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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
Or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ___________________ to _____________________
Commission file number: 0-26456
RISK CAPITAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1424716
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 Horseneck Lane
Greenwich, Connecticut 06830
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (203) 862-4300
--------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock.
Class Outstanding at September 30, 1998
----- ---------------------------------
Common Stock, $.01 par value 17,066,283
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<PAGE>
RISK CAPITAL HOLDINGS, INC.
INDEX
Page No.
--------
PART I. Financial Information
Item 1 - Consolidated Financial Statements
Review Report of Independent Accountants 1
Consolidated Balance Sheet 2
September 30, 1998 and December 31, 1997
Consolidated Statement of Income and Comprehensive Income 3
For the three and nine month periods ended
September 30, 1998 and 1997
Consolidated Statement of Changes in Stockholders' Equity 4
For the nine month periods ended September 30, 1998
and 1997
Consolidated Statement of Cash Flows 5
For the nine month periods ended September 30, 1998
and 1997
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial
Condition And Results of Operations 15
PART II. Other Information
Item 6 - Exhibits and Reports on Form 8-K 24
Signatures 25
<PAGE>
Review Report of Independent Accountants
To the Board of Directors and Stockholders of
Risk Capital Holdings, Inc.
We have reviewed the accompanying interim consolidated balance sheet of Risk
Capital Holdings, Inc. and its subsidiary as of September 30, 1998, and the
related consolidated statements of income and comprehensive income, of changes
in stockholders' equity and of cash flows for the period from January 1, 1998 to
September 30, 1998. This financial information is the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial information for it to be in
conformity with generally accepted accounting principles.
We previously audited, in accordance with generally accepted auditing standards,
the consolidated balance sheet as of December 31, 1997, and the related
consolidated statements of income, of retained earnings, and of cash flows for
the year then ended (not presented herein), and in our report dated January 30,
1998 we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 1997, is fairly stated
in all material respects in relation to the consolidated balance sheet from
which it has been derived.
PricewaterhouseCoopers LLP
New York, New York
October 23, 1998
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(in thousands, except per share data)
(Unaudited)
September 30, December 31,
1998 1997
-------- ---------
ASSETS
Investments:
Fixed maturities $ 175,502 $ 132,159
(amortized cost: 1998, $173,483; 1997, $129,887)
Publicly traded equity securities 178,788 180,052
(cost: 1998, $134,782; 1997, $116,258)
Privately held securities 143,978 95,336
(cost: 1998, $113,569; 1997, $77,550)
Short-term investments 50,160 89,167
--------- ---------
Total investments 548,428 496,714
--------- ---------
Cash 4,685 9,014
Accrued investment income 3,395 2,781
Premiums receivable 82,957 47,507
Reinsurance recoverable 24,033
Deferred policy acquisition costs 22,698 17,292
Other assets 24,033 7,939
--------- ---------
Total Assets $ 710,229 $ 581,247
========= =========
LIABILITIES
Claims and claims expenses $ 177,262 $ 70,768
Unearned premiums 95,157 74,234
Contingent commissions payable 2,561 682
Reinsurance balances payable 7,162 211
Investment accounts payable 4,745 1,996
Deferred income tax liability 18,834 25,090
Other liabilities 9,381 7,235
--------- ---------
Total Liabilities 315,102 180,216
--------- ---------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value:
20,000,000 shares authorized (none issued)
Common stock, $.01 par value:
80,000,000 shares authorized
(1998, 17,080,365; 1997, 17,069,845 shares issued) 171 171
Additional paid-in capital 341,461 341,162
Deferred compensation under stock award plan (1,190) (1,778)
Retained earnings 5,267 7,170
Less treasury stock, at cost (1998, 14,082; 1997,
11,383 shares) (264) (198)
Accumulated other comprehensive income consisting of
unrealized appreciation of investments,
net of income tax 49,682 54,504
--------- ---------
Total Stockholders' Equity 395,127 401,031
--------- ---------
Total Liabilities & Stockholders' Equity $ 710,229 $ 581,247
========= =========
See Notes to Consolidated Financial Statements.
2
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
(in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Premiums and Other Revenues
Net premiums written $ 66,628 $ 34,906 $ 163,572 $ 98,862
Increase in unearned premiums (13,958) (10,251) (20,923) (33,234)
------------ ------------ ------------ ------------
Net premiums earned 52,670 24,655 142,649 65,628
Net investment income 3,995 3,798 11,930 10,774
Net investment gains (losses) (425) 4,062 2,922 3,617
------------ ------------ ------------ ------------
Total revenues 56,240 32,515 157,501 80,019
Expenses
Claims and claims expenses 51,407 18,041 116,891 45,992
Commissions and brokerage 10,640 6,217 33,295 17,740
Other operating expenses 3,935 3,281 12,265 10,188
Foreign exchange (gain) loss (648) 116 (588) 654
------------ ------------ ------------ ------------
Total expenses 65,334 27,655 161,863 74,574
Income Before Income Taxes and Equity
In Net Income (Loss) of Investees (9,094) 4,860 (4,362) 5,445
Federal income taxes:
Current (2,721) 507 1,150 1,182
Deferred (788) 930 (3,642) (7)
------------ ------------ ------------ ------------
Income tax expense (benefit) (3,509) 1,437 (2,492) 1,175
------------ ------------ ------------ ------------
Income Before Equity in Net Income
(Loss) of Investees (5,585) 3,423 (1,870) 4,270
Equity in net income (loss) of
investees (1,046) (168) (33) (473)
------------ ------------ ------------ ------------
Net Income (Loss) (6,631) 3,255 (1,903) 3,797
------------ ------------ ------------ ------------
Other Comprehensive Income (Loss), Net
of Tax
Change in net unrealized appreciation,
(depreciation) of investments, net of tax (13,991) 13,391 (4,822) 38,970
------------ ------------ ------------ ------------
Comprehensive Income (Loss) ($ 20,622) $ 16,646 ($ 6,725) $ 42,767
============ ============ ============ ============
Average shares outstanding
Basic 17,065,739 17,034,977 17,061,975 17,027,778
Diluted 17,845,152 17,494,435 17,825,517 17,046,362
Per Share Data
Net Income (Loss) - Basic ($0.39) $0.19 ($0.11) $0.22
- Diluted ($0.39) $0.19 ($0.11) $0.22
Comprehensive Income (Loss) - Basic ($1.21) $0.98 ($0.39) $2.51
- Diluted ($1.21) $0.95 ($0.39) $2.51
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
(Unaudited)
Nine Months Ended
September 30,
1998 1997
--------- ---------
Common Stock
Balance at beginning of year $ 171 $ 170
Issuance of common stock
--------- ---------
Balance at end of period 171 170
--------- ---------
Additional Paid-in Capital
Balance at beginning of year 341,162 340,435
Issuance of common stock 299 280
--------- ---------
Balance at end of period 341,461 340,715
--------- ---------
Deferred Compensation Under Stock Award Plan
Balance at beginning of year (1,778) (2,959)
Restricted common stock issued (221) (280)
Compensation expense recognized 809 1,398
--------- ---------
Balance at end of period (1,190) (1,841)
--------- ---------
Retained Earnings
Balance at beginning of year 7,170 5,131
Net income (loss) (1,903) 3,797
--------- ---------
Balance at end of period 5,267 8,928
--------- ---------
Treasury Stock, At Cost
Balance at beginning of year (198)
Purchase of treasury stock (66) (178)
--------- ---------
Balance at end of period (264) (178)
--------- ---------
Accumulated Other Comprehensive Income Consisting of
Unrealized Appreciation (Depreciation) of
Investments, Net of Income Tax
Balance at beginning of year 54,504 9,436
Change in unrealized appreciation (depreciation) (4,822) 38,970
--------- ---------
Balance at end of period 49,682 48,406
--------- ---------
Total Stockholders' Equity
Balance at beginning of year 401,031 352,213
Issuance of common stock 299 280
Change in deferred compensation 588 1,118
Net income (loss) (1,903) 3,797
Purchase of treasury stock (66) (178)
Change in unrealized appreciation (depreciation)
of investments, net of income tax (4,822) 38,970
--------- ---------
Balance at end of period $ 395,127 $ 396,200
========= =========
See Notes to Consolidated Financial Statements.
4
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
Nine Months Ended
September 30,
1998 1997
-------- --------
OPERATING ACTIVITIES
Net income (loss) ($ 1,903) $ 3,797
Adjustments to reconcile net income
to net cash provided by operating activities:
Liability for claims and claims expenses 106,494 31,963
Unearned premiums 20,923 33,953
Premiums receivable (35,450) (23,627)
Accrued investment income (614) (555)
Contingent commissions, net (1,094) 3,230
Reinsurance balances, net (17,083) (1,086)
Deferred policy acquisition costs (5,406) (8,482)
Net investment gains (2,922) (3,617)
Deferred income tax asset (3,660) (261)
Other liabilities 2,146 (667)
Other items, net (13,890) (3,966)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 47,541 30,682
--------- ---------
INVESTING ACTIVITIES
Purchases of fixed maturity investments (216,789) (172,367)
Sales of fixed maturity investments 176,925 172,973
Net (purchases)/sales of short-term investments 41,142 (2,830)
Purchases of equity securities (102,057) (55,853)
Sales of equity securities 49,097 30,740
Purchases of furniture and equipment (200) (543)
--------- ---------
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES (51,882) (27,880)
--------- ---------
FINANCING ACTIVITIES
Common stock issued 299 280
Purchase of treasury stock (66) (178)
Deferred compensation on restricted stock (221) (280)
--------- ---------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 12 (178)
--------- ---------
Increase (decrease) in cash (4,329) 2,624
Cash beginning of year 9,014 1,466
--------- ---------
Cash end of period $ 4,685 $ 4,090
--------- ---------
See Notes to Consolidated Financial Statements.
5
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Risk Capital Holdings, Inc. ("RCHI"), incorporated in March 1995 under the laws
of the State of Delaware, is a holding company whose wholly owned subsidiary,
Risk Capital Reinsurance Company ("Risk Capital Reinsurance"), a Nebraska
corporation, was formed to provide, 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 an aggregate of 16,750,625 shares of
RCHI's common stock, par value $.01 per share (the "Common Stock"), at $20 per
share, and the issuance of warrants, RCHI was capitalized with net proceeds of
approximately $335.0 million, of which $328.0 million was contributed to the
statutory capital of Risk Capital Reinsurance.
Class A warrants to purchase an aggregate of 2,531,079 shares of Common Stock
and Class B warrants to purchase an aggregate of 1,920,601 shares of Common
Stock were issued in connection with the direct sales. Class A warrants are
immediately exercisable at $20 per share and expire September 19, 2002. Class B
warrants are exercisable at $20 per share during the seven year period
commencing September 19, 1998, provided that the Common Stock has traded at or
above $30 per share for 20 out of 30 consecutive trading days.
In July 1998, Risk Capital Reinsurance capitalized its wholly owned subsidiary,
Cross River Insurance Company ("Cross River"), with $20 million. Cross River
received its Nebraska insurance license in October 1998 and intends to seek
authorization to operate in most other states as an excess and surplus lines
insurer.
2. GENERAL
The accompanying interim consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and in the opinion of
management, reflect all adjustments necessary (consisting of normal recurring
accruals) for a fair presentation of results for such periods. These
consolidated financial statements should be read in conjunction with the 1997
consolidated financial statements and related notes contained in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997.
3. COMPREHENSIVE INCOME
In presenting its financial statements, the Company has adopted the reporting of
comprehensive income in a one financial statement approach, consistent with
Statement of Financial Accounting Standards No. 130 of the Financial Accounting
Standards Board ("FASB"). Comprehensive income is comprised of net income and
other comprehensive income, which for the Company consists of the change in net
unrealized appreciation or depreciation of investments, net of tax. In addition,
prior periods have been reclassified to reflect the new accounting standard in
order to make prior results comparable to current reporting.
