 3,831
Prior year --
Total 3,831
-----------------
At end of year:
Net claims and claims expense reserves current
year 20,248
Reinsurance recoverables 522
-----------------
Gross claims and claims expense reserves $20,770
-----------------
-----------------
</TABLE>
The Company believes that its exposure, if any, to environmental impairment
liability and asbestos-related claims is minimal since no business has been
written prior to 1996. The Company does not currently discount its reserves to
reflect the present value of claims that may eventually be paid.
Subject to the foregoing, the Company believes that the reserves for claims
and claims expenses are adequate to cover the ultimate cost of claims and claims
expenses incurred through December 31, 1996. The estimates will be continuously
reviewed and as adjustments to these reserves become necessary, such adjustments
will be reflected in current operations.
OVERVIEW OF THE REINSURANCE INDUSTRY
Reinsurance is a form of insurance in which a reinsurer indemnifies a
primary insurer against part or all of the liability assumed by the primary
insurer under one or more insurance policies. Reinsurance is a contractual
agreement whereby an insurer or reinsurer (ceding company) remits a portion of
the premium it receives to a reinsurer (assuming company) as payment for the
assuming company's agreement to indemnify the ceding company for a portion of
the risk. Reinsurance provides insurers with several benefits which include the
following: reduction in net liability on individual risks, protection against
catastrophic losses and assistance in maintaining acceptable regulatory ratios
and additional underwriting capacity in that the primary insurer can accept
larger risks and can expand the book of business it writes at a faster rate than
would be possible without a corresponding increase in its capital and surplus
position. Reinsurance does not legally discharge the ceding company from its
liability with respect to its obligation to the insured.
There are two principal types of reinsurance: treaty reinsurance and
facultative reinsurance. Treaty reinsurance is a contractual arrangement,
usually renewable annually, between a primary insurer and a reinsurer under
which the primary insurer must cede and the reinsurer must assume a specified
portion of a type or category of risks. Facultative reinsurance is the
reinsurance of individual risks. Rather than agreeing to reinsure all or a
portion of a class of risk, the reinsurer separately rates and underwrites each
risk. In the underwriting of treaty reinsurance, the reinsurer need not
separately evaluate each of the individual risks assumed, as it must in the
underwriting of facultative reinsurance, and in general depends on the original
underwriting decisions made by the reinsured.
Both facultative and treaty reinsurance can be written on both an excess of
loss and a quota share basis. In quota share reinsurance, the reinsurer assumes
from the reinsured a percentage specified in the treaty of each risk
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<PAGE>
in the reinsured class of risk. Premiums that the reinsured pays to the
reinsurer are proportional to the portion of the risk that the reinsurer
assumes, and the reinsurer generally pays the reinsured a ceding commission to
reimburse the reinsured for the expenses incurred in obtaining the business. The
ceding commission may also contain a profit component. In quota share
reinsurance, the reinsurer may receive the benefit of common account reinsurance
and, therefore, the reinsurer will have credit risk with respect to the
underlying reinsurers providing such common account reinsurance. In excess of
loss treaty reinsurance, the reinsurer indemnifies the reinsured for a portion
of the losses on underlying policies which exceed a specified loss retention
amount up to an amount per loss specified in the treaty. Premiums that the
reinsured pays to the reinsurer for excess of loss coverage are not directly
proportional to the premiums that the reinsured receives because the reinsurer
does not assume a proportionate risk. The reinsurer generally does not pay any
commission to the reinsured in connection with excess of loss reinsurance.
Excess of loss treaty reinsurance can, in turn, be written on a per risk or
catastrophe basis. Per risk excess of loss reinsurance protects the reinsured
against a loss resulting from a single risk or location. Catastrophe excess of
loss reinsurance protects a reinsured from an accumulation or large number of
related losses resulting from a variety of risks which may occur in a given
catastrophe and hence is a highly volatile business.
Excess of loss reinsurance is often written in layers, with one reinsurer
taking the risk from the primary insurer's retention layer up to a specified
amount, at which point another reinsurer takes over the excess liability or the
excess liability reverts back to the primary insurer. The reinsurer taking on
the risk just above the primary insurer's retention layer is said to write
"working" or "low layer" excess of loss reinsurance. A loss that reaches just
beyond the primary insurer's retention layer will create a loss for the lower
layer reinsurer, but not for the reinsurers on higher layers. Losses incurred in
low layer reinsurance tend to be more predictable than those in high layers due
to the availability of greater actuarial data.
Excess of loss and pro rata reinsurance are priced differently because the
probability of loss is different for the two types of coverage. Premiums that
the ceding company pays to the reinsurer for excess of loss reinsurance are not
directly proportional to the premiums that the ceding company receives because
the reinsurer does not assume a proportionate risk. In contrast, premiums that
the ceding company pays to the reinsurer for pro rata reinsurance are
proportional to the premiums that the ceding company receives, consistent with
the proportional sharing of risk. In addition, in pro rata reinsurance the
reinsurer generally pays the ceding company a ceding commission. The ceding
commission generally is based on the ceding company's cost of acquiring the
business being reinsured (commissions, premium taxes, assessments and
miscellaneous administrative expense) and also may include a profit factor.
Because facultative reinsurance, unlike treaty reinsurance, usually
involves the assumption of selected, individual risks and is sold in separate
transactions, facultative reinsurance is typically priced for higher profit
margins than treaty business. However, the reinsurer's losses may be higher for
facultative business because the reinsurer may assume a higher potential
liability and because the risks involved may be more volatile. In addition,
underwriting expenses and, in particular, personnel costs, are higher on
facultative business because each risk is individually underwritten and
administered. Facultative reinsurance is normally purchased by insurance
companies for individual risks not covered by their reinsurance treaties, for
excess losses on risks covered by their reinsurance treaties, and for unusual
risks. The demand for facultative reinsurance is typically inversely related to
the supply of treaty reinsurance.
Reinsurers may also purchase reinsurance, known as retrocessional
reinsurance, to cover their own risk exposure. Reinsurance companies enter into
retrocessional agreements for reasons similar to those that cause ceding
companies to purchase reinsurance.
The reinsurance market has two basic segments: reinsurers which primarily
obtain their business directly from insurers and other reinsurers ("direct
writers"), and those which, like the Company, primarily obtain business through
reinsurance intermediaries or brokers.
COMPETITION
The property and casualty reinsurance business is highly competitive.
Competition is based on many factors, including the perceived overall financial
strength of the reinsurer, premiums charged, contract terms and conditions,
services offered, ratings assigned by independent rating agencies, speed of
claims payment and reputation and experience. The Company, in pursuing its
investment strategy, also competes with venture
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<PAGE>
capitalists, buyout funds, merchant banking firms, investment banking firms and
other banking and financing sources for investment opportunities in publicly
traded and privately held equity securities. Competition is based on many
factors, including the ability to identify trends and investment opportunities
that could lead to superior returns, financial and personnel resources of the
investor, the ability to negotiate investment terms effectively, and the ability
of the investor to provide expertise and advice to companies targeted for
investment.
The Company competes in the United States and international reinsurance
markets and, in the United States markets, competes with both United States and
internationally domiciled reinsurers. The Company's competitors include
independent reinsurance companies, subsidiaries or affiliates of established
worldwide insurance companies, reinsurance departments of certain primary
insurance companies and domestic and international underwriting syndicates, many
of which have substantially greater financial resources than the Company.
Competitors include direct writers and those that, like the Company, write
primarily through reinsurance intermediaries.
Significant competitors of the Company in the direct market include General
Re Group, Employers Re Group, American Re Corporation and Swiss Re. Significant
competitors of the Company in the intermediary/ broker market include Zurich
Reinsurance Centre Holdings, Inc., Everest Re, Transatlantic Reinsurance
Company, NAC Re Group, Constitution Reinsurance Corporation, TIG Reinsurance
Company, PMA Reinsurance Corporation, Underwriters Reinsurance Company, Munich
Reinsurance Group and The St. Paul Companies, Inc. In addition, the Company
competes with Lloyd's Syndicates and certain companies operating in the London
reinsurance market. The Company may also face competition from other market
participants that determine to devote greater amounts of capital to the types of
business to be written by the Company.
The Company believes that the reinsurance industry is consolidating, and
the largest reinsurers are writing a larger proportion of total industry
premiums as ceding companies place increasing importance on size and financial
strength in the selection of reinsurers.
The Company may also compete with new market entrants, including possibly
other companies organized by (or that may, in the future, be organized by)
certain of the Company's initial investors, including Risk Capital Corp., EXEL
and Trident, their affiliates or entities that they advise or in which such
initial investors, their affiliates or entities that they advise, have (or may,
in the future, have) significant investments. In addition, affiliates of Risk
Capital Corp. engage in activities in support of their ongoing business
strategies, which activities may compete with those of the Company.
A.M. Best ("Best") is generally considered to be a significant rating
agency with respect to the evaluation of insurance and reinsurance companies.
Best's ratings are based on a quantitative evaluation of performance with
respect to profitability, leverage and liquidity and a qualitative evaluation of
spread of risk, reinsurance program, investments, reserves and management.
Unlike many of the Company's competitors, the Company has not initially been
rated by Best. Best generally will not assign a rating to a company until it has
accumulated representative operating performance. Insurance ratings are used by
insurers and reinsurance intermediaries as an important means of assessing the
financial strength and quality of reinsurers. In addition, a ceding company's
own rating may be adversely affected by the lack of a rating of its reinsurer.
Therefore, the lack of a rating may dissuade a ceding company from reinsuring
with the Company and may influence a ceding company to reinsure with a
competitor of the Company that has an insurance rating. The number of
jurisdictions in which a reinsurer is licensed or authorized to do business is
also a factor. See "Business--Insurance Regulation--Credit for Reinsurance" for
a discussion regarding the licensing status of the Company.
The Company does not believe that the absence of a rating by Best or its
non-admitted status in any jurisdiction should have a material adverse effect on
the Company's ability to compete in the reinsurance markets in which it
operates. There can be no assurances, however, that increased competitive
pressure from current reinsurers and future entrants and the lack of a rating by
Best or other insurance rating agencies will not adversely affect the Company.
In March 1997, Demotech, Inc., an Ohio-based ratings firm ("Demotech"),
issued to Risk Capital Reinsurance a 1997 Financial Stability Rating of A" -- A
double prime Unsurpassed, Demotech's highest financial stability rating. The
Company cannot predict whether the financial stability rating assigned to Risk
Capital Reinsurance by Demotech will increase Risk Capital Reinsurance's ability
to compete in the reinsurance markets in which it operates.
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<PAGE>
INSURANCE REGULATION
GENERAL
The terms and conditions of reinsurance agreements generally are not
subject to regulation by any governmental authority with respect to rates or
policy terms. This contrasts with primary insurance policies and agreements, the
rates and terms of which generally are closely regulated by state insurance
regulators. As a practical matter, however, the rates charged by primary
insurers do have an effect on the rates that can be charged by reinsurers.
STATE REGULATION
Risk Capital Reinsurance, in common with other insurers, is subject to
extensive governmental regulation and supervision in the various states and
jurisdictions in which it transacts business. The laws and regulations of the
State of Nebraska, the domicile of Risk Capital Reinsurance, have the most
significant impact on its operations. This regulation and supervision is
designed to protect policyholders rather than investors and relates to, among
other things, the standards of solvency which must be met and maintained, the
nature of and limitations on investments, restrictions on the size of risk which
may be insured under a single policy and reserves and provisions for unearned
premiums, losses and other purposes.
Some states are considering legislative proposals which would authorize the
establishment of an interstate compact concerning various aspects of insurer
insolvency proceedings, including interstate governance of receiverships and
guaranty funds. As of March 1997, this legislation had been adopted by five
states, including Nebraska, California, Illinois, Michigan and New Hampshire.
Insurance departments also conduct periodic examinations of the affairs of
insurance companies and require the filing of annual and other reports relating
to the financial condition of companies and other matters. Risk Capital
Reinsurance has not been examined by the Nebraska Insurance Department other
than in connection with the receipt of its insurance license in November 1995.
CREDIT FOR REINSURANCE
A primary insurer ordinarily will enter into a reinsurance agreement only
if it can obtain credit for the reinsurance ceded on its statutory financial
statements. In general, credit for reinsurance is allowed in the following
circumstances: (i) if the reinsurer is licensed in the state in which the
primary insurer is domiciled and, in some instances, in certain states in which
the primary insurer is licensed; (ii) if the reinsurer is an "accredited" or
"approved" reinsurer in the state in which the primary insurer is domiciled and,
in some instances, in certain states in which the primary insurer is licensed;
(iii) in some instances, if the reinsurer (a) is domiciled in a state that is
deemed to have substantially similar credit for reinsurance standards as the
state in which the primary insurer is domiciled and (b) meets certain financial
requirements; or (iv) if none of the above apply, to the extent that the
reinsurance obligations of the reinsurer are collateralized appropriately,
typically through the posting of a letter of credit for the benefit of the
primary insurer or the deposit of assets into a trust fund established for the
benefit of the primary insurer. Therefore, as a result of the requirements
relating to the provision of credit for reinsurance, the Company is indirectly
subject to certain regulatory requirements imposed by jurisdictions in which
ceding companies are licensed.
Accreditation procedures and standards vary from state to state. States
generally require that a reinsurer (i) be licensed in a state with substantially
similar credit for reinsurance standards, (ii) submits to the (a) jurisdiction
of any United States court of competent jurisdiction requested by the ceding
insurer and (b) authority of the insurer's state of domicile to examine its
books and records, and (iii) maintains a minimum policyholder surplus.
As of March 28, 1997, Risk Capital Reinsurance is licensed in Illinois,
Nebraska, Ohio and Pennsylvania. It is an accredited or otherwise approved
reinsurer in Arkansas, Connecticut, Hawaii, Kentucky, New Hampshire, New Jersey,
Oregon, South Dakota, Vermont and Wisconsin. Risk Capital Reinsurance has
applications pending for licenses or reinsurance authorizations in Alaska,
Delaware, District of Columbia, Idaho, Indiana, Iowa, Maryland, Michigan,
Minnesota, Mississippi, Missouri, Montana, New Mexico, Nevada, North Carolina,
Oklahoma, Rhode Island, Tennessee, Virginia, West Virginia and Wyoming. Risk
Capital Reinsurance intends to apply for licenses or reinsurance authorizations
in the remainder of the states. Risk Capital Reinsurance also has an application
pending for authorization as a reinsurer in the Argentine Republic. If
necessary, and until such time that all remaining reinsurance authorizations are
granted, Risk Capital Reinsurance intends to appropriately
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<PAGE>
collateralize its reinsurance obligations. The Company cannot predict if and
when such authorizations will be granted.
INVESTMENT LIMITATIONS
The Nebraska insurance laws contain rules governing the types and amounts
of investments that are permissible for Nebraska-domiciled insurers, including
Risk Capital Reinsurance. These rules are designed to ensure the safety and
liquidity of an insurer's investment portfolio. Investments in excess of
statutory guidelines do not constitute "admitted assets" (i.e., assets permitted
by the Nebraska insurance laws to be included in a domestic insurer's statutory
financial statements), unless special approval is obtained from the Nebraska
Director of Insurance ("Nebraska Director"), and do not count for the purposes
of various financial ratios and tests, including those governing solvency and
the ability to write premiums.
Subject to the "basket" clause, described below, the maximum amount of an
insurer's authorized investments in preferred and common insurance company stock
for calculation of admitted assets in Nebraska is the lesser of (i) the amount
by which admitted assets exceed required capital and liabilities, or (ii) one
half of policyholder surplus. Such amounts were $329.3 million and $167.2
million, respectively, at December 31, 1996. Stock of insurance companies is
valued for these purposes at cost. Unrealized appreciation of such securities
does not count for the purpose of determining the percentage of certain admitted
assets attributable to insurance stock investments.
While there is a concentration restriction which precludes investment of
more than 5% of the insurer's admitted assets in any one person, this
restriction does not apply to investments in common and preferred stock of other
insurers whose senior debt obligations have received the designations 1 or 2 by
the Securities Valuation Office ("SVO") of the National Association of Insurance
Commissioners ("NAIC"). Designations assigned by the NAIC range from class 1 to
class 6, with class 1 as the highest quality rating. Generally, SVO designations
of 1 and 2 are comparable to investment grade ratings by Moody's Investors
Service, Inc. or Standard & Poor's Corporation and SVO designations of 3 to 6
are comparable to below investment grade ratings by such rating organizations.
There are other concentration restrictions, however, which preclude
investment of more than 3%, 2%, 1% or 1/2% of an insurer's admitted assets in
any one person whose senior debt obligations have received the designations 3,
4, 5 or 6, respectively, by the SVO of the NAIC. In addition, an insurer's
investments in obligations having a 3, 4, 5 or 6 SVO designation may not exceed,
in the aggregate, 15% of the insurer's admitted assets.
Investment in foreign stocks is permitted where such stocks are
"substantially of the same kinds, classes and investment grades" as are
authorized for United States investments. Total investments in foreign stocks by
a Nebraska-domiciled insurer may not exceed 5% of its admitted assets.
Notwithstanding the foregoing restrictions, there is a "basket" clause
under which investments "not otherwise authorized" are permitted up to a maximum
of the greater of (i) the lesser of (a) 25% of the amount by which admitted
assets exceed total liabilities, or (b) 5% of admitted assets (investments
authorized under this clause do not include obligations with SVO designations of
3, 4, 5 or 6), or (ii) that portion of policyholder surplus which is in excess
of 50% of its annual net written premiums. As of December 31, 1996, the "basket"
clause would have allowed Risk Capital Reinsurance to make investments up to a
maximum amount of $298.1 million (i.e., in addition to "otherwise authorized"
investments).
The Nebraska insurance laws provide that the Nebraska Director may waive
any of the legal investment limitations upon application by an insurer. The
Nebraska Director is required to consider the following factors in determining
whether to approve or disapprove any such application: (i) the credit risk
quality of the proposed investment; (ii) the liquidity of the proposed
investment and of the insurer's entire investment portfolio; (iii) the extent of
the diversification of the insurer's investment portfolio; (iv) the yield of the
proposed investment; (v) the reasonableness of the insurer's policyholder
surplus in relation to the insurer's outstanding liabilities and financial
needs; and (vi) any other relevant considerations. From time to time, it may be
necessary for the Company to seek waivers from the Nebraska Director of the
legal investment limitations imposed by the Nebraska insurance laws; no
assurances can be given that such waivers can be obtained.
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<PAGE>
States in which Risk Capital Reinsurance may become licensed or authorized
may also seek to impose their legal investment laws on Risk Capital Reinsurance.
Such laws vary from state to state and may not permit investments that are
permitted under Nebraska law. To the extent that any state disallows an
investment that is permitted under Nebraska law, Risk Capital Reinsurance's
statutory surplus reflected in its statutory financial statements would be
reduced by the amount of such disallowal for purposes of the regulatory
requirements of such state.
Certain provisions of the Nebraska insurance laws are proposed to be
amended through a bill that is currently before the Nebraska legislature. If
such legislation is adopted, the proposed amendments could have a material
impact on the investment strategy of the Company. See "Business--Insurance
Regulation--Legislative and Regulatory Proposals."
HOLDING COMPANY ACTS
State insurance holding company statutes provide a regulatory apparatus
which is designed to protect the financial condition of domestic insurers
operating within a holding company system. All holding company statutes require
disclosure and, in some instances, prior approval of significant transactions
between the domestic insurer and an affiliate. Such transactions typically
include sales, purchases, exchanges, loans and extensions of credit, and
investments between an insurance company and its affiliates, involving in the
aggregate certain percentages of a company's admitted assets or of a company's
policyholder surplus, or dividends that exceed certain percentages of the
company's surplus or income.
Nebraska insurance laws and the insurance laws of other states generally
regard an issuer as an "affiliate" of one of its investors if it is controlled
by, or is under common control with, the investor. Generally, "control" means
the possession of the power to direct or cause the direction of the management
and policies of the issuer, whether through the ownership of voting securities,
by contract or otherwise. Control is presumed to exist if the investor, directly
or indirectly, owns or controls 10% or more of the voting securities of the
issuer. Nebraska insurance laws and the insurance laws of other states generally
allow investors to rebut this presumption by filing a "disclaimer" that sets
forth the bases for disclaiming affiliation. In certain states, such as
Nebraska, a disclaimer is deemed effective once filed unless it is specifically
disallowed by the respective insurance department (after the parties in interest
have been provided notice and an opportunity to be heard). In other states, a
disclaimer must be specifically approved by the relevant insurance department.
In cases where Risk Capital Reinsurance may be presumed to "control," and
therefore deemed an affiliate of, an insurer under applicable holding company
statutes, Risk Capital Reinsurance intends to continue to file disclaimers with
respect to such insurer unless prevented by the surrounding circumstances.
Typically, the holding company statutes also require each of the insurance
subsidiaries periodically to file information with state insurance regulatory
authorities, including information concerning capital structure, ownership,
financial condition and general business operations. Under the terms of
applicable state statutes, any person or entity desiring to acquire control of a
domestic insurer is required first to obtain approval of the applicable state
insurance regulator.
LIQUIDATION OF INSURERS
The liquidation of insurance companies, including reinsurers, is generally
conducted pursuant to state insurance law. In the event of the liquidation of
Risk Capital Reinsurance, such liquidation would be conducted by the Nebraska
Director as the domestic receiver of the properties, assets and business of Risk
Capital Reinsurance. Liquidators located in other states, known as ancillary
liquidators, in which Risk Capital Reinsurance conducts business may have
jurisdiction over assets or properties located in such states under certain
circumstances. Under Nebraska law, all creditors of Risk Capital Reinsurance,
including but not limited to reinsureds under its reinsurance agreements, would
be entitled to payment of their allowed claims in full from the assets of Risk
Capital Reinsurance before RCHI, as a stockholder of Risk Capital Reinsurance,
would be entitled to receive any distribution therefrom.
REGULATION OF DIVIDENDS AND OTHER PAYMENTS FROM INSURANCE SUBSIDIARIES
As an insurance holding company, RCHI will be largely dependent on
dividends and other permitted payments from Risk Capital Reinsurance to meet its
obligations. The ability of Risk Capital Reinsurance to pay dividends or make
other distributions is subject to insurance regulatory limitations of Nebraska,
the state in
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<PAGE>
which Risk Capital Reinsurance is domiciled. Nebraska insurance laws provide
that dividends or other distributions together with other dividends or
distributions paid during the preceding 12 months, may not exceed the greater of
(i) 10% of statutory surplus as of the preceding December 31 or (ii) statutory
net income from operations for 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 dividend 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. Notwithstanding the foregoing,
Nebraska insurance laws provide that any distribution that is a dividend may be
paid by Risk Capital Reinsurance only out of earned surplus arising from its
business, which is defined as unassigned funds (surplus) as reported in the
statutory financial statement filed by Risk Capital Reinsurance with the
Nebraska Insurance Department for the most recent year. In addition, Nebraska
insurance laws also provide that 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. See
Note 10 of the Notes to the Consolidated Financial Statements of the Company.
Nebraska insurance laws also require that the statutory surplus of Risk
Capital Reinsurance following any dividend or distribution be reasonable in
relation to its outstanding liabilities and adequate to its financial needs. The
Nebraska Director is required to apply certain factors in determining the
adequacy of an insurer's surplus, including, among other things, the size of the
insurer, the extent to which the insurer's business is diversified, the number
and size of risks insured by each line of business, the extent of geographical
dispersion of insured risks and the reinsurance program and characteristics of
the investment portfolio. In addition, Nebraska insurance laws require that each
insurer give notice to the Nebraska Director of all dividends and other
distributions within five business days following declaration thereof and that
any such dividend or other distribution may not be paid within 10 business days
of such notice (the "Notice Period") unless for good cause shown the Nebraska
Director has approved such payment within the Notice Period.
INSURANCE REGULATORY INFORMATION SYSTEM RATIOS
The NAIC's Insurance Regulatory Information System ("IRIS") was developed
by a committee of state insurance regulators and is intended primarily to assist
state insurance departments in executing their statutory mandates to oversee the
financial condition of insurance companies operating in their respective states.
IRIS identifies 11 industry ratios and specifies "usual values" for each ratio.
Departure from the usual values of the ratios can lead to inquiries from
individual state insurance commissioners as to certain aspects of an insurer's
business. For the year ended December 31, 1996, Risk Capital Reinsurance's
results were within the usual values for nine of the 11 ratios. The "change in
writings" ratio was outside the usual value due to the fact that Risk Capital
Reinsurance commenced writing reinsurance business in 1996. The "investment
yield" ratio was outside the usual value primarily due to Risk Capital
Reinsurance's investment strategy of investing a significant portion of its
investment portfolio in equity securities, which generally yield less investment
income than fixed maturity investments. Due to Risk Capital Reinsurance's
limited operating history, its current IRIS ratios are not meaningful indicators
of its financial condition or of the IRIS ratios it may experience in the
future.
ACCREDITATION
The NAIC has instituted its Financial Regulatory Accreditation Standards
Program ("FRASP") in response to federal initiatives to regulate the business of
insurance. FRASP provides a set of standards designed to establish effective
state regulation of the financial condition of insurance companies. Under FRASP,
a state must adopt certain laws and regulations, institute required regulatory
practices and procedures, and have adequate personnel to enforce such items in
order to become an "accredited" state. If a state was not accredited by January
1, 1994, accredited states are not able to accept certain financial examination
reports of insurers prepared solely by the regulatory agency in such
unaccredited state. The State of Nebraska is accredited under FRASP; however,
there can be no assurance that it or any other state will remain accredited.
RISK-BASED CAPITAL REQUIREMENTS
In order to enhance the regulation of insurer solvency, the NAIC adopted in
December 1993 a formula and model law to implement risk-based capital
requirements for property and casualty insurance companies.
-15 -
<PAGE>
Nebraska adopted, effective January 1, 1994, risk-based capital legislation for
property and casualty companies which is similar to the NAIC risk-based capital
requirements. These risk-based capital requirements are designed to assess
capital adequacy and to raise the level of protection that statutory surplus
provides for policyholder obligations. The risk-based capital model for property
and casualty insurance companies measures three major areas of risk facing
property and casualty insurers: (i) underwriting, which encompasses the risk of
adverse loss developments and inadequate pricing; (ii) declines in asset values
arising from credit risk; and (iii) declines in asset values arising from
investment risks. Insurers having less statutory surplus than required by the
risk-based capital calculation will be subject to varying degrees of regulatory
action, depending on the level of capital inadequacy. Equity investments in
common stock typically are valued at 85% of their market value under the
risk-based capital guidelines. For equity investments in an insurance company
affiliate, the risk-based capital requirement for the equity securities of such
affiliate would generally be the Company's proportionate share of the
affiliate's risk-based capital requirement. For a discussion of "affiliate"
status under the insurance laws, see "Business--Insurance Regulation--Holding
Company Acts."
The Company's surplus (as calculated for statutory annual statement
purposes) is well above the risk-based capital thresholds that would require
either company or regulatory action.
REGULATION OF CERTAIN REINSURANCE INTERMEDIARIES
Certain states, including Nebraska, have adopted legislation or regulation
that, in effect, places additional requirements upon insurance and reinsurance
intermediaries and brokers when, on behalf of an insured, they place business
with an insurance or reinsurance company that is affiliated with such
intermediary or broker. While the Company believes that there will be no such
affiliation between the Company and reinsurance intermediaries that may be
affiliated with Marsh & McLennan, no assurances can be given that other persons
(including such intermediaries) may not take a contrary position. While the
Company believes that compliance with such regulations would not be burdensome
upon an intermediary or broker, no assurances can be given as to whether a
broker or intermediary would decide to place or continue to place business with
the Company if such regulations were viewed to be applicable.
FEDERAL REGULATION
Although the federal government does not directly regulate the insurance or
reinsurance industries, federal initiatives often affect the insurance business
in a variety of ways. Although state regulation remains the dominant form of
regulation, the federal government has shown increasing concern over the
adequacy of state regulation.
It is not possible to predict the future impact of any of these or other
possible laws or regulations on Risk Capital Reinsurance's capital and
operations, and such laws or regulations could materially adversely affect its
business.