Comprehensive income for the Company consists of net income (loss) and the
change in unrealized appreciation or depreciation, net of income tax, as
follows:
6
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. COMPREHENSIVE INCOME (Cont'd)
(In thousands)
Nine Months Ended
September 30,
1998 1997
---------- ------------
Net income (loss) ($ 1,903) $ 3,797
Other comprehensive income, net of tax:
Unrealized appreciation (depreciation) of
investments:
Unrealized holdings gains arising during
period (2,923) 41,321
Less, reclassification adjustment for
net realized (gains) losses included in
net income (1,899) (2,351)
-------- --------
Other comprehensive income (loss) (4,822) 38,970
-------- --------
Comprehensive income (loss) ($ 6,725) $ 42,767
======== ========
4. EARNINGS PER SHARE DATA
Earnings per share are computed in accordance with FASB Statement No. 128
"Earnings Per Share" which was retroactively adopted in the 1997 fourth quarter.
All earnings per share amounts for all periods have been presented and, where
appropriate, restated to conform to the new accounting requirements.
Basic earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of shares of
Common Stock outstanding for the periods. Diluted earnings per share reflect the
potential dilution that could occur if Class A and B warrants and employee stock
options were exercised or converted into Common Stock. Diluted per share amounts
are computed using basic average shares outstanding when a loss occurs since the
inclusion of dilutive securities in dilutive earnings per share would be
anti-dilutive.
The following table sets forth the computation of basic and diluted earnings per
share:
(In thousands, except share data)
Nine Months Ended
September 30,
1998 1997
------------ ------------
Net Income
Basic Earnings Per Share:
Net income (loss) ($1,903) $3,797
Divided by:
Weighted average shares outstanding for
the period 17,061,975 17,027,778
Basic earnings (loss) per share ($0.11) $0.22
Diluted Earnings Per Share:
Net income (loss) ($1,903) $3,797
Divided by:
Weighted average shares outstanding for
the period 17,061,975 17,027,778
Effect of dilutive securities:
Warrants
Employee stock options 18,584
------------ ------------
Total shares 17,061,925 17,046,362
============ ============
Diluted earnings (loss) per share ($0.11) $0.22
7
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. EARNINGS PER SHARE DATA (Cont'd)
(In thousands, except share
data)
Nine Months Ended
September 30,
1998 1997
----------------- ---------------
Comprehensive Income
Basic Earnings Per Share:
Comprehensive income (loss) ($6,725) $42,767
Divided by:
Weighted average shares outstanding for
the period 17,061,975 17,027,778
Basic earnings (loss) per share ($0.39) $2.51
Diluted Earnings Per Share:
Comprehensive income (loss) ($6,725) $42,767
Divided by:
Weighted average shares outstanding for
the period 17,061,975 17,027,778
Effect of dilutive securities:
Warrants
Employee stock options 18,584
------------ ------------
Total shares 17,061,975 17,046,362
============ ============
Diluted earnings (loss) per share ($0.39) $2.51
5. INVESTMENT INFORMATION
The Company classifies all of its publicly traded fixed maturity and equity
securities as "available for sale" and accordingly, they are carried at
estimated fair value. The fair value of publicly traded fixed maturity
securities and publicly traded equity securities is estimated using quoted
market prices or dealer quotes. Short-term investments, which have a maturity of
one year or less at the date of acquisition, are carried at cost, which
approximates fair value.
All of the Company's publicly traded equity securities and privately held
securities were issued by insurance and reinsurance companies or companies
providing services to the insurance industry. At September 30, 1998, the
publicly traded equity portfolio consisted of 17 investments, with estimated
fair values ranging individually from $500,000 to $30.9 million.
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.
8
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENT INFORMATION (Cont'd)
The estimated fair value of investments in privately held securities, other than
those carried under the equity method or those with quoted market values, 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 Marsh & McLennan
Capital, Inc., its equity investment advisor.
Privately held securities consisted of the following:
(In thousands)
September 30, December 31,
1998 1997
------------ ------------
Carried under the equity method:
Arbor Acquisition Corp. (Montgomery &
Collins, Inc.) $ 3,573
The ARC Group, LLC 8,868 $ 10,341
Arx Holding Corp. 2,385 2,425
Capital Protection Insurance Services, LLC 1,223 182
First American Financial Corporation 9,415 6,572
Island Heritage Insurance Company, Ltd. 3,145 3,950
LARC Holdings, Ltd. 25,764 24,496
New Europe Insurance Ventures 622 730
Providers' Assurance Corporation 1,112 3,637
Sunshine State Holding Corporation 1,588 1,424
-------- --------
Sub-total 57,695 53,757
-------- --------
Carried at fair value:
Altus Holdings, Ltd. 6,667
Annuity and Life Re (Holdings), Ltd. 23,692
GuideStar Health Systems, Inc. 1,000 1,000
Peregrine Russell Miller Insurance
Investment Fund of Asia Limited 4,399
Sovereign Risk Insurance Ltd. 246 246
Stockton Holdings Limited 10,000
Terra Nova (Bermuda) Holdings, Ltd. 23,760 23,250
TRG Associates, LLC 4,875 4,875
Venton Holdings, Ltd. 16,043 7,809
-------- --------
Sub-total 86,283 41,579
-------- --------
Total $143,978 $ 95,336
======== ========
During the nine month period ended September 30, 1998, the Company received a
special and a regular distribution from The ARC Group, LLC totaling $2.6 million
and dividend distributions by (i) Terra Nova (Bermuda) Holdings, Ltd. of
$102,000 and (ii) TRG Associates, LLC of $103,000.
At September 30, 1998, the Company had investment commitments relating to its
privately held securities totaling approximately $15.0 million, compared to
$22.6 million at December 31, 1997.
Set forth below is certain information relating to the Company's private
investment activity for the nine month period ended September 30, 1998:
9
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENT INFORMATION (Cont'd)
Altus Holdings, Ltd.
In March 1998, the Company purchased for $10 million an approximately 28.3%
economic interest (9.9% voting interest) in Altus Holdings, Ltd. ("Altus"), a
new Cayman Islands company formed to provide rent-a-captive and other
underwriting management services for risks of individual corporations and
insurance programs developed by insurance intermediaries. The Company's
investment was funded through two-thirds cash and one-third through a letter of
credit. The balance of the $35 million of initial capital invested in Altus was
contributed by The Trident Partnership, L.P. ("Trident"), EXEL Limited, Marsh &
McLennan Risk Capital Holdings, Ltd. ("MMRCH") and members of Altus' management.
The Company may provide reinsurance capacity for business developed by Altus.
The Company issued a letter of credit in the amount of $5.8 million for
Trident's unfunded investment commitment in Altus for an annual fee of $58,000,
or 100 basis points on the letter of credit amount.
Annuity and Life Re (Holdings), Ltd.
In April 1998, the Company acquired for approximately $20 million a minority
interest in Annuity and Life Re (Holdings), Ltd. ("Annuity and Life Re"), a new
Bermuda-based reinsurance company formed to provide annuity and life
reinsurance. The Company's investment was made concurrently with the
consummation of Annuity and Life Re's initial public offering. The Company
purchased approximately 1.4 million common shares of Annuity and Life Re and
warrants to purchase at an exercise price of $15.00 per share (the initial
public offering price) an additional 100,000 common shares. The aggregate
purchase price paid by the Company was based on a price of $14.10 for a unit
consisting of one common share and certain warrants. The Company owns
approximately 5.6% of the outstanding common shares of Annuity and Life Re
following the exercise of the underwriters' over-allotment option. Annuity and
Life Re's common shares are quoted on The Nasdaq Stock Market's National Market
under the symbol "ALREF." The Company is subject to a one-year lock-up period
and therefore carries this investment at a discount to its current market price
until such restriction expires in April 1999.
Arbor Acquisition Corp. (Montgomery & Collins, Inc.)
In March 1998, the Company purchased for approximately $2.8 million a 34.5%
economic and voting interest in Arbor Acquisition Corp. ("Arbor"), the parent of
Montgomery & Collins, Inc., a Boston-based national surplus lines and wholesale
brokerage firm which operates in 11 cities, in addition to Boston. The
investment was made concurrently with investments by MMRCH and Rufus Williams, a
former partner and director of Johnson & Higgins and former Chief Executive
Officer of Henry Ward Johnson & Company, Johnson & Higgins' excess and surplus
brokerage operation. In the third quarter of 1998, Risk Capital Reinsurance
invested an additional $845,000 in Arbor.
First American Financial Corporation
In June 1998, the Company invested an additional $3.8 million in First American
Financial Corporation ("FAFC"), bringing the total investment to $10 million,
representing an approximately 38% interest. The investment was made in
connection with the purchase by Trident of the remaining approximately 62% of
the outstanding capital stock of FAFC. FAFC is a holding company for First
American Insurance Company ("FAIC"), an insurer located in Kansas City,
Missouri. FAIC is rated A- by A.M. Best and writes commercial and private
passenger automobile liability and automobile physical damage, with emphasis
placed on collateral protection.
10
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENT INFORMATION (Cont'd)
The equity in net loss of $1.0 million in the Company's 1998 nine-month results
represents its proportionate share of First American Financial Corporation's net
loss, recorded on a quarter lag basis, plus goodwill amortization. The loss
emanated from start-up and related costs resulting from the acquisition by The
Trident Partnership, L.P. of a majority ownership interest in First American.
The Company expects to record a similar loss in the 1998 fourth quarter, and a
loss of approximately $800,000 in 1999.
Providers' Assurance Corporation
In April 1997, the Company acquired a 34.3% economic and voting interest in
Providers' Assurance Corporation ("Providers"), a Nashville, Tennessee-based
underwriting management company with a Bermuda insurance subsidiary, for $4
million. Providers, formed in June 1995, develops and markets workers'
compensation insurance programs through joint operating arrangements with
community-based healthcare providers, and offers other workers'
compensation-related consulting services to the healthcare community. Under the
agreements with Providers, the Company has the right to provide certain
reinsurance on insurance programs developed by Providers during specified time
periods.
In the 1998 second quarter, the Company wrote down its investment in Providers
to its estimated realizable value and recorded a net realized investment loss,
net of tax, of $1.4 million, or $0.08 cents per share.
Stockton Holdings Limited
In June 1998, the Company acquired for $10 million a minority interest in
Stockton Holdings Limited ("Stockton Holdings"), a Cayman Islands insurance
holding company. Stockton Holdings conducts a world-wide reinsurance business
through its wholly owned subsidiary Stockton Reinsurance Limited, a
Bermuda-based reinsurance company writing specialty risks with a focus on finite
products. The Company's investment was made as part of a $173.5 million private
placement by Stockton Holdings.
Venton Holdings, Ltd.
During the 1998 third quarter, the Company entered into an agreement to sell one
of its privately held equity investments, Venton Holdings, Ltd. ("Venton"), to
an independent third party. At September 30, 1998, the Company increased the
carrying value of Venton from $7.8 million to $16 million to reflect the
expected transaction's net realizable value, which transaction closed on October
23, 1998. The Company's cost basis in Venton is $4.4 million. The Company had
previously increased the carrying value in June 1997 by $3.3 million to
partially reflect the purchase price paid by EXEL Limited for its 20% ownership
in Venton. The unrealized appreciation resulting from the Venton transaction
increased book value by thirty-one cents per share during the 1998 third
quarter.
6. RETROCESSION AGREEMENTS
The Company utilizes retrocession agreements for the purpose of limiting its
exposure with respect to multiple claims arising from a single occurrence or
event. The Company also participates in "common account" retrocessional
arrangements for certain treaties. Such arrangements 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.
11
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RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. RETROCESSION AGREEMENTS (Cont'd)
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 obligations
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:
(In thousands)
Nine Months Ended
September 30,
1998 1997
-------- --------
Assumed premiums written $178,794 $100,244
Ceded premiums written 15,222 1,382
-------- --------
Net premiums written $163,572 $ 98,862
======== ========
Assumed premiums earned 157,871 66,292
Ceded premiums earned 15,222 664
-------- --------
Net premiums earned $142,649 $ 65,628
======== ========
Assumed claims and claims expenses incurred 140,458 46,345
Ceded claims and claims expenses incurred 23,567 353
-------- --------
Net claims and claims expenses incurred $116,891 $ 45,992
======== ========
At September 30, 1998, the Company's balance sheet reflects reinsurance
recoverable balances as follows:
(In thousands)
September 30, December 31,
1998 1997
-------- --------
Reinsurance recoverable balances:
Unpaid claims and claim expenses $ 24,033
Ceded balances payable (7,162) ($ 211)
-------- --------
Reinsurance balances, net $ 16,871 ($ 211)
======== ========
7. STATUTORY DATA
The statutory capital and surplus of Risk Capital Reinsurance at September 30,
1998 was $361.8 million, compared to $385.0 million at December 31, 1997. The
statutory net loss for the nine month period ended September 30, 1998 was $13.8
million, compared to a net loss of $4.3 million in the prior year period.
12
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. ACCOUNTING PRONOUNCEMENTS
Derivatives and Hedging
In June 1998, the FASB issued Statement No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement requires that all derivative
financial instruments be recognized in the statement of financial position as
either assets or liabilities and measured at fair value.
If a derivative instrument is not designated as a hedging instrument, gains or
losses resulting from changes in fair values of such derivative are required to
be recognized in earnings in the period of the change. If certain conditions are
met, a derivative may be designated as a hedging instrument, in which case the
recording of the changes in fair value will depend on the specific exposure
being hedged. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes on fair
values or cash flows.
This statement is effective for fiscal years beginning after June 15, 1999, with
initial application as of the beginning of the first quarter of the applicable
fiscal year. The provisions of this statement may be applied as early as the
beginning of any fiscal quarter that begins after June 1998. Retroactive
application is prohibited.
The Company will adopt this statement in the first quarter of 2000. Generally
the Company has not invested in derivative financial instruments. However, the
Company's portfolio includes market sensitive instruments, such as
mortgage-backed securities, which are subject to prepayment risk and changes in
market value in connection with changes in interest rates. The Company's
investments in mortgage-backed securities are classified as available for sale
and are not held for trading purposes. Assuming the current investment strategy
at the time of adoption, the Company's presentation of financial information
under the new statement will not be materially different than the current
presentation.
Start-Up Costs
In April 1998, the Accounting Standards Executive Committee issued Statement of
Position ("SOP") 98-5 "Reporting on the Costs of Start-Up Activities." This
statement requires costs of start-up activities, including organization costs,
to be expensed as incurred. Unless another conceptual basis exists under other
generally accepted accounting literature to capitalize the cost of an activity,
costs of start-up activities cannot be capitalized.
Start-up activities are defined broadly as those one-time activities related to
opening a new facility, introducing a new product or service, conducting
business in a new territory, conducting business with a new class of customer or
beneficiary, initiating a new process in an existing facility or commencing some
new operation. Start-up activities also include activities related to organizing
a new entity.
SOP 98-5 is effective for fiscal years beginning after December 15, 1998. The
Company will adopt the new statement in the first quarter of 1999 as a
cumulative effect of a change in accounting principle in accordance with the
provisions of Accounting Principles Board Opinion No. 20.
The Company and its investee companies currently amortize organization and
start-up costs over a three to five year period. The Company is presently
evaluating the impact of adopting this new statement.
13
<PAGE>
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. ACCOUNTING PRONOUNCEMENTS (Cont'd)
Market Risk Sensitive Instruments
The Securities and Exchange Commission ("SEC") has amended rules and forms for
domestic and foreign issuers to clarify and expand existing disclosure
requirements for derivative financial instruments, other financial instruments
and derivative commodity instruments (collectively, "market risk sensitive
instruments"). The amendments require enhanced disclosure of accounting policies
for derivative financial instruments and derivative commodity instruments
(collectively, "derivatives"). In addition, the amendments expand existing
disclosure requirements to include quantitative and qualitative information
about market risk inherent in market risk sensitive instruments, which
disclosure will be subject to safe harbor protection under the new SEC rule.
Under SEC guidance, the new rules will be effective for the Company commencing
with filings with the SEC that include annual financial statements for fiscal
years ending after June 15, 1998. Interim information is not required until
after the first fiscal year end in which the new rules are applicable. The
Company is evaluating qualitatively and quantitatively the market risk on its
market risk sensitive instruments and derivatives for the necessary disclosures
under the new rules.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
General
The Company
Risk Capital Holdings, Inc. ("RCHI") is the holding company for Risk Capital
Reinsurance Company ("Risk Capital Reinsurance"), RCHI's wholly owned subsidiary
which is domiciled in Nebraska. (RCHI and Risk Capital Reinsurance are
collectively referred to herein as the "Company".) RCHI was incorporated in
March 1995 and commenced operations during September 1995 upon completion of its
initial public offering and related exercise of the underwriters' over-allotment
option and direct sales of an aggregate of 16,750,625 shares of RCHI's common
stock, par value $.01 per share, at $20 per share, and the issuance of warrants
(collectively, the "Offerings"). RCHI received aggregate net proceeds from the
Offerings of approximately $335.0 million, of which $328.0 million was
contributed to the capital of Risk Capital Reinsurance. On November 6, 1995,
Risk Capital Reinsurance was licensed under the insurance laws of the State of
Nebraska. In July 1998, Risk Capital Reinsurance capitalized its wholly owned
subsidiary, Cross River Insurance Company ("Cross River") with $20 million.
Cross River received its Nebraska insurance license in October 1998, and intends
to seek authorization to operate in most other states as an excess and surplus
lines insurer.
Recent Industry Performance
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 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 renewal periods through October 1, 1998 were marked by continuing
intensified competitive conditions in terms of premium rates and treaty terms
and conditions in both the property and casualty segments of the marketplace.
These conditions have been 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, relationship with its equity investment
advisor and strategic focus on generating a small number of large reinsurance
treaty transactions that may also be integrated with an equity investment in
client companies as well as its expansion into the marine and aerospace and
surety and fidelity lines of business commencing late in 1997 and early 1998
respectively.
As of October 1, 1998, the Company had 264 in-force treaties, with approximately
$213 million of estimated annualized net in-force premiums. Such in-force
premiums represent estimated annualized premiums from treaties entered into
during the 1997 and 1998 renewal periods that are expected to generate net
premiums written during calendar year 1998. All of the Company's in-force
treaties will be considered for renewal, although there can be no assurance that
such treaties will be renewed.
15
<PAGE>
Results of Operations
The Company had consolidated comprehensive loss for the nine month period ended
September 30, 1998 of $6.7 million, which was comprised of net loss of $1.9
million, and other comprehensive loss of $4.8 million, which consisted of the
change in net unrealized appreciation of investments, net of tax. Net loss for
the nine month period ended September 30, 1998 included net realized investment
gains, net of tax, of approximately $1.9 million, and equity in net loss of
investees of approximately $33,000. These amounts compare with comprehensive
income for the nine month period ended September 30, 1997 of $42.8 million,
which was comprised of net income of $3.8 million and the change in net
unrealized appreciation of investments, net of tax, of $39.0 million. Net income
for the nine month period ended September 30, 1997 included net realized
investment losses, net of tax, of $2.4 million, and equity in net loss of
investees of $473,000.
Following is a table of per share data for the nine months ended September 30,
1998 and 1997 on a net of tax basis:
Nine Months Ended
September 30,
1998 1997
----------- ---------
Basic earnings per share:
Operating income loss (1) ($0.22) $0.11
Net realized investment gains (losses) 0.11 (0.14)
Equity in net income (loss) of investees (0.03)
---------- ----------
Net income (loss) (0.11) 0.22
Change in net unrealized appreciation of investments (0.28) 2.29
---------- ----------
Comprehensive income (loss) ($0.39) $2.51
========== ==========
Average shares outstanding (000's) 17,062 17,028
========== ==========
Diluted earnings per share:
Operating income (loss) (1) ($0.22) $0.11
Net realized investment gains (losses) 0.11 (0.14)
Equity in net income (loss) of investees (0.03)
---------- ----------
Net income (loss) (0.11) 0.22
========== ==========
Comprehensive income (loss) ($0.39) $2.51
========== ==========
Average shares outstanding (000's) 17,062 17,046
========== ==========
(1) Represents net income, excluding realized net investment gains (losses)
and equity in net income (loss) of investees, net of tax.
At September 30, 1998, basic and diluted book value per share were $23.15 and
$22.54, respectively, which compare with basic and diluted book value per share
of $23.51 and $22.79, respectively, at December 31, 1997.
16
<PAGE>
Net Premiums Written
Net premiums written for the three and nine month periods ended September 30,
1998 and 1997 were as follows:
(in millions) (in millions)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1998 1997 1998 1997
--------- -------- --------- ---------
Property $ 6.2 $ 6.1 $ 25.6 $ 14.1
Casualty 18.9 18.9 50.1 50.8
Multi-line 18.9 6.6 46.5 24.6
Aviation and Space 9.8 18.1
Marine 4.7 1.3 12.0 1.3
Other 7.7 2.0 10.8 8.1
Fidelity and Surety .4 .5
------ ------ ------ ------
Total $ 66.6 $ 34.9 $163.6 $ 98.9
====== ====== ====== ======
For the nine months ended September 30 1998, quota share reinsurance and excess
of loss reinsurance amounted to approximately 82% and 18%, respectively, of the
Company's net premiums written, compared to 90% and 10%, respectively, during
the prior year period. The higher content of excess of loss business is due to
the contributions of the Marine and Aviation and Space books of business. 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.
Approximately 32% of net premiums written in the first nine months of 1998 was
from non-United States clients, compared to 29% in the first nine months of
1997. Approximately 32% of net premiums written in the first nine months of 1998
were generated from companies in which the Company has invested or committed to
invest funds. New business activity during the first nine months of 1998
reflects contributions of (i) the Company's three new specialty underwriting
units of Marine, Aviation and Space, and Fidelity and Surety and (ii) the
Company's integrated investment strategy.
Set forth below is the Company's statutory composite ratios for the nine month
periods ended September 30, 1998 and 1997:
Nine Months Ended
---------------------------------
As Excluding As 1997
Reported Aviation Reported Year
1998 1998 1997 Actual
-------- --------- -------- --------
Claims and claims expenses 81.9% 70.7% 70.1% 68.4%
Commissions and brokerage 23.7% 25.4% 26.5% 28.8%
----- ----- ----- -----
105.6% 96.1% 96.6% 97.2%
Operating expense 7.2% 8.1% 10.0% 9.1%
----- ----- ----- -----
Combined ratio 112.8% 104.2% 106.6% 106.3%
===== ===== ===== =====
The 1998 ratio as reported includes claims expenses and net reinstatement
premiums from the Company's Aviation and Space business, which was impacted
during the third quarter by the Swiss Air catastrophe and a series of satellite
losses. The Aviation and Space business increased the overall statutory
composite ratio for the 1998 third quarter, which was 123.8%, by 28.9 percentage
points. The Aviation and Space business increased the overall statutory
composite ratio for the 1998 nine month period by 8.6 points, which contributed
$26 million to the Company's pre-tax underwriting loss for the nine month period
ended September 30, 1998.