LEGISLATIVE AND REGULATORY PROPOSALS
A bill which proposes to amend certain provisions of the Nebraska insurance
laws is currently before, and subject to further review by, the Nebraska
legislature. Among other things, such bill proposes possible changes to the
limitations on foreign investments, ownership interests in investees, insurer
investments and categories of permitted investments. The Company is unable to
predict whether this bill will be adopted or the specific form in which such
bill will be adopted. Although the Company does not currently believe that such
bill will be adopted in a form that will materially adversely affect its
investment strategy, no assurances can be made that any amendments to existing
law, whether implemented at the present time or in the future, will not have an
adverse effect on the Company's investment strategy.
In addition, from time to time various regulatory and legislative changes
have been proposed in the insurance and reinsurance industry, some of which
could have an effect on reinsurers. Among the proposals that have in the past
been or are at present being considered are the possible introduction of federal
regulation in addition to, or in lieu of, the current system of state regulation
of insurers and proposals in various state legislatures (some of which proposals
have been enacted) to conform portions of their insurance laws and regulations
to various model acts adopted by the NAIC. The Company is unable to predict
whether any of these laws and regulations will be adopted, the form in which any
such laws and regulations would be adopted, or the effect, if any, these
developments would have on the operations and financial condition of the
Company.
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<PAGE>
SENIOR MANAGEMENT
The Company's senior management team consists of:
<TABLE>
<S> <C> <C>
NAME AGE POSITION
Mark D. Mosca 43 President and Director
Robert Clements 64 Chairman and Director
Peter A. Appel 35 Managing Director, General Counsel and Secretary
Bonnie L. Boccitto 47 Managing Director and Chief Underwriting Officer*
Paul J. Malvasio 50 Managing Director, Chief Financial Officer and
Treasurer
</TABLE>
-----------------------
* Chief Underwriting Officer of Risk Capital Reinsurance Company.
Mark D. Mosca was elected President and Director of RCHI in June 1995 and
President, Chief Executive Officer and Director of Risk Capital Reinsurance in
August 1995. Prior to that time, he was Senior Vice President and Chief
Underwriting Officer of Zurich Reinsurance Centre Holdings, Inc. since the
completion of its initial public offering in May 1993. Prior thereto, Mr. Mosca
served as a Vice President of NAC Re Corporation ("NAC Re"), where he was
manager of the Treaty Division since February 1986. From 1975 to 1986, Mr. Mosca
was employed by General Reinsurance Corporation where he was a Vice President.
Mr. Mosca holds an A.B. degree from Harvard University.
Robert Clements was elected Chairman and Director of RCHI at its formation
in March 1995 and Chairman and Director of Risk Capital Reinsurance in September
1995. He is currently an advisor to Risk Capital Corp., with whom he served as
Chairman and Chief Executive Officer from January 1994 to March 1996. Prior
thereto, he served as President of Marsh & McLennan Companies, Inc. since 1992,
having been Vice Chairman during 1991. He was Chairman of Marsh & McLennan,
Incorporated, a subsidiary of Marsh & McLennan Companies, Inc., from 1988 until
March 1992. He joined Marsh & McLennan, Ltd., a Canadian subsidiary of Marsh &
McLennan Companies, Inc., in 1959. Mr. Clements is a director of Marsh &
McLennan Companies, Inc., EXEL Limited and Hiscox plc. He is Chairman of the
Board of Trustees of The College of Insurance and a member of Rand Corp.
President's Council.
Peter A. Appel has been a Managing Director, General Counsel and Secretary
of both RCHI and Risk Capital Reinsurance since November 1995. From September
1987 to October 1995, Mr. Appel practiced law with the New York firm of Willkie
Farr & Gallagher, where he was a partner from January 1995. He holds an A.B.
degree from Colgate University and a law degree from Harvard University.
Bonnie L. Boccitto has been a Managing Director of RCHI and a Managing
Director and Chief Underwriting Officer of Risk Capital Reinsurance since
October 1995. From September 1993 to September 1995, Ms. Boccitto was a Senior
Vice President of Everest Reinsurance Holdings, Inc. (formerly Prudential
Reinsurance Holdings, Inc.) and its reinsurance subsidiary, Everest Re (formerly
Prudential Reinsurance Company), where she was responsible for all United States
broker treaty and facultative operations. From 1989 to September 1993, she
served as a Vice President of Everest Re, where she was manager of the treaty
casualty department. She joined Everest Re in 1979 in the actuarial department
and became an underwriter in the treaty department in 1983. Ms. Boccitto holds a
B.S. degree in Mathematics from Dana College and a M.Ed. degree in Mathematics
Education from Rutgers University.
Paul J. Malvasio has been a Managing Director, Chief Financial Officer and
Treasurer of both RCHI and Risk Capital Reinsurance since September 1995 and a
Director of Risk Capital Reinsurance since November 1995. Prior to that time, he
was Senior Vice President and Chief Financial Officer of NAC Re since the
completion of NAC Re's initial public offering in February 1986. From 1967 to
1986, Mr. Malvasio was employed by the public accounting firm of Coopers &
Lybrand, where he was an audit partner from October 1979. Mr. Malvasio is a
certified public accountant and holds a B.B.A. degree in Accounting from St.
Francis College.
EMPLOYEES
At March 27, 1997, the Company employed a total of 26 full-time employees.
The Company will continue to increase its staff over time commensurate with the
expansion of operations. The Company's employees are not represented by a labor
union and the Company believes that its employee relations are good.
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<PAGE>
GLOSSARY OF SELECTED INSURANCE TERMS
<TABLE>
<S> <C>
Admitted assets.................... Assets permitted by state law to be included as "assets" in
an insurance company's annual statement.
Assume............................. To take from an insurer or reinsurer (a ceding company) all
or part of a risk underwritten by such person, along with
the related premiums, losses and expenses.
Annual Statement................... A report that an insurance company must file annually with
the state insurance commissioner in its domiciliary state
and each other state in which it does business. The
statement shows the current status of reserves, expenses,
assets, total liabilities and investment portfolio.
Attachment point................... The amount of loss (per occurrence or in the aggregate, as
the case may be) above which excess of loss coverage
becomes operative.
Broker market reinsurer............ A reinsurer that markets and sells reinsurance through
brokers rather than through its own employees.
Case reserves...................... Loss reserves established with respect to individual
reported claims.
Casualty insurance................. Insurance which is primarily concerned with the losses
caused by injuries to third persons (in other words,
persons other than the policyholder) and the legal
liability imposed on the insured resulting therefrom.
Catastrophe reinsurance............ A form of excess of loss reinsurance that, subject to a
specified limit, indemnifies the ceding company for the
amount of loss in excess of a specified retention with
respect to an accumulation of losses resulting from a
catastrophic event. The actual reinsurance document is
called a "catastrophe cover."
Cede; Cedent; Ceding company....... When a party reinsures all or part of its risks with
another, it "cedes" business and is referred to as the
"cedent" or "ceding company."
Clash reinsurance.................. Excess of loss reinsurance which requires the involvement
of two or more original insurance policies to generate a
covered reinsurance claim. The attachment point of clash
reinsurance generally is greater than the amount of
insurance provided to any one original insured.
Common account reinsurance......... Arrangements whereby the ceding company enters the
reinsurance market and purchases a cover for the benefit of
the ceding company and the reinsurers on the reinsurance
treaty. A pro rata portion of the costs of this protection
is deducted from the ceded premium.
Credit enhancement................. Use of financial guaranty to upgrade the quality of a
security through the use of an insurance policy or letter
of credit or other means.
Direct underwriter; Direct writer.. An insurer or reinsurer that markets and sells insurance
directly to its insureds or reinsureds without the
assistance of brokers.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Excess of loss reinsurance......... A generic term describing reinsurance that indemnifies the
reinsured against all or a specified portion of losses on
underlying insurance policies in excess of a specified
amount, which is called a "level" or "retention." Also
known as non-proportional reinsurance. Excess of loss
reinsurance is written in layers. A reinsurer or group of
reinsurers accepts a band of coverage up to a specified
amount. The total coverage purchased by the cedent is
referred to as a "program" and will typically be placed
with predetermined reinsurers in prenegotiated layers. Any
liability exceeding the outer limit of the program reverts
to the ceding company, which also bears the credit risk of
a reinsurer's insolvency.
Facultative reinsurance............ The reinsurance of all or a portion of the insurance
provided by a single policy. Each policy reinsured is
separately negotiated.
Finite risk reinsurance............ Similar to traditional reinsurance with the exception that
there is a finite risk to the reinsurer with respect to
minimum and maximum exposure in relation to the premium to
be received.
Gross premiums written............. Total premiums for insurance and reinsurance assumed during
a given period.
Incurred but not reported ("IBNR"). Reserves for estimated losses that have been incurred by
insureds and reinsureds but not yet reported to the insurer
or reinsurer including unknown future developments on
losses which are known to the insurer or reinsurer.
In-force premiums.................. The total of estimated annualized premiums of all policies
in force as of a certain date which would be anticipated to
generate net premiums written for the annual period being
considered.
Intermediary/broker................ One who negotiates contracts of insurance between an
insured and a primary insurer on behalf of the insured
and/or contracts of reinsurance between a primary insurer
or other reinsured and a reinsurer on behalf of the primary
insurer or reinsured, in each case receiving a commission
for placement and other services rendered.
Lloyd's Syndicate.................. Underwriting members of Lloyd's (which can be individual
"names" and/ or dedicated corporate members) that group
together annually to form a syndicate to underwrite
insurance coverage. Each syndicate is managed by a
Lloyd's-approved managing agent, which appoints one or more
active or named underwriters who have the authority to bind
the syndicate to contracts of insurance, pay claims and
effect recoveries.
Net premiums written............... Gross premiums written for a given period less premiums
ceded to retrocessionaires during such period.
Primary insurer.................... An insurance company that contracts with the insured to
provide insurance coverage. Such insurer may then cede a
portion of its business to reinsurers.
Probable maximum loss.............. Under Risk Capital Reinsurance's current guidelines,
probable maximum loss is the anticipated maximum exposure
to an event of a magnitude such that it would be expected
to occur once in 100 years.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Quota share or proportional
reinsurance...................... A generic term describing all forms of reinsurance in which
the reinsurer shares a proportional part of the original
premiums and losses of the reinsured. (Also known as pro
rata reinsurance or participating reinsurance.) In
proportional reinsurance, the reinsurer generally pays the
ceding company a ceding commission. The ceding commission
generally is based on the ceding company's cost of
acquiring the business being reinsured (including
commissions, premium taxes, assessments and miscellaneous
administrative expenses) and also may include a profit
factor. Generally, the reinsurer gets the benefit of common
account reinsurance.
RAA................................ Reinsurance Association of America, a trade association of
medium and large property and casualty reinsurers doing
business in the United States. The RAA provides statistical
data concerning the markets, which voluntarily provide such
information to the RAA.
Reinsurance........................ An arrangement in which an insurance company, the
reinsurer, agrees to indemnify another insurance or
reinsurance company, the ceding company, against all or a
portion of the insurance or reinsurance risks underwritten
by the ceding company under one or more policies. Reinsur-
ance can provide a ceding company with several benefits,
including a reduction in net liability on individual risks
and catastrophe protection from large or multiple losses.
Reinsurance also provides a ceding company with additional
underwriting capacity by permitting it to accept larger
risks and write more business than would be possible
without a concomitant increase in capital and surplus, and
facilitates the maintenance of acceptable financial ratios
by the ceding company. Reinsurance does not legally
discharge the ceding company from its liability with
respect to its obligations to the insured.
Reserves........................... Liabilities established by insurers and reinsurers to
reflect the estimated costs of claims payments and the
related expenses that the insurer or reinsurer will
ultimately be required to pay in respect of insurance or
reinsurance it has written. Reserves are established for
losses and for unpaid claims and claims expenses and for
unearned premiums. Loss reserves consist of case reserves
and IBNR reserves. For reinsurers, unpaid claims and claims
expense reserves are generally not significant because
substantially all of the unpaid claims and claims expenses
associated with particular claims are incurred by the
primary insurer and reported to reinsurers as losses.
Unearned premium reserves constitute the portion of
premiums paid in advance for insurance or reinsurance that
has not yet been provided.
Retention.......................... The amount or portion of risk that an insurer retains for
its own account. Losses in excess of the retention level
are paid by the reinsurer. In proportional treaties, the
retention may be a percentage of the original policy's
limit. In excess of loss business, the retention is a
dollar amount of loss, a loss ratio or a percentage.
Retrocession....................... A transaction whereby a reinsurer cedes to another
reinsurer (the "retrocessionaire") all or part of the
reinsurance that the first reinsurer has assumed.
Retrocessions do not legally discharge the ceding reinsurer
from its liability with respect to its obligations to the
reinsured. Reinsurance companies cede risks to
retrocessionaires for reasons similar to those that cause
primary insurers to purchase reinsurance: to reduce net
liability on individual risks, to protect against
catastrophic losses, to stabilize financial ratios and to
obtain additional underwriting capacity.
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Statutory accounting principles
("SAP").......................... The rules and procedures prescribed or permitted by United
States state insurance regulatory authorities including the
NAIC, which govern the preparation of financial statements.
Such rules and procedures generally reflect a liquidating,
rather than going concern, concept of accounting.
Statutory composite ratio.......... Provides an overall indication of underwriting
profitability. The ratio is the sum of: the ratio of
commissions and other underwriting expenses to premiums
written, and the ratio of claims and claims expenses to
premiums earned. A statutory composite ratio of under 100%
indicates underwriting profitability, while a composite
ratio exceeding 100% indicates an underwriting loss.
Statutory surplus.................. The excess of admitted assets over total liabilities
(including loss reserves), determined in accordance with
SAP.
Tail............................... The period of time that elapses between the writing of the
applicable insurance policy or the loss event (or the
insurer's knowledge of the loss event) and the payment in
respect thereof.
Treaties........................... The reinsurance of a specified type or category of risks
defined in a reinsurance agreement (a "treaty") between an
insurer and a reinsurer or between a reinsurer and a
retrocessionaire. In treaty reinsurance the cedent is
typically obligated to offer, and the reinsurer or
retrocessionaire is obligated to accept, a specified
portion of a type or category of risks insured by the
ceding company as set forth in the governing contract.
Treaty reinsurance may provide for proportional or
non-proportional reinsurance.
Underwriting....................... The insurer's or reinsurer's process of reviewing
applications submitted for insurance coverage, deciding
whether to accept all or part of the coverage requested and
determining the applicable premiums.
Underwriting capacity.............. The maximum amount that an insurance company can
underwrite. The limit is generally determined by the
company's policyholder or statutory surplus, which depends,
among other things, on the insurer's admitted assets.
Reinsurance serves to increase a company's capacity by
reducing its exposure from particular risks.
</TABLE>
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<PAGE>
ITEM 2. PROPERTIES.
In March 1996, the Company entered into a sublease agreement initially
expiring in October 2002 for approximately 40,000 square feet of office space in
Greenwich, Connecticut, at which the Company's principal offices are located.
Under the sublease, future minimum annual rental charges, exclusive of
escalation clauses and maintenance costs and net of rental income, will be
approximately $4.3 million. The Company's rental expense, net of sublease
income, was approximately $613,000 during 1996 and $54,000 in 1995. Commencing
in 1996, approximately 13,000 square feet of the office space was subleased to
Risk Capital Corp. for a term expiring in October 2002. Under such arrangement,
Risk Capital Corp.'s future minimum annual rental charges, exclusive of
escalation clauses and maintenance costs, will be approximately $2.8 million.
Risk Capital Corp.'s rental expense for 1996 was $264,000. The Company currently
intends to sublease approximately 6,000 square feet of the remaining portion of
the office space to another tenant.
ITEM 3. LEGAL PROCEEDINGS.
The Company will be subject to litigation and arbitration in the ordinary
course of its business. The Company is not currently involved in any litigation
or arbitration.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the
fourth quarter of 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
Shares of the Common Stock are traded on the Nasdaq National Market tier of
The Nasdaq Stock Market under the symbol "RCHI." For the periods presented
below, the high and low sales prices and closing prices for the Common Stock as
reported on the Nasdaq National Market were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------
<S> <C> <C> <C> <C>
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
<CAPTION>
----------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
High......................... $ 23.25 $ 20.50 $ 20.75 $19.875
Low.......................... $ 19.75 $ 19.125 $ 16.50 $15.875
Close........................ $ 20.50 $ 19.625 $ 19.00 $19.375
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 14, 1995
(INITIAL TRADING DAY) TO THREE MONTHS ENDED
SEPTEMBER 30, 1995 DECEMBER 31, 1995
<S> <C> <C>
------------------------- -------------------
High......................... $ 21.75 $23.375
Low.......................... 20.50 19.875
Close........................ 21.75 23.375
</TABLE>
On March 27, 1997, the high and low sales prices and the closing price for
the Common Stock as reported on the Nasdaq National Market were $17.125, $16.75
and $16.75, respectively.
-22 -
<PAGE>
HOLDERS
As of March 27, 1997, there were 39 holders of record of the Common Stock
and approximately 1,543 beneficial holders of the Common Stock.
DIVIDENDS
The declaration and payment of dividends will be at the discretion of the
Board of Directors of RCHI and will depend upon the Company's results of
operations and cash flows, the financial position and capital requirements of
the Company, general business conditions, legal, tax and regulatory restrictions
on the payment of dividends and other factors the Board of Directors of RCHI
deems relevant. There is no requirement or assurance that dividends will be
declared or paid in the future. 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 Risk Capital Reinsurance's ability to achieve
satisfactory underwriting and investment results and to meet certain regulatory
standards of its jurisdiction of domicile. See "Business--Insurance
Regulation--Regulation of Dividends and Other Payments from Insurance
Subsidiaries," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 10 of the Notes to the Consolidated Financial
Statements of the Company.
The Board of Directors of RCHI did not declare any dividends in 1996.
Subject to the foregoing, the Board of Directors of RCHI will consider the
declaration and payment of cash and other dividends in the future to the extent
that the Board concludes that the consolidated capital of the Company is not
then needed in the business and operations of the Company.
ITEM 6. SELECTED FINANCIAL DATA.
Set forth below is certain selected consolidated financial information for
the year ended December 31, 1996 and the period from June 23, 1995 (date of
inception) to December 31, 1995. This information should be read in conjunction
with the accompanying Consolidated Financial Statements of the Company and the
Notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations.
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JUNE 23, 1995 TO
DECEMBER 31, 1996 DECEMBER 31, 1995
<S> <C> <C>
------------------ ------------------
(In thousands, except share data)
INCOME STATEMENT DATA
Net premiums earned............................ $35,761 --
Net investment income.......................... 13,151 $4,578
Net realized investment gains.................. 1,259 397
Total revenues................................. 50,171 4,975
Net income..................................... 4,112 1,019
Average shares of Common Stock outstanding..... 16,981,724 16,747,084
Primary and fully-diluted earnings per share... $0.24 $0.06
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT DECEMBER 31,
1996 1995
<S> <C> <C>
------------------ ------------------
(In thousands, except share data)
BALANCE SHEET DATA
Total assets................................... $432,486 $350,986
Total stockholders' equity..................... 352,213 340,215
Shares outstanding............................. 17,031,246 16,941,125
Book value per share........................... $20.68 $20.08
</TABLE>
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
THE COMPANY
RCHI is the holding company for Risk Capital Reinsurance, its wholly owned
subsidiary which is domiciled in Nebraska. RCHI was incorporated in March 1995
and commenced operations during September 1995 upon completion of 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. As of December 31, 1996, the
statutory surplus of Risk Capital Reinsurance was approximately $334.3 million.
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 by intermediaries are typically for
one year terms with a substantial number that are written or renewed on January
1 each year. Other significant renewal dates include April 1, July 1 and October
1. The January 1, 1997 renewal period was 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. These conditions
have worsened due to large domestic primary companies retaining more of their
business and ceding less premiums to reinsurers. While the Company is initially
somewhat disadvantaged compared to many of its competitors, which are larger,
have greater resources and longer operating histories than the Company, it
believes it has been able 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 an equity investment in client
companies.
At January 1, 1997, the Company had 55 in-force treaties, with
approximately $128 million of annualized in-force premiums. Such in-force
premiums represent estimated annualized premiums from treaties entered into
during 1996 and the January 1, 1997 renewal period that are expected to generate
net premiums written during calendar year 1997. All 55 of such treaties are
subject to renewal. Without taking into account the possibility that (x) several
of the treaties entered into during 1996 that are scheduled to expire during the
remainder of 1997 may be renewed and (y) additional new treaties may be bound
during 1997, it is estimated that the Company will record approximately $110
million of net premiums written over the twelve month period ending December 31,
1997 from such treaties. Such estimates of in-force premiums and net premiums
written at January 1, 1997 do not include the unearned premium portfolios and
other non-recurring transactions reflected in the Company's net premiums written
for 1996 because such portfolios and transactions will not generate any net
premiums written during 1997.
RESULTS OF OPERATIONS
For the year ended December 31, 1996 and for the period June 23, 1995 (date
of inception) to December 31, 1995, the Company had consolidated net income of
approximately $4.1 million, or $0.24 per share, and $1.0
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<PAGE>
million, or $0.06 per share, respectively. After-tax realized investment gains
of $0.8 million, or $0.05 per share, and $0.3 million, or $0.02 per share, were
also included in net income for the 1996 and 1995 periods, respectively. Net
income for 1996 included a loss of $0.2 million, or $0.01 per share,
representing the Company's equity in the net loss of an investee company which
is accounted for under the equity method of accounting.
The Company believes that the results of operations for the year ended
December 31, 1996 are not necessarily indicative of its future financial results
due to a number of factors, including (i) the potential increase in net premiums
written indicated by the Company's January 1, 1997 renewal season activity, (ii)
the Company's emphasis on targeting casualty business that is longer-tail than
its current mix of business and (iii) the Company's investment strategy.
Increased premium writings, particularly longer-tail casualty business, can
generally be expected to generate higher underwriting losses than the business
recorded in 1996 because of the related requirement to establish claims
liabilities that are adequate to cover the costs of anticipated future claim
payments without taking into account the time value of money.
The amount of investment income earned that may offset underwriting losses
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 and insurance-related entities. Investments in equity securities yield
less current investment income than fixed maturity investments. Variability and
declines in the Company's results of operations could be further exacerbated by
private equity investments in start-up companies which are accounted for under
the equity method. Such start-up companies may be expected to initially generate
operating losses. Accordingly, the Company's results of operations for the year
ending December 31, 1997 may vary from quarter to quarter and from the financial
results reported by the Company in 1996, and could also produce operating
losses.
Unrealized appreciation or depreciation of investments to the extent that
it occurs for investments carried at fair value is recorded in a separate
components of stockholders' equity, net of related deferred income taxes. Such
gains or losses are recorded in net income to the extent investments are sold.
The timing and recognition of such gains and losses are unpredictable and not
indicative of future operating results.
NET PREMIUMS WRITTEN
Net premiums written for the year ended December 31, 1996 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEAR ENDED
DECEMBER 31, 1996
<S> <C>
------------------
Property........................ $ 19.4
Casualty........................ 17.6
Multi-line...................... 21.8
Specialty....................... 13.7
------
Total........................... $ 72.5
------
------
</TABLE>
Approximately $32.9 million, or 45%, of net premiums written resulted from
unearned premium portfolios and other non-recurring transactions. This amount
includes $11.9 million of specialty premiums written from contracts pursuant to
which the Company reinsures a portion of one underlying policy for multiple
years. Such premiums will be earned over the multiple periods as the exposures
expire.
Approximately 30% of net premiums written was from non-U.S. clients which
are Lloyd's Syndicates or are located in the United Kingdom and Continental
Europe.
OPERATING COSTS AND EXPENSES
One traditional means of measuring the underwriting performance of a
property/casualty insurer, such as the Company, is the statutory composite
ratio. This ratio, which is based upon statutory accounting principles (which
differ from generally accepted accounting principles in several respects),
reflects underwriting experience, but does not reflect income from investments.
A statutory composite ratio of under 100% indicates underwriting profitability,
while a composite ratio exceeding 100% indicates an underwriting loss.
-25 -
<PAGE>
Set forth below is the Company's statutory composite ratio for the year
ended December 31, 1996 and the estimated aggregate statutory composite ratio
for domestic reinsurers based on data reported by the RAA as of such date:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
<S> <C>
------------------
Claims and claims expenses............... 67.3%
Commissions and brokerage................ 23.7
Other operating expenses................. 15.3
--------
Statutory composite ratio................ 106.3%
--------
--------
Domestic reinsurer aggregate statutory
composite ratios......................... 103.5%
--------
--------
</TABLE>
Claims and claims expenses generally represent the Company's most
significant and uncertain costs. Reserves for these expenses are estimates
involving actuarial and statistical projections at a given time of what the
Company expects the ultimate settlement and administration of claims to cost
based on facts and circumstances then known. The reserves are based on estimates
of claims and claims expenses incurred and, therefore, the amount ultimately
paid may be more or less than such estimates. The inherent uncertainties of
estimating claim reserves are exacerbated for reinsurers by the significant
periods of time (the "tail") that often elapse between the occurrence of an
insured claim, the reporting of the claim to the primary insurer and,
ultimately, to the reinsurer, and the primary insurer's payment of that claim
and subsequent indemnification by the reinsurer. As a consequence, actual claims
and claims expenses paid may deviate, perhaps substantially, from estimates
reflected in the Company's reserves reported in its financial statements. The
estimation of reserves by new reinsurers, such as the Company, may be less
reliable than the reserve estimations of a reinsurer with an established volume
of business and claim history. To the extent reserves prove to be inadequate,
the Company may have to augment such reserves and incur a charge to earnings.
Such a development, while not anticipated, could occur and result in a material
charge to earnings or stockholders' equity in future periods. Subject to the
foregoing, the Company believes that the reserves for claims and claims expenses
are adequate to cover the ultimate cost of claims and claims expense incurred
through December 31, 1996.
In pricing its reinsurance treaties, the Company focuses on many factors,
including exposure to claims and commissions and brokerage expenses. Commissions
and brokerage expenses are acquisition costs that generally vary by the type of
treaty and line of business, and are considered by the Company's underwriting
and actuarial staff in evaluating the adequacy of premium writings.
Other operating expenses increased to $11.3 million for the year ended
1996, compared to $3.9 million for the period June 23, 1995 (date of inception)
to December 31, 1995. The other operating expense ratio component of the 1996
statutory composite ratio was reduced by 12.7 percentage points due to the
premiums written generated from assumed unearned premium portfolios and other
non-recurring transactions. Assuming the successful execution of the Company's
business strategy, the Company expects other operating expenses to grow
commensurate with maturing operations, but expects other operating expenses to
decline moderately as a percentage of net premiums written because increases in
premium writings are generally expected to exceed the growth in such expenses.
RISK RETENTION
Given the Company's current level of surplus, under its underwriting
guidelines, the maximum net retention on any one claim or occurrence for
property and casualty treaty risks will generally be $10.0 million.
The Company will evaluate its retrocessional requirements periodically in
relation to many factors, including its surplus capacity, gross line capacity
and changing market conditions. Other than the Company's participation in
"common account" retrocessional arrangements for certain reinsurance treaties,
the Company currently does not maintain retrocessional arrangements on a per
risk or per treaty basis, or for the purpose of limiting its exposure with
respect to catastrophe losses or unusual accumulations of losses resulting from
a single occurrence involving two or more reinsured policies. The Company
believes that such exposures are currently adequately managed through
appropriate terms and conditions and pricing of reinsurance contracts. Common
-26 -
<PAGE>
account retrocessional arrangements reduce the effect of individual or aggregate
losses to all participating companies with respect to a reinsurance treaty,
including the cedent.
The Company monitors its earthquake and wind exposures and continuously
reevaluates its estimated probable maximum pre-tax loss for such exposures
through the use of modeling techniques. The Company generally seeks to limit its
probable maximum pre-tax loss to no more than 10% of its statutory surplus for
severe catastrophic events that could be expected to occur once in every 100
years and that would result in insurance industry-wide losses ranging from
approximately $40.0 to $45.0 billion depending on the catastrophe exposure zone
(a "100 Year Event"). This limitation includes combined exposure to underwriting
losses, reinstatement costs for retrocessional arrangements which may be in
force at the time of the losses resulting from the catastrophic event and losses
that the Company may be exposed to as a result of its privately held investments
in insurance and insurance-related entities. While the Company believes its risk
management techniques are adequate, there can be no assurances that the Company
will not suffer pre-tax losses greater than 10% of its statutory surplus from a
catastrophic event due to the inherent uncertainties in estimating the frequency
and severity of such exposures. In addition, the Company believes that it cannot
reasonably estimate its exposure to unrealized investment losses (if any) that
may result from the Company's investments in publicly traded securities of
insurance and insurance-related entities.
With respect to integrated transactions (where the Company combines an
equity or equity-like investment in a client company with the purchase by such
client of reinsurance from the Company), the Company generally limits its
combined underwriting and investment exposure to pre-tax losses on any
individual client to no more than 10% of its total statutory surplus, and
subjects these commitments to intensive scrutiny by the combined professional
staffs of both the Company and Risk Capital Corp.
INVESTMENT RESULTS
At December 31, 1996, approximately 63% of the Company's invested assets
consisted of fixed maturity and short-term investments compared to 83% at
December 31, 1995. Net investment income for the year ended December 31, 1996
was approximately $13.2 million compared to $4.6 million for the period June 23,
1995 (date of inception) to December 31, 1995. As discussed above, the amount of
investment income from quarter to quarter may vary and could 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, which generally yield less investment income than fixed maturity
investments.
The Company's investment yields at amortized cost were as follows for the
periods set forth below:
<TABLE>
<CAPTION>
JUNE 23, 1995
YEAR ENDED (DATE OF INCEPTION) TO
DECEMBER 31, 1996 DECEMBER 31, 1995
<S> <C> <C>
------------------ -----------------------
Investment yields:
Pre-tax.............................. 3.8% 4.8%
Net of tax........................... 2.8% 3.5%
</TABLE>
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.
INCOME TAXES
The Company's effective tax rate of 7% for the year ended December 31, 1996
and 7% for the period June 23, 1995 (date of inception) to December 31, 1995 are
less than the 35% statutory rate on pre-tax operating income due to tax exempt
income and the dividends received deductions. The 1996 and 1995 gross deferred
income tax benefits of approximately $1.8 million and $0.2 million,
respectively, which are assets considered recoverable from future taxable
income, result from temporary differences between financial and taxable income.
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
-27 -
<PAGE>
companies and companies providing services to the insurance industry. Cash and
fixed maturity investments and, if necessary, the sale of marketable equity
securities will be used to support short-term liquidity requirements.
As a significant portion of the Company's investment portfolio will
generally consist of equity securities issued by insurance and reinsurance
companies and companies providing services to the insurance industry, the equity
portfolio will lack industry diversification and will be particularly subject to
the cyclicality 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 are not generally
predictable, such gains and losses may differ significantly from period to
period.
Investments that are or will be included in the Company's private portfolio
include securities issued by privately held companies and by publicly traded
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 an inability by the Company 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 December 31, 1996, cash and invested assets totaled approximately $392.9
million, consisting of $106.3 million of cash and short-term investments, $140.4
million of publicly traded fixed maturity investments, $117.4 million of
publicly traded equity securities and $28.8 million of privately held
securities. Included in privately held securities are two investments totaling
$4.4 million which are accounted for under the equity method.
See Note 3 under the caption "Investment Information" of the accompanying
Notes to Consolidated Financial Statements of the Company for certain
information regarding the Company's publicly traded and privately held
securities and their carrying values, and commitments made by the Company
relating to its privately held securities. 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.
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
2.2 years.
At December 31, 1996, the Company is obligated under letters of credit
approximating $34 million, which secure certain reinsurance obligations and
investment commitments in amounts of approximately $22 million and $12 million,
respectively. Securities with a carrying value of approximately $30 million have
been pledged as collateral for a portion of these letters of credit.
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 reinsurance and
other forms of capital to insurance and reinsurance companies and making
investments in
-28 -
<PAGE>
insurance-related companies. RCHI will rely on cash dividends and distributions
from Risk Capital Reinsurance to pay any cash dividends to stockholders of RCHI
and to pay any operating expense that RCHI may incur. 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 regulatory
standards of the State of Nebraska. There are presently no contractual
restrictions on the payment of dividends or the making of distributions by Risk
Capital Reinsurance to RCHI.
Nebraska insurance laws provide that, without prior approval of 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.
Notwithstanding the foregoing, Nebraska insurance laws provide that any
distribution that is a dividend may be paid by Risk Capital Reinsurance only out
of earned surplus arising from its business, which is defined as unassigned
funds (surplus) as reported in the statutory financial statement filed by Risk
Capital Reinsurance with the Nebraska Insurance Department for the most recent
year. In addition, Nebraska insurance laws also provide that 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. See "Business-- Insurance Regulation--Regulation of
Dividends and Other Payments from Insurance Subsidiaries" and Note 10 of the
Notes to the Consolidated Financial Statements of the Company.
RCHI and Risk Capital Reinsurance file consolidated federal income tax
returns and have entered into a tax sharing agreement (the "Tax Sharing
Agreement"), allocating the consolidated income tax liability on a separate
return basis. Pursuant to the Tax Sharing Agreement, Risk Capital Reinsurance
makes tax sharing payments to RCHI based on such allocation.
Net cash flow from operating activities for the year ended December 31,
1996 was approximately $31 million, consisting principally of premiums received,
investment income and net investment gains, offset by operating costs and
expenses.
The primary sources of liquidity for Risk Capital Reinsurance are net cash
flow from operating activities, 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 is also 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. 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 December 31, 1996, the Company's consolidated stockholders' equity
totaled $352.2 million, or $20.68 per share. At such date, statutory surplus of
Risk Capital Reinsurance was approximately $334.3 million. Based on data
available as of December 31, 1996 from the RAA, Risk Capital Reinsurance is the
twelfth largest domestic broker market oriented reinsurer as measured by
statutory surplus.
ACCOUNTING PRONOUNCEMENT
The Company has elected to continue to account for its stock-based
compensation under Accounting Principles Board Opinion ("APB") No. 25
"Accounting for Stock Issued to Employees" and related interpretations under APB
No. 25. The Company does not recognize any compensation expense for its grants
of employee stock options because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant. In addition, under APB No. 25, the Company does not recognize
-29 -
<PAGE>
compensation expense for stock issued to employees under its stock purchase
plan. The alternative to APB No. 25 is the Financial Accounting Standards Board
("FASB") No. 123 "Accounting for Stock-Based Compensation," which requires fair
value accounting for stock-based compensation. This alternative requires the use
of option valuation models that were not developed for use in valuing employee
stock options and employee stock purchase plans. Therefore, the Company believes
that the existing models do not provide a reliable single measure of the fair
value of employee stock options that have vesting provisions and are not
transferable. For additional discussion, see Note 8 under the caption "Employee
Benefits and Compensation Arrangements" of the accompanying Notes to the
Consolidated Financial Statements of the Company.
Set forth below is pro forma information regarding net income and earnings
per share, assuming the Company had accounted for its employee stock options
under FASB No. 123 using a Black-Scholes option valuation model:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
JUNE 23, 1995
YEAR ENDED (DATE OF INCEPTION) TO
DECEMBER 31, 1996 DECEMBER 31, 1995
<CAPTION>
------------------ -----------------------
<S> <C> <C>
Net income, as reported...... $4,112 $ 1,019
Proforma net income.......... $3,569 $ 911
Earnings per share, as
reported..................... $ 0.24 $ 0.06
Proforma earnings per
share........................ $ 0.21 $ 0.05
</TABLE>
The effect on net income and earnings per share after applying FASB No.
123's fair valuation method to stock issued under the Company's employee stock
purchase plan does not materially differ from the pro forma information set
forth above with respect to the Company's employee stock options.
INSURANCE REGULATION
Risk Capital Reinsurance, in common with other insurers, is subject to
extensive governmental regulation and supervision in the various states and
jurisdictions in which it transacts business. The laws and regulations of the
State of Nebraska, the domicile of Risk Capital Reinsurance, have the most
significant impact on its operations.
From time to time various regulatory and legislative changes have been
proposed in the insurance and reinsurance industry, some of which could have an
effect on reinsurers. Among the proposals that have in the past been or are at
present being considered are the possible introduction of federal regulation in
addition to, or in lieu of, the current system of state regulation of insurers
and proposals in various state legislatures (some of which proposals have been
enacted) to conform portions of their insurance laws and regulations to various
model acts adopted by the NAIC. The Company is unable to predict whether any of
these laws and regulations will be adopted, the form in which any such laws and
regulations would be adopted, or the effect, if any, these developments would
have on the operations and financial condition of the Company. See
"Business--Insurance Regulation."
Certain provisions of the Nebraska insurance laws are proposed to be
amended through a bill that is currently before the Nebraska legislature. If
such legislation is adopted, the proposed amendments could have a material
impact on the investment strategy of the Company. See "Business--Insurance
Regulation--Legislative and Regulatory Proposals."
EFFECTS OF INFLATION
The effects of inflation on the Company will be implicitly considered in
pricing and estimating reserves for unpaid claims and claims expenses. The
actual effects of inflation on the results of the Company cannot be accurately
known until claims are ultimately settled.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Consolidated Financial Statements and Notes thereto and required
financial statement schedules on pages F-1 through F-26 and S-1 through S-7
below.
-30 -
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Incorporated herein by reference to the captions "Election of
Directors--Directors and Executive Officers--Nominees" and "--Continuing
Directors and Executive Officers" in the Company's definitive proxy statement
for the Company's Annual Meeting of Stockholders to be held on May 13, 1997 (the
"Proxy Statement"), which statement the Company intends to file with the
Securities and Exchange Commission within 120 days after December 31, 1996.
ITEM 11. EXECUTIVE COMPENSATION.
Incorporated herein by reference to the captions "Election of
Directors--Directors and Executive Officers--Compensation of Directors,"
"Election of Directors--Executive Compensation" and "--Performance Graph" in the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated herein by reference to the caption "Election of
Directors--Security Ownership of Certain Beneficial Owners and Management" in
the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated herein by reference to the captions "Election of
Directors--Executive Compensation-- Compensation Committee Interlocks and
Insider Participation" and "Election of Directors--Certain Relationships and
Related Transactions" in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
FINANCIAL STATEMENTS AND SCHEDULES
Financial Statements and Schedules listed in the accompanying Index to
Financial Statements and Schedules on page F-1 are filed as part of this Report,
and are included in Item 8.
EXHIBITS
The exhibits listed in the accompanying Index to Exhibits are filed as part
of this Report. Such exhibits include, without limitation, certain management
contracts and compensatory plans as therein described.
REPORTS ON FORM 8-K
No Reports on Form 8-K were filed by the Company during the fourth quarter
of 1996.
-31 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RISK CAPITAL HOLDING, INC.
(Registrant)
By: __/s/ Mark D. Mosca__
Mark D. Mosca,
President
Dated: March 28, 1997
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------------------------------- ---------------------------------- -------------------
<C> <S> <C>
/s/Mark D. Mosca President (Principal Executive March 28, 1997
Mark D. Mosca Officer) and Director
* Chairman and Director March 28, 1997
Robert Clements
/s/Paul J. Malvasio Chief Financial Officer and March 28, 1997
Paul J. Malvasio Treasurer (Principal Financial
Officer and Principal Accounting
Officer)
* Director March 28, 1997
Michael P. Esposito, Jr.
* Director March 28, 1997
Allan W. Fulkerson
* Director March 28, 1997
Lewis L. Glucksman
* Director March 28, 1997
Ian R. Heap
* Director March 28, 1997
Thomas V. A. Kelsey
* Director March 28, 1997
Mark N. Williamson
* Director March 28, 1997
Philip L. Wroughton
By: /s/ Peter A. Appel Attorney-in-Fact March 28, 1997
Name: Peter A. Appel
</TABLE>
-32 -
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY Pages
----------
<S> <C>
Report of Independent Accountants on Financial Statements............... F-2
Consolidated Balance Sheet at December 31, 1996 and 1995................ F-3
Consolidated Statement of Income for the year ended December 31, 1996
and for the period from June 23, 1995 (date of inception) to December
31, 1995................................................................ F-4
Consolidated Statement of Changes in Stockholders' Equity for the year
ended December 31, 1996 and for the period from June 23, 1995 (date of
inception) to December 31, 1995......................................... F-5
Consolidated Statement of Cash Flows for the year ended December 31,
1996 and the period from June 23, 1995 (date of inception) to December
31, 1995................................................................ F-6
Notes to Consolidated Financial Statements.............................. F-7
SCHEDULES
Report of Independent Accountants on Financial Statement Schedules...... S-1
I. Summary of Investments Other Than Investments in Related Parties at
December 31, 1996.................................................. S-2
II. Condensed Financial Information of Registrant...................... S-3 to S-5
III. Supplementary Insurance Information for the year ended December 31,
1996.................................................................... S-6
IV. Reinsurance for the year ended December 31, 1996.................... S-7
</TABLE>
Schedules other than those listed above are omitted for the reason that
they are not applicable.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Risk Capital Holdings, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Risk Capital Holdings, Inc. and its subsidiary at December 31, 1996 and 1995,
and the results of their operations and their cash flows for the year ended
December 31, 1996 and for the period from June 23, 1995 (date of inception) to
December 31, 1995, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
New York, New York
February 7, 1997
F-2
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
<S> <C> <C>
1996 1995
-------- --------
ASSETS
Investments:
Fixed maturities (amortized cost: 1996, $140,128; 1995,
$130,949).................................................... $140,381 $132,321
Publicly traded equity securities (cost: 1996, $108,580;
1995, $36,009)............................................... 117,360 39,374
Privately held securities (cost: 1996, $23,363; 1995,
$18,531)..................................................... 28,847 19,534
Short-term investments....................................... 104,886 155,116
-------- --------
Total investments....................................... 391,474 346,345
Cash......................................................... 1,466 982
Accrued investment income.................................... 2,151 2,442
Premiums receivable.......................................... 23,669
Reinsurance recoverable on unearned premiums................. 576
Reinsurance recoverable...................................... 522
Deferred policy acquisition costs............................ 7,018
Other assets................................................. 5,610 1,217
-------- --------
TOTAL ASSETS............................................ $432,486 $350,986
-------- --------
-------- --------
LIABILITIES
Claims and claims expenses................................... $ 20,770
Unearned premiums............................................ 37,348
Reinsurance premiums payable................................. 536
Contingent commissions payable............................... 2,734
Investment accounts payable.................................. 10,598 $ 5,895
Deferred income tax liability................................ 3,026 1,851
Other liabilities............................................ 5,261 3,025
-------- --------
TOTAL LIABILITIES....................................... 80,273 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
(issued and outstanding: 1996, 17,031,246; 1995,
16,941,125)............................................. 170 169
Additional paid-in capital................................... 340,435 338,737
Unrealized appreciation of investments, net of income tax.... 9,436 3,731
Deferred compensation under stock award plan................. (2,959) (3,441)
Retained earnings............................................ 5,131 1,019
-------- --------
TOTAL STOCKHOLDERS' EQUITY.............................. 352,213 340,215
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............. $432,486 $350,986
-------- --------
-------- --------
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 23, 1995
YEAR ENDED (DATE OF INCEPTION) TO
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------------
<S> <C> <C>
REVENUES
Net premiums written........................... $ 72,532
Increase in unearned premiums.................. (36,771)
-----------------
Net premiums earned............................ 35,761
Net investment income.......................... 13,151 $ 4,578
Net realized investment gains.................. 1,259 397
----------------- -----------------------
Total revenues............................ 50,171 4,975
----------------- -----------------------
OPERATING COSTS AND EXPENSES
Claims and claims expenses..................... 24,079
Commissions and brokerage...................... 10,197
Other operating expenses....................... 11,285 3,884
----------------- -----------------------
Total operating costs and expenses........ 45,561 3,884
----------------- -----------------------
INCOME
Income before income taxes and equity in net
loss of investee............................. 4,610 1,091
----------------- -----------------------
Federal income taxes:
Current................................... 2,147 230
Deferred.................................. (1,810) (158)
----------------- -----------------------
Income tax expense............................. 337 72
----------------- -----------------------
Income before equity in net loss of investee... 4,273 1,019
Equity in net loss of investee................. (161)
----------------- -----------------------
Net income................................ $ 4,112 $ 1,019
----------------- -----------------------
----------------- -----------------------
PER SHARE DATA
Primary and fully diluted:
Average shares outstanding................ 16,981,724 16,747,084
----------------- -----------------------
----------------- -----------------------
Net income................................ $ 0.24 $ .06
----------------- -----------------------
----------------- -----------------------
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 23, 1995
YEAR ENDED (DATE OF INCEPTION) TO
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- ----------------------
<S> <C> <C>
COMMON STOCK
Balance at beginning of year.................... $ 169
Issuance of common stock........................ $ 168
Restricted common stock issued.................. 1 1
----------------- ----------------------
Balance at end of year..................... 170 169
----------------- ----------------------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year.................... 338,737
Issuance of common stock, and in 1995, Class A
and B warrants................................ 1,698 338,737
----------------- ----------------------
Balance at end of year..................... 340,435 338,737
----------------- ----------------------
UNREALIZED APPRECIATION OF INVESTMENTS, NET OF
INCOME TAX
Balance at beginning of year.................... 3,731
Change in unrealized appreciation............... 5,705 3,731
----------------- ----------------------
Balance at end of year..................... 9,436 3,731
----------------- ----------------------
DEFERRED COMPENSATION UNDER STOCK AWARD PLAN
Balance at beginning of year.................... (3,441)
Restricted common stock issued.................. (1,487) (3,895)
Compensation expense recognized................. 1,969 454
----------------- ----------------------
Balance at end of year..................... (2,959) (3,441)
----------------- ----------------------
RETAINED EARNINGS
Balance at beginning of year.................... 1,019
Net income...................................... 4,112 1,019
----------------- ----------------------
Balance at end of year..................... 5,131 1,019
----------------- ----------------------
TOTAL STOCKHOLDERS' EQUITY
Balance at beginning of year.................... 340,215
Issuance of common stock, and in 1995, Class A
and B warrants................................ 1,699 338,906
Change in unrealized appreciation of
investments, net of income tax................ 5,705 3,731
Change in deferred compensation................. 482 (3,441)
Net income...................................... 4,112 1,019
----------------- ----------------------
Balance at end of year..................... $ 352,213 $340,215
----------------- ----------------------
----------------- ----------------------
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 23, 1995
YEAR ENDED (DATE OF INCEPTION) TO
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- ----------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income......................................... $ 4,112 $ 1,019
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Liability for claims and claims expenses...... 20,770
Unearned premiums............................. 37,348
Premiums receivable........................... (23,669)
Accrued investment income..................... 291 (2,442)
Reinsurance premiums payable.................. 536
Contingent commissions payable................ 2,734
Reinsurance recoverable....................... (522)
Reinsurance recoverable on unearned premium
reserves...................................... (576)
Deferred policy acquisition costs............. (7,018)
Net realized investment gains................. (1,259) (397)
Deferred income tax asset..................... (1,897) (158)
Other liabilities............................. 1,826 2,959
Other items, net.............................. (1,687) (1,048)
----------------- ----------------------
NET CASH PROVIDED BY (USED FOR) OPERATING
ACTIVITIES....................................... 30,989 (67)
----------------- ----------------------
INVESTING ACTIVITIES
Purchases of fixed maturity investments............ (232,568) (177,950)
Sales of fixed maturity investments................ 226,927 43,587
Net sales (purchases) of short-term investments.... 53,982 (155,116)
Purchases of equity securities..................... (110,551) (46,107)
Sales of equity securities......................... 34,352 1,228
Purchases of furniture, equipment and leasehold
improvements..................................... (2,859) (124)
----------------- ----------------------
NET CASH USED FOR INVESTING ACTIVITIES............. (30,717) (334,482)
----------------- ----------------------
FINANCING ACTIVITIES
Net cash proceeds from initial public offering and
direct sales..................................... 322,073
Proceeds from issuance of Class B warrants......... 13,458
Common stock issued................................ 1,699 3,895
Deferred compensation on restricted stock.......... (1,487) (3,895)
----------------- ----------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES.......... 212 335,531
----------------- ----------------------
Increase in cash................................... 484 982
Cash beginning of period........................... 982
----------------- ----------------------
Cash end of period................................. $ 1,466 $ 982
----------------- ----------------------
----------------- ----------------------
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FORMATION AND CAPITALIZATION
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, on a global basis, property and
casualty reinsurance and other forms of capital, either on a stand-alone basis
or as part of integrated capital solutions for insurance companies with capital
needs that cannot be met by reinsurance alone. 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 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.
The Company seeks to write a small number of large reinsurance treaty
transactions that may also be integrated with an equity investment in client
companies. Such reinsurance may include traditional and finite risk property and
casualty reinsurance treaty coverages, including excess of loss reinsurance and
quota share or proportional reinsurance. The Company's investment strategy is
focused on the insurance industry. A principal component of this strategy is
investing a significant portion of invested assets in publicly traded and
privately held equity securities issued by insurance and reinsurance companies
and companies providing services to the insurance industry.
The Company obtains substantially all of its reinsurance through
intermediaries which represent the cedent in negotiations for the purchase of
reinsurance. In addition to investment opportunities arising from the activities
of Marsh & McLennan Risk Capital Corp. ("Risk Capital Corp."), as the Company's
equity investment advisor, the Company is provided with investment opportunities
by reinsurance brokers and traditional financing sources, including investment
banking firms, venture capital firms and other banking and financing sources,
both acting as principal investors and intermediaries. Underwriting
opportunities may arise from such sources in connection with the Company's
investment activities as part of integrated transactions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles ("GAAP") and include the accounts of
RCHI and Risk Capital Reinsurance. All intercompany transactions and balances
have been eliminated in consolidation. The preparation of financial statements
in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
PREMIUM REVENUES AND RELATED EXPENSES
Premiums are recognized as income on a pro rata basis over the terms of the
related reinsurance contracts. These amounts are based on reports received from
ceding companies, supplemented by the Company's own estimates of premiums for
which ceding company reports have not been received. Unearned premium reserves
represent the portion of premiums written that relates to the unexpired terms of
contracts in force. Certain of the Company's contracts include provisions that
adjust premiums based upon the experience under the contracts. Premiums written
under these contracts are recorded based upon the expected ultimate experience
under these contracts.
F-7
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Acquisition costs, which vary with and are primarily related to the
acquisition of policies, consisting principally of commissions and brokerage
expenses incurred at the time a contract is issued, are deferred and amortized
over the period in which the related premiums are earned. Deferred acquisition
costs are limited to their estimated realizable value based on the related
unearned premiums and take into account anticipated claims and claims expenses,
based on historical and current experience, and anticipated investment income.
INVESTMENTS
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.
Investments in privately held securities, issued by privately and publicly
held companies, may include both equity securities and securities convertible
into, or exercisable for, equity securities (some of which may have fixed
maturities). 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 carried under the
equity method of accounting. Under this method, the Company records its
proportionate share of income or loss for such investments in results of
operations.
The estimated fair value of investments in privately held securities, other
than those carried under the equity method, is initially equal to the cost of
such investments until the investments are revalued based principally on
substantive events or other 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 Risk Capital Corp., its equity
investment advisor.
Realized investment gains or losses on the sale of investments are
determined by the specific identification method and recorded in net income.
Unrealized appreciation or depreciation of securities which are carried at fair
value, is excluded from net income and recorded as a separate component of
stockholders' equity, net of applicable deferred income tax.
Net investment income, consisting of dividends and interest, net of
investment expenses, is recognized when earned. The amortization of premium and
accretion of discount for fixed maturity investments is computed utilizing the
interest method. Anticipated prepayments and expected maturities are used in
applying the interest method for certain investments such as mortgage and other
asset-backed securities. When actual prepayments differ significantly from
anticipated prepayments, the effective yield is recalculated to reflect actual
payments to date and anticipated future payments. The net investment in the
security is adjusted to the amount that would have existed had the new effective
yield been applied since the acquisition of the security. Such adjustments, if
any, are included in net investment income.
F-8
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CLAIMS AND CLAIMS EXPENSES
The reserve for claims and claims expenses consists of unpaid reported
claims and claims expenses and estimates for claims incurred but not reported.
These reserves are based on reports received from ceding companies, supplemented
by the Company's estimates of reserves for which ceding company reports have not
been received, and the Company's own historical experience. To the extent that
the Company's own historical experience is inadequate for estimating reserves,
such estimates will be determined based upon industry experience and
management's judgment. The ultimate liability may vary from such estimates, and
any adjustments to such estimates are reflected in income in the period in which
they become known. Reserves are recorded without consideration of potential
salvage or subrogation recoveries which are estimated to be immaterial. Such
recoveries, when realized, are reflected as a reduction of claims incurred.
FOREIGN EXCHANGE
The United States dollar is the functional currency for the Company's
foreign business. Gains and losses on the translation into United States dollars
of amounts denominated in foreign currencies are included in net income. Foreign
currency revenue and expenses are translated at average exchange rates during
the year. Assets and liabilities denominated in foreign currencies are
translated at the rate of exchange in effect at the balance sheet date.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes.
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes. A valuation allowance is
recorded using the "more-likely-than-not" criteria when some or all of a
deferred tax asset may not be realized.
EARNINGS 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.
For 1995 and 1996, the common stock equivalents were anti-dilutive, and thus not
included in the weighted average shares outstanding.
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
The costs of furniture and equipment are charged against income over their
estimated service lives. Leasehold improvements are amortized over the terms of
the office lease. Depreciation and amortization are computed on the
straight-line method. Maintenance and repairs are charged to expense as
incurred.
NEW ACCOUNTING STANDARD
The Company has elected to follow Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees" ("APB No. 25") and related
interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under Financial Accounting
Standards Board ("FASB") Statement No. 123 "Accounting for Stock-Based
Compensation" ("FASB No. 123") requires use of option valuation models that were
not developed for use in valuing employee stock options (see Note 8). Under APB
No. 25, no compensation expense is recognized by the Company because the
exercise price of the Company's employee stock options equal the market price of
the underlying stock on the date of grant.
RECLASSIFICATIONS
The Company has reclassified the presentation of certain prior year
information to conform with the current presentation.
F-9
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. INVESTMENT INFORMATION
NET INVESTMENT INCOME
The components of net investment income were derived from the following
sources:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
JUNE 23, 1995
YEAR ENDED (DATE OF INCEPTION) TO
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- ----------------------
Fixed maturity securities....................... $ 7,470 $1,464
Publicly traded equity securities............... 1,606 118
Privately held equity securities................ 56
Short-term investments.......................... 5,491 3,339
----------------- --------
Gross investment income......................... 14,623 4,921
Investment expenses............................. 1,472 343
----------------- --------
Net investment income........................... $13,151 $4,578
----------------- --------
----------------- --------
</TABLE>
REALIZED AND UNREALIZED INVESTMENT GAINS
Realized investment gains were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
JUNE 23, 1995
YEAR ENDED (DATE OF INCEPTION) TO
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- ----------------------
Net realized investment gains (losses):
Fixed maturity securities..................... ($ 359) $ 397
Publicly traded equity securities............. 1,549
Privately held securities..................... 69
----------------- --------
Subtotal...................................... 1,259 397
----------------- --------
Income tax expense............................ 441 139
----------------- --------
Net realized investment gains, net of tax..... $ 818 $ 258
----------------- --------
----------------- --------
</TABLE>
F-10
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table reconciles amortized cost to the estimated fair value
and carrying value of fixed maturity and equity securities:
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31, 1996
------------------------------------------------------
<S> <C> <C> <C> <C>
ESTIMATED
GROSS GROSS FAIR VALUE
AMORTIZED UNREALIZED UNREALIZED AND CARRYING
COST GAINS LOSSES VALUE
---------- ---------- ---------- ------------
Fixed maturities:
U.S. government and
government agencies................ $ 35,907 $ 42 $ 153 $ 35,796
Foreign governments................... 509 10 519
Municipal bonds....................... 59,751 339 49 60,041
Corporate bonds....................... 17,359 81 124 17,316
Mortgage and asset backed
securities......................... 26,602 133 26 26,709
---------- ---------- ---------- ------------
Sub-total fixed maturities............ 140,128 605 352 140,381
Equity securities:
Publicly traded.................... 108,580 12,036 3,256 117,360
Privately held..................... 23,363 7,001 1,517 28,847
---------- ---------- ---------- ------------
Sub-total equity securities........... 131,943 19,037 4,773 146,207
---------- ---------- ---------- ------------
Total.............................. $272,071 $ 19,642 $5,125 $286,588
---------- ---------- ---------- ------------
---------- ---------- ---------- ------------
</TABLE>
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31, 1996
------------------------------------------------------
<S> <C> <C> <C> <C>
ESTIMATED
GROSS GROSS FAIR VALUE
AMORTIZED UNREALIZED UNREALIZED AND CARRYING
COST GAINS LOSSES VALUE
---------- ---------- ---------- ------------
Fixed maturities:
U.S. government and government
agencies........................... $ 31,059 $ 626 $ 31,685
Municipal bonds....................... 69,698 364 $ 50 70,012
Corporate bonds....................... 15,881 211 16,092
Mortgage and asset backed
securities......................... 14,311 221 14,532
---------- ---------- ---------- ------------
Sub-total fixed maturities............ 130,949 1,422 50 132,321
Equity securities:
Publicly traded.................... 36,009 3,665 300 39,374
Privately held..................... 18,531 1,003 19,534
---------- ---------- ---------- ------------
Sub-total equity securities........... 54,540 4,668 300 58,908
---------- ---------- ---------- ------------
Total.............................. $185,489 $ 6,090 $ 350 $191,229
---------- ---------- ---------- ------------
---------- ---------- ---------- ------------
</TABLE>
At December 31, 1996, all of the Company's equity investments were in
securities issued by insurance and reinsurance companies or companies providing
services to the insurance industry.