17
<PAGE>
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. The claims
and commissions and brokerage ratios reflect the Company's business mix.
Other operating expenses increased to $11.7 million for the first nine months of
1998, compared to $10.8 million for the 1997 prior year period. Assuming the
successful execution of the Company's business strategy, the Company expects
other operating expenses to grow commensurate with growing operations, but
expects other operating expenses to continue 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.
Pre-tax foreign exchange gains and losses were approximately $588,000 and
$654,000 for the nine months ended September 30, 1998 and 1997, respectively.
Such gains and losses are principally related to assets and premiums receivable
of approximately $5.8 million denominated in European Currency Units, which is
recorded separately from statutory underwriting results and therefore excluded
from the statutory composite ratio. Unhedged monetary assets and liabilities are
translated at the exchange rate in effect at the balance sheet date, with the
resulting foreign exchange gains or losses recognized in income. Such future
gains or losses are unpredictable, and could be material.
Investment Results
At September 30, 1998, approximately 41% of the Company's invested assets
consisted of fixed maturity and short-term investments, compared to 44% at the
end of 1997. Net investment income for the first nine months of 1998 was
approximately $11.9 million, compared to $10.8 million for the prior year
period.
The Company's pre-tax and net of tax investment yields in the first nine months
of 1998 were 3.6% and 2.7%, respectively, compared to 3.7% and 2.7%,
respectively, for the same prior year period. Assuming a stable interest rate
environment, the Company anticipates the 1998 yields to moderately decline as
funds invested in short-term securities are allocated into equity securities.
The amount of investment income from quarter to quarter could vary and diminish
as the Company continues to employ its strategy of investing a substantial
portion of its investment portfolio in publicly traded and privately held equity
securities of insurance companies which generally yield less current investment
income than fixed maturity investments. Unrealized appreciation or depreciation
of such investments to the extent that it occurs is recorded in a separate
component of stockholders' equity, net of related deferred income taxes. Gains
or losses are recorded in net income to the extent investments are sold, but the
recognition of such gains and losses is unpredictable and not indicative of
future operating results.
For the nine months ended September 30, 1998, the Company's equity in net loss
of investee companies was $33,000. This compares to equity in net loss of
investee companies of $473,000 in the prior year period.
Equity in net loss of investee companies for the 1998 third quarter was $1.0
million, which reflected losses from Hurricane Georges in the Caribbean that
impacted an investee company and losses from start-up and related costs
resulting from an acquisition by The Trident Partnership, L.P. of a majority
ownership interest in another investee company.
Income Taxes
The Company's effective tax rates for the first nine months of 1998 and 1997
were less than the 35% statutory rate on pre-tax operating income due to tax
exempt income and dividends received deductions. The gross deferred income tax
benefits for the first nine months of 1998 and 1997 of approximately $3.6
million and $261,000, respectively, which are assets considered recoverable from
future taxable income, resulted principally from temporary differences between
financial and taxable income. Temporary differences include, among other things,
charges for restricted stock grants which are not deductible for income tax
purposes until vested (vesting of existing restricted stock grants will occur
over a five-year period), as well as charges for a portion of unearned premiums
and claims reserves and equity in net income (loss) of investees.
18
<PAGE>
Investments
A principal component of the Company's investment strategy is investing a
significant portion of invested assets in publicly traded and privately held
equity securities, primarily issued by insurance and reinsurance companies and
companies providing services to the insurance industry. Cash and fixed maturity
investments and, if necessary, the sale of publicly traded equity securities
will be used to support shorter-term liquidity requirements.
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
lacks industry diversification and will be particularly subject to the
cyclicallity 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 and/or reinsurance companies, and net realized and
unrealized gains (losses) on investments may have a greater effect on the
Company's results of operations or stockholders' equity at the end of any fiscal
period than other insurance and/or reinsurance companies. Because the
realization of gains and losses on equity investments is not generally
predictable, such gains and losses may differ significantly from period to
period. 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 initially to generate operating losses.
Investments that are or will be included in the Company's private portfolio
include securities issued by privately held companies and securities issued by
public companies that are generally restricted as to resale or are otherwise
illiquid and do not have readily ascertainable market values. The risk of
investing in such securities is generally greater than the risk of investing in
securities of widely held, publicly traded companies. Lack of a secondary market
and resale restrictions may result in the Company's inability to sell a security
at a price that would otherwise be obtainable if such restrictions did not exist
and may substantially delay the sale of a security the Company seeks to sell.
At September 30, 1998, cash and invested assets totaled approximately $553.1
million, consisting of $54.8 million of cash and short-term investments, $175.5
million of publicly traded fixed maturity investments, $178.8 million of
publicly traded equity securities and $144.0 million of privately held
securities. Included in privately held securities are investments totaling $57.7
million which are accounted for under the equity method.
During the first nine months of 1998, the Company completed four private
investments, bringing the private equity portfolio to 18 investments, totaling
approximately $144.0 million of invested capital at September 30, 1998. The
Company also allocated approximately $30 million to its high grade taxable
portfolio (which amount included approximately $20 million invested in high
grade taxable securities through Cross River following its capitalization by
Risk Capital Reinsurance in July 1998) and $10 million to its tax exempt core
fixed income portfolio, each managed by The Putnam Advisory Company, Inc. In
addition, the Company allocated $35 million to a high yield fixed income
portfolio managed by Miller Anderson & Sherrerd, LLP ("MAS"), a subsidiary of
Morgan Stanley & Co. The objective of such portfolio is to earn a superior total
return consistent with reasonable risk through investing primarily in below
investment grade fixed income securities.
19
<PAGE>
Approximately 86% of fixed maturity and short-term investments were rated
investment grade by Moody's Investors Service, Inc. or Standard & Poor's
Corporation and have an average duration of approximately 3.6 years.
See Note 5 under the caption "Investment Information" of the accompanying Notes
to Consolidated Financial Statements for certain information regarding the
Company's privately held securities and their carrying values. During the
remainder of 1998 and over the long-term, the Company intends to continue to
maintain a substantial portion of its investments in publicly traded and
privately held equity securities.
At September 30, 1998, the publicly traded equity portfolio consisted of
investments in 17 publicly traded domestic insurers, reinsurers or companies
providing services to the insurance industry. The estimated fair values of such
investments ranged individually from $500,000 to $30.9 million.
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. The Company's portfolio includes market sensitive instruments,
such as mortgage-backed securities, which are subject to prepayment risk and
changes in market value in connection with changes in interest rates. The
Company's investments in mortgage-backed securities, which amounted to
approximately $42.4 million at September 30, 1998, or 7.7% of cash and invested
assets, are classified as available for sale and are not held for trading
purposes.
Ratings
The Company has been assigned an initial rating of "A" (Excellent) by A. M. Best
Company ("A.M. Best"). This rating is assigned by A.M. Best to companies which
A.M. Best considers to have, on balance, excellent financial strength, operating
performance and market profile when compared to established standards and a
strong ability to meet their ongoing obligations to policyholders.
The objective of A.M. Best's rating system is to provide an overall opinion of
an insurance company's ability to meet its obligations to policyholders. A.M.
Best's ratings reflect their independent opinion of the financial strength,
operating performance and market profile of an insurer relative to standards
established by A. M. Best. A.M. Best's ratings are not a warranty of an
insurer's current or future ability to meet its obligations to policyholders,
nor are they a recommendation of a specific policy form, contract, rate or claim
practice.
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 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 of Insurance (the "Nebraska Director"), Risk Capital Reinsurance cannot
pay a dividend or make a distribution (together with other dividends or
distributions paid during the preceding 12 months) that exceeds the greater of
(i) 10% of statutory surplus as of the preceding December 31 or (ii) statutory
net income from operations from the preceding calendar year not including
realized capital gains. Net income (exclusive of realized capital gains) not
previously distributed or paid as dividends from the preceding two calendar
years may be carried forward for dividends and distribution purposes. Any
proposed dividend or distribution in excess of such amount is called an
"extraordinary" dividend or distribution and may not be paid until either it has
been approved, or a 30-day waiting period has passed during which it has not
been disapproved, by the Nebraska Director.
20
<PAGE>
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.
RCHI, Risk Capital Reinsurance and Cross River 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
and Cross River make tax sharing payments to RCHI based on such allocation.
Net cash flow from operating activities for the nine months ended September 30,
1998 was $47.5 million, compared with $30.7 million for the prior year period.
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 September 30, 1998, the Company's consolidated stockholders' equity totaled
$395.1 million, or $23.15 per share. At such date, statutory surplus of Risk
Capital Reinsurance was approximately $361.8 million. Based on data available as
of June 30, 1998 from the Reinsurance Association of America, Risk Capital
Reinsurance is the twelfth largest domestic broker market oriented reinsurer as
measured by statutory surplus.
In March 1998, the National Association of Insurance Commissioners adopted the
codification of statutory accounting principles project that will generally be
applied to all insurance and reinsurance company financial statements filed with
insurance regulatory authorities as early as the 2001 statutory filings.
Although the codification is not expected to materially affect many existing
statutory accounting practices presently followed by most insurers and
reinsurers such as the Company, there are several accounting practices that will
be changed. The most significant change involves accounting for deferred income
taxes, which change would require a deferred tax liability to be recorded for
unrealized appreciation of invested assets, net of available deferred tax
assets, that would result in a reduction to statutory surplus. If this
requirement had been in effect in 1998, the statutory surplus of the Company
would have been reduced by approximately $9.8 million for a net deferred tax
liability, from $361.8 million to $352.0 million at September 30, 1998.
Accounting Pronouncements
In June 1998, the FASB issued Statement No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement is effective for fiscal
years beginning after June 15, 1999, with initial application as of the
beginning of the first quarter of the applicable fiscal year. The provisions of
this statement may be applied as early as the beginning of any fiscal quarter
that begins after June 1998. Retroactive application is prohibited. The Company
will adopt this statement in the first quarter of 2000. (See Note 8 of the
accompanying notes to the Consolidated Financial Statements of the Company.)
21
<PAGE>
In April 1998, the Accounting Standards Executive Committee issued Statement of
Position ("SOP") 98-5 "Reporting on the Costs of Start-Up Activities." This
statement requires costs of start-up activities, including organization costs,
to be expensed as incurred. SOP 98-5 is effective for fiscal years beginning
after December 15, 1998. Initial application of SOP 98-5 should be as of the
beginning of the fiscal year in which the SOP is first adopted. The Company will
apply the provisions of SOP 98-5 in the first quarter of 1999. The Company and
its investee companies currently amortize organization and start-up costs over a
three to five year period. (See Note 8 of the accompanying notes to the
Consolidated Financial Statements of the Company.)
The Securities and Exchange Commission ("SEC") has amended rules and forms for
domestic and foreign issuers to clarify and expand existing disclosure
requirements for derivative financial instruments, other financial instruments
and derivative commodity instruments (collectively, "market risk sensitive
instruments"). The amendments require enhanced disclosure of accounting policies
for derivative financial instruments and derivative commodity instruments
(collectively "derivatives"). In addition, the amendments expand existing
disclosure requirements to include quantitative and qualitative information
about market risk inherent in market risk sensitive instruments, which
disclosure will be subject to safe harbor protection under the new SEC rule.
Under SEC guidance, the new rules will be effective for the Company commencing
with filings with the SEC that include annual financial statements for fiscal
years ending after June 15, 1998. Interim information is not required until
after the first fiscal year end in which the new rules are applicable. (See Note
8 of the accompanying notes to the Consolidated Financial Statements of the
Company.)
Year 2000 Issues
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed and developed without considering the
impact of the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results by or at the year 2000. The
year 2000 issue affects virtually all companies and organizations.