F-11
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1996, the publicly traded equity portfolio consisted of the
following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31, 1996
--------------------------------------------
<S> <C> <C> <C>
ESTIMATED
NET FAIR VALUE
UNREALIZED AND CARRYING
COST GAIN (LOSS) VALUE
-------- ------------ ------------
Common Stocks:
ACE Limited.................................... $ 11,109 $4,523 $ 15,632
American International Group, Inc.............. 12,431 2,183 14,614
EXEL Limited................................... 12,685 2,086 14,771
E.W. Blanch Holdings, Inc...................... 12,439 (565) 11,874
Gainsco Inc.................................... 10,028 (966) 9,062
RenaissanceRe Holdings Ltd..................... 1,141 64 1,205
Trenwick Group Inc............................. 11,624 (1,218) 10,406
USF&G Corp..................................... 11,331 3,073 14,404
Vesta Insurance Group, Inc..................... 14,547 (507) 14,040
Preferred Stock:
St. Paul Companies, 6% Convertible Preferred... 11,245 107 11,352
-------- ------------ ------------
Total................................ $108,580 $8,780 $117,360
-------- ------------ ------------
-------- ------------ ------------
</TABLE>
Privately held securities consisted of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31,
----------------------
<S> <C> <C>
1996 1995
------- -------
EQUITY SECURITIES:
Carried under the equity method:
Island Heritage Insurance Company, Ltd........................... $ 4,269
Insurance Investment Group, L.P.................................. 180
Carried at fair value:
Peregrine Russell Miller Insurance Fund of Asia Limited.......... 7,465
Terra Nova (Bermuda) Holdings, Ltd............................... 15,870 $ 8,869
Venton Holdings, Ltd............................................. 1,063
------- -------
Total privately held equity securities................. 28,847 8,869
CONVERTIBLE SECURITY, CARRIED AT FAIR VALUE
Mutual Risk Management, Ltd.
Zero Coupon Subordinated Debenture............................. 10,665
------- -------
Total privately held securities........................ $28,847 $19,534
------- -------
------- -------
</TABLE>
F-12
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In addition, the Company's investment commitments relating to its privately
held securities were as follows at December 31, 1996:
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31, 1996
-----------------
<S> <C>
Insurance Investment Group, L.P.................... $11,820
Venton Holdings, Ltd............................... 10,300
-----------------
Total.................................... $22,120
-----------------
-----------------
</TABLE>
There were no investment commitments outstanding as of December 31, 1995.
At December 31, 1996, the carrying values of the privately held equity
securities are net of an accrual aggregating approximately $426,000 for fees
which would be payable to Risk Capital Corp. had the securities been sold at
their carrying value at December 31, 1996.
Set forth below is certain information relating to each of the Company's
investments and investment commitments in privately held securities at December
31, 1996.
ISLAND HERITAGE INSURANCE COMPANY, LTD.
In April 1996, the Company acquired a 9.75% voting interest and an
approximately 33% economic interest in Island Heritage Insurance Company, Ltd
("Island Heritage"), a Cayman Islands insurer, for an aggregate purchase price
of $4.5 million, which was funded through $1.7 million in cash and a trust
account in an amount equal to $2.8 million. Island Heritage commenced operations
in May 1996 as an 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. The Company's Chairman and President are two
of the five directors of Island Heritage.
The investment in Island Heritage is reported under the equity method since
the Company believes it has the ability to exercise significant influence over
the operating and financial policies of Island Heritage due to the Company's
participation on the Board of Directors and through certain consent rights
attaching to the Company's holdings of non-voting shares.
The Company records its equity in the operating results of Island Heritage
on a quarter lag basis. Set forth below is summary unaudited financial
information for Island Heritage:
<TABLE>
<CAPTION>
(IN THOUSANDS)
APRIL 22, 1996
(DATE OF INCEPTION) TO
SEPTEMBER 30, 1996
----------------------
<S> <C>
Gross premiums earned............................ $ 63
Ceded premiums................................... (482)
--------
Net premiums earned.............................. (419)
Total revenues................................... (306)
Net loss......................................... ($ 687)
</TABLE>
<TABLE>
<CAPTION>
(IN THOUSANDS)
SEPTEMBER 30, 1996
----------------------
<S> <C>
Total assets..................................... $5,620
Total stockholders' equity....................... $4,865
</TABLE>
F-13
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Island Heritage experienced a net loss for the period due to the cost of
reinsurance for protection against catastrophe losses, which exceeded the
revenues generated from the low volume of premiums written which resulted from
the start up nature of its operations.
The Company's equity in the net loss, net of tax, for the period recorded
in 1996 was $161,000, or $.01 per share.
INSURANCE INVESTMENT GROUP, L.P.
In March 1996, the Company committed to pay $12.0 million over the
long-term to fund its currently 28.6% limited partner interest in Insurance
Investment Group, L.P. (the "Partnership"), a private limited partnership. At
December 31, 1996, $180,000 had been funded under this commitment. The
Partnership meets periodically to evaluate investment opportunities. For the
year ended December 31, 1996, there had not been any significant financial
activity to be recorded by the Company.
PEREGRINE RUSSELL MILLER INSURANCE FUND OF ASIA LIMITED
In March 1996, the Company purchased securities of the Peregrine Russell
Miller Insurance Investment Fund of Asia Limited (the "Asian Fund") for
approximately $9.0 million. The Company's investment represents approximately
18.0% of the outstanding voting securities of, and an approximately 44.0%
economic interest in, the Asian Fund. The Asian Fund, based in Hong Kong,
invests in publicly traded and privately held insurance companies incorporated
or operating in Asia. At December 31, 1996, the Company had recorded its
investment in the Asian Fund based on the Company's interest in the unaudited
net asset value of the Asian Fund reported in United States dollars at November
29, 1996.
TERRA NOVA (BERMUDA) HOLDINGS, LTD.
The Company's $8.9 million investment in Terra Nova (Bermuda) Holdings,
Ltd. ("Terra Nova"), acquired in October 1995, currently represents a 3.6%
voting and economic interest in Terra Nova. Terra Nova, based in Bermuda, is a
holding company for two operating insurance companies located in Bermuda and
London that write property and casualty reinsurance. In April 1996, Terra Nova
completed the initial public offering of its common stock, which is traded on
the New York Stock Exchange ("NYSE").
At December 31, 1996, the Company recorded its investment in Terra Nova at
the closing price reported on the NYSE on such date, net of a 17.5% discount for
certain restrictions as to resale which expire in October 1997. At December 31,
1995, the Company recorded its investment in Terra Nova at fair value, which was
determined to equal cost. In 1996, dividend income was approximately $56,000.
VENTON HOLDING, LTD.
In April 1996, the Company acquired a 9.9% voting and economic interest in
Venton Holdings Ltd. ("Venton"), 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 dedicated underwriting capacity. The Company's
investment in Venton was made for a combination of $1.1 million in cash and a
$4.2 million capital contribution commitment to Venton to fund its capital
requirements at Lloyd's. The Company is a co-investor with The Trident
Partnership, L.P. ("Trident"), a dedicated insurance industry private equity
fund.
The Company's $4.2 million capital contribution commitment prior to
December 31, 1996, in effect, supports the Company's pro rata portion of a $31.0
million letter of credit in favor of Lloyd's supporting Venton's 1996 corporate
underwriting vehicles. Trident has a similar commitment for the remainder of the
letter of credit. The letter of credit was provided by a bank with the credit
backing of X.L. Insurance Company, Ltd.
In the fourth quarter of 1996, the letter of credit amount was increased to
approximately $76.1 million principally to increase Venton's underwriting
capacity for 1997. The Company and Trident agreed to pay their pro rata portion
of any draws under the letter of credit based on their share ownership in
Venton.
F-14
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1996, the Company's additional capital contribution
commitment and pro rata share of the letter of credit was approximately $10.3
million. At December 31, 1996, the Company recorded its investment in Venton at
fair value, which was estimated to equal cost.
The Company also reinsures certain Lloyd's Syndicates managed by Venton.
The Company's net premiums written and earned from such syndicates in 1996 were
$2.9 million and $1.0 million, respectively.
MUTUAL RISK MANAGEMENT, LTD.
The Mutual Risk Management, Ltd. ("Mutual Risk") zero coupon subordinated
debenture was acquired in a private transaction 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 traded Bermuda company, providing risk management
services to client companies. This security was sold in October 1996 at a
realized gain of approximately $69,000.
FIXED MATURITIES
Contractual maturities of fixed maturity securities at December 31, 1996
are shown below. Expected maturities, which are management's best estimates,
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31, 1996
----------------------------
<S> <C> <C>
AMORTIZED ESTIMATED FAIR
COST VALUE
---------- --------------
Available for Sale:
Due in one year or less..................................... $ 57,351 $ 57,386
Due after one year through five years....................... 14,514 14,567
Due after five years through 10 years....................... 22,261 22,404
Due after 10 years.......................................... 19,400 19,315
---------- --------------
Sub-total................................................... 113,526 113,672
Mortgage and asset-backed securities........................ 26,602 26,709
---------- --------------
Total......................................................... $140,128 $140,381
---------- --------------
---------- --------------
</TABLE>
As of December 31, 1996, the weighted average contractual and expected
maturities of the fixed maturity investments, based on fair value, were 8.7
years and 5.7 years, respectively.
Gross realized gains and gross realized losses on sales of fixed maturity
securities were $3.3 million and $2.0 million during 1996 and $410,000 and
$13,000 during 1995, respectively.
All fixed maturity investments held at December 31, 1996 were considered
investment grade by Standard & Poor's Corporation or Moody's Investors Service,
Inc.
There are no investments in any entity in excess of 10% of the Company's
stockholders' equity at December 31, 1996, other than investments issued or
guaranteed by the United States government or its agencies.
F-15
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SECURITIES PLEDGED AND ON DEPOSIT
Securities with a carrying value of approximately $30.0 million have been
pledged as collateral for letters of credit obtained in connection with certain
reinsurance obligations of the Company (see Note 5).
At December 31, 1996, securities with a face amount of $100,000 were on
deposit with the Insurance Department of the State of Nebraska in order to
comply with certain Nebraska insurance laws. In January 1997, additional
securities with a face amount of $1,400,000 were placed on deposit with the
Nebraska Insurance Department in order to comply with certain insurance laws of
other states in which the Company is seeking licensing.
4. AGREEMENTS WITH RELATED PARTIES
INVESTMENT ADVISORY AGREEMENTS
The Company has an investment advisory agreement with Risk Capital Corp.
for management of the Company's portfolios of equity securities (including
convertible securities) that are publicly traded ("Public Portfolio") and
privately held ("Private Portfolio"). The Private Portfolio includes equity
securities which at the time of acquisition do not have a readily ascertainable
market or are subject to certain trading restrictions. Risk Capital Corp. is
also an investment advisor to Trident, a dedicated insurance industry private
equity fund organized by Risk Capital Corp. and three other sponsors. Risk
Capital Corp.'s direct parent, Marsh & McLennan Risk Capital Holdings, Ltd.,
owns approximately 8.2% of the outstanding Common Stock, and Class A warrants
and Class B warrants to purchase 905,397 and 1,920,601 shares of Common Stock,
respectively. Trident owns approximately 10.3% of the outstanding Common Stock,
and Class A warrants to purchase 1,386,079 shares of Common Stock.
The Company pays an annual fee equal to 0.35% of the daily average market
value of the Public Portfolio. With respect to the Private Portfolio, the
Company pays an annual fee equal to the sum of (i) 1.5% per annum on the first
$250.0 million in carrying value of the Private Portfolio and (ii) 1.0% per
annum on the carrying value of the Private Portfolio that exceeds $250.0
million. Risk Capital Corp. is also entitled to annual compensation equal to the
excess, if any, of (x) 7.5% of cumulative net realized gains including
dividends, interest and other distributions, received on the Private Portfolio
over (y) cumulative compensation previously paid in prior years on cumulative
net realized gains.
The agreement has an initial term expiring on December 31, 2001 and will be
automatically renewed for successive one-year terms thereafter, unless either
party delivers written notice of termination at least one year prior to the end
of the then current term. The agreement provides for a minimum aggregate cash
fee to Risk Capital Corp. of $500,000 per annum through December 31, 1997. Fees
incurred under the agreement during fiscal year 1996 and partial fiscal year
1995 were approximately $686,000 and $151,000, respectively.
The Company has an investment advisory agreement with The Putnam Advisory
Company, Inc. ("Putnam"), an affiliate of Risk Capital Corp., for the management
of the Company's portfolio of fixed-income securities. The Company pays a fee
equal to the sum of 0.35% per annum of the first $50 million of the market value
of the portfolio, 0.30% per annum on the next $50.0 million, 0.20% per annum on
the next $100 million and 0.15% per annum of the market value of assets that
exceeds $200 million. Fees incurred under the agreement during 1996 and 1995
were approximately $547,000 and $190,000 respectively. The agreement is subject
to termination by either party upon 30 days' written notice.
OTHER AGREEMENTS
The Company reimbursed Risk Capital Corp. approximately $1,579,000 in 1995
for certain expenses incurred by Risk Capital Corp. in connection with the
formation and initial public offering of the Company.
Commencing in 1996, Risk Capital Corp. subleased office space from the
Company for a term expiring in October 2002. Future minimum rental income,
exclusive of escalation clauses and maintenance costs, under the remaining term
of the sublease will be approximately $2.8 million. Rental income for 1996 was
$264,000.
F-16
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. COMMITMENTS
LEASE AGREEMENT
The Company has a sublease agreement for office facilities for a term
expiring in October 2002. Future minimum rental charges under the remaining term
of the sublease, exclusive of escalation clauses and maintenance costs and net
of rental income, are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
----------------
<S> <C>
1997........................................ $ 718
1998........................................ 732
1999........................................ 742
2000........................................ 756
2001 and thereafter......................... 1,404
----------------
$4,352
----------------
----------------
</TABLE>
Rental expense, net of sublease income, was approximately $613,000 during 1996
and $54,000 in 1995.
LETTERS OF CREDIT
At December 31, 1996, the Company is obligated under letters of credit in
an aggregate amount of approximately $34 million, which secure certain of the
Company's reinsurance obligations and investment commitments (see Note 3).
SEVERANCE ARRANGEMENTS
The Company has adopted a program for all employees that provides for
certain severance payments and continuation of benefits in the event of
termination of employment resulting from a change in control. The extent of such
payments depends on the position of the employee and, in the case of certain
employees, length of employment.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with its executive officers. One of
these agreements has a five-year term initially expiring in September 2000, and
the remaining agreements may be terminated upon notice by either party. These
agreements provide for compensation in the form of base salary, annual bonus,
stock-based awards under the Stock Plan (as hereinafter defined), participation
in the Company's employee benefit programs and the reimbursement of certain
expenses. Under one of the agreements, the Company guaranteed loans in the
amount of $500,000 made to an executive by a financial institution to fund such
executive's purchase of 25,000 shares of Common Stock and related tax liability
under such stock's vesting provisions. In connection with such guarantee, the
Company is entitled to customary subrogation rights.
F-17
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. CLAIMS AND CLAIMS EXPENSES
The reconciliation of claims and claims expense reserves is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEAR ENDED
DECEMBER 31, 1996
-----------------
<S> <C>
At beginning of year:
Gross claims and claims expense reserves........................... --
Reinsurance recoverables........................................... --
-----------------
Net claims and claims expense reserves
Net claims and claims expenses incurred relating to:
Current year....................................................... $24,079
Prior year......................................................... --
-----------------
Total........................................................... 24,079
Net paid claims and claims expenses incurred relating to:
Current year....................................................... 3,831
Prior year......................................................... --
-----------------
Total........................................................... 3,831
At end of year:
Net claims and claims expense reserves current year................ 20,248
Reinsurance recoverables........................................... 522
-----------------
Gross claims and claims expense reserves........................ $20,770
-----------------
-----------------
</TABLE>
The Company believes that its exposure, if any, to environmental impairment
liability and asbestos-related claims is minimal since no business has been
written for periods prior to 1996.
Subject to the following, the Company believes that the reserves for claims
and claims expenses are adequate to cover the ultimate cost of claims and claims
expenses incurred through December 31, 1996. The reserves are based on estimates
of claims and claims expenses incurred and, therefore, the amount ultimately
paid may be more or less than such estimates. The inherent uncertainties of
estimating claims and claims expense reserves are exacerbated for reinsurers by
the significant periods of time (the "tail") that often elapse between the
occurrence of an insured claim, the reporting of the claim to the primary
insurer and, ultimately, to the reinsurer, and the primary insurer's payment of
that claim and subsequent indemnification by the reinsurer. As a consequence,
actual claims and claims expenses paid may deviate, perhaps substantially, from
estimates reflected in the Company's reserves reported in its financial
statements. The estimation of reserves by new reinsurers, such as the Company,
may be less reliable than the reserve estimations of a reinsurer with an
established volume of business and claims history. To the extent reserves prove
to be inadequate, the Company may have to augment such reserves and incur a
charge to earnings. Such a development, while not anticipated, could occur and
result in a material charge to earnings or stockholders' equity in future
periods.
F-18
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. RETROCESSION AGREEMENTS
At December 31, 1996, the Company is a participant in "common account"
retrocessional arrangements for certain treaties. Such agreements reduce the
effect of individual or aggregate losses to all companies participating on such
treaties including the reinsurer, such as the Company, and the ceding company.
Reinsurance recoverables are recorded as assets, predicated on the
retrocessionaires' ability to meet their obligations under the retrocessional
agreements. If the retrocessionaries are unable to satisfy their obligation
under the agreements, the Company would be liable for such defaulted amounts.
The effects of reinsurance on written and earned premiums and claims and
claims expenses are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEAR ENDED
DECEMBER 31, 1996
-----------------
<S> <C>
Assumed premiums written............................................. $73,685
Ceded premiums written............................................... 1,153
-----------------
Net premiums written................................................. 72,532
Assumed premiums earned.............................................. 36,337
Ceded premiums earned................................................ 576
-----------------
Net premiums earned.................................................. 35,761
Assumed claims and claims expenses incurred.......................... 24,601
Ceded claims and claims expenses incurred............................ 522
-----------------
Net claims and claims expenses incurred.............................. $24,079
-----------------
-----------------
</TABLE>
At December 31, 1996, the Company's balance sheet reflects reinsurance
recoverables balances as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEAR ENDED
DECEMBER 31, 1996
-----------------
<S> <C>
Reinsurance recoverable balances:
Unpaid claims and claim expenses.............................. $ 522
Ceded balances payable........................................ (536)
-----------------
Reinsurance balances, net............................................ ($ 14)
-----------------
-----------------
Reinsurance recoverable on unearned premium.......................... $ 576
-----------------
-----------------
</TABLE>
F-19
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. EMPLOYEE BENEFITS AND COMPENSATION ARRANGEMENTS
1995 LONG TERM INCENTIVE AND SHARE AWARD PLAN
In September 1995, the Company adopted the 1995 Long Term Incentive and
Share Award Plan (the "Stock Plan") which is administered by the Compensation
Committee of the Board of Directors. The Company may grant, subject to certain
restrictions, stock options, stock appreciation rights, restricted shares,
restricted share units payable in shares of Common Stock or cash, stock awards
in lieu of cash awards, and other stock-based awards to eligible employees of
the Company. Awards relating to not more than 1,700,000 shares of Common Stock
may be made over the five-year term of the Stock Plan.
RESTRICTED STOCK
During 1996 and 1995, the Company granted an aggregate of 76,000 and
190,500 shares, respectively, of restricted stock under the Stock Plan. Grants
of restricted stock generally vest at a rate of 20% per year over five years
commencing on the first anniversary of the date of grant. The Company records a
deferred expense equal to the market value of the shares at the date of grant
which is amortized and charged to income over the vesting period. The deferred
expense was $1,487,000 and $3,895,000, and the amortization of the deferred
expense was $1,969,000 and $454,000, for 1996 and 1995, respectively.
STOCK OPTIONS
The Company issues stock options at fair market values at the grant dates
to officers and non-employee directors. Options to officers generally vest and
become exercisable at a rate of 20% per year over five years from the date of
grant and expire seven years after vesting. Initial options granted to
non-employee directors vest and become exercisable at a rate of 33% per year
commencing on the date of grant and vest on each of the next two anniversary
dates thereafter.
Information relating to the Company's stock options is set forth below:
<TABLE>
<CAPTION>
(IN THOUSANDS)
JUNE 23, 1995
YEAR ENDED (DATE OF INCEPTION) TO
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------ -----------------------
NUMBER OF OPTIONS
<S> <C> <C>
Outstanding, beginning of year................. 192,700 --
Granted........................................ 436,350 192,900
Canceled....................................... -- (200)
Exercised...................................... 100 --
Outstanding, end of year....................... 628,950 192,700
Exercisable, end of year....................... 39,500 800
AVERAGE EXERCISE PRICE
Granted........................................ $ 17.98 $ 20.44
Canceled....................................... -- 20.00
Exercised...................................... 20.00 --
Outstanding, end of year....................... 18.74 20.44
Exercisable, end of year....................... $ 20.43 $ 20.12
</TABLE>
Exercise prices for options outstanding at December 31, 1996 ranged from
$17.19 to $23.38. The weighted average remaining contractual life of these
options is approximately 9.5 years.
F-20
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
Effective December 1, 1995, the Company established a tax-qualified
employee stock purchase plan (the "Purchase Plan"). An aggregate of 120,000
shares of the Common Stock have been reserved for issuance under the Purchase
Plan. Eligible employees may elect to participate in an annual offering period
under the Purchase Plan by authorizing after-tax payroll deductions of up to 20%
(in whole percentages) of their eligible compensation for the purchase of shares
of the Common Stock at 85% of the lesser of the market value per share of the
Common Stock at the beginning or end of the annual offering period, subject to
certain restrictions. During 1996, employees purchased approximately 14,000
shares of Common Stock under the Purchase Plan.
PRO FORMA INFORMATION
Pro forma information regarding net income and earnings per share is
required by FASB Statement No. 123. Such information has been determined for the
Company as if the Company has accounted for its employee stock options under the
fair value method of this Statement. The fair value for the Company's employee
stock options has been estimated at the date of grant using a Black-Scholes
option valuation model with the following weighted-average assumptions for
options issued in 1995 and 1996: (i) risk free rate: 6.0%; (ii) dividend yield:
0.0%; (iii) volatility factor: 25.0%; and (iv) average expected option life: 6
years. The weighted average fair value of options granted for the year ended
December 31, 1996 and for the period from June 23, 1995 (date of inception) to
December 31, 1995 was $3.0 million and $1.5 million, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models, such as the
Black-Scholes model, require the input of highly subjective assumptions
(particularly with respect to the Company, which has a limited stock-trading
history), including expected stock price volatility. Because the Company's
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, the Company believes that the
existing option valuations models, such as the Black-Scholes model, may not
necessarily provide a reliable single measure of the fair value of employee
stock options.
For purposes of the required pro forma information, the estimated fair
value of employee stock options is amortized to expense over the options'
vesting period. The Company's pro forma information regarding net income and
earnings per share follows:
<TABLE>
<CAPTION>
JUNE 23, 1995
YEAR ENDED (DATE OF INCEPTION) TO
(IN THOUSANDS, EXCEPT PER SHARE DATA) DECEMBER 31, 1996 DECEMBER 31, 1995
------------------ -----------------------
<S> <C> <C>
Pro forma net income........................... $ 3,569 $ 911
Pro forma earnings per share:
Primary and fully diluted.................... $ 0.21 $ 0.05
</TABLE>
The effects of applying FASB Statement No. 123 as shown in the pro forma
disclosures may not be representative of the effects on reported net income for
future years.
The effect on net income and earnings per share after applying FASB
Statement No. 123's fair valuation method to stock issued to employees under the
Purchase Plan does not materially differ from the pro forma information set
forth above with respect to the Company's employee stock options.
F-21
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
RETIREMENT PLANS
Effective as of January 1, 1996, the Company adopted a tax-qualified
non-contributory defined contribution money purchase pension plan (the "Pension
Plan") under which the Company contributes for each eligible employee an amount
equal to the sum of (i) 4% of eligible compensation up to the taxable wage base
(as such term is defined in the Pension Plan; for 1996 set at $62,700) and (ii)
8% of eligible compensation in excess of the taxable wage base (up to the
applicable compensation limit (the "compensation limit") imposed by Section
401(a)(17) of the Internal Revenue Code of 1986, as amended (the "Code"), which
for 1996 was $150,000). Substantially all employees of the Company are eligible
for participation in the Pension Plan. The Company expensed $90,000 in 1996
related to the Pension Plan.
Effective as of January 1, 1996, the Company adopted a tax-qualified
employee savings plan (the "Savings Plan"). Pursuant to Section 401(k) of the
Code, eligible employees of the Company are able to make deferral contributions
of up to 15% of their eligible compensation. Subject to limitations under
applicable law, the Company matches 100% of the first 3% of eligible
compensation deferred by employees and 50% of the next 3% of eligible
compensation so deferred. Substantially all employees of the Company are
eligible for participation in the Savings Plan. The Company expensed $75,000 in
1996 related to the Saving Plan.
Effective as of January 1, 1996, the Company adopted a supplemental,
non-qualified executive savings and retirement plan (the "Supplemental Plan")
under which the Company contributes 8% of eligible compensation in excess of the
compensation limit for eligible officers of the Company. Participants may also
defer certain amounts of eligible base compensation and bonus. Under the
Supplemental Plan, the Company matches 100% of the first 3% of eligible base
compensation in excess of the compensation limit that is deferred by
participants under the Supplemental Plan, and provides a 50% matching
contribution for the next 3% of such excess eligible compensation so deferred.
The Company expensed $46,000 in 1996 related to the Supplemental Plan.
9. INCOME TAXES
RCHI and Risk Capital Reinsurance file a consolidated federal income tax
return and have a tax sharing agreement (the "Tax Sharing Agreement"),
allocating the consolidated income tax liability on a separate return basis.
Pursuant to the Tax Sharing Agreement, Risk Capital Reinsurance makes tax
sharing payments to RCHI based on such allocation.
The provision for federal income taxes has been determined on the basis of
a consolidated tax return consisting of RCHI and Risk Capital Reinsurance.
An analysis of the Company's effective tax rate for the year ended December
31, 1996 and for the period June 23, 1995 (date of inception) to December 31,
1995 is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C>
JUNE 23, 1995
YEAR ENDED (DATE OF INCEPTION)
DECEMBER 31, 1996 TO DECEMBER 31, 1995
---------------------- ----------------------
<CAPTION>
% OF PRE- % OF PRE-
AMOUNT TAX INCOME AMOUNT TAX INCOME
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Income taxes computed on pre-tax
income................................... $1,614 35% $381 35%
Reduction in income taxes resulting from:
Tax-exempt investment income........ (979 ) (21) (285) (26)
Dividend received deduction......... (341 ) (8) (24) (2)
Other............................... 43 1
--- ---
------ ------
Income tax expense on pre-tax income..... $ 337 7% $ 72 7%
--- ---
------ ------
</TABLE>
The Company's current federal tax expense for 1996 and 1995 was based on
regular taxable income. Federal income taxes paid in 1996 were $1.7 million.
F-22
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The net deferred income tax liability reflects temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and income tax purposes, net of a valuation allowance for any portion of the
deferred tax asset that management believes will not be realized. Significant
components of the Company's deferred income tax assets and liabilities as of
December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
JUNE 23, 1995
YEAR ENDED (DATE OF INCEPTION) TO
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------ -----------------------
Deferred income tax assets:
Net claim reserve discount................ $ 1,275
Net unearned premium reserve.............. 2,574
Compensation liabilities.................. 575 $ 158
Equity in net loss of investee............ 87
------------------ ----------
Total deferred tax assets...................... 4,511 158
------------------ ----------
Deferred income tax liabilities:
Deferred policy acquisition cost.......... (2,456)
Unrealized appreciation of investments.... (5,081) (2,009)
------------------ ----------
Total deferred tax liabilities................. (7,537) (2,009)
------------------ ----------
Net deferred income tax liability.............. ($ 3,026) ($1,851)
------------------ ----------
------------------ ----------
</TABLE>
10. STATUTORY INFORMATION
The Director of Insurance of the State of Nebraska issued to Risk Capital
Reinsurance its domiciliary insurance license on November 6, 1995. Statutory net
income and surplus of Risk Capital Reinsurance, as reported to insurance
regulatory authorities, differ in certain respects from the amounts prepared in
accordance with GAAP. The following tables reconcile statutory net income and
surplus to consolidated GAAP net income and stockholders' equity:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
JUNE 23, 1995
YEAR ENDED (DATE OF INCEPTION) TO
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------ -----------------------
NET INCOME:
Statutory net income (loss).................... ($ 4,636) $ 910
GAAP adjustments:
Deferred acquisition costs................ 7,018
Deferred income taxes..................... 1,810 158
Other, net................................ (161)
------------------ --------
GAAP net income................................ 4,031 1,068
RCHI (parent company only) operations.......... 81 (49)
Consolidated GAAP net income................... $ 4,112 $ 1,019
------------------ --------
------------------ --------
</TABLE>
F-23
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. STATUTORY INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31,
------------------------
<S> <C> <C>
1996 1995
-------- --------
STOCKHOLDERS' EQUITY:
Statutory surplus.............................................. $334,309 $331,733
Deferred acquisition costs................................ 7,018
Unrealized appreciation................................... 252 2,375
Deferred income tax liability, net........................ (3,026) (1,851)
Other, net................................................ 4,053 613
-------- --------
Investment in insurance subsidiary, GAAP....................... 342,606 332,870
RCHI (parent company only):
Other net assets.......................................... 9,607 7,345
-------- --------
Consolidated stockholders' equity GAAP......................... $352,213 $340,215
-------- --------
-------- --------
</TABLE>
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. RCHI
will rely on cash dividends and distributions from Risk Capital Reinsurance to
pay any cash dividends to stockholders of RCHI and to pay any operating expenses
that RCHI may incur. 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 regulatory standards of the State of Nebraska. There
are presently no contractual restrictions on the payment of dividends or the
making of distributions by Risk Capital Reinsurance to RCHI.
Nebraska insurance laws provide that, without prior approval of the
Nebraska Director of Insurance ("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 ($334.3 million as
of December 31, 1996) or (ii) statutory net income from operations from the
preceding calendar year not including after tax realized capital gains ($5.5
million loss for 1996). 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. Notwithstanding the foregoing,
Nebraska insurance laws provide that any distribution that is a dividend may
only be paid out of earned surplus arising from its business, which is defined
as unassigned funds (surplus) as reported in the statutory statement for the
most recent year ($6.2 million as of December 31, 1996). In addition, Nebraska
insurance laws also provide that 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 ($7.5
million deficit as of December 31, 1996) will be deemed an "extraordinary"
dividend subject to the foregoing requirements. Therefore, Risk Capital
Reinsurance cannot make a distribution that is a dividend without the prior
approval of the Nebraska Director during 1997.
Nebraska insurance laws also require that the statutory surplus of Risk
Capital Reinsurance following any dividend or distribution be reasonable in
relation to its outstanding liabilities and adequate to its financial needs. In
addition, Nebraska insurance laws require that each insurer give notice to the
Nebraska Director of all dividends and other distributions within five business
days following declaration thereof and that any such dividend or other
distribution may not be paid within 10 business days of such notice (the "Notice
Period") unless for good cause shown the Nebraska Director has approved such
payment within the Notice Period.
F-24
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. BUSINESS INFORMATION
The Company operates from one domestic location and has one business
segment which is providing capital and/or property casualty reinsurance to
insurance and reinsurance companies and making investments in insurance and
insurance-related entities on a global basis.
Net premiums written and earned in 1996 from client companies located in
Europe or Lloyd's Syndicates (some of which are denominated in United States
dollars) were $21.8 million and $4.6 million, respectively.
During 1996, three reinsurance brokers, U.S. Reinsurance Corporation,
Faugere & Jutheau, and AON Reinsurance, Inc. generated 27.7%, 13.7%, and 12.1%,
respectively, of the Company's assumed net premiums written from client
companies. U.S. Reinsurance Corporation, Balis & Company Inc. and Minet Re
generated 37.1%, 12.4%, and 10.1%, respectively of the Company's assumed net
earned premium for 1996.
Approximately 45% and 44%, respectively, of 1996 net premiums written and
earned are from unearned premium portfolios assumed or other one time
transactions which are non-renewable.
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of unaudited quarterly financial data:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
(IN THOUSANDS DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
EXCEPT PER SHARE DATA) 1996 1996 1996 1996
------------ --------------- ------------ ------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net premiums written....... $ 19,023 $29,938 $ 16,468 $ 7,103
Premiums earned............ 17,522 12,628 3,838 1,773
Net investment income...... 3,244 3,363 3,136 3,408
Net realized investment
gains (losses)........... 1,114 (109) 448 (194)
Operating expenses......... 20,016 14,886 6,357 4,302
Equity in net loss of
investee................... (113) (48)
Net income................. 1,401 919 985 807
PER SHARE DATA:
Primary and fully-diluted
earnings per share:
Net income................. $ 0.08 $ 0.05 $ 0.06 $ 0.05
Stockholders' equity per
share...................... $ 20.68 $ 20.48 $ 20.07 $ 20.10
COMMON STOCK PRICES:
High....................... $ 19.88 $ 20.75 $ 20.50 $ 23.25
Low........................ $ 15.88 $ 16.50 $ 19.13 $ 19.75
Close...................... $ 19.38 $ 19.00 $ 19.63 $ 20.50
</TABLE>
F-25
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS JUNE 23, 1995
ENDED (DATE OF INCEPTION) TO
DECEMBER 31, 1995 SEPTEMBER 30, 1995
------------------ ------------------------
<S> <C> <C>
INCOME STATEMENT DATA:
Net investment income........................ $4,043 $ 535
Net realized investment gains (losses)....... 398 (1)
Operating expenses........................... 3,177 707
Net income/(loss)............................ 1,120 (101)
PER SHARE DATA:
Primary and fully-diluted earnings per share:
Net income/(loss)..................... $ .07 ($ .01)
Stockholders' equity per share............... $20.08 $18.85
COMMON STOCK PRICES:
High......................................... $23.38 $21.75
Low.......................................... $19.88 $20.50
Close........................................ $23.38 $21.75
</TABLE>
Initial Public Offering price at
September 13, 1995 was $20.00 per share
F-26
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of
Risk Capital Holdings, Inc.
Our audits of the consolidated financial statements referred to in our report
dated February 7, 1997 appearing on Page F-2 of this Annual Report on Form 10-K
also included an audit of the Financial Statement Schedules listed on Page F-1
of this Form 10-K. In our opinion, these Financial Statement Schedules present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
Price Waterhouse LLP
New York, New York
February 7, 1997
S-1
<PAGE>
SCHEDULE I
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------
<S> <C> <C> <C>
AMOUNT
AT WHICH
SHOWN IN
THE
AMORTIZED FAIR BALANCE
COST VALUE SHEET
---------- -------- ---------
Type of Investment:
FIXED MATURITY SECURITIES
U.S. government and government agencies and
authorities....................................... $ 35,907 $35,796 $ 35,796
Foreign governments................................. 509 519 519
Mortgage and asset-backed securities................ 26,602 26,709 26,709
States, municipalities and political subdivisions... 59,751 60,041 60,041
Corporate bonds..................................... 17,359 17,316 17,316
---------- -------- ---------
Total Fixed Maturities....................... 140,128 140,381 140,381
EQUITY SECURITIES
Publicly traded..................................... 108,580 117,360 117,360
Privately held...................................... 23,363 28,847 28,847
---------- -------- ---------
Total Equity Securities...................... 131,943 146,207 146,207
SHORT-TERM INVESTMENTS.............................. 104,886 104,886 104,886
---------- -------- ---------
Total Investments............................ $376,957 $391,474 $391,474
---------- -------- ---------
---------- -------- ---------
</TABLE>
S-2
<PAGE>
SCHEDULE II
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET
(PARENT COMPANY ONLY)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1996 1995
-------- --------
ASSETS
Investments in wholly owned subsidiary............................ $342,606 $332,870
Short-term investments............................................ 6,705 5,800
Cash.............................................................. 938 373
Due from subsidiary............................................... 1,977 1,277
Other assets...................................................... 332 559
-------- --------
TOTAL ASSETS................................................. $352,558 $340,879
-------- --------
-------- --------
LIABILITIES
Accounts payable and other liabilities............................ $ 345 $ 664
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value:
20,000,000 shares authorized (none issued)
Common stock, $.01 par value:
80,000,000 shares authorized
(issued and outstanding; 1996, 17,031,246; 1995,
16,941,125).................................................. 170 169
Additional paid-in capital........................................ 340,435 338,737
Unrealized appreciation of investments, net of income tax......... 9,436 3,731
Deferred compensation under stock award plan...................... (2,959) (3,441)
Retained earnings................................................. 5,131 1,019
-------- --------
TOTAL STOCKHOLDERS' EQUITY................................... 352,213 340,215
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................... $352,558 $340,879
-------- --------
-------- --------
</TABLE>
S-3
<PAGE>
SCHEDULE II
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
STATEMENT OF INCOME
(PARENT COMPANY ONLY)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 23, 1995
DECEMBER 31, 1996 (DATE OF INCEPTION) TO
------------------ -----------------------
<S> <C> <C>
REVENUES
Net investment income........................ $ 317 $ 216
OPERATING COSTS AND EXPENSES
Operating expenses........................... 193 291
-------- --------
Income (loss) before income tax expense
(benefit).................................... 124 (75)
Income tax expense (benefit)................. 43 (26)
-------- --------
Net income (loss) before equity in net income
of wholly owned subsidiary................... 81 (49)
Equity in net income of wholly owned
subsidiary................................... 4,031 1,068
-------- --------
Net income................................... $4,112 $ 1,019
-------- --------
-------- --------
</TABLE>
S-4
<PAGE>
SCHEDULE II
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
STATEMENT OF CASH FLOWS
(PARENT COMPANY ONLY)
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 23, 1995
YEAR ENDED (DATE OF INCEPTION) TO
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------ -----------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) from operations.............. 81 ($ 49)
Adjustments to reconcile net income (loss) to
net cash used for operating activities:
Net change in other assets and
liabilities.......................... 723 (1,238)
------------------ -----------------------
Net cash provided by (used for) operating
activities..................................... 804 (1,287)
Investing activities:
Net change in short-term investments........... (905) (5,800)
Capital contribution to subsidiary............. (328,071)
------------------ -----------------------
NET CASH USED FOR INVESTING ACTIVITIES......... (905) (333,871)
Financing activities:
Net cash proceeds from initial public
offering and direct sales......... 322,073
Proceeds from issuance of Class B
warrants............................. 13,458
Common stock issued.................. 1,699 3,895
Deferred compensation on restricted
stock awarded........................ (1,487) (3,895)
Amortization of deferred
compensation......................... 454
------------------ -----------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES...... 666 335,531
Increase in cash............................... 565 373
Cash at beginning of period.................... 373
------------------ -----------------------
Cash at end of period.......................... $ 938 $ 373
------------------ -----------------------
------------------ -----------------------
</TABLE>
S-5
<PAGE>
SCHEDULE III
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
FUTURE
POLICY
BENEFITS,
LOSSES, BENEFITS, AMORTIZATION
DEFERRED CLAIMS CLAIMS, OF DEFERRED
POLICY AND NET LOSSES AND POLICY OTHER
ACQUISITION CLAIMS UNEARNED PREMIUM INVESTMENT SETTLEMENT ACQUISITION OPERATING PREMIUMS
COSTS EXPENSES PREMIUMS REVENUE INCOME EXPENSES COSTS EXPENSES WRITTEN
----------- -------- -------- ------- ---------- ---------- ------------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
December
31, 1996
Property-
Casualty... $ 7,018 $20,770 $37,348 $35,761 $ 13,151 $3,831 $ 7,018 $11,285 $72,532
Accident
and
Health
----------- -------- -------- ------- ---------- ---------- ------------- --------- --------
Total... $ 7,018 $20,770 $37,348 $35,761 $ 13,151 $3,831 $ 7,018 $11,285 $72,532
----------- -------- -------- ------- ---------- ---------- ------------- --------- --------
----------- -------- -------- ------- ---------- ---------- ------------- --------- --------
</TABLE>
S-6
<PAGE>
SCHEDULE IV
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
REINSURANCE
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
------- --------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1996
Premiums Written:
Property and casualty............. $ 1,153 $73,685 $72,532 101.6%
Accident and health
------- --------- --------- ------- ---------
Total.......................... $ 1,153 $73,685 $72,532 101.6%
------- --------- --------- ------- ---------
------- --------- --------- ------- ---------
</TABLE>
S-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -------------------------------------------------------------------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of Risk Capital
Holdings, Inc.(a)
3.2 Amended and Restated Bylaws of Risk Capital Holdings, Inc.(b)
4.1 Specimen Common Stock Certificate(a)
4.2.1 Class A Common Stock Purchase Warrants issued to Marsh & McLennan
Risk Capital Holdings, Ltd. on September 19, 1995(b) and September
28, 1995
4.2.2 Class A Common Stock Purchase Warrants issued to The Trident
Partnership, L.P. on September 19, 1995(b) and September 28, 1995
4.2.3 Class A Common Stock Purchase Warrants issued to Taracay Investors
on September 19, 1995(b) and September 28, 1995
4.3 Class B Common Stock Purchase Warrants issued to Marsh & McLennan
Risk Capital Holdings, Ltd. on September 19, 1995(b) and September
28, 1995
10.1.1 Employment Agreement, between Risk Capital Holdings, Inc. and Mark
D. Mosca(b)+
10.1.2 Employment Agreement, between Risk Capital Holdings, Inc. and Peter
A. Appel(b)+
10.1.3 Employment Agreement, between Risk Capital Holdings, Inc. and
Bonnie L. Boccitto(b)+
10.1.4 Employment Agreement, between Risk Capital Holdings, Inc. and Paul
J. Malvasio(b)+
10.1.5 Termination Agreement, between Risk Capital Holdings, Inc. and
Richard D. Robinson
10.2 Amended and Restated Subscription Agreement, between Risk Capital
Holdings, Inc. and The Trident Partnership L.P.(b)
10.3 Amended and Restated Subscription Agreement, between Risk Capital
Holdings, Inc. and Marsh & McLennan Risk Capital Holdings, Ltd.(b)
10.4 Amended and Restated Subscription Agreement, between Risk Capital
Holdings, Inc. and Taracay Investors(b)
10.5 Purchase Agreement between Risk Capital Holdings, Inc. and EXEL
Limited(b)
10.6.1 Investment Advisory Agreement, between Risk Capital Holdings, Inc.
and Marsh & McLennan Risk Capital Corp.(b)
10.6.2 Investment Advisory Agreement, between Risk Capital Reinsurance
Company and Marsh & McLennan Risk Capital Corp.(b)
10.7 Management Agreement, among Risk Capital Holdings, Inc., Risk
Capital Reinsurance Company and The Putnam Advisory Company,
Inc.(b)
10.8 Sublease Agreement, dated as of March 18, 1996, between Risk
Capital Reinsurance Company and Coca-Cola Bottling Company of New
York, Inc.(b)
10.9 Tax Sharing Agreement between Risk Capital Holdings, Inc. and Risk
Capital Reinsurance Company(b)
10.10.1 Risk Capital Holdings, Inc. 1995 Long Term Incentive and Share
Award Plan (the "Share Award Plan")(b)+
10.10.2 First Amendment to the Share Award Plan+
10.10.3 Non-Employee Director Stock Option Agreements (Initial Option
Grants)
10.10.4 Non-Employee Director Stock Option Agreements (Annual Option
Grants)
10.11 Risk Capital Holdings, Inc. 1995 Employee Stock Purchase Plan(c)+
10.12.1 Risk Capital Reinsurance Company Money Purchase Pension Plan (the
"Pension Plan")(b)+
10.12.2 Amendment and Restatement of the Adoption Agreement relating to the
Pension Plan+
10.13.1 Risk Capital Reinsurance Company Employee Savings Plan (the
"Savings Plan")(b)+
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.13.2 Amendment and Restatement of the Adoption Agreement relating to the
Savings Plan
10.14.1 Risk Capital Reinsurance Company Executive Supplemental
Non-Qualified Savings and Retirement Plan (the "Supplemental Plan")
and related Trust Agreement(b)+
10.14.2 Amendment to the Adoption Agreement relating to the Supplemental
Plan
21 Subsidiaries of the Registrant(d)
23 Consent of Price Waterhouse LLP
24 Powers of Attorney
27 Financial Data Schedule
</TABLE>
- ------------------------------
(a) Incorporated by reference to Amendment No. 3 to the Registrant's
Registration Statement on Form S-1 (No. 33-94184), as filed with the
Securities and Exchange Commission (the "Commission") on August 11, 1995.
(b) Incorporated by reference to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995, as filed with the Commission on March 30,
1996.
(c) Incorporated by reference to the Registrant's Registration Statement on Form
S-8 (No. 33-99974), as filed with the Commission on December 4, 1995.
(d) Incorporated by reference to Amendment No. 2 to the Registrant's
Registration Statement on Form S-1 (No. 33-94184), as filed with the
Commission on August 4, 1995.
+ A management contract or compensatory plan or arrangement required to be filed
pursuant to Item 14(c) of Form 10-K.
EXHIBIT 4.2.1
CLASS A COMMON STOCK PURCHASE WARRANTS--M&MRCH
CLASS A COMMON STOCK PURCHASE WARRANTS
Class A Warrants to purchase 101,117 shares of common stock, par value
$.01 per share (the "Common Stock"), of Risk Capital Holdings, Inc. ("RCHI")
issued to Marsh & McLennan Risk Capital Holdings, Ltd. ("M&MRCH") on September
28, 1995, are substantially identical in all material respects to the Class A
Warrants to purchase 1,004,280 shares of Common Stock issued to M&MRCH on
September 19, 1995 (the "September 19th Warrant"). A copy of the September 19th
Warrant has previously been filed as an exhibit to RCHI's Annual Report on Form
10-K for the year ended December 31, 1995.
* * * *
1
<PAGE>
EXHIBIT 4.2.2
CLASS A COMMON STOCK PURCHASE WARRANTS--TRIDENT
CLASS A COMMON STOCK PURCHASE WARRANTS
Class A Warrants to purchase 126,794 shares of common stock, par value
$.01 per share (the "Common Stock"), of Risk Capital Holdings, Inc. ("RCHI")
issued to The Trident Partnership, L.P. ("Trident") on September 28, 1995, are
substantially identical in all material respects to the Class A Warrants to
purchase 1,259,285 shares of Common Stock issued to Trident on September 19,
1995 (the "September 19th Warrant"). A copy of the September 19th Warrant has
previously been filed as an exhibit to RCHI's Annual Report on Form 10-K for the
year ended December 31, 1995.
* * * *
2
<PAGE>
EXHIBIT 4.2.3
CLASS A COMMON STOCK PURCHASE WARRANTS--TARACAY
CLASS A COMMON STOCK PURCHASE WARRANTS
Class A Warrants to purchase 13,623 shares of common stock, par value
$.01 per share (the "Common Stock"), of Risk Capital Holdings, Inc. ("RCHI")
issued to Taracay Investors ("Taracay") on September 28, 1995, are
substantially identical in all material respects to the Class A Warrants to
purchase 35,980 shares of Common Stock issued to Taracay on September 19, 1995
(the "September 19th Warrant"). A copy of the September 19th Warrant has
previously been filed as an exhibit to RCHI's Annual Report on Form 10-K for
the year ended December 31, 1995.
* * * *
3
<PAGE>
EXHIBIT 4.3
CLASS B COMMON STOCK PURCHASE WARRANTS--M&MRCH
CLASS B COMMON STOCK PURCHASE WARRANTS
Class B Warrants to purchase 195,601 shares of common stock, par value
$.01 per share (the "Common Stock"), of Risk Capital Holdings, Inc. ("RCHI")
issued to Marsh & McLennan Risk Capital Holdings, Ltd. ("M&MRCH") on September
28, 1995, are substantially identical in all material respects to the Class B
Warrants to purchase 1,725,000 shares of Common Stock issued to M&MRCH on
September 19, 1995 (the "September 19th Warrant"). A copy of the September 19th
Warrant has previously been filed as an exhibit to RCHI's Annual Report on Form
10-K for the year ended December 31, 1995.
4
<PAGE>
EXHIBIT 10.1.5
January 23, 1997
Mr. Richard D. Robinson
12 Evergreen Avenue
Westport, Connecticut 06880
Dear Richard:
This letter confirms our and your understanding and
agreement on the terms under which your employment with Risk
Capital Holdings, Inc. and its affiliates (collectively the
"Company") will terminate.
1. Your last day of employment with the Company will be
January 31, 1997 (the "Termination Date").
2. You will be entitled to continue to receive your annual
base salary at the rate of $261,000 per annum, payable semimonthly,
for twelve months commencing on the Termination Date; provided,
however, that such payments shall be reduced by any compensation
received by you in connection with any other employment you may
obtain.
3. Medical and dental coverage will remain in effect for you
and your covered dependents for twelve months following the
Termination Date or until you secure alternate employment, if earlier.
Such coverage shall be provided on the same basis as provided to
active employees of the Company in accordance with the terms and
provisions of each applicable plan as in effect from time to time,
including any contribution required to be made by you toward such
coverage.
4. The 25,000 shares of restricted Common Stock of the
Company awarded to you as of April 30, 1996 under the Company's 1995
Long Term Incentive and Share Award Plan (the "Share Plan") shall
become immediately vested in full on the Termination Date.
5. The option to purchase 25,000 shares of Company Common
Stock granted to you as of April 30, 1996 pursuant to the Share Plan
shall become exercisable in full on the Termination Date, and such
option shall be exercisable for seven years from the date it first
became exercisable. The terms of such stock option are set forth in
the attached Stock Option Agreement.
<PAGE>
6. Except as set forth in paragraph 3 above, you will cease
participation in all employee benefit plans and arrangements of the
Company as of the Termination Date. Your rights with respect to your
accrued benefits as of the Termination Date under the Risk Capital
Reinsurance Company Savings Plan, the Risk Capital Reinsurance Company
Pension Plan, the Risk Capital Reinsurance Company Executive
Supplemental Non-Qualified Savings and Retirement Plan and the Risk
Capital Holdings, Inc. 1995 Employee Stock Purchase Plan are as set
forth in the applicable plan document. Other than as expressly set
forth in this letter agreement, you will have no continuing rights
under any employee benefit plan or arrangement of the Company
following the Termination Date.
7. The amounts payable hereunder shall be subject to
applicable withholding taxes, and you will be required to make
arrangements satisfactory to the Company in order to satisfy all
applicable withholding tax obligations arising out of the vesting of
restricted shares under paragraph 4 above and the exercise of the
stock option described in paragraph 5 above.
8. You agree to hold all Proprietary Information in
confidence and not to, directly or indirectly, disclose, use, copy,
publish, summarize or remove from the Company premises any Proprietary
Information. You will as soon as possible after the Termination Date
(but in any event no later than ten days after the Termination Date)
return to the Company all Proprietary Information and related reports,
files, memoranda, and records; credit cards, card key passes; door and
file keys; computer access codes; software, and other physical and
personal property which you received or prepared or helped prepare in
connection with your employment and which are in your possession or
control, and you will not retain any copies, duplicates, reproductions
or excepts thereof. As used in this paragraph, "Proprietary
Information" means any information in whatever form, tangible or
intangible, directly related to the business of the Company unless the
information is publicly available through lawful means.
9. You understand and agree that you will not, directly or
indirectly, divulge to any person or use for your own benefit or the
benefit of any person any information of a private, secret or
confidential nature concerning the business, accounts or finances of
the Company or any of the secrets, dealings, transactions or affairs
including mergers, acquisitions, divestitures, joint ventures,
partnership or equity participations, investors, reinsurance terms or
any business plans of the Company or of any customer or client of the
Company which have come into your knowledge during the course of your
employment with the Company. Without prejudice to the generality of
this clause, confidential information includes any and all data,
plans, specifications, drawings, documents, com-
<PAGE>
puter software and other information belonging to or owned or developed by and
unique to the Company.
10. In consideration for the Company's agreement to execute
and deliver to you the Release and Waiver attached hereto as Exhibit A
and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, you agree to execute and
deliver to the Company the Release and Waiver attached hereto as
Exhibit B on the date you execute this letter agreement below.
11. You acknowledge that the terms of this letter agreement are
contractual and not a mere recital and that there are no agreements,
understandings or representations made by the Company except as
expressly stated in this letter agreement and the attachments hereto.
Please indicate your agreement and acceptance of these provisions
by signing and dating the enclosed copy of this letter agreement, the
Stock Option Agreement attached hereto and the Release and Waiver
attached as Exhibit B and returning them to the Company.
Sincerely,
RISK CAPITAL HOLDINGS, INC.
By: /s/ Mark D. Mosca
--------------------------------
Name: Mark D. Mosca
Title: President
Agreed and Accepted RISK CAPITAL REINSURANCE COMPANY
/s/ Richard D. Robinson
- ------------------------
Richard D. Robinson By: /s/ Mark D. Mosca
-------------------
Name: Mark D. Mosca
Title: President and Chief
Executive Officer
Date: 1/23/97
<PAGE>
Exhibit 10.10.2
FIRST AMENDMENT TO
RISK CAPITAL HOLDINGS, INC.
1995 LONG TERM INCENTIVE AND SHARE AWARD PLAN
The Risk Capital Holdings, Inc. 1995 Long Term Incentive and Share
Award Plan is amended as follows, effective September 16, 1996; provided,
however, that paragraph 2 of this amendment shall be contingent upon approval by
the affirmative vote of the holders of a majority of voting securities of Risk
Capital Holdings, Inc. at a meeting duly held during calendar year 1997.
1. Section 2(g) is amended to read as follows:
"(g) `Committee' means the Compensation Committee of the
Board, or such other Board committee (or the entire Board) as may be
designated by the Board to administer the Plan."
2. Section 2(l) is amended to read as follows:
"(l) `Eligible Employee' means (i) an employee of the Company
or its Subsidiaries and Affiliates, including any director who is an
employee, who is responsible for or contributes to the management,
growth and/or profitability of the business of the Company, its
Subsidiaries or Affiliates, and (ii) any Director."
3. Section 3(b) is amended by adding the following at the end
thereof:
"Notwithstanding any provision of this Plan to the contrary, the
Committee may grant Awards which are subject to the approval of the
Board; provided that an Award shall be subject to Board approval only
if the Committee expressly so states."
4. Section 6(a) is amended by adding the following at the end
thereof:
"Notwithstanding the foregoing, the exercise price of any Option, grant
price of any SAR or purchase price of any other Award conferring a
right to purchase Shares which is granted in exchange or substitution
for an option, SAR or other award granted by the Company (other than in
connection with a transaction described in Section 4(c) hereof) shall
not be less than the exercise price, grant price or purchase price of
the exchanged or substituted option, SAR or other award, and
outstanding Awards shall not be amended (other than in connection with
a transaction described in Section 4(c) hereof) to reduce the exercise
price, grant price or purchase price of any such Award."