The Company has instituted a comprehensive year 2000 compliance plan designed to
help avoid unexpected interruption in conducting its business. The Company's
year 2000 initiative includes the following strategic steps:
o Inventory of business systems and operating facilities;
o Assessment of potential year 2000 problems;
o Repair/replacement of non-compliant systems and facilities;
o Testing of systems and facilities; and
o Implementation of year 2000 compliant systems and facilities.
The Company has completed the assessment phase for its business systems and
operating facilities, and is currently in the remediation and testing phases to
ensure that the Company's systems and facilities are capable of processing
information for the year 2000 and beyond. The Company does not currently
anticipate any material year 2000 compliance problems with respect to its
internal business systems and operating facilities. Based on information
currently available, the cost of this internal compliance effort, while not
quantified, is not expected to have a material adverse effect on the Company's
financial position and results of operations.
However, due to the interdependent nature of systems and facilities, the Company
may be adversely impacted depending upon whether its business partners and
vendors address this issue successfully. Therefore, the Company is surveying its
key business partners and vendors in an attempt to determine their respective
level of year 2000 compliance. As part of this initiative, the Company is
evaluating the year 2000 exposures to insurers included in the Company's
investment portfolio. The effect, if any, on the Company's results of operations
from the possible failure of these entities to be year 2000 compliant is not
determinable.
22
<PAGE>
The Company has not established a contingency plan for noncompliance of its
internal systems and operating facilities as the Company does not currently
expect any material year 2000 compliance problems with respect to such systems
and facilities. At this time, the Company is not aware of any material business
partners or vendors that will not be year 2000 compliant. If the Company becomes
aware of noncompliant business partners or vendors, one option will be to
evaluate replacing the noncompliant business partners and vendors. The Company
intends to continue to assess and attempt to mitigate its risks in the event
these third parities fail to be year 2000 compliant, and will consider
appropriate contingency arrangements for such potential noncompliance by such
entities. In certain instances, the establishment of a contingency plan is not
possible or is cost prohibitive. In these situations, noncompliance by the
Company's material business partners or vendors could have a material adverse
impact on the Company's financial position and results of operation.
In addition, property and casualty reinsurance companies, like the Company, may
have underwriting exposure related to the year 2000. The year 2000 issue is a
risk for some of the Company's reinsureds and is therefore considered during the
underwriting process similar to any other risk to which the Company's clients
may be exposed. While the Company continues to review these potential exposures,
the Company is unable to determine at this time whether the adverse impact, if
any, in connection with these exposures would be material to the Company.
Cautionary Note Regarding Forward-Looking Statements
Except for the historical information and discussions contained herein,
statements included in this release may constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements address matters that involve risks, uncertainties and
other factors that could cause actual results or performance to differ
materially from those indicated in such statements. The Company believes that
these factors include, but are not limited to, acceptance in the market of the
Company's reinsurance products; competition from new products (including
products that may be offered by the capital markets); the availability of
investments on attractive terms; competition, including increased competition
(both as to underwriting and investment opportunities); changes in the
performance of the insurance sector of the public equity markets or market
professionals' views as to such sector; the amount of underwriting capacity from
time to time in the market; general economic conditions and conditions specific
to the reinsurance and investment markets in which the Company operates;
regulatory changes and conditions; rating agency policies and practices; claims
development, including as to the frequency or severity of claims and the timing
of payments; and loss of key personnel. Changes in any of the foregoing may
affect the Company's ability to realize its business strategy or may result in
changes in the Company's business strategy. The foregoing review of important
factors should not be construed as exhaustive and should be read in conjunction
with other cautionary statements that are included herein or elsewhere in the
Company's filings with the SEC. The Company undertakes no obligation to publicly
update or revise any forward-looking statement, whether as a result of new
information, future events or otherwise.
23
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit No. Description
----------- -----------
10.1 Stock Option Agreements - Executive Officers (1997 Grant)
10.2.1 Change in Control Agreement -President
10.2.2 Change in Control Agreements - Managing Directors
15 Accountants' Awareness Letter and Limitation of Liability
(regarding unaudited interim financial information)
27 Financial Data Schedule
(b) Reports on Form 8-K.
There were no reports filed on Form 8-K for the three month period ended
September 30, 1998.
Omitted from this Part II are items which are inapplicable or to which
the answer is negative for the period covered.
24
<PAGE>
SIGNATURES
================================================================================
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RISK CAPITAL HOLDINGS, INC.
-------------------------------------
(Registrant)
/s/ Mark D. Mosca
-------------------------------------
Date: November 11, 1998 MARK D. MOSCA
President and Chief Executive
Officer
/s/ Paul J. Malvasio
-------------------------------------
Date: November 11, 1998 PAUL J. MALVASIO
Chief Financial Officer
25
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.1 Stock Option Agreements - Executive Officers (1997 Grant)
10.2.1 Change in Control Agreement - President
10.2.2 Change in Control Agreements - Managing Directors
15 Accountants' Awareness Letter and Limitation of Liability
(regarding unaudited interim financial information)
27 Financial Data Schedule
Exhibit 10.1
STOCK OPTION AGREEMENTS -- EXECUTIVE OFFICERS (1997 Grant)
Each of the executive officers of Risk Capital Holdings, Inc. ("RCHI")
listed below has entered into agreements relating to an incentive stock option
("ISO") and a non-qualified stock option ("NQSO"), with RCHI that are
substantially identical in all material respects to the agreements, dated as of
November 18, 1997, between RCHI and Mark D. Mosca, copies of which are being
filed herewith in this Exhibit 10.1, except for the terms indicated below:
Executive Officer Option Shares*
- ----------------- --------------
Mark D. Mosca ISO: 4,347
NQSO: 67,753
Peter A. Appel ISO: 4,347
NQSO: 34,153
Bonnie L. Boccitto ISO: 4,347
NQSO: 34,153
Paul J. Malvasio ISO: 4,347
NQSO: 34,153
- ----------
* Such term is defined in the attached agreements.
* * * *
<PAGE>
RISK CAPITAL HOLDINGS, INC.
Incentive Stock 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 Mark D. Mosca, an officer 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 granted an option (the "Option") to
purchase 4,347 Shares (the "Option Shares") pursuant to the Plan, the terms of
which are incorporated herein by reference. The Option is granted as of November
18, 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. This Option is intended to be an incentive stock option as defined in
Section 422 of the Internal Revenue Code of 1986, as amended. However, the
Option will qualify as an incentive stock option only to the extent that the
aggregate fair market value (determined on the Date of Grant) of the Shares
(together with Shares under other incentive stock options granted by the Company
or any subsidiary to the Option Holder) for which the incentive stock options
first become exercisable in any calendar year does not exceed $100,000. Should
the fair market value exceed $100,000, the Option to the extent of such excess
shall be regarded as a non-qualified stock option.
(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, $23.00 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) below and
shall continue for ten years from the Date of Grant; thereafter the Option
Holder shall cease to have any rights in respect thereof. The right to exercise
the Option may be subject to sooner termination in the event employment with the
Company is terminated, 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. One-fifth of the Option shall become exercisable on
each of the first, second, third, fourth and fifth anniversary of the Date of
Grant, subject to paragraph (j) below; provided that such Option, to the extent
not already exercisable in full, shall become immediately and fully exercisable
(1) to the extent provided in paragraph (j) below and (2) upon a Change in
Control. 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 is then exercisable, as may be adjusted pursuant to paragraph
(g) below.
"Change in Control" means and shall be deemed to have occurred if:
<PAGE>
a. any person (within the meaning of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")), other than a
Permitted Person or an Initial Investor, is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of Voting Securities representing 35%
or more of the total voting power of all the then outstanding Voting
Securities; or
b. any Initial Investor is or becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of Voting Securities representing 50% or more of the
total voting power of all the then outstanding Voting Securities; or
c. the individuals who, as of the Date of Grant, constitute
the Board of Directors of the Company (the "Board") together with
those who become directors subsequent to such date and whose
recommendation, election or nomination for election to the Board was
approved by a vote of at least a majority of the directors then
still in office who either were directors as of such date or whose
recommendation, election or nomination for election was previously
so approved, cease for any reason to constitute a majority of the
members of the Board; or
d. the required stockholders of the Company approve a merger,
consolidation, recapitalization, liquidation, sale or disposition by
the Company of all or substantially all of the Company's assets, or
reorganization of the Company (provided that all material regulatory
approvals have been obtained), or consummation of any such
transaction, other than any such transaction which would (x) result
in at least 60% of the total voting power represented by the voting
securities of the surviving entity outstanding immediately after
such transaction being beneficially owned by the former stockholders
of the Company and (y) not otherwise be deemed a Change in Control
under subparagraphs a, b, c or e of this paragraph (f); or
e. the Board adopts a resolution to the effect that, for
purposes hereof, a Change in Control has occurred.
(i) "Initial Investors" means (A) X.L. Insurance
Company, Ltd.; (B) The Trident Partnership, L.P.; (C) Marsh &
McLennan Risk Capital Holdings, Ltd.; or (D) any
majority-owned subsidiary or parent (or equivalent in the case
of a non-corporate entity) of the foregoing.
(ii) "Permitted Persons" means (A) the Company; (B) any
Related Party; or (C) any group (as defined in Rule 13d-3
under the Exchange Act) comprised of any or all of the
foregoing.
(iii) "Related Party" means (A) a majority-owned
subsidiary of the Company; (B) a trustee or other fiduciary
holding securities under an employee benefit plan of the
Company or any majority-owned subsidiary of the Company; or
(C) a corporation owned directly or indirectly by the
stockholders of the Company in substantially the same
proportion as their ownership of Voting Securities.
(iv) "Voting Security" means any security of the Company
which carries the right to vote generally in the election of
directors.
-2-
<PAGE>
(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 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) Nontransferability. 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.
(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, in a manner acceptable to the Company,
of the Option Price for the Option Shares for which the Option is being
exercised. Payment to the Company 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, shall
be deemed acceptable. Option Shares will be issued accordingly by the Company
within 15 business days, and a share certificate dispatched to the Option Holder
within 30 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 an
employee of the Company (i) due to retirement after attainment of age 65, (ii)
due to death or disability, as determined under the Company's long-term
disability plan, or (iii) due to (A) termination by the Company without cause
(as defined in the Option Holder's employment agreement dated September 19,
1995) or (B) constructive termination (as defined below), the Option, to the
extent not already exercisable in full, shall become immediately and fully
exercisable at the time of such termination of service, and the Option may be
exercised at any time during the Option Period. Subject to paragraph (f) above,
if the Option Holder ceases to be an employee of the Company for any other
reason, the portion of the Option which is
-3-
<PAGE>
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. For purposes of this Option, service with Risk
Capital Reinsurance Company, the Company's wholly owned subsidiary, shall be
considered to be service with the Company. "Constructive termination" means the
occurrence, with respect to the Option Holder, of any of the following: (i) the
assignment of duties inconsistent with such Option Holder's position or a
significant diminution in his/her responsibilities; (ii) a reduction in such
Option Holder's base salary or bonus opportunity; (iii) the requirement that
such Option Holder work at a location outside of Fairfield County, Connecticut,
or Westchester County, New York; or (iv) the failure to provide such Option
Holder with benefits and incentive compensation opportunities at least as
favorable, in the aggregate, as the benefits and incentive compensation
opportunities available to such Option Holder immediately prior to a Change in
Control; or (v) the failure to secure the agreement of any successor corporation
or other entity to the Company to fully assume the Company's obligations under
the arrangements described herein.
(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 or such other legend as the Company deems appropriate:
"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 States 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 or such other legend deemed appropriate by the
Company 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.