<PAGE>
5. Section 6(d) is amended by deleting the first sentence thereof and
replacing it with the following:
"Except as set forth below and except for vested Shares,
Awards shall not be transferable by an Eligible Employee
except by will or the laws of descent and distribution (except
pursuant to a Beneficiary designation) and shall be exercisable during
the lifetime of an Eligible Employee only by such Eligible Employee or
his guardian or legal representative. Notwithstanding the foregoing, if
the Committee expressly so provides in the applicable Award agreement
(at the time of grant or at any time thereafter), an Award (other than
an ISO) granted hereunder may be transferred by a Participant to
members of his or her `immediate family' or to a trust established for
the exclusive benefit of solely one or more members of the
Participant's `immediate family,' and any such transfer by a
Participant other than a Director must be for no consideration. Any
Award held by the transferee will continue to be subject to the same
terms and conditions that were applicable to the Award immediately
prior to the transfer, except that the Award will be transferable by
the transferee only by will or the laws of descent and distribution.
For purposes hereof, `immediate family' means the Participant's
children, stepchildren, grandchildren, parents, stepparents,
grandparents, spouse, siblings (including half brothers and sisters),
in-laws, and relationships arising because of legal adoption."
6. Section 7(f) is amended by adding the following at the end thereof:
"Notwithstanding the foregoing, if the Committee expressly so provides
in the applicable Award agreement (at the time of grant or at any time
thereafter), a Director's Option granted hereunder may be transferred
by an optionee to members of his or her `immediate family' or to a
trust established for the exclusive benefit of solely one or more
members of his or her `immediate family.' Any Director's Option held by
the transferee will continue to be subject to the same terms and
conditions that were applicable to the Director's Option immediately
prior to the transfer, except that the Director's Option will be
transferable by the transferee only by will or the laws of descent and
distribution. For purposes hereof, `immediate family' means the
Director's children, stepchildren, grandchildren, parents, stepparents,
grandparents, spouse, siblings (including half brothers and sisters),
in-laws, and relationships arising because of legal adoption."
7. Section 8(d) is amended by deleting the last sentence thereof.
* * * * *
-2-
<PAGE>
EXHIBIT 10.10.3
N.-EMPL. DIR. STOCK OPT. AGREE'S/INIT. OPT. GRANTS
NON-EMPLOYEE DIRECTOR STOCK OPTION
AGREEMENTS--INITIAL OPTION GRANTS
Stock Option Agreements that are substantially identical in all
material respects to the agreement, dated as of September 19, 1995, between Risk
Capital Holdings, Inc. ("RCHI") and Michael P. Esposito, Jr., a copy of which is
being filed herewith in this Exhibit 10.10.3, have been entered into by RCHI and
each of the following Non-Employee Directors of RCHI (unless otherwise
indicated, (i) the date of each agreement, and the date exercisability
commences, is September 19, 1995, (ii) the exercise price is $20.00 and
(iii) the term of the option continues through September 19, 2005):
Robert Clements
Allan W. Fulkerson
Lewis L. Glucksman (date: November 14, 1995; exercise price: $20.9375;
term: through November 14, 2005)
Ian R. Heap
Thomas V. A. Kelsey (date: September 16, 1996; exercise price: $17.1875;
term: through September 19, 2006)
Philip L. Wroughton
* * * *
5
<PAGE>
RISK CAPITAL HOLDINGS, INC.
Director Option Agreement
FOR GOOD AND VALUABLE CONSIDERATION, receipt of which is
hereby acknowledged, Risk Capital Holdings, Inc. (the "Company"), a Delaware
corporation, hereby grants to Michael P. Esposito, Jr., a director of the
Company on the date hereof (the "Option Holder"), the option to purchase common
stock, $.01 par value per share, of the Company ("Shares"), upon the following
terms:
WHEREAS, the following terms reflect the Company's 1995 Long
Term Incentive and Share Award Plan, as amended by the First Amendment thereto
(the "Plan");
(a) Grant. The Option Holder is hereby automatically granted
an option (the "Option") to purchase 300 Shares (the "Option Shares") pursuant
to the Plan, the terms of which are incorporated herein by reference. The Option
is granted as of September 19, 1995 (the "Date of Grant") and such grant is
subject to the terms and conditions herein and the terms and conditions of the
applicable provisions of the Plan. Such Option shall not be treated as an
incentive stock option under Section 422 of the Internal Revenue Code of 1986,
as amended.
(b) Status of Option Shares. The Option Shares shall upon
issue rank equally in all respects with the other Shares.
(c) Option Price. The purchase price for the Option Shares
shall be, except as herein provided, $20.00 per Option Share, hereinafter
sometimes referred to as the "Option Price," payable immediately in full upon
the exercise of the Option.
(d) Term of Option. The Option may be exercised only during
the period (the "Option Period") commencing in accordance with paragraph (f)
hereof and shall continue until September 19, 2005; thereafter the Option Holder
shall cease to have any rights in respect thereof. The right to exercise the
Option is subject to sooner termination as provided in paragraph (j) below.
(e) No Rights of Shareholder. The Option Holder shall not, by
virtue hereof, be entitled to any rights of a shareholder in the Company, either
at law or in equity.
(f) Exercisability. The Option shall become exercisable in
three equal installments, commencing on September 19, 1995 and thereafter on the
first and second anniversary thereof, subject to paragraph (j) below. The Option
may be exercised at any time or from time to time during the Option Period in
regard to all or any portion of the Option which are then exercisable, as may be
adjusted pursuant to paragraph (g) below.
(g) Adjustments for Recapitalization and Dividends. In the
event that, prior to the expiration of the Option, any dividend in Shares,
recapitalization, Share split, reverse split, reorganization, merger,
consolidation, spin-off, combination, repurchase, or share exchange, or other
such change affects the Shares such that they are increased or decreased or
changed into or exchanged for a different number or kind of shares, other
securities of the Company or of another corporation or other consideration, then
in order to maintain the proportionate interest of the Option Holder and
preserve the value of the Option, (i) there shall automatically be substituted
for each Share subject to the unexercised Option the number and kind of shares,
other securities or other consideration into which each outstanding
6
<PAGE>
Share shall be changed or for which each such Share shall be exchanged, and (ii)
the exercise price shall be increased or decreased proportionately so that the
aggregate purchase price for the Shares subject to the unexercised Option shall
remain the same as immediately prior to such event.
(h) Transferability. The Option may not be assigned or
otherwise transferred, disposed of or encumbered by the Option Holder, other
than by will or by the laws of descent and distribution. During the lifetime of
the Option Holder, the Option shall be exercisable only by the Option Holder or
by his or her guardian or legal representative. Notwithstanding the foregoing,
the Option may be transferred by the Option Holder to members of his or her
"immediate family" or to a trust established for the exclusive benefit of solely
one or more members of the Option Holder's "immediate family." Any Option held
by the transferee will continue to be subject to the same terms and conditions
that were applicable to the Option immediately prior to the transfer, except
that the Option will be transferable by the transferee only by will or the laws
of descent and distribution. For purposes hereof, "immediate family" means the
Option Holder's children, stepchildren, grandchildren, parents, stepparents,
grandparents, spouse, siblings (including half brothers and sisters), in-laws,
and relationships arising because of legal adoption.
(i) Exercise of Option. In order to exercise the Option, the
Option Holder shall submit to the Company an instrument in writing signed by the
Option Holder, specifying the number of Option Shares in respect of which the
Option is being exercised, accompanied by payment of the Option Price for the
Option Shares for which the Option is being exercised in cash or Shares already
owned by the Option Holder (provided that the Option Holder has owned such
Shares for a minimum period of six months) and having a total Fair Market Value
(as defined below) equal to the exercise price, or in a combination of cash and
such Shares. Option Shares will be issued accordingly by the Company within
fifteen business days, and a share certificate dispatched to the Option Holder
within thirty days.
The Company shall not be required to issue fractional Shares
upon the exercise of the Option. If any fractional interest in a Share would be
deliverable upon the exercise of the Option in whole or in part but for the
provisions of this paragraph, the Company, in lieu of delivering any such
fractional share therefor, shall pay a cash adjustment therefor in an amount
equal to their Fair Market Value (or if any Shares are not publicly traded, an
amount equal to the book value per share at the end of the most recent fiscal
quarter) multiplied by the fraction of the fractional share which would
otherwise have been issued hereunder. Anything to the contrary herein
notwithstanding, the Company shall not be obligated to issue any Option Shares
hereunder if the issuance of such Option Shares would violate the provision of
any applicable law, in which event the Company shall, as soon as practicable,
take whatever action it reasonably can so that such Option Shares may be issued
without resulting in such violations of law. For purposes hereof, Fair Market
Value shall mean the mean between the high and low selling prices per Share on
the immediately preceding date (or, if the Shares were not traded on that day,
the next preceding day that the Shares were traded) on the principal exchange on
which the Shares are traded, as such prices are officially quoted on such
exchange.
(j) Termination of Service. In the event the Option Holder
ceases to be a director of the Company, (i) due to retirement after attainment
of age 65 or (ii) due to death or disability, the Option, to the extent not
already exercisable in full, shall become immediately and fully exercisable at
the time of termination of service, and the Option may be exercised at any time
during the Option Period. If the Option Holder ceases to be a director of the
Company for any other reason, the portion of the Option which is not then
exercisable shall be cancelled on the date service terminates, and the portion
of the Option which is then exercisable may be exercised at any time within six
months after the date of such termination, but not later than termination of the
Option Period.
7
<PAGE>
(k) Obligations as to Capital. The Company agrees that it will
at all times maintain authorized and unissued share capital sufficient to
fulfill all of its obligations under the Option.
(l) Transfer of Shares. The Option, the Option Shares, or any
interest in either, may be sold, assigned, pledged, hypothecated, encumbered, or
transferred or disposed of in any other manner, in whole or in part, only in
compliance with the terms, conditions and restrictions as set forth in the
governing instruments of the Company, applicable United States federal and state
securities laws and the terms and conditions hereof. Each certificate for Option
Shares issued upon exercise of the Option, unless at the time of exercise such
Option Shares are registered under the Securities Act of 1933, as amended, shall
bear the following legend:
"The securities evidenced hereby have not been registered
under the Securities Act of 1933, as amended (the `Act'), and
may not be offered, sold or otherwise transferred except (i)
in compliance with the provisions of any applicable state
securities or `Blue Sky' laws and (ii) (A) pursuant to an
effective registration under the Act, (B) in compliance with
Rule 144 under the Act, (C) inside the United States to a
Qualified Institutional Buyer in compliance with Rule 144A
under the Act, (D) outside the United States in compliance
with Rule 904 of Regulation S under the Act or (E) inside the
United State to an institutional `accredited investor' as
defined in Rule 501(a)(1), (2), (3) or (7) under the Act in a
transaction which, in the opinion of counsel reasonably
satisfactory to the Company, qualifies as an exempt
transaction under the Act and the rules and regulations
promulgated thereunder."
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend shall also bear such legend unless, in the
opinion of counsel for the Company, the securities represented thereby need no
longer be subject to the restrictions set forth therein. The provisions of this
paragraph (l) shall be binding upon all subsequent holders of certificates
bearing the above legend and all subsequent holders of the Option, if any.
(m) Expenses of Issuance of Option Shares. The issuance of
stock certificates upon the exercise of the Option in whole or in part, shall be
without charge to the Option Holder. The Company shall pay, and indemnify the
Option Holder from and against any issuance, stamp or documentary taxes (other
than transfer taxes) or charges imposed by any governmental body, agency or
official (other than income taxes) by reason of the exercise of the Option in
whole or in part or the resulting issuance of the Option Shares.
(n) Withholding. The Option Holder agrees to make appropriate
arrangements with the Company for satisfaction of any applicable tax withholding
requirements, or similar requirements, arising out of the Option.
(o) References. References herein to rights and obligations of
the Option Holder shall apply, where appropriate, to the Option Holder's legal
representative or estate without regard to whether specific reference to such
legal representative or estate is contained in a particular provision of this
Option.
8
<PAGE>
(p) Settlement of Disputes. Any dispute between the parties
arising from or relating to the terms of this Option shall be resolved by
arbitration held in the State of Connecticut in accordance with the rules of the
American Arbitration Association. All costs associated with any arbitration,
including all legal expenses, for both parties shall be borne by the Company.
(q) Notices. Any notice required or permitted to be given
under this agreement shall be in writing and shall be deemed to have been given
when delivered personally or by courier, or sent by certified or registered
mail, postage prepaid, return receipt requested, duly addressed to the party
concerned at the address indicated below or to such changed address as such
party may subsequently by similar process give notice of:
If to the Company:
Risk Capital Holdings, Inc.
20 Horseneck Lane
Greenwich, CT 06830
Attn: Secretary
If to the Option Holder:
550 Prospect Avenue
Oradell, NJ 07649
(r) Governing Law. This Option shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to principles of conflict of laws.
(s) Entire Agreement. This agreement constitutes the entire
contract among the parties relating to the subject matter hereof, and any
previous agreement or understanding among the parties with respect thereto is
superseded by this agreement.
(t) Counterparts. This agreement may be executed in two
counterparts, each of which shall constitute one and the same instrument.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly caused this
agreement to be signed as of the Date of Grant.
RISK CAPITAL HOLDINGS, INC.
By: /s/ Peter A. Appel
---------------------------------------
Peter A. Appel
Managing Director, General Counsel
and Secretary
/s/ Michael P. Esposito, Jr.
---------------------------------------
Michael P. Esposito, Jr.
10
<PAGE>
EXHIBIT 10.10.4
N-EMPL. DIR. STOCK OPT. AGREE.S/ANN. OPT. GRANTS
NON-EMPLOYEE DIRECTOR STOCK OPTION
AGREEMENTS--ANNUAL OPTION GRANTS
Stock Option Agreements that are substantially identical in all
material respects to the agreements, dated as of January 1, 1996 ("1996
Agreement") and January 1, 1997 ("1997 Agreement"), respectively, between Risk
Capital Holdings, Inc. ("RCHI") and Michael P. Esposito, Jr., copies of which
are being filed herewith in this Exhibit 10.10.4, have been entered into by RCHI
and each of the following Non-Employee Directors of RCHI (unless otherwise
indicated, the number of Option Shares (as defined in the agreements) under each
agreement is 250 and each Non-Employee Director has entered into both the 1996
and 1997 Agreements):
Robert Clements
Allan W. Fulkerson
Lewis L. Glucksman
Ian R. Heap
Thomas V. A. Kelsey (1997 Agreement only)
Mark N. Williamson (Option Shares under 1996 Agreement: 146)
Philip L. Wroughton
* * * *
11
<PAGE>
RISK CAPITAL HOLDINGS, INC.
Director Option Agreement
FOR GOOD AND VALUABLE CONSIDERATION, receipt of which is
hereby acknowledged, Risk Capital Holdings, Inc. (the "Company"), a Delaware
corporation, hereby grants to Michael P. Esposito, Jr., a director of the
Company on the date hereof (the "Option Holder"), the option to purchase common
stock, $.01 par value per share, of the Company ("Shares"), upon the following
terms:
WHEREAS, the following terms reflect the Company's 1995 Long
Term Incentive and Share Award Plan, as amended by the First Amendment thereto
(the "Plan");
(a) Grant. The Option Holder is hereby automatically granted
an option (the "Option") to purchase 250 Shares (the "Option Shares") pursuant
to the Plan, the terms of which are incorporated herein by reference. The Option
is granted as of January 1, 1996 (the "Date of Grant") and such grant is subject
to the terms and conditions herein and the terms and conditions of the
applicable provisions of the Plan. Such Option shall not be treated as an
incentive stock option under Section 422 of the Internal Revenue Code of 1986,
as amended.
(b) Status of Option Shares. The Option Shares shall upon
issue rank equally in all respects with the other Shares.
(c) Option Price. The purchase price for the Option Shares
shall be, except as herein provided, $22.00 per Option Share, hereinafter
sometimes referred to as the "Option Price," payable immediately in full upon
the exercise of the Option.
(d) Term of Option. The Option may be exercised only during
the period (the "Option Period") commencing in accordance with paragraph (f)
hereof and shall continue until January 1, 2006; thereafter the Option Holder
shall cease to have any rights in respect thereof. The right to exercise the
Option is subject to sooner termination as provided in paragraph (j) below.
(e) No Rights of Shareholder. The Option Holder shall not, by
virtue hereof, be entitled to any rights of a shareholder in the Company, either
at law or in equity.
(f) Exercisability. The Option shall become exercisable on
January 1, 1997, subject to paragraph (j) below. The Option may be exercised at
any time or from time to time during the Option Period in regard to all or any
portion of the Option which are then exercisable, as may be adjusted pursuant to
paragraph (g) below.
(g) Adjustments for Recapitalization and Dividends. In the
event that, prior to the expiration of the Option, any dividend in Shares,
recapitalization, Share split, reverse split, reorganization, merger,
consolidation, spin-off, combination, repurchase, or share exchange, or other
such change affects the Shares such that they are increased or decreased or
changed into or exchanged for a different number or kind of shares, other
securities of the Company or of another corporation or other consideration, then
in order to maintain the proportionate interest of the Option Holder and
preserve the value of the Option, (i) there shall automatically be substituted
for each Share subject to the unexercised Option the number and kind of shares,
other securities or other consideration into which each outstanding Share shall
be changed or for which each such Share shall be exchanged, and (ii) the
exercise price shall
12
<PAGE>
be increased or decreased proportionately so that the aggregate purchase price
for the Shares subject to the unexercised Option shall remain the same as
immediately prior to such event.
(h) Transferability. The Option may not be assigned or
otherwise transferred, disposed of or encumbered by the Option Holder, other
than by will or by the laws of descent and distribution. During the lifetime of
the Option Holder, the Option shall be exercisable only by the Option Holder or
by his or her guardian or legal representative. Notwithstanding the foregoing,
the Option may be transferred by the Option Holder to members of his or her
"immediate family" or to a trust established for the exclusive benefit of solely
one or more members of the Option Holder's "immediate family." Any Option held
by the transferee will continue to be subject to the same terms and conditions
that were applicable to the Option immediately prior to the transfer, except
that the Option will be transferable by the transferee only by will or the laws
of descent and distribution. For purposes hereof, "immediate family" means the
Option Holder's children, stepchildren, grandchildren, parents, stepparents,
grandparents, spouse, siblings (including half brothers and sisters), in-laws,
and relationships arising because of legal adoption.
(i) Exercise of Option. In order to exercise the Option, the
Option Holder shall submit to the Company an instrument in writing signed by the
Option Holder, specifying the number of Option Shares in respect of which the
Option is being exercised, accompanied by payment of the Option Price for the
Option Shares for which the Option is being exercised in cash or Shares already
owned by the Option Holder (provided that the Option Holder has owned such
Shares for a minimum period of six months) and having a total Fair Market Value
(as defined below) equal to the exercise price, or in a combination of cash and
such Shares. Option Shares will be issued accordingly by the Company within
fifteen business days, and a share certificate dispatched to the Option Holder
within thirty days.
The Company shall not be required to issue fractional Shares
upon the exercise of the Option. If any fractional interest in a Share would be
deliverable upon the exercise of the Option in whole or in part but for the
provisions of this paragraph, the Company, in lieu of delivering any such
fractional share therefor, shall pay a cash adjustment therefor in an amount
equal to their Fair Market Value (or if any Shares are not publicly traded, an
amount equal to the book value per share at the end of the most recent fiscal
quarter) multiplied by the fraction of the fractional share which would
otherwise have been issued hereunder. Anything to the contrary herein
notwithstanding, the Company shall not be obligated to issue any Option Shares
hereunder if the issuance of such Option Shares would violate the provision of
any applicable law, in which event the Company shall, as soon as practicable,
take whatever action it reasonably can so that such Option Shares may be issued
without resulting in such violations of law. For purposes hereof, Fair Market
Value shall mean the mean between the high and low selling prices per Share on
the immediately preceding date (or, if the Shares were not traded on that day,
the next preceding day that the Shares were traded) on the principal exchange on
which the Shares are traded, as such prices are officially quoted on such
exchange.
(j) Termination of Service. In the event the Option Holder
ceases to be a director of the Company, (i) due to retirement after attainment
of age 65 or (ii) due to death or disability, the Option, to the extent not
already exercisable in full, shall become immediately and fully exercisable at
the time of termination of service, and the Option may be exercised at any time
during the Option Period. If the Option Holder ceases to be a director of the
Company for any other reason, the portion of the Option which is not then
exercisable shall be cancelled on the date service terminates, and the portion
of the Option which is then exercisable may be exercised at any time within six
months after the date of such termination, but not later than termination of the
Option Period.
13
<PAGE>
(k) Obligations as to Capital. The Company agrees that it will
at all times maintain authorized and unissued share capital sufficient to
fulfill all of its obligations under the Option.
(l) Transfer of Shares. The Option, the Option Shares, or any
interest in either, may be sold, assigned, pledged, hypothecated, encumbered, or
transferred or disposed of in any other manner, in whole or in part, only in
compliance with the terms, conditions and restrictions as set forth in the
governing instruments of the Company, applicable United States federal and state
securities laws and the terms and conditions hereof. Each certificate for Option
Shares issued upon exercise of the Option, unless at the time of exercise such
Option Shares are registered under the Securities Act of 1933, as amended, shall
bear the following legend:
"The securities evidenced hereby have not been registered
under the Securities Act of 1933, as amended (the `Act'), and
may not be offered, sold or otherwise transferred except (i)
in compliance with the provisions of any applicable state
securities or `Blue Sky' laws and (ii) (A) pursuant to an
effective registration under the Act, (B) in compliance with
Rule 144 under the Act, (C) inside the United States to a
Qualified Institutional Buyer in compliance with Rule 144A
under the Act, (D) outside the United States in compliance
with Rule 904 of Regulation S under the Act or (E) inside the
United State to an institutional `accredited investor' as
defined in Rule 501(a)(1), (2), (3) or (7) under the Act in a
transaction which, in the opinion of counsel reasonably
satisfactory to the Company, qualifies as an exempt
transaction under the Act and the rules and regulations
promulgated thereunder."
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend shall also bear such legend unless, in the
opinion of counsel for the Company, the securities represented thereby need no
longer be subject to the restrictions set forth therein. The provisions of this
paragraph (l) shall be binding upon all subsequent holders of certificates
bearing the above legend and all subsequent holders of the Option, if any.
(m) Expenses of Issuance of Option Shares. The issuance of
stock certificates upon the exercise of the Option in whole or in part, shall be
without charge to the Option Holder. The Company shall pay, and indemnify the
Option Holder from and against any issuance, stamp or documentary taxes (other
than transfer taxes) or charges imposed by any governmental body, agency or
official (other than income taxes) by reason of the exercise of the Option in
whole or in part or the resulting issuance of the Option Shares.
(n) Withholding. The Option Holder agrees to make appropriate
arrangements with the Company for satisfaction of any applicable tax withholding
requirements, or similar requirements, arising out of the Option.
(o) References. References herein to rights and obligations of
the Option Holder shall apply, where appropriate, to the Option Holder's legal
representative or estate without regard to whether specific reference to such
legal representative or estate is contained in a particular provision of this
Option.
(p) Settlement of Disputes. Any dispute between the parties
arising from or relating to the terms of this Option shall be resolved by
arbitration held in the State of Connecticut in accordance
14
<PAGE>
with the rules of the American Arbitration Association. All costs associated
with any arbitration, including all legal expenses, for both parties shall be
borne by the Company.
(q) Notices. Any notice required or permitted to be given
under this agreement shall be in writing and shall be deemed to have been given
when delivered personally or by courier, or sent by certified or registered
mail, postage prepaid, return receipt requested, duly addressed to the party
concerned at the address indicated below or to such changed address as such
party may subsequently by similar process give notice of:
If to the Company:
Risk Capital Holdings, Inc.
20 Horseneck Lane
Greenwich, CT 06830
Attn: Secretary
If to the Option Holder:
550 Prospect Avenue
Oradell, NJ 07649
(r) Governing Law. This Option shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to principles of conflict of laws.
(s) Entire Agreement. This agreement constitutes the entire
contract among the parties relating to the subject matter hereof, and any
previous agreement or understanding among the parties with respect thereto is
superseded by this agreement.
(t) Counterparts. This agreement may be executed in two
counterparts, each of which shall constitute one and the same instrument.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly caused this
agreement to be signed as of the Date of Grant.
RISK CAPITAL HOLDINGS, INC.
By: /s/ Peter A. Appel
----------------------------------------
Peter A. Appel
Managing Director, General Counsel
and Secretary
/s/ Michael P. Esposito, Jr.
----------------------------------------
Michael P. Esposito, Jr.
16
<PAGE>
RISK CAPITAL HOLDINGS, INC.
Director Option Agreement
FOR GOOD AND VALUABLE CONSIDERATION, receipt of which is
hereby acknowledged, Risk Capital Holdings, Inc. (the "Company"), a Delaware
corporation, hereby grants to Michael P. Esposito, Jr., a director of the
Company on the date hereof (the "Option Holder"), the option to purchase common
stock, $.01 par value per share, of the Company ("Shares"), upon the following
terms:
WHEREAS, the following terms reflect the Company's 1995 Long
Term Incentive and Share Award Plan, as amended by the First Amendment thereto
(the "Plan");
(a) Grant. The Option Holder is hereby automatically granted
an option (the "Option") to purchase 250 Shares (the "Option Shares") pursuant
to the Plan, the terms of which are incorporated herein by reference. The Option
is granted as of January 1, 1997 (the "Date of Grant") and such grant is subject
to the terms and conditions herein and the terms and conditions of the
applicable provisions of the Plan. Such Option shall not be treated as an
incentive stock option under Section 422 of the Internal Revenue Code of 1986,
as amended.
(b) Status of Option Shares. The Option Shares shall upon
issue rank equally in all respects with the other Shares.
(c) Option Price. The purchase price for the Option Shares
shall be, except as herein provided, $19.625 per Option Share, hereinafter
sometimes referred to as the "Option Price," payable immediately in full upon
the exercise of the Option.
(d) Term of Option. The Option may be exercised only during
the period (the "Option Period") commencing in accordance with paragraph (f)
hereof and shall continue until January 1, 2007; thereafter the Option Holder
shall cease to have any rights in respect thereof. The right to exercise the
Option is subject to sooner termination as provided in paragraph (j) below.
(e) No Rights of Shareholder. The Option Holder shall not, by
virtue hereof, be entitled to any rights of a shareholder in the Company, either
at law or in equity.
(f) Exercisability. The Option shall become exercisable on
January 1, 1998, subject to paragraph (j) below. The Option may be exercised at
any time or from time to time during the Option Period in regard to all or any
portion of the Option which are then exercisable, as may be adjusted pursuant to
paragraph (g) below.
(g) Adjustments for Recapitalization and Dividends. In the
event that, prior to the expiration of the Option, any dividend in Shares,
recapitalization, Share split, reverse split, reorganization, merger,
consolidation, spin-off, combination, repurchase, or share exchange, or other
such change affects the Shares such that they are increased or decreased or
changed into or exchanged for a different number or kind of shares, other
securities of the Company or of another corporation or other consideration, then
in order to maintain the proportionate interest of the Option Holder and
preserve the value of the Option, (i) there shall automatically be substituted
for each Share subject to the unexercised Option the number and kind of shares,
other securities or other consideration into which each outstanding Share shall
be changed or for which each such Share shall be exchanged, and (ii) the
exercise price shall
17
<PAGE>
be increased or decreased proportionately so that the aggregate purchase price
for the Shares subject to the unexercised Option shall remain the same as
immediately prior to such event.
(h) Transferability. The Option may not be assigned or
otherwise transferred, disposed of or encumbered by the Option Holder, other
than by will or by the laws of descent and distribution. During the lifetime of
the Option Holder, the Option shall be exercisable only by the Option Holder or
by his or her guardian or legal representative. Notwithstanding the foregoing,
the Option may be transferred by the Option Holder to members of his or her
"immediate family" or to a trust established for the exclusive benefit of solely
one or more members of the Option Holder's "immediate family." Any Option held
by the transferee will continue to be subject to the same terms and conditions
that were applicable to the Option immediately prior to the transfer, except
that the Option will be transferable by the transferee only by will or the laws
of descent and distribution. For purposes hereof, "immediate family" means the
Option Holder's children, stepchildren, grandchildren, parents, stepparents,
grandparents, spouse, siblings (including half brothers and sisters), in-laws,
and relationships arising because of legal adoption.
(i) Exercise of Option. In order to exercise the Option, the
Option Holder shall submit to the Company an instrument in writing signed by the
Option Holder, specifying the number of Option Shares in respect of which the
Option is being exercised, accompanied by payment of the Option Price for the
Option Shares for which the Option is being exercised in cash or Shares already
owned by the Option Holder (provided that the Option Holder has owned such
Shares for a minimum period of six months) and having a total Fair Market Value
(as defined below) equal to the exercise price, or in a combination of cash and
such Shares. Option Shares will be issued accordingly by the Company within
fifteen business days, and a share certificate dispatched to the Option Holder
within thirty days.
The Company shall not be required to issue fractional Shares
upon the exercise of the Option. If any fractional interest in a Share would be
deliverable upon the exercise of the Option in whole or in part but for the
provisions of this paragraph, the Company, in lieu of delivering any such
fractional share therefor, shall pay a cash adjustment therefor in an amount
equal to their Fair Market Value (or if any Shares are not publicly traded, an
amount equal to the book value per share at the end of the most recent fiscal
quarter) multiplied by the fraction of the fractional share which would
otherwise have been issued hereunder. Anything to the contrary herein
notwithstanding, the Company shall not be obligated to issue any Option Shares
hereunder if the issuance of such Option Shares would violate the provision of
any applicable law, in which event the Company shall, as soon as practicable,
take whatever action it reasonably can so that such Option Shares may be issued
without resulting in such violations of law. For purposes hereof, Fair Market
Value shall mean the mean between the high and low selling prices per Share on
the immediately preceding date (or, if the Shares were not traded on that day,
the next preceding day that the Shares were traded) on the principal exchange on
which the Shares are traded, as such prices are officially quoted on such
exchange.
(j) Termination of Service. In the event the Option Holder
ceases to be a director of the Company, (i) due to retirement after attainment
of age 65 or (ii) due to death or disability, the Option, to the extent not
already exercisable in full, shall become immediately and fully exercisable at
the time of termination of service, and the Option may be exercised at any time
during the Option Period. If the Option Holder ceases to be a director of the
Company for any other reason, the portion of the Option which is not then
exercisable shall be cancelled on the date service terminates, and the portion
of the Option which is then exercisable may be exercised at any time within six
months after the date of such termination, but not later than termination of the
Option Period.
18
<PAGE>
(k) Obligations as to Capital. The Company agrees that it will
at all times maintain authorized and unissued share capital sufficient to
fulfill all of its obligations under the Option.
(l) Transfer of Shares. The Option, the Option Shares, or any
interest in either, may be sold, assigned, pledged, hypothecated, encumbered, or
transferred or disposed of in any other manner, in whole or in part, only in
compliance with the terms, conditions and restrictions as set forth in the
governing instruments of the Company, applicable United States federal and state
securities laws and the terms and conditions hereof. Each certificate for Option
Shares issued upon exercise of the Option, unless at the time of exercise such
Option Shares are registered under the Securities Act of 1933, as amended, shall
bear the following legend:
"The securities evidenced hereby have not been registered
under the Securities Act of 1933, as amended (the `Act'), and
may not be offered, sold or otherwise transferred except (i)
in compliance with the provisions of any applicable state
securities or `Blue Sky' laws and (ii) (A) pursuant to an
effective registration under the Act, (B) in compliance with
Rule 144 under the Act, (C) inside the United States to a
Qualified Institutional Buyer in compliance with Rule 144A
under the Act, (D) outside the United States in compliance
with Rule 904 of Regulation S under the Act or (E) inside the
United State to an institutional `accredited investor' as
defined in Rule 501(a)(1), (2), (3) or (7) under the Act in a
transaction which, in the opinion of counsel reasonably
satisfactory to the Company, qualifies as an exempt
transaction under the Act and the rules and regulations
promulgated thereunder."
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend shall also bear such legend unless, in the
opinion of counsel for the Company, the securities represented thereby need no
longer be subject to the restrictions set forth therein. The provisions of this
paragraph (l) shall be binding upon all subsequent holders of certificates
bearing the above legend and all subsequent holders of the Option, if any.
(m) Expenses of Issuance of Option Shares. The issuance of
stock certificates upon the exercise of the Option in whole or in part, shall be
without charge to the Option Holder. The Company shall pay, and indemnify the
Option Holder from and against any issuance, stamp or documentary taxes (other
than transfer taxes) or charges imposed by any governmental body, agency or
official (other than income taxes) by reason of the exercise of the Option in
whole or in part or the resulting issuance of the Option Shares.
(n) Withholding. The Option Holder agrees to make appropriate
arrangements with the Company for satisfaction of any applicable tax withholding
requirements, or similar requirements, arising out of the Option.
(o) References. References herein to rights and obligations of
the Option Holder shall apply, where appropriate, to the Option Holder's legal
representative or estate without regard to whether specific reference to such
legal representative or estate is contained in a particular provision of this
Option.
(p) Settlement of Disputes. Any dispute between the parties
arising from or relating to the terms of this Option shall be resolved by
arbitration held in the State of Connecticut in accordance
19
<PAGE>
with the rules of the American Arbitration Association. All costs associated
with any arbitration, including all legal expenses, for both parties shall be
borne by the Company.
(q) Notices. Any notice required or permitted to be given
under this agreement shall be in writing and shall be deemed to have been given
when delivered personally or by courier, or sent by certified or registered
mail, postage prepaid, return receipt requested, duly addressed to the party
concerned at the address indicated below or to such changed address as such
party may subsequently by similar process give notice of:
If to the Company:
Risk Capital Holdings, Inc.
20 Horseneck Lane
Greenwich, CT 06830
Attn: Secretary
If to the Option Holder:
550 Prospect Avenue
Oradell, NJ 07649
(r) Governing Law. This Option shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to principles of conflict of laws.
(s) Entire Agreement. This agreement constitutes the entire
contract among the parties relating to the subject matter hereof, and any
previous agreement or understanding among the parties with respect thereto is
superseded by this agreement.
(t) Counterparts. This agreement may be executed in two
counterparts, each of which shall constitute one and the same instrument.
20
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly caused this
agreement to be signed as of the Date of Grant.
RISK CAPITAL HOLDINGS, INC.
By: /s/ Peter A. Appel
----------------------------------------
Peter A. Appel
Managing Director, General Counsel
and Secretary
/s/ Michael P. Esposito, Jr.
----------------------------------------
Michael P. Esposito, Jr.
21
<PAGE>
Exhibit 10.12.2
The CORPORATEplan for Retirement(SM)
(Money Purchase Pension Plan)
A Fidelity Prototype Plan
Non-Standardized Adoption Agreement 002
Basic Plan No. 09
<PAGE>
ADOPTION AGREEMENT
ARTICLE 1
NON-STANDARDIZED MONEY PURCHASE PENSION PLAN
1.01 PLAN INFORMATION
(a) Name of Plan:
This is the Risk Capital Reinsurance Company Pension Plan (the
"Plan").
(b) Type of Plan: Money Purchase Pension Plan
(c) Name of Plan Administrator, if not the Employer:
Address:
Phone Number:
The Plan Administrator is the agent for service of
legal process for the Plan.
(d) Limitation Year (check one):
(1) /X/ Calendar Year
(2) / / Plan Year
(3) / / Other:
(e) Three Digit Plan Number: 002
(f) Plan Year End (month/day): 12/31
(g) Plan Status (check one):
(1) / / Effective Date of new Plan:
(2) /X/ Amendment Effective Date: 1/1/97 . This
is (check one):
/X/ (A) an amendment of The CORPORATEplan for
Retirement Adoption Agreement previously
executed by the Employer; or
<PAGE>
/ / (B) a conversion from another plan document
into The CORPORATEplan for Retirement.
The original effective date of the Plan:
1/1/96
The substantive provisions of the Plan shall apply
prior to the Effective Date to the extent required
by the Tax Reform Act of 1986 or other applicable
laws.
1.02 EMPLOYER
(a) The Employer is: Risk Capital Reinsurance Company
Address: 20 Horseneck Lane
Greenwich, CT 06830
Contact's Name: Paul J. Malvasio
Telephone Number: (203) 862-4300
(1) Employer's Tax Identification Number: 06-1430254
(2) Business form of Employer (check one):
(A) /X/ Corporation (D) / / Governmental
(B) / / Sole proprietor or (E) / / Tax-exempt organization
partnership
(C) / / Subchapter S Corporation (F) / / Rural Electric
Cooperative
(3) Employer's fiscal year end: 12/31
(4) Date business commenced: 9/19/95
(b) The term "Employer" includes the following Related
Employer(s) (as defined in Section 2.01(a)(26)):
Not Applicable
2
<PAGE>
1.03 COVERAGE
(a) All Employees who meet the conditions specified below
will be eligible to participate in the Plan:
(1) Service requirement (check one):
(A) / / no service requirement.
(B) /x/ three consecutive months of service (no
minimum number Hours of Service can be
required).
(C) / / six consecutive months of service (no minimum
number Hours of Service can be required).
(D) / / one Year of Service (1,000 Hours of Service
is required during the Eligibility Computation
Period.)
(2) Age requirement (check one):
(A) /X/ no age requirement.
(B) / / must have attained age ______ (not to exceed
21).
(3) The class of Employees eligible to participate in the
Plan (check one):
(A) / / includes all Employees of the Employer.
(B) /X/ includes all Employees of the Employer
except for (check the appropriate box(es)):
(i) / / Employees covered by a collective
bargaining agreement.
(ii) / / Highly Compensated Employees as
defined in Code Section 414(q).
(iii)/X/ Leased Employees as defined in
Section 2.01(a)(18).
(iv) / / Nonresident aliens who do not receive
any earned income from the
Employer which constitutes United
States source income.
(v) / / Other
3
<PAGE>
Note: No exclusion in this section may create a
discriminatory class of employees. An
Employer's Plan must still pass the Internal
Revenue Code coverage and participation
requirements if one or more of the above groups
of Employees have been excluded from the Plan.
(b) The Entry Date(s) shall be (check one):
(1) / / the first day of each Plan Year (do not select if
Section 1.03 (a)(1)(D) is elected or if there is
an age requirement of greater than 20 1/2 in Section
1.03(a)(2)(B)).
(2) / / the first day of each Plan Year and the date six
months later.
(3) /X/ the first day of each Plan Year and the first day
of the fourth, seventh, and tenth months.
(4) / / the first day of each month.
(c) Date of Initial Participation - An Employee will become a
Participant unless excluded by Section 1.03(a)(3) above
on the Entry Date immediately following the date the
Employee completes the service and age requirement(s) in
Section 1.03(a), if any, except (check one):
(1) /X/ No exceptions.
(2) / / Employees employed on the Effective Date in Section
1.01(g) will become Participants on that date.
(3) / / Employees who meet the age and service requirement(s)
of Section 1.03(a) on the Effective Date in Section
1.01(g) will become Participants on that date.
1.04 COMPENSATION
(a) For purposes of determining contributions under the Plan,
Compensation shall be as defined in Section 2.01(a)(7),
but excluding (check the appropriate box(es)):
(1) / / Overtime Pay.
(2) / / Bonuses (other than non-cash compensation,
including restricted stock and stock options* ).
(3) /X/ Commissions.
(4) /X/ The value of a qualified or a non-qualified stock
option granted to an Employee by the Employer
to the extent such value is includable in the
Employee's taxable income.
_______________________________
* The amount of any non-cash compensation, including compensation
income resulting from restricted stock and the exercise of stock options,
shall be excluded from Compensation for purposes of determining contributions
under the Plan.
4
<PAGE>
Note: These exclusions shall not apply for purposes
of the "Top Heavy" requirements in Section 9.03.
(5) / / No exclusions.
(b) Compensation for the First Year of Participation
Contributions for the Plan Year in which an Employee
first becomes a Participant shall be determined based on
the Employee's Compensation (check one):
(1) / / For the entire Plan Year.
(2) /X/ For the portion of the Plan Year in which the
Employee is eligible to participate in the Plan.
1.05 CONTRIBUTIONS
(a) Employer Contributions (check (1) or (2)):
(1) / / Nonintegrated Formula :
For each Plan Year, the Employer will
contribute for each eligible Participant an
amount equal to __________% (not to exceed
25%) of such Participant's Compensation.
(2) /X/ Integrated Formula:
For each Plan Year, the Employer shall
contribute for each Participant an amount equal
to (complete both (A) and (B)):
(A) 4% (not less than 3%) of each
Participant's Compensation.
PLUS
(B) 4% of each Participant's
Compensation in excess of the Integration
Level as defined in (2)(A) below. This
percentage may not exceed the lesser of:
(i) the percentage elected in (A) above, or
(ii) the Applicable Percentage as
defined in (2)(B) below.
The following definitions apply for the
purposes of (1) above (check one):
5
<PAGE>
(A) "Integration Level" shall mean the Taxable
Wage Base as defined in (C) below, unless
the Employer elects a lesser amount in (i)
or (ii) below:
(i) $________ (a flat dollar amount that
is less than the Taxable Wage
Base), or
(ii) ________% (not to exceed 100%) of
the Taxable Wage Base.
(B) "Applicable Percentage" shall mean the
percentage provided by the following
table:
If The Integration Level But Less Than
is at Least --% of the --% of the The Applicable
Taxable Wage Base Taxable Wage Base Percentage is:
- -------------------------------------------------------------------------------
0% 20% 5.7%
20% 80% 4.3%
80% 100% 5.4%
100% N/A 5.7%
- -------------------------------------------------------------------------------
(C) "Taxable Wage Base" is the contribution
and benefit base in effect under Section
230 of the Social Security Act at the
beginning of the Plan Year. The Taxable
Wage Base for 1994 is $60,600.
Note: An Employer who maintains any other plan
that provides for Social Security Integration
(permitted disparity) may not elect 1.05
(a)(2).
(3) Eligibility Requirement(s)
A Participant shall be entitled to Employer
contributions for a Plan Year under this Subsection
(a) if the Participant satisfies the following
requirement(s) (Check the appropriate box(es) -
Options (B) and (C) may not be elected together):
(A) / / is employed by the Employer on the last day
of the Plan Year.
(B) / / earns at least 500 Hours of Service during the
Plan Year.
(C) / / earns at least 1,000 Hours of Service during
the Plan Year.
(D) /X/ no requirements.
Note: If option (A), (B) or (C) above is selected
then Employer contributions can only be funded
by the Employer after Plan Year end. Employer
contributions funded during the Plan Year
shall not be subject to the eligibility
requirements of this Section 1.05(a)(3).
6
<PAGE>
1.06 RETIREMENT AGE(S)
(a) The Normal Retirement Age under the Plan is (check one):
(1) /X/ age 65.
(2) / / age ____ (specify between 55 and 64).
(3) / / later of the age ___ (can not exceed 65) or
the fifth anniversary of the Participant's
Employment Commencement Date.
(b) /X/ The Early Retirement Age is the first day of the
month after the Participant attains
age 59 (specify 55 or greater) and completes
N/A Years of Service for Vesting.
(c) /X/ A Participant is eligible for Disability Retirement
if he/she (check the appropriate box(es)):
(1) /X/ satisfies the requirements for benefits under the
Employer's Long-Term
Disability Plan.
(2) / / satisfies the requirements for Social Security
disability benefits.
(3) / / is determined to be disabled by a physician
approved by the Employer.
1.07 VESTING SCHEDULE
(a) The Participant's vested percentage in Employer
contributions elected in Section 1.05(a) shall be based upon
the schedule selected below, except with respect to any Plan
Year during which the Plan is Top-Heavy. The schedule
elected in Section 1.12(d) shall automatically apply for a
Top-Heavy Plan Year and all Plan Years thereafter unless the
Employer has already elected a more favorable vesting
schedule below.
(1) Employer Contributions
(check one):
(A) [Reserved]
(B) /X/ 100% Vesting immediately
(C) / / 3 year cliff (see C below)
(D) / / 5 year cliff (see D below)
(E) / / 6 year graduated (see E below)
(F) / / 7 year graduated (see F below)
(G) / / Other vesting (complete G below)
7
<PAGE>
VESTING SCHEDULE
- ----------------------------------------------------------------
Years of
Service for
Vesting C D E F G
----------- --- ---- ---- ---- ----
0 0% 0% 0% 0% ---
1 0% 0% 0% 0% ---
2 0% 0% 20% 0% ---
3 100% 0% 40% 0% ---
4 100% 0% 60% 40% ---
5 100% 100% 80% 60% ---
6 100% 100% 100% 80% ---
7 100% 100% 100% 100% 100%
Note: A schedule elected under G above must be at least as
favorable as one of the schedules in C, D, E or F above.
(b) / / Years of Service for Vesting shall exclude:
(1) / / for new plans, service prior to the Effective Date
as defined in Section 1.01(g)(1).
(2) / / for existing plans converting from another plan
document, service prior to the original Effective
Date as defined in Section 1.01(g)(2).
1.08 PREDECESSOR EMPLOYER SERVICE
/ / Service for purposes of eligibility in Section 1.03(a)(1)
and vesting in Section 1.07(a) of this Plan shall include
service with the following employer(s):
(a)
(b)
(c)
(d)
1.09 PARTICIPANT LOANS
Participant loans (check (a) or (b)):
(a) / / will be allowed in accordance with Section 7.09,
subject to a $1,000 minimum amount and will
be granted (check (1) or (2)):
(1) / / for any purpose.
(2) / / for hardship purposes (as defined in Section 7.09)
only.
8
<PAGE>
(b) /X/ will not be allowed.
1.10 RESERVED
1.11 DISTRIBUTIONS
(a) Subject to Articles 7 and 8, and (b) below, distributions
under the Plan will be paid as a single lump sum or under
a systematic withdrawal plan (installments) following
retirement, death, disability or other termination of
employment.
(b) / / Check if the Plan was converted (by plan amendment)
from another defined contribution plan, and the
benefits were payable with respect to voluntary after-
tax employee contributions, prior to termination of
employment.
Note: Under Federal Law, distributions to Participants must
generally begin no later than April 1 following the year
in which the Participant attains age 70 1/2.
1.12 TOP HEAVY STATUS
(a) The Plan shall be subject to the Top-Heavy Plan
requirements of Article 9 (check one):
(1) /X/ for each Plan Year.
(2) / / for each Plan Year, if any, for which the Plan is
Top-Heavy as defined in Section 9.02.
(b) In determining Top-Heavy status, if necessary, for an
Employer with at least one defined benefit plan, the
following assumptions shall apply:
(1) Interest rate: _____% per annum
(2) Mortality table: _____________
(3) /X/ Not Applicable
(c) In the event that the Plan is treated as Top-Heavy for a
Plan Year, each non-key Employee shall receive an
Employer Contribution of at least 3 (3, 4, 5, or 7 1/2)%
of Compensation for the Plan Year in
accordance with Section 9.03 (check one):
(1) /X/ under this Plan in any event.
(2) / / under this Plan only if the Participant is not
entitled to such contribution under another
qualified plan of the Employer.
9
<PAGE>
Note: Such minimum Employer contribution may be less
than the percentage indicated in (c) above to
the extent provided in Section 9.03(a).
(d) In the event that the Plan is treated as Top-Heavy for a Plan
Year, the following vesting schedule shall apply instead of
the schedule elected in Section 1.07(a) for such Plan Year
and each Plan Year thereafter (check one):
(1) /X/ 100% vested after 0 (not in excess
of 3) Years of Service for Vesting.
(2) / /Years of Service for Vesting Vesting Percentage Must be at Least
0 ________ 0%
1 ________ 0%
2 ________ 20%
3 ________ 40%
4 ________ 60%
5 ________ 80%
6 ________ 100%
Note: If the schedule elected in Section 1.07(a)
is more favorable in all cases than the
schedule elected in (d) above, then the
schedule in Section 1.07(a) will continue to
apply even in Plan Years in which the Plan is
Top-Heavy.
1.13 TWO OR MORE PLANS - Code Section 415 limitation on annual
additions
If the Employer maintains or ever maintained another qualified
plan in which any Participant in this Plan is (or was) a
participant or could become a participant, the Employer must
complete this section. The Employer must also complete this
section if it maintains a welfare benefit fund, as defined in
Section 419(e) of the Code, or an individual medical account, as
defined in Section 415(l)(2) of the Code, under which amounts are
treated as annual additions with respect to any Participant in
this Plan.
(a) If the Employer maintains, or maintained, any other defined
contribution plan or plans which are not Master or Prototype
Plans, Annual Additions for any Limitation Year to this Plan
will be limited (check one):
(1) / / in accordance with Section 5.03 of this Plan.
(2) /X/ in accordance with another method set forth on
an attached separate sheet.
(3) / / Not Applicable.
(b) If the Employer maintains, or maintained, any defined
benefit plan(s), the sum of the Defined Contribution
Fraction and Defined Benefit Fraction for a Limitation Year
may not exceed the limitation specified in Code Section
415(e), modified by section 416(h)(1) of the Code. This
combined plan limit will be met as follows (check one):
10
<PAGE>
(1) / / Annual Additions to this Plan are limited so
that the sum of the Defined Contribution Fraction and the
Defined Benefit Fraction does not exceed 1.0.
(2) / / another method of limiting Annual Additions or reducing
projected annual benefits is set forth on an attached
schedule.
(3) /X/ Not Applicable.
1.14 ESTABLISHMENT OF TRUST AND INVESTMENT DECISIONS
(a) nvestment Directions
Participant Accounts will be invested (check one):
(1) / / in accordance with investment directions provided to
the Trustee by the Employer for allocating all
Participant Accounts among the options listed in (b)
below.
(2) /X/ in accordance with investment directions provided
to the Trustee by each Participant for allocating
his entire Account among the options listed in
(b) below.
<PAGE>
(b) Plan Investment Options
The Employer hereby establishes a Trust under the Plan in
accordance with the provisions of Article 14, and the
Trustee signifies acceptance of its duties under Article 14
by its signature below. Participant Accounts under the
Trust will be invested among the Fidelity Funds listed below
pursuant to Participant or Employer directions.
Fund Name Fund Number
(1) Fidelity Retirement Money Market Portfolio
(2) Fidelity Intermediate Bond Fund
(3) Fidelity Fund
(4) Fidelity Blue Chip Growth Fund
(5) Fidelity Growth Company Fund
(6) Fidelity US Equity Index Portfolio
(7) Fidelity Overseas Fund
(8)
(9)
(10)
Note: An additional annual recordkeeping fee will be
charged for each fund in excess of seven funds.
To the extent that the Employer selects as an
investment option the Managed Income Portfolio of
the Fidelity Group Trust for Employee Benefit Plans
(the "Group Trust"), the Employer hereby (A) agrees
to the terms of the Group Trust and adopts said
terms as a part of this Agreement and (B)
acknowledges that it has received from the Trustee a
copy of the Group Trust, the Declaration of Separate
Fund for the Managed Income Portfolio of the Group
Trust, and the Circular for the Managed Income
Portfolio.
Note: The method and frequency for change of
investments will be determined under the rules
applicable to the selected funds or, if applicable,
the rules of the Employer adopted in accordance with
Section 6.03. Information will be provided
regarding expenses, if any, for changes in
investment options.
12
<PAGE>
1.15 RELIANCE ON OPINION LETTER
An adopting Employer may not rely on the opinion letter issued by
the National Office of the Internal Revenue Service as evidence that
this Plan is qualified under Section 401 of the Code.
If the Employer wishes to obtain reliance that his or her Plan(s)
are qualified, application for a determination letter should be
made to the appropriate Key District Director of the Internal
Revenue Service. Failure to fill out properly the Adoption
Agreement may result in disqualification of the Plan.
This Adoption Agreement may be used only in conjunction with
Fidelity Prototype Plan Basic
Plan Document No. 09. The Prototype Sponsor shall inform the
adopting Employer of any amendments made to the Plan or of the
discontinuance or abandonment of the prototype plan document.
1.16 PROTOTYPE INFORMATION:
Name of Prototype Sponsor: Fidelity Management & Research Co.
Address of Prototype Sponsor: 82 Devonshire Street
Boston, MA 02109
Questions regarding this prototype document may be directed to
the following telephone number:
1-(800) 343-9184.
13
<PAGE>
EXECUTION PAGE
(Employer's Copy)
IN WITNESS WHEREOF, the Employer has caused this Adoption Agreement
to be executed this 27 day of December ,199.
Employer Risk Capital Reinsurance Company
By /s/ Peter A. Appel
Title Managing Director, General
Counsel and Secretary
Employer Risk Capital Reinsurance Company
By /s/ Paul J. Malvasio
Title Managing Director, Chief Financial Officer and
Treasurer
Accepted by
Fidelity Management Trust Company, as Trustee
By /s/ Wayne Isaacs Date Feb. 10, 1997
Title Sr. Legal Counsel/Authorized Signatory
14
<PAGE>
Attachment to the Risk Capital Reinsurance Company Pension Plan
Addendum to Section 1.13(a)(2): Any Excess Annual Additions shall be
disposed of as follows: first from the Risk Capital Reinsurance Company
Employee Savings Plan; and second, from this Plan.
<PAGE>
Exhibit 10.13.2
The CORPORATEplan for RetirementSM
(Profit Sharing/401(k) Plan)
A Fidelity Prototype Plan
Non-Standardized Adoption Agreement 002
Basic Plan No. 07
<PAGE>
ADOPTION AGREEMENT
ARTICLE 1
NON-STANDARDIZED PROFIT SHARING PLAN
1.01 PLAN INFORMATION
(a) Name of Plan:
This is the Risk Capital Reinsurance Company Employee
Savings Plan (the "Plan").
(b) Type of Plan:
(1) / / 401(k) and Profit Sharing
(2) / / Profit Sharing Only
(3) /X/ 401(k) Only
(c) Name of Plan Administrator, if not the Employer:
Address:
Phone Number:
The Plan Administrator is the agent for service of legal
process for the Plan.
(d) Limitation Year (check one):
(1) /X/ Calendar Year
(2) / / Plan Year
(3) / / Other:
(e) Three Digit Plan Number: 001
(f) Plan Year End (month/day): 12/31
<PAGE>
(g) Plan Status (check one):
(1) / / Effective Date of new Plan:
(2) /X/ Amendment Effective Date: 1/1/97. This
is (check one):
(A) /X/ an amendment of The CORPORATEplan for
RetirementSM Adoption Agreement previously
executed by the Employer; or
(B) / / a conversion from another plan document into
The CORPORATEplan for RetirementSM.
The original effective date of the Plan:
1/1/96
The substantive provisions of the Plan shall
apply prior to the Effective Date to the
extent require by the Tax Reform Act of 1986
or other applicable laws.
1.02 EMPLOYER
(a) The Employer is Risk Capital Reinsurance Company
Address: 20 Horseneck Lane
Greenwich, CT 06830
Contact's Name: Paul J. Malvasio
Telephone Number: (203) 862-4300
(1) Employer's Tax Identification Number: 06-1430254
(2) Business form of Employer (check one):
(A) /X/ Corporation (D) / / Governmental
(B) / / Sole proprietor or partnership (E) / / Tax-exempt
organization
(C) / / Subchapter S Corporation (F) / / Rural Electric
Cooperative
(3) Employer's fiscal year end: 12/31
(4) Date business commenced: 9/19/95
2
<PAGE>
(b) The term "Employer" includes the following Related
Employer(s) (as defined in Section 2.01(a)(26)):
Not Applicable
1.03 COVERAGE
(a) All Employees who meet the conditions specified below
will be eligible to participate in the Plan:
(1) Service requirement (check one):
(A) / / no service requirement.
(B) /X/ three consecutive months of service (no
minimum number Hours of Service can be
required).
(C) / / six consecutive months of service (no minimum
number Hours of Service can be required).
(D) / / one Year of Service (1,000 Hours of Service
is required during the Eligibility
Computation Period.)
(2) Age requirement (check one):
(A) /X/ no age requirement.
(B) / / must have attained age ______ (not to
exceed 21).
3
<PAGE>
(3) The class of Employees eligible to participate in the
Plan (check one):
(A) / / includes all Employees of the Employer.
(B) /X/ includes all Employees of the Employer
except for (check the appropriate box(es)):
(i) / / Employees covered by a collective
bargaining agreement.
(ii) / / Highly Compensated Employees as
defined in Code Section 414(q).
(iii) /X/ Leased Employees as defined in Section
2.01(a)(18).