-4-
<PAGE>
(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 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) No Mitigation. To the extent that the vesting of any portion of the
Option is accelerated upon a Change in Control or upon a termination of service
as provided herein, neither the Option, nor any Option Shares nor any interest
in either, shall be reduced by any compensation received by the Option Holder in
connection with any other employment.
(r) Notice of Transfer. The Option Holder agrees that, in the event he or
she disposes (whether by sale, exchange, gift or any other transfer) of any
Shares acquired by the Option Holder on exercise of this Option within two years
from the Date of Grant or within one year after the acquisition of such Shares
pursuant to this agreement, the Option Holder will notify the Company no later
than 15 days after the date of such disposition of the date and number of Shares
so disposed of by the Option Holder and any consideration received.
(s) 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:
Mark D. Mosca
[Address of Option Holder]
(t) Governing Law. This agreement 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.
(u) Entire Agreement. This agreement constitutes the entire agreement
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.
-5-
<PAGE>
(v) Counterparts. This agreement may be executed in two counterparts, each
of which shall constitute one and the same instrument.
-6-
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this agreement 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/ Mark D. Mosca
---------------------------------------
Mark D. Mosca
-7-
<PAGE>
RISK CAPITAL HOLDINGS, INC.
Non-Qualified Stock Option and Amendment Agreement
FOR GOOD AND VALUABLE CONSIDERATION, receipt of which is hereby
acknowledged, Risk Capital Holdings, Inc. (the "Company"), a Delaware
corporation, hereby grants to Mark D. Mosca, an officer 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 granted an option (the "Option") to
purchase 67,753 Shares (the "Option Shares") pursuant to the Plan, the terms of
which are incorporated herein by reference. The Option is granted as of November
18, 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, $23.00 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) below and
shall continue for seven years from the date the Option, or portion thereof,
becomes exercisable; thereafter the Option Holder shall cease to have any rights
in respect thereof. The right to exercise the Option may be subject to sooner
termination in the event employment with the Company is terminated, 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. One-fifth of the Option shall become exercisable on
each of the first, second, third, fourth and fifth anniversary of the Date of
Grant, subject to paragraph (j) below; provided that such Option, to the extent
not already exercisable in full, shall become immediately and fully exercisable
(1) to the extent provided in paragraph (j) below and (2) upon a Change in
Control. 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 is then exercisable, as may be adjusted pursuant to paragraph
(g) below.
"Change in Control" means and shall be deemed to have occurred if:
a. any person (within the meaning of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")), other than a
Permitted Person or an Initial Investor, is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of Voting Securities representing 35%
or more of the total voting power of all the then outstanding Voting
Securities; or
b. any Initial Investor is or becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of Voting Securities representing 50% or more of the
total voting power of all the then outstanding Voting Securities; or
<PAGE>
c. the individuals who, as of the Date of Grant, constitute
the Board of Directors of the Company (the "Board") together with
those who become directors subsequent to such date and whose
recommendation, election or nomination for election to the Board was
approved by a vote of at least a majority of the directors then
still in office who either were directors as of such date or whose
recommendation, election or nomination for election was previously
so approved, cease for any reason to constitute a majority of the
members of the Board; or
d. the required stockholders of the Company approve a merger,
consolidation, recapitalization, liquidation, sale or disposition by
the Company of all or substantially all of the Company's assets, or
reorganization of the Company (provided that all material regulatory
approvals have been obtained), or consummation of any such
transaction, other than any such transaction which would (x) result
in at least 60% of the total voting power represented by the voting
securities of the surviving entity outstanding immediately after
such transaction being beneficially owned by the former stockholders
of the Company and (y) not otherwise be deemed a Change in Control
under subparagraphs a, b, c or e of this paragraph (f); or
e. the Board adopts a resolution to the effect that, for
purposes hereof, a Change in Control has occurred.
(i) "Initial Investors" means (A) X.L. Insurance
Company, Ltd.; (B) The Trident Partnership, L.P.; (C) Marsh &
McLennan Risk Capital Holdings, Ltd.; or (D) any
majority-owned subsidiary or parent (or equivalent in the case
of a non-corporate entity) of the foregoing.
(ii) "Permitted Persons" means (A) the Company; (B) any
Related Party; or (C) any group (as defined in Rule 13d-3
under the Exchange Act) comprised of any or all of the
foregoing.
(iii) "Related Party" means (A) a majority-owned
subsidiary of the Company; (B) a trustee or other fiduciary
holding securities under an employee benefit plan of the
Company or any majority-owned subsidiary of the Company; or
(C) a corporation owned directly or indirectly by the
stockholders of the Company in substantially the same
proportion as their ownership of Voting Securities.
(iv) "Voting Security" means any security of the Company
which carries the right to vote generally in the election of
directors.
(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 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.
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<PAGE>
(h) Nontransferability. 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 for no consideration 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, in a manner acceptable to the Company,
of the Option Price for the Option Shares for which the Option is being
exercised. Payment to the Company 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, shall
be deemed acceptable. Option Shares will be issued accordingly by the Company
within 15 business days, and a share certificate dispatched to the Option Holder
within 30 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 an
employee of the Company (i) due to retirement after attainment of age 65, (ii)
due to death or disability, as determined under the Company's long-term
disability plan, or (iii) due to (A) termination by the Company without cause
(as defined in the Option Holder's employment agreement dated September 19,
1995) or (B) constructive termination (as defined below), the Option, to the
extent not already exercisable in full, shall become immediately and fully
exercisable at the time of such termination of service, and the Option may be
exercised at any time during the Option Period. Subject to paragraph (f) above,
if the Option Holder ceases to be an employee 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. For
purposes of this Option, service with Risk Capital Reinsurance Company, the
Company's wholly owned subsidiary, shall be considered to be service with the
Company. "Constructive termination" means the occurrence, with respect to the
Option Holder, of any of the following: (i) the assignment of duties
inconsistent with such Option Holder's position or a significant diminution in
his/her responsibilities; (ii) a reduction in such Option Holder's base salary
or bonus opportunity; (iii) the requirement that such Option Holder work at a
location outside of
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<PAGE>
Fairfield County, Connecticut, or Westchester County, New York; (iv) the failure
to provide such Option Holder with benefits and incentive compensation
opportunities at least as favorable, in the aggregate, as the benefits and
incentive compensation opportunities available to such Option Holder immediately
prior to a Change in Control; or (v) the failure to secure the agreement of any
successor corporation or other entity to the Company to fully assume the
Company's obligations under the arrangements described herein.
(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 or such other legend as the Company deems appropriate:
"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 States 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 or such other legend deemed appropriate by the
Company 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 with the rules of the
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<PAGE>
American Arbitration Association. All costs associated with any arbitration,
including all legal expenses, for both parties shall be borne by the Company.
(q) No Mitigation. To the extent that the vesting of any portion of the
Option is accelerated upon a Change in Control or upon a termination of service
as provided herein, neither the Option, nor any Option Shares nor any interest
in either, shall be reduced by any compensation received by the Option Holder in
connection with any other employment.
(r) Amendments. Paragraph (j) of the Stock Option Agreements, dated as of
September 19, 1995 and November 19, 1996 (the "Other Agreements"), between the
Company and the Option Holder, shall be hereby amended by adding at the end of
the last sentence thereof the following: "or (v) the failure to provide such
Option Holder with benefits and incentive compensation opportunities at least as
favorable, in the aggregate, as the benefits and incentive compensation
opportunities available to such Option Holder immediately prior to a Change in
Control." All other terms and provisions of the Other Agreements shall remain in
full force and effect.
(s) 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:
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If to the Company:
Risk Capital Holdings, Inc.
20 Horseneck Lane
Greenwich, CT 06830
Attn: Secretary
If to the Option Holder:
Mark D. Mosca
[Address of Option Holder]
(t) Governing Law. This agreement 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.
(u) Entire Agreement. This agreement constitutes the entire agreement
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.
(v) Counterparts. This agreement may be executed in two counterparts, each
of which shall constitute one and the same instrument.
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<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this agreement 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/ Mark D. Mosca
---------------------------------------
Mark D. Mosca
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Exhibit 10.2.1
CHANGE IN CONTROL AGREEMENT -- PRESIDENT
CHANGE IN CONTROL AGREEMENT
Agreement, made as of the 1st day of March, 1998, by and between Risk
Capital Holdings, Inc., a Delaware corporation (the "Company"), and Mark D.
Mosca (the "Executive").
WHEREAS, the Executive is a key employee of the Company or one of its
subsidiaries; and
WHEREAS, the Board of Directors of the Company (the "Board") considers the
maintenance of a sound management to be essential to protecting and enhancing
the best interests of the Company and its stockholders and recognizes that the
possibility of a change in control raises uncertainty and questions among key
employees and may result in the departure or distraction of such key employees
to the detriment of the Company and its stockholders; and
WHEREAS, the Board wishes to assure that it will have the continued
dedication of the Executive and the availability of his or her advice and
counsel notwithstanding the possibility, threat or occurrence of a bid to take
over control of the Company, and to induce the Executive to remain in the employ
of the Company; and
WHEREAS, the Executive is willing to continue to serve the Company or one
of its subsidiaries taking into account the provisions of this Agreement;
NOW, THEREFORE, in consideration of the foregoing, and the respective
covenants and agreements of the parties herein contained, the parties agree as
follows:
1. Change in Control. Benefits shall be provided hereunder only in the
event there shall have occurred a "Change in Control," as such term is defined
below, and, in the case of benefits described in Section 4 below, the
Executive's employment by the Company and its subsidiaries shall thereafter have
terminated in accordance with Section 3 below within the Protection Period. No
benefits shall be paid under Section 4 of this Agreement if the Executive's
employment terminates outside of a Protection Period.
(i) For purposes of this Agreement, a "Change in Control" shall
mean:
(A) any person (within the meaning of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")), other than a
Permitted Person or an Initial Investor, is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of Voting Securities representing 35%
or more of the total voting power of all the then outstanding Voting
Securities; or
(B) any Initial Investor is or becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of Voting Securities representing 50% or more of the
total voting power of all the then outstanding Voting Securities; or
(C) the individuals who, as of the date hereof, constitute the
Board together with those who become directors subsequent to such
date and whose recommendation, election or nomination for election
to the Board was approved by a vote of at least a majority of the
directors then still in office who either were directors as of such
date or whose recommendation, election or nomination for election
was previously so approved, cease for any reason to constitute a
majority of the members of the Board; or
<PAGE>
(D) the required stockholders of the Company approve a merger,
consolidation, recapitalization, liquidation, sale or disposition by
the Company of all or substantially all of the Company's assets, or
reorganization of the Company (provided that all material regulatory
approvals have been obtained), or consummation of any such
transaction, other than any such transaction which would (x) result
in at least 60% of the total voting power represented by the voting
securities of the surviving entity outstanding immediately after
such transaction being beneficially owned by the former stockholders
of the Company and (y) not otherwise be deemed a Change in Control
under subparagraphs (A), (B), (C) or (E) of this paragraph (i); or
(E) the Board adopts a resolution to the effect that, for
purposes hereof, a Change in Control has occurred.
(ii) The "Change in Control Date" shall be any date during the term
of this Agreement on which a Change in Control occurs.
(iii) "Initial Investors" means (A) X.L. Insurance Company, Ltd.;
(B) The Trident Partnership, L.P.; (C) Marsh & McLennan Risk Capital
Holdings, Ltd.; or (D) any majority-owned subsidiary or parent (or
equivalent in the case of a non-corporate entity) of the foregoing.
(iv) "Permitted Persons" means (A) the Company; (B) any Related
Party; or (C) any group (as defined in Rule 13d-3 under the Exchange Act)
comprised of any or all of the foregoing.
(v) "Protection Period" means the period beginning on the Change in
Control Date and ending on the second anniversary of the Change in Control
Date.
(vi) "Related Party" means (A) a majority-owned subsidiary of the
Company; (B) a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any majority-owned subsidiary of
the Company; or (C) a corporation owned directly or indirectly by the
stockholders of the Company in substantially the same proportion as their
ownership of Voting Securities.
(vii) "Voting Security" means any security of the Company which
carries the right to vote generally in the election of directors.
2. Acceleration of Vesting Upon Change in Control. All stock options and
restricted stock issued under the Company's 1995 Long Term Incentive and Share
Award Plan (or any successor plan) shall become immediately vested in full and,
in the case of stock options, immediately exercisable in full, upon a Change in
Control in accordance with the applicable restricted stock agreements and stock
option agreements.
3. Termination Following Change in Control. The Executive shall be
entitled to the benefits provided in Section 4 hereof upon any termination of
his or her employment with the Company and its subsidiaries within a Protection
Period, except a termination of employment (a) because of his or her death, (b)
because of a "Disability," (c) by the Company or any of its subsidiaries for
"Cause," or (d) by the Executive other than due to "Constructive Termination."
(i) Disability. The Executive's employment shall be deemed to have
terminated because of a "Disability" if the Executive applies for and is
determined to be eligible to receive disability benefits under the
Company's Long-Term Disability Plan.
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<PAGE>
(ii) Cause. Termination of the Executive's employment by the Company
or any of its subsidiaries for "Cause" shall mean termination by reason of
the Executive's willful engagement in conduct which involves dishonesty or
moral turpitude in connection with his or her employment and which is
demonstrably and materially injurious to the financial condition or
reputation of the Company. An act or omission shall be deemed "willful"
only if done, or omitted to be done, in bad faith and without reasonable
belief that it was in the best interest of the Company. Notwithstanding
the foregoing, the Executive shall not be deemed to have been terminated
for Cause unless and until there shall have been delivered to the
Executive a written notice of termination from the Compensation Committee
of the Board (the "Committee") after reasonable notice to the Executive
and an opportunity for him or her, together with his or her counsel, to be
heard before the Committee.
(iii) Without Cause. The Company or any of its subsidiaries may
terminate the employment of the Executive without Cause during a
Protection Period only by giving the Executive written notice of
termination to that effect. In that event, the Executive's employment
shall terminate on the last day of the month in which such notice is given
(or such later date as may be specified in such notice), and the benefits
set forth in Section 4 hereof shall be provided to the Executive.
(iv) Constructive Termination. Termination of employment by the
Executive during a Protection Period due to "Constructive Termination"
shall mean termination by the Executive subsequent to any of the
following:
(A) the assignment of duties inconsistent with the Executive's
position or a significant diminution in his/her responsibilities;
(B) a reduction in the Executive's base salary or bonus
opportunity;
(C) the requirement that the Executive work at a location
outside of Fairfield County, Connecticut, or Westchester County, New
York;
(D) the failure to provide the Executive with benefits and
incentive compensation opportunities at least as favorable, in the
aggregate, as the benefits and incentive compensation opportunities
available to the Executive immediately prior to a Change in Control;
or
(E) if the Company has failed to obtain the assumption of the
obligations contained in this Agreement by any successor as
contemplated in Section 9(c) hereof.
The Executive shall exercise his or her right to terminate employment due to
Constructive Termination by giving the Company a written notice of termination
specifying in reasonable detail the circumstances constituting such Constructive
Termination. In that event, the Executive's employment shall terminate on the
last day of the month in which such notice is given unless an earlier date is
specified in writing by the Executive. A termination of employment by the
Executive within a Protection Period shall be due to Constructive Termination if
one of the occurrences specified in this subsection (iv) shall have occurred,
notwithstanding that the Executive may have other reasons for terminating
employment, including employment by another employer which the Executive desires
to accept.
4. Benefits Upon Termination Within Protection Period. If, within a
Protection Period, the Executive's employment by the Company and its
subsidiaries shall be terminated (a) by the Company or any of its subsidiaries
other than for Cause and other than because of a Disability or death, or (b) by
the Executive due to Constructive Termination, the Executive shall be entitled
to the benefits provided for below:
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(i) The Company shall pay to the Executive, through the date of the
Executive's termination of employment, salary at the rate then in effect,
together with salary in lieu of vacation accrued to the date on which his
or her employment terminates, in accordance with the standard payroll
practices of the Company;
(ii) The Company shall pay to the Executive an amount equal to the
product of (A) the amount of the Executive's annual bonus for the year
immediately preceding the year including the Change in Control Date (or
the year immediately preceding the year including the termination date, if
higher), multiplied by (B) a fraction, the numerator of which is the
number of days elapsed in the calendar year through the date of
termination of the Executive's employment, and the denominator of which is
365; and such payment shall be made in a lump sum within 10 business days
after the date of such termination of employment;
(iii) The Company shall pay to the Executive an amount equal to 2.99
times the sum of (A) the Executive's annual base salary in effect on the
Change in Control Date (or the date of termination, if higher), and (B)
the Executive's annual bonus for the year immediately preceding the year
including the Change in Control Date (or the year immediately preceding
the year including the termination date, if higher); and such payment
shall be made in a lump sum within 10 business days after the date of such
termination of employment; and
(iv) The Company shall continue to cover the Executive and his or
her dependents under, or provide the Executive and his or her dependents
with insurance coverage no less favorable than, the Company's life,
disability, health and dental benefit plans or programs (as in effect on
the day immediately preceding the Protection Period or, at the option of
the Executive, on the date of termination of employment) for a period
equal to the lesser of (x) 36 months following the date of termination or
(y) until the Executive is provided by another employer with benefits
substantially comparable (with no preexisting condition limitations) to
the benefits provided by such plans or programs. To the extent any such
benefits cannot be provided under the benefit plans or programs of the
Company or any of its subsidiaries, the Executive will be entitled to
receive, on a monthly basis following termination, cash payments in an
amount equal to the monthly cost of such benefits. The statutory health
care continuation coverage period under Section 4980B of the Internal
Revenue Code of 1986, as amended (the "Code"), will commence at the end of
such 36-month period.
5. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any benefit, bonus,
policies or programs provided by the Company or any of its subsidiaries and for
which the Executive may qualify, nor shall anything herein limit or otherwise
affect such rights as the Executive may have under any stock option or other
agreements with the Company or any of its subsidiaries; provided, however, that
amounts payable hereunder are in lieu of any severance benefit payable under any
other severance plan or agreement of the Company or its subsidiaries in effect
on the date hereof. Amounts which are vested benefits or which the Executive is
otherwise entitled to receive under any plan, practice, policy or program of the
Company or any of its subsidiaries at or subsequent to the date of termination
of the Executive's employment shall be payable in accordance with such plan,
practice, policy or program.
6. Full Settlement; Legal Expenses. The Company's obligation to make the
payments provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company or any of its
subsidiaries may have against the Executive or others. In no event shall the
Executive be obligated to seek other employment or take any other action by way
of mitigation of the amounts payable to the Executive under any of the
provisions of this Agreement, and amounts payable hereunder will not be reduced
by compensation the Executive receives from other employment. The Company agrees
to pay, upon written demand therefor by the Executive, all legal fees and
expenses which the Executive may reasonably incur as a
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<PAGE>
result of any dispute or contest by or with the Company or others regarding the
validity or enforceability of, or liability under, any provision of this
Agreement (including as a result of any contest by the Executive about the
amount of any payment hereunder), plus in each case interest at the applicable
federal rate provided for in Section 7872(f)(2) of the Code, unless the Company
prevails on all causes of action in the dispute or contest. In any such action
brought by the Executive for damages or to enforce any provisions of this
Agreement, the Executive shall be entitled to seek both legal and equitable
relief and remedies, including, without limitation, specific performance of the
Company's obligations hereunder, in the Executive's sole discretion.
7. Limitation on Payments by the Company. Anything in this Agreement to
the contrary notwithstanding, in the event that any payment or distribution
made, or benefit provided (including, without limitation, the acceleration of
any payment, distribution or benefit and the acceleration of exercisability of
any stock option) by the Company to or for the benefit of the Executive (whether
paid or payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise) would be subject to the excise tax imposed by Section
4999 of the Code as an "excess parachute payment" (within the meaning of Section
280G of the Code), the payment set forth in Section 4(iii) hereof shall be
reduced to the smallest extent possible such that no amount payable hereunder
constitutes an "excess parachute payment" (within the meaning of Section 280G of
the Code).
8. Confidential Information. The Executive shall hold in a fiduciary
capacity for the benefit of the Company and its subsidiaries all secret or
confidential information, knowledge or data relating to the Company or any of
its subsidiaries, and their respective businesses, which shall have been
obtained by the Executive during the Executive's employment by the Company or
any of its subsidiaries (except for information, knowledge or data which shall
be or subsequently become known or generally available to the public other than
by acts of the Executive or his or her representatives in violation of this
Agreement). After the date of termination of the Executive's employment with the
Company or any of its subsidiaries, the Executive shall not, without the prior
written consent of the Company, communicate or divulge any such information,
knowledge or data to anyone other than the Company and those designated by the
Company. The Executive shall return to the Company at the time of the
termination of the Executive's employment with the Company or any of its
subsidiaries all tangible property of the Company or any its subsidiaries in the
Executive's possession, including, but not limited to, confidential information
relating to the Company or any of its subsidiaries. In the event of a breach or
threatened breach by the Executive of any provision of this Section 8, the
Executive acknowledges that the Company and its subsidiaries shall be entitled
to an injunction restraining the Executive from such act or threatened act, in
addition to monetary damages and any other available remedies. The Executive
hereby expressly consents and agrees that, for any breach or threatened breach
of any provision of this Section 8, a restraining order and/or an injunction may
be issued against the Executive in addition to any other rights the Company or
any of its subsidiaries may have with respect to such violation or breach. In no
event shall an asserted violation of the provisions of this Section 8 constitute
a basis for deferring or withholding any amounts otherwise payable to the
Executive under this Agreement. The provisions of this Section 8 shall apply to
the Executive whether or not there has been a Change in Control.
9. Successors.
(a) This Agreement is personal to the Executive and without the
prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution.
This Agreement shall inure to the benefit of and be enforceable by the
Executive's legal representatives or successors in interest.
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
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(c) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform it if no
such succession had taken place. As used in this Agreement, "Company"
shall mean the Company as hereinbefore defined and any successor to its
business and/or assets as aforesaid which assumes and agrees (or is
required hereunder to assume and agree) to perform this Agreement by
operation of law or otherwise. A subsequent Change in Control of a
successor shall be considered a Change in Control under Section 1 hereof
upon termination of Executive's employment with the successor within a
Protection Period.
10. Miscellaneous.
(a) This Agreement shall be governed by and construed in accordance
with the laws of the State of Connecticut, without reference to principles
of conflict of laws. The captions of this Agreement are not part of the
provisions hereof and shall have no force or effect. This Agreement may
not be amended or modified otherwise than by a written agreement executed
by the parties hereto or their respective successors and legal
representatives.
(b) All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive:
Mark D. Mosca
[Address of Executive]
If to the Company:
Risk Capital Holdings, Inc.
20 Horseneck Lane
Greenwich, CT 06830
Attention: General Counsel
or to such other address as either party shall have furnished to the other
in writing in accordance herewith. Notice and communications shall be
effective when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provision of this Agreement.
(d) The Company or any of its subsidiaries may withhold from any
amounts payable under this Agreement such federal, state or local taxes as
shall be required to be withheld pursuant to any applicable law or
regulation.