(iv) / / Nonresident aliens who do not receive
any earned income from the Employer which
constitutes United States source income.
(v) / / Other
Note: No exclusion in this section may create a
discriminatory class of employees. An
Employer's Plan must still pass the Internal
Revenue Code coverage and participation
requirements if one or more of the above groups
of Employees have been excluded from the Plan.
(b) The Entry Date(s) shall be (check one):
(1) / / the first day of each Plan Year (do not select if
Section 1.03 (a)(1)(D) is elected or if there is
an age requirement of greater than 20 1/2 in Section
1.03(a)(2)(B)).
(2) / / the first day of each Plan Year and the date six
months later.
(3) /X/ the first day of each Plan Year and the first day
of the fourth, seventh, and tenth months.
(4) / / the first day of each month.
4
<PAGE>
(c) Date of Initial Participation--An Employee will become a
Participant unless excluded by Section 1.03(a)(3) above
on the Entry Date immediately following the date the
Employee completes the service and age requirement(s) in
Section 1.03(a), if any, except (check one):
(1) /X/ No exceptions.
(2) / / Employees employed on the Effective Date in Section
1.01(g) will become Participants on that date.
(3) / / Employees who meet the age and service requirement(s)
of Section 1.03(a) on the Effective Date in
Section 1.01(g) will become Participants on that date.
1.04 COMPENSATION
(a) For purposes of determining contributions under the Plan,
Compensation shall be as defined in Section 2.01(a)(7),
but excluding (check the appropriate box(es)):
(1) / / Overtime Pay.
(2) / / Bonuses (other than non-cash compensation,
including restricted stock and stock options*).
(3) /X/ Commissions.
(4) /X/ The value of a qualified or a non-qualified stock
option granted to an Employee by the Employer
to the extent such value is includable in the
Employee's taxable income.
Note: These exclusions shall not apply for purposes
of the "Top Heavy" requirements in Section 9.03 or
for allocating Discretionary Employer
Contributions if an Integrated Formula is elected
in Section 1.05(a)(2).
(5) / / No exclusions.
_______________________________
* The amount of any non-cash compensation, including compensation
income resulting from restricted stock and the exercise of stock options,
shall be excluded from Compensation for purposes of determining contributions
under the Plan.
5
<PAGE>
(b) Compensation for the First Year of Participation
Contributions for the Plan Year in which an Employee
first becomes a Participant shall be determined based on
the Employee's Compensation (check one):
(1) / / For the entire Plan Year.
(2) /X/ For the portion of the Plan Year in which the
Employee is eligible to participate in the
Plan.
1.05 CONTRIBUTIONS
(a) / / Employer Contributions :
(1) / / Fixed Formula--Nonintegrated Formula (check (A)
or (B)):
(A) / / Fixed Percentage Employer Contribution:
For each Plan Year, the Employer will
contribute for each eligible Participant an
amount equal to __________% (not to exceed
15%) of such Participant's Compensation.
(B) / / Fixed Flat Dollar Employer Contribution:
For each Plan Year, the Employer will
contribute for each eligible Participant an
amount equal to $_________.
(2) / / Discretionary Formula
The Employer may decide each Plan Year whether to
make a discretionary Employer contribution on
behalf of eligible Participants in accordance with
Section 4.06. Such contributions shal be allocated
to eligible Participants based upon the following
(check (A) or (B)):
(A) / / Nonintegrated Allocation Formula:
In the ratio that each eligible Participant's
Compensation bears to the total Compensation
paid to all eligible Participants for the
Plan Year.
(B) / / Integrated Allocation Formula:
In accordance with Section 4.06.
Note: An Employer who maintains any other plan that
provides for Social Security Integration
(permitted disparity) may not elect (2)(B).
6
<PAGE>
(3) Eligibility Requirement(s)
A Participant shall be entitled to Employer
Contributions for a Plan Year under this Subsection
(a) if the Participant satisfies the following
requirement(s) (Check the appropriate box(es)--
Options (B) and (C) may not be elected together):
(A) / / is employed by the Employer on the last day
of the Plan Year.
(B) / / earns at least 500 Hours of Service during the
Plan Year.
(C) / / earns at least 1,000 Hours of Service during
the Plan Year.
(D) / / no requirements.
Note: If option (A), (B) or (C) above is selected
then Employer contributions can only be funded
by the Employer after Plan Year end. Employer
contributions funded during the Plan Year shall
not be subject to the eligibility requirements
of this Section 1.05(a)(3).
(b) /X/ Deferral Contributions
(1) Regular Contributions
The Employer shall make a Deferral Contribution in
accordance with Section 4.01 on behalf of each
Participant who has an executed salary reduction
agreement in effect with the Employer for the
payroll period in question, not to exceed 15%
(no more than 15%) of Compensation for that
period.
(A) A Participant may increase or decrease, on
a prospective basis, his salary reduction
agreement percentage (check one):
(i) / / As of the beginning of each
payroll period.
(ii) / / As of the first day of each
month.
(iii) /X/ As of the next Entry Date.
(iv) / / (Specify, but must be at least
once per Plan Year)
(B) A Participant may revoke, on a prospective
basis, a salary reduction agreement at any time
upon proper notice to the Administrator but in
such case may not file a new salary reduction
agreement until (check one):
(i) / / The first day of the next Plan
Year.
(ii) /X/ Any subsequent Plan Entry Date.
(iii) / / (Specify, but must be at least
once per Plan Year)
7
<PAGE>
(2) /X/ Catch-Up Contributions
The Employer may allow Participants upon proper
notice and approval to enter into a special salary
reduction agreement to make additional Deferral
Contributions in an amount up to 100% of their
Compensation for the payroll period(s) in the final
month of the Plan Year.
(3) /X/ Bonus Contributions
The Employer may allow Participants upon proper
notice and approval to enter into a special salary
reduction agreement to make Deferral Contributions
in an amount up to 100% of any Employer paid cash
bonuses made for such Participants during the Plan
Year. The Compensation definition elected by the
Employer in Section 1.04(a) must include bonuses if
bonus contributions are permitted.
Note: A Participant's contributions under (2) and/or
(3) may not cause the Participant to exceed
the percentage limit specified by the Employer
in (1) after the Plan Year. The Employer has
the right to restrict a Participant's right to
make Deferral Contributions if they will
adversely affect the Plan's ability to pass
the actual deferral percentage and/or the
actual contribution percentage test.
(4) / / Qualified Discretionary Contributions
The Employer may contribute an amount which it
designates as a Qualified Discretionary
Contribution to be included in the actual deferral
percentage or actual contribution percentage test.
Qualified Discretionary Contributions shall be
allocated to Non-highly Compensated Employees
(check one):
(A) / / in the ratio which each such Participant's
Compensation for the Plan Year bears to the
total of all such Participants' Compensation for
the Plan Year.
(B) / / as a flat dollar amount for each such
Participant for the Plan Year.
8
<PAGE>
(c) /X/ Matching Contributions (only if Section 1.05(b) is
checked)
(1) The Employer shall make a Matching Contribution on
behalf of each Participant in an amount equal to the
following percentage of a Participant's Deferral
Contributions during the Plan Year (check one):
(A) / / 50%
(B) / / 100%
(C) / / %
(D) /X/ (Tiered Match) 100% of the first
3% of the Participant's Compensation
contributed to the Plan,
50% of the next 3% of the Participant's
Compensation contributed to the Plan,
% of the next % of the Participant's
Compensation contributed to the Plan.
Note: The percentages specified above for Matching
Contributions may not increase as the percentage
of Compensation contributed increases.
(E) / / The percentage declared for the year, if
any, by a Board of Directors' Resolution
(or by a Letter of Intent for a Sole
Proprietor or Partnership).
(2) /X/ The Employer may at Plan Year end make an
additional Matching Contribution equal to a
percentage declared by the Employer, through a
Board of Directors' Resolution (or by a Letter of
Intent for a Sole Proprietor or Partnership), of
the Deferral Contributions made by each
Participant during the Plan Year (only if an option
is checked under Section 1.05(c)(1)).
(3) /X/ Matching Contribution Limits (check the
appropriate box):
(A) /X/ Deferral Contributions in excess of
6% of the Participant's Compensation
for the period in question shall not be
considered for Matching Contributions.
Note: If the Employer elects a percentage
limit in (A) above and requests the Trustee
to account separately for matched and
unmatched Deferral Contributions, the
Matching Contributions allocated to each
Participant must be computed, and the
percentage limit applied, based upon each
payroll period.
9
<PAGE>
(B) / / Matching Contributions for each Participant
for each Plan Year shall be limited to
$___________.
(4) Eligibility Requirement(s)
A Participant who makes Deferral Contributions
during the Plan Year under Section 1.05(b) shall be
entitled to Matching Contributions for that Plan
Year if the Participant satisfies the following
requirement(s) (Check the appropriate box(es).
Options (B) and (C) may not be elected together):
(A) / / Is employed by the Employer on the last day of
the Plan Year.
(B) / / Earns at least 500 Hours of Service during the
Plan Year.
(C) / / Earns at least 1,000 Hours of Service during
the Plan Year.
(D) / / Is not a Highly Compensated Employee for the
Plan Year.
(E) / / Is not a Partner of the Employer, if the
Employer is a Partnership.
(F) /X/ No requirements.
Note: If option (A), (B) or (C) above is selected
then Matching Contributions can only be funded
by the Employer after the Plan Year ends. Any
Matching Contribution funded before Plan Year
end shall not be subject to the eligibility
requirements of this Section 1.05(c)(4)). If
option (A), (B), or (C) is adopted during a
Plan Year, such option shall not become
effective until the first day of the next Plan
Year.
(d) / / Employee After-Tax Contributions (check one):
(1) / / Future Contributions
Participants may make voluntary non-deductible
Employee Contributions pursuant to Section 4.09 of
the Plan. This option may only be elected if the
Employer has elected to permit Deferral
Contributions under Section 1.05(b). Matching
Contributions by the Employer are not allowed on any
voluntary non-deductible Employee Contributions.
Withdrawals are limited to one per year unless
Employee Contributions were allowed under a previous
plan document which authorized more frequent
withdrawals.
10
<PAGE>
(2) / / Frozen Contributions
Participants may not make voluntary non-deductible
Employee Contributions, but the Employer does
maintain frozen Participant voluntary non-deductible
Employee Contribution Accounts.
1.06 RETIREMENT AGE(S)
(a) The Normal Retirement Age under the Plan is (check one):
(1) /X/ age 65.
(2) / / age ____ (specify between 55 and 64).
(3) / / later of the age ___ (can not exceed 65) or the
fifth anniversary of the Participant's
Employment Commencement Date.
(b) /X/ The Early Retirement Age is the first day of the month
after the Participant attains age 59
(specify 55 or greater) and completes
N/A Years of Service for Vesting.
(c) /X/ A Participant is eligible for Disability Retirement
if he/she (check the appropriate box(es)):
(1) /X/ satisfies the requirements for benefits under the
Employer's Long-Term Disability Plan.
(2) / / satisfies the requirements for Social Security
disability benefits.
(3) / / is determined to be disabled by a physician
approved by the Employer.
11
<PAGE>
1.07 VESTING SCHEDULE
(a) The Participant's vested percentage in Employer
contributions (Fixed or Discretionary) elected in Section
1.05(a) and/or Matching Contributions elected in Section
1.05(c) shall be based upon the schedule(s) selected below,
except with respect to any Plan Year during which the Plan
is Top-Heavy. The schedule elected in Section 1.12(d) shall
automatically apply for a Top-Heavy Plan Year and all Plan
Years thereafter unless the Employer has already elected a
more favorable vesting schedule below.
(1) Employer Contributions (2) Matching Contributions
(check one): (check one):
(A)/ / N/A - No Employer Contributions (A) / / N/A - No Matching
Contributions
(B)/ / 100% Vesting immediately (B)/X/ 100% Vesting immediately
(C)/ / 3 year cliff (see C below) (C)/ / 3 year cliff (see C below)
(D)/ / 5 year cliff (see D below) (D)/ / 5 year cliff (see D below)
(E)/ / 6 year graduated (see E below) (E)/ / 6 year graduated (see E
below)
(F)/ / 7 year graduated (see F below) (F)/ / 7 year graduated (see F
below)
(G)/ / Other vesting (complete G1 below) (G)/ / Other vesting (complete
G2 below)
VESTING SCHEDULE
- ---------------------------------------------------------------------------
Years of
Service for
Vesting C D E F G1 G2
0 0% 0% 0% 0% ___ ___
1 0% 0% 0% 0% ___ ___
2 0% 0% 20% 0% ___ ___
3 100% 0% 40% 20% ___ ___
4 100% 0% 60% 40% ___ ___
5 100% 100% 80% 60% ___ ___
6 100% 100% 100% 80% ___ ___
7 100% 100% 100% 100% 100% 100%
Note: A schedule elected under G1 or G2 above must be at
least as favorable as one of the schedules in C, D, E or
F above.
(b) / / Years of Service for Vesting shall exclude:
(1) / / for new plans, service prior to the Effective Date
as defined in Section 1.01(g)(1).
(2) / / for existing plans converting from another plan
document, service prior to the original Effective
Date as defined in Section 1.01(g)(2).
12
<PAGE>
1.08 PREDECESSOR EMPLOYER SERVICE
Service for purposes of eligibility in Section 1.03(a)(1)
and vesting in Section 1.07(a) of this Plan shall include
service with the following employer(s):
(a)
(b)
(c)
(d)
1.09 PARTICIPANT LOANS
Participant loans (check (a) or (b)):
(a) /X/ will be allowed in accordance with Section 7.09,
subject to a $1,000 minimum amount and will
be granted (check (1) or (2)):
(1) /X/ for any purpose.
(2) / / for hardship withdrawal (as defined in Section
7.10) purposes only.
(b) / / will not be allowed.
1.10 HARDSHIP WITHDRAWALS
Participant withdrawals for hardship prior to termination of
employment (check one):
(a) /X/ will be allowed in accordance with Section 7.10,
subject to a $1,000 minimum amount.
(b) / / will not be allowed.
13
<PAGE>
1.11 DISTRIBUTIONS
(a) Subject to Articles 7 and 8 and (b) below,
distributions under the Plan will be paid (check the
appropriate box(es)):
(1) /X/ as a lump sum.
(2) /X/ under a systematic withdrawal plan
(installments).
(b) /X/ Check if a Participant will be entitled to receive a
distribution of all or any portion of the following
Accounts without terminating employment upon
attainment of age 59 1/2 (check one):
(1) / / Deferral Contribution Account
(2) /X/ All Accounts
(c) / / Check if the Plan was converted (by plan amendment)
from another defined contribution plan, and the
benefits were payable as (check the appropriate
box(es)):
(1) / / a form of single or joint and survivor life
annuity.
(2) / / an in-service withdrawal of vested Employer
contributions maintained in a
Participant's account (check (A) and/or (B)):
(A) / / for at least (24 or more)
months.
(B) / / after the Participant has at least 60
months of participation.
(3) / / another distribution option that is a
"protected benefit" under Section 411(d)(6) of
the Internal Revenue Code. Please attach a separate
page identifying the distribution
option(s).
These additional forms of benefit may be provided for
such plans under Articles 7 or 8.
Note: Under Federal Law, distributions to
Participants must generally begin no later than
April 1 following the year in which the Participant
attains age 70 1/2.
14
<PAGE>
1.12 TOP HEAVY STATUS
(a) The Plan shall be subject to the Top-Heavy Plan requirements
of Article 9 (check one):
(1) /X/ for each Plan Year.
(2) / / for each Plan Year, if any, for which the Plan is
Top-Heavy as defined in Section 9.02.
(3) / / Not applicable. (This option is available for
plans covering only employees subject to a
collective bargaining agreement and there are no
Employer or Matching Contributions elected in
Section 1.05.)
(b) In determining Top-Heavy status, if necessary, for an
employer with at least one defined benefit plan, the
following assumptions shall apply:
(1) Interest rate: _____% per annum
(2) Mortality table: _____________
(3) / / Not Applicable.
(c) In the event that the Plan is treated as Top-Heavy for a
Plan Year, each non-key Employee shall receive an
Employer Contribution of at least 3 (3,4, 5, or 7 1/2) %
of Compensation for the Plan Year in
accordance with Section 9.03 (check one):
(1) / / under this Plan in any event.
(2) /x/ under this Plan only if the Participant is not
entitled to such contribution under another
qualified plan of the Employer.
(3) / / Not applicable. (This option is available for
plans covering only Employees subject to a
collective bargaining agreement and there are no
Employer or Matching Contributions elected in
Section 1.05.)
Note: Such minimum Employer contribution may be less
than the percentage indicated in (c) above to
the extent provided in Section 9.03(a).
15
<PAGE>
(d) In the event that the Plan is treated as Top-Heavy for a Plan
Year, the following vesting schedule shall apply instead of
the schedule(s) elected in Section 1.07(a) for such Plan Year
and each Plan Year thereafter (check one):
(1) /x/ 100% vested after 0 (not in excess
of 3) Years of Service for Vesting.
(2) / / Years of Service Vesting Must be
for Vesting Percentage at Least
---------------------------------------------
0 ________ 0%
1 ________ 0%
2 ________ 20%
3 ________ 40%
4 ________ 60%
5 ________ 80%
6 ________ 100%
Note: If the schedule(s) elected in Section 1.07(a)
is(are) more favorable in all cases than the
schedule elected in (d) above, then the schedule(s)
in Section 1.07(a) will continue to apply even in
Plan Years in which the Plan is Top-Heavy.
1.13 TWO OR MORE PLANS--Code Section 415 limitation on annual
additions:
If the Employer maintains or ever maintained another qualified
plan in which any Participant in this Plan is (or was) a
participant or could become a participant, the Employer must
complete this section. The Employer must also complete this
section if it maintains a welfare benefit fund, as defined in
Section 419(e) of the Code, or an individual medical account, as
defined in Section 415(l)(2) of the Code, under which amounts are
treated as annual additions with respect to any Participant in
this Plan.
(a) If the Employer maintains, or maintained, any other defined
contribution plan which is not a Master or Prototype Plan,
Annual Additions for any Limitation Year to this Plan will
be limited (check one):
(1) / / in accordance with Section 5.03 of this Plan.
(2) /x/ in accordance with another method set forth on an
attached separate sheet.
(3) / / Not Applicable.
16
<PAGE>
(b) If the Employer maintains, or maintained, any defined
benefit plan(s), the sum of the Defined Contribution
Fraction and Defined Benefit Fraction for a Limitation Year
may not exceed the limitation specified in Code Section
415(e), modified by section 416(h)(1) of the Code. This
combined plan limit will be met as follows (check one):
(1) / / Annual Additions to this Plan are limited so that
the sum of the Defined Contribution Fraction and
the Defined Benefit Fraction does not exceed 1.0.
(2) / / another method of limiting Annual Additions or
reducing projected annual benefits is set forth
on an attached schedule.
(3) /X/ Not Applicable.
1.14 ESTABLISHMENT OF TRUST AND INVESTMENT DECISIONS
(a) Investment Directions
Participant Accounts will be invested (check one):
(1) / / in accordance with investment directions provided to
the Trustee by the Employer for allocating all
Participant Accounts among the options listed in
(b) below.
(2) /X/ in accordance with investment directions provided to
the Trustee by each Participant for allocating his
entire Account among the options listed in (b)
below.
(3) / / in accordance with investment directions provided to
the Trustee by each Participant for all contribution
sources in a Participant's Account except the
following sources shall be invested as directed by
the Employer (check (A) and/or (B)):
(A) / / Fixed or Discretionary Employer
Contributions
(B) / / Employer Matching Contributions
The Employer must direct the applicable sources
among the same investment options made available for
Participant directed sources listed in (b) below.
17
<PAGE>
(b) Plan Investment Options
The Employer hereby establishes a Trust under the Plan in
accordance with the provisions of Article 14, and the
Trustee signifies acceptance of its duties under Article 14
by its signature below. Participant Accounts under the
Trust will be invested among the Fidelity Funds listed below
pursuant to Participant and/or Employer directions.
Fund Name Fund Number
--------- -----------
(1) Fidelity Retirement Money Market Portfolio __________
(2) Fidelity Intermediate Bond Fund __________
(3) Fidelity Fund __________
(4) Fidelity Blue Chip Growth Fund __________
(5) Fidelity Growth Company Fund __________
(6) Fidelity US Equity Index Portfolio __________
(7) Fidelity Overseas Fund __________
(8) __________
(9) __________
(10) __________
Note: An additional annual recordkeeping fee will be
charged for each fund in excess of seven funds.
To the extent that the Employer selects as an
investment option the Managed Income Portfolio of
the Fidelity Group Trust for Employee Benefit Plans
(the "Group Trust"), the Employer hereby (A) agrees
to the terms of the Group Trust and adopts said
terms as a part of this Agreement and (B)
acknowledges that it has received from the Trustee a
copy of the Group Trust, the Declaration of Separate
Fund for the Managed Income Portfolio of the Group
Trust, and the Circular for the Managed Income
Portfolio.
Note: The method and frequency for change of
investments will be determined under the rules
applicable to the selected funds or, if applicable,
the rules of the Employer adopted in accordance with
Section 6.03. Information will be provided
regarding expenses, if any, for changes in
investment options.
18
<PAGE>
1.15 RELIANCE ON OPINION LETTER
An adopting Employer may not rely on the opinion letter issued by
the National Office of the Internal Revenue Service as evidence
that this Plan is qualified under Section 401 of the Code.
If the Employer wishes to obtain reliance that his or her Plan(s)
are qualified, application for a determination letter should be
made to the appropriate Key District Director of the Internal
Revenue Service. Failure to fill out the Adoption Agreement
properly may result in disqualification of the Plan.
This Adoption Agreement may be used only in conjunction with
Fidelity Prototype Plan Basic Plan Document No. 07. The
Prototype Sponsor shall inform the adopting Employer of any
amendments made to the Plan or of the discontinuance or
abandonment of the prototype plan document.
1.16 PROTOTYPE INFORMATION:
Name of Prototype Sponsor: Fidelity Management & Research Co.
Address of Prototype Sponsor: 82 Devonshire Street
Boston, MA 02109
Questions regarding this prototype document may be directed to
the following telephone number:
1-(800) 343-9184.
19
<PAGE>
EXECUTION PAGE
(Employer's Copy)
IN WITNESS WHEREOF, the Employer has caused this Adoption Agreement
to be executed this 27th day of December , 1996.
Employer Risk Capital Reinsurance Company
By /s/ Peter A. Appel
Title Managing Director, General Counsel
and Secretary
Employer Risk Capital Reinsurance Company
By /s/ Paul J. Malvasio
Title Managing Director, Chief Financial
Officer and Treasurer
Accepted by
Fidelity Management Trust Company, as Trustee
By /s/ Wayne Isaacs Date Feb. 10, 1997
Title Sr. Legal Counsel/Authorized Signatory
20
<PAGE>
Attachment to the Risk Capital Reinsurance Company Employee Savings Plan
Addendum to Section 1.13(a)(2): Any Excess Annual Additions
shall be disposed of from this Plan as follows: first, distribute
unmatched 401(k) Deferral Contributions; and second, distribute
matched 401(k) Deferral Contributions and forfeit any associated
Matching Contributions.
21
<PAGE>
EXHIBIT 10.14.2
RISK CAPITAL REINSURANCE COMPANY
EXECUTIVE SUPPLEMENTAL NON-QUALIFIED
SAVINGS AND RETIREMENT PLAN
AMENDMENT TO ADOPTION AGREEMENT
Rider 3
With respect to annual incentive bonuses payable in 1997
for the 1996 Plan Year, the Employer shall make an additional
Deferral Contribution on behalf of each Participant who has
entered into an agreement with the Employer to defer an amount
from such bonus, such amount not to exceed $20,000. With respect
to the 1996 Plan Year only, the Employer shall make an additional
Deferral Contribution on behalf of each Participant who has
entered into an agreement with the Employer to defer an amount
from his or her Compensation, such amount not to exceed $50,000.
With respect to Plan Years beginning after 1996, the Employer
shall make an additional Deferral Contribution on behalf of each
Participant who has entered into an agreement with the Employer
to defer an amount from his or her Compensation for the Plan Year
and/or his or her annual incentive bonus for the Plan Year
(whether paid in the Plan Year or a subsequent year), such
aggregate amount not to exceed $50,000. All additional Deferral
Contributions set forth in this paragraph shall not be eligible
for Matching Contributions under Section 1.05(b) hereof.
Rider 5
1.05(c) Additional Contributions.
The Employer shall make an Additional Contribution in
accordance with Section 4.04 on behalf of each Participant in
an amount equal to 8% (eight percent) of the Participant's
Excess Compensation.
Employer: Risk Capital Reinsurance
Company
By: /s/ Paul J. Malvasio
Title: Managing Director, Chief
Financial Officer and Treasurer
Date: December 4, 1996
22
EXHIBIT 23
Consent of Independent Accountants
We hereby consent to 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 February 7, 1997
appearing on page F-2 of this Form 10-K. We also consent to the
incorporation by reference of our report dated February 7, 1997
on the Financial Statement Schedules, which appears on page S-1
of this Form 10-K.
Price Waterhouse LLP
New York, New York
March 28, 1997
23
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Mark D. Mosca,
Paul J. Malvasio and Peter A. Appel, and each of them, with full
power to act without the other, his true and lawful attorney-
in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any
and all capacities, to sign the Annual Report of Risk Capital
Holdings, Inc. on Form 10-K for the fiscal year ended December
31, 1996, including one or more amendments to such Form 10-K,
which amendments may make such changes as such person deems
appropriate, and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and
perform each and every act and thing requisite and necessary
fully to all intents and purposes as he might or could do in
person thereby ratifying and confirming all that said attorneys-
in-fact and agents or any of them, or their or his substitutes or
substitute, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power-
of-Attorney on the date set opposite his respective name.
Signature Title Date
- --------- ----- ----
/s/ Mark D. Mosca President and March 17, 1997
- ---------------------------- Director
Mark D. Mosca (Principal
Executive Officer)
/s/ Robert Clements Chairman and March 17, 1997
- ---------------------------- Director
Robert Clements
/s/ Paul J. Malvasio Chief Financial March 17, 1997
- ---------------------------- Officer and
Paul J. Malvasio Treasurer
(Principal
Financial Officer
and Principal
Accounting Officer)
/s/ Michael P. Esposito, Jr. Director March 17, 1997
- ----------------------------
Michael P. Esposito, Jr.
/s/ Allan W. Fulkerson Director March 17, 1997
- ----------------------------
Allan W. Fulkerson
/s/ Lewis L. Glucksman Director March 17, 1997
- ----------------------------
Lewis L. Glucksman
/s/ Ian R. Heap Director March 17, 1997
- ----------------------------
Ian R. Heap
/s/ Thomas V. A. Kelsey Director March 17, 1997
- ----------------------------
Thomas V. A. Kelsey
/s/ Mark N. Williamson Director March 17, 1997
- ----------------------------
Mark N. Williamson
/s/ Philip L. Wroughton Director March 17, 1997
- ----------------------------
Philip L. Wroughton
24
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
RISK CAPITAL HOLDINGS, INC
Article 7 of Regulation S-X
Insurance Companies
One year period ended December 31, 1996
(Dollars in thousands, except per share amounts)
This schedule contains summary financial information extracted from the Annual
Report in Form 10-K for the year ended December 31, 1996 of Risk Capital
Holdings, Inc., and is qualified in its entirely by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 140381
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 146207
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 391474
<CASH> 1466
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 7018
<TOTAL-ASSETS> 432486
<POLICY-LOSSES> 20770
<UNEARNED-PREMIUMS> 37348
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 170
<OTHER-SE> 352043
<TOTAL-LIABILITY-AND-EQUITY> 432486
35761
<INVESTMENT-INCOME> 13151
<INVESTMENT-GAINS> 1259
<OTHER-INCOME> 0
<BENEFITS> 24079
<UNDERWRITING-AMORTIZATION> 10197
<UNDERWRITING-OTHER> 11285
<INCOME-PRETAX> 4610
<INCOME-TAX> 337
<INCOME-CONTINUING> 4112
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4112<F1>
<EPS-PRIMARY> .24
<EPS-DILUTED> .24
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 3831
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 20770
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>40 - Includes Equity in net loss of investee of ($161)
</FN>
</TABLE>