(e) The Executive's failure to insist upon strict compliance with
any provision hereof shall not be deemed to be a waiver of such provision
or any other provision thereof.
(f) This Agreement contains the entire understanding of the Company
and the Executive with respect to the subject matter hereof but, except as
otherwise expressly stated herein, does not supersede or override the
provisions of any stock option, employee benefit or other plan, program,
policy or practice in which the Executive is a participant or under which
the Executive is a beneficiary.
-8-
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set his/her hand and,
pursuant to the authorization from its Board of Directors, the Company has
caused this Agreement to be executed as of the date first above written.
RISK CAPITAL HOLDINGS, INC.
By: /s/ Peter A. Appel
------------------------------------------
Name: Peter A. Appel
Title: Managing Director, General Counsel
and Secretary
/s/ Mark D. Mosca
------------------------------------------
Mark D. Mosca
-9-
Exhibit 10.2.2
CHANGE IN CONTROL AGREEMENTS -- MANAGING DIRECTORS
Each of Bonnie L. Boccitto and Paul J. Malvasio, Managing Directors of
Risk Capital Holdings, Inc. ("RCHI"), have entered into a Change in Control
Agreement with RCHI that is substantially identical in all material respects to
the Change in Control Agreement, dated as of March 1, 1998, between RCHI and
Peter A. Appel, a copy of which is being filed herewith in this Exhibit 10.2.2.
* * * *
<PAGE>
CHANGE IN CONTROL AGREEMENT
Agreement, made as of the 1st day of March, 1998, by and between Risk
Capital Holdings, Inc., a Delaware corporation (the "Company"), and Peter A.
Appel (the "Executive").
WHEREAS, the Executive is a key employee of the Company or one of its
subsidiaries; and
WHEREAS, the Board of Directors of the Company (the "Board") considers the
maintenance of a sound management to be essential to protecting and enhancing
the best interests of the Company and its stockholders and recognizes that the
possibility of a change in control raises uncertainty and questions among key
employees and may result in the departure or distraction of such key employees
to the detriment of the Company and its stockholders; and
WHEREAS, the Board wishes to assure that it will have the continued
dedication of the Executive and the availability of his or her advice and
counsel notwithstanding the possibility, threat or occurrence of a bid to take
over control of the Company, and to induce the Executive to remain in the employ
of the Company; and
WHEREAS, the Executive is willing to continue to serve the Company or one
of its subsidiaries taking into account the provisions of this Agreement;
NOW, THEREFORE, in consideration of the foregoing, and the respective
covenants and agreements of the parties herein contained, the parties agree as
follows:
1. Change in Control. Benefits shall be provided hereunder only in the
event there shall have occurred a "Change in Control," as such term is defined
below, and, in the case of benefits described in Section 4 below, the
Executive's employment by the Company and its subsidiaries shall thereafter have
terminated in accordance with Section 3 below within the Protection Period. No
benefits shall be paid under Section 4 of this Agreement if the Executive's
employment terminates outside of a Protection Period.
(i) For purposes of this Agreement, a "Change in Control" shall
mean:
(A) any person (within the meaning of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")), other than a
Permitted Person or an Initial Investor, is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of Voting Securities representing 35%
or more of the total voting power of all the then outstanding Voting
Securities; or
(B) any Initial Investor is or becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of Voting Securities representing 50% or more of the
total voting power of all the then outstanding Voting Securities; or
(C) the individuals who, as of the date hereof, constitute the
Board together with those who become directors subsequent to such
date and whose recommendation, election or nomination for election
to the Board was approved by a vote of at least a majority of the
directors then still in office who either were directors as of such
date or whose recommendation, election or nomination for election
was previously so approved, cease for any reason to constitute a
majority of the members of the Board; or
(D) the required stockholders of the Company approve a merger,
consolidation, recapitalization, liquidation, sale or disposition by
the Company of all or substantially all of
<PAGE>
the Company's assets, or reorganization of the Company (provided
that all material regulatory approvals have been obtained), or
consummation of any such transaction, other than any such
transaction which would (x) result in at least 60% of the total
voting power represented by the voting securities of the surviving
entity outstanding immediately after such transaction being
beneficially owned by the former stockholders of the Company and (y)
not otherwise be deemed a Change in Control under subparagraphs (A),
(B), (C) or (E) of this paragraph (i); or
(E) the Board adopts a resolution to the effect that, for
purposes hereof, a Change in Control has occurred.
(ii) The "Change in Control Date" shall be any date during the term
of this Agreement on which a Change in Control occurs.
(iii) "Initial Investors" means (A) X.L. Insurance Company, Ltd.;
(B) The Trident Partnership, L.P.; (C) Marsh & McLennan Risk Capital
Holdings, Ltd.; or (D) any majority-owned subsidiary or parent (or
equivalent in the case of a non-corporate entity) of the foregoing.
(iv) "Permitted Persons" means (A) the Company; (B) any Related
Party; or (C) any group (as defined in Rule 13d-3 under the Exchange Act)
comprised of any or all of the foregoing.
(v) "Protection Period" means the period beginning on the Change in
Control Date and ending on the second anniversary of the Change in Control
Date.
(vi) "Related Party" means (A) a majority-owned subsidiary of the
Company; (B) a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any majority-owned subsidiary of
the Company; or (C) a corporation owned directly or indirectly by the
stockholders of the Company in substantially the same proportion as their
ownership of Voting Securities.
(vii) "Voting Security" means any security of the Company which
carries the right to vote generally in the election of directors.
2. Acceleration of Vesting Upon Change in Control. All stock options and
restricted stock issued under the Company's 1995 Long Term Incentive and Share
Award Plan (or any successor plan) shall become immediately vested in full and,
in the case of stock options, immediately exercisable in full, upon a Change in
Control in accordance with the applicable restricted stock agreements and stock
option agreements.
3. Termination Following Change in Control. The Executive shall be
entitled to the benefits provided in Section 4 hereof upon any termination of
his or her employment with the Company and its subsidiaries within a Protection
Period, except a termination of employment (a) because of his or her death, (b)
because of a "Disability," (c) by the Company or any of its subsidiaries for
"Cause," or (d) by the Executive other than due to "Constructive Termination."
(i) Disability. The Executive's employment shall be deemed to have
terminated because of a "Disability" if the Executive applies for and is
determined to be eligible to receive disability benefits under the
Company's Long-Term Disability Plan.
(ii) Cause. Termination of the Executive's employment by the Company
or any of its subsidiaries for "Cause" shall mean termination by reason of
the Executive's willful engagement in
-4-
<PAGE>
conduct which involves dishonesty or moral turpitude in connection with
his or her employment and which is demonstrably and materially injurious
to the financial condition or reputation of the Company. An act or
omission shall be deemed "willful" only if done, or omitted to be done, in
bad faith and without reasonable belief that it was in the best interest
of the Company. Notwithstanding the foregoing, the Executive shall not be
deemed to have been terminated for Cause unless and until there shall have
been delivered to the Executive a written notice of termination from the
Compensation Committee of the Board (the "Committee") after reasonable
notice to the Executive and an opportunity for him or her, together with
his or her counsel, to be heard before the Committee.
(iii) Without Cause. The Company or any of its subsidiaries may
terminate the employment of the Executive without Cause during a
Protection Period only by giving the Executive written notice of
termination to that effect. In that event, the Executive's employment
shall terminate on the last day of the month in which such notice is given
(or such later date as may be specified in such notice), and the benefits
set forth in Section 4 hereof shall be provided to the Executive.
(iv) Constructive Termination. Termination of employment by the
Executive during a Protection Period due to "Constructive Termination"
shall mean termination by the Executive subsequent to any of the
following:
(A) the assignment of duties inconsistent with the Executive's
position or a significant diminution in his/her responsibilities;
(B) a reduction in the Executive's base salary or bonus
opportunity;
(C) the requirement that the Executive work at a location
outside of Fairfield County, Connecticut, or Westchester County, New
York;
(D) the failure to provide the Executive with benefits and
incentive compensation opportunities at least as favorable, in the
aggregate, as the benefits and incentive compensation opportunities
available to the Executive immediately prior to a Change in Control;
or
(E) if the Company has failed to obtain the assumption of the
obligations contained in this Agreement by any successor as
contemplated in Section 9(c) hereof.
The Executive shall exercise his or her right to terminate employment due to
Constructive Termination by giving the Company a written notice of termination
specifying in reasonable detail the circumstances constituting such Constructive
Termination. In that event, the Executive's employment shall terminate on the
last day of the month in which such notice is given unless an earlier date is
specified in writing by the Executive. A termination of employment by the
Executive within a Protection Period shall be due to Constructive Termination if
one of the occurrences specified in this subsection (iv) shall have occurred,
notwithstanding that the Executive may have other reasons for terminating
employment, including employment by another employer which the Executive desires
to accept.
4. Benefits Upon Termination Within Protection Period. If, within a
Protection Period, the Executive's employment by the Company and its
subsidiaries shall be terminated (a) by the Company or any of its subsidiaries
other than for Cause and other than because of a Disability or death, or (b) by
the Executive due to Constructive Termination, the Executive shall be entitled
to the benefits provided for below:
(i) The Company shall pay to the Executive, through the date of the
Executive's termination of employment, salary at the rate then in effect,
together with salary in lieu of vacation
-5-
<PAGE>
accrued to the date on which his or her employment terminates, in
accordance with the standard payroll practices of the Company;
(ii) The Company shall pay to the Executive an amount equal to the
product of (A) the amount of the Executive's target annual bonus for the
year including the Change in Control Date (or the year including the
termination date, if higher), multiplied by (B) a fraction, the numerator
of which is the number of days elapsed in the calendar year through the
date of termination of the Executive's employment, and the denominator of
which is 365; and such payment shall be made in a lump sum within 10
business days after the date of such termination of employment;
(iii) The Company shall pay to the Executive an amount equal to 1.5
times the sum of (A) the Executive's annual base salary in effect on the
Change in Control Date (or the date of termination, if higher), and (B)
the Executive's target annual bonus for the year including the Change in
Control Date (or the year including the termination date, if higher); and
such payment shall be made in a lump sum within 10 business days after the
date of such termination of employment; and
(iv) The Company shall continue to cover the Executive and his or
her dependents under, or provide the Executive and his or her dependents
with insurance coverage no less favorable than, the Company's life,
disability, health and dental benefit plans or programs (as in effect on
the day immediately preceding the Protection Period or, at the option of
the Executive, on the date of termination of employment) for a period
equal to the lesser of (x) 18 months following the date of termination or
(y) until the Executive is provided by another employer with benefits
substantially comparable (with no preexisting condition limitations) to
the benefits provided by such plans or programs. To the extent any such
benefits cannot be provided under the benefit plans or programs of the
Company or any of its subsidiaries, the Executive will be entitled to
receive, on a monthly basis following termination, cash payments in an
amount equal to the monthly cost of such benefits. The statutory health
care continuation coverage period under Section 4980B of the Internal
Revenue Code of 1986, as amended (the "Code"), will commence at the end of
such 18-month period.
5. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any benefit, bonus,
policies or programs provided by the Company or any of its subsidiaries and for
which the Executive may qualify, nor shall anything herein limit or otherwise
affect such rights as the Executive may have under any stock option or other
agreements with the Company or any of its subsidiaries; provided, however, that
amounts payable hereunder are in lieu of any severance benefit payable under any
other severance plan or agreement of the Company or its subsidiaries in effect
on the date hereof. Amounts which are vested benefits or which the Executive is
otherwise entitled to receive under any plan, practice, policy or program of the
Company or any of its subsidiaries at or subsequent to the date of termination
of the Executive's employment shall be payable in accordance with such plan,
practice, policy or program.
6. Full Settlement; Legal Expenses. The Company's obligation to make the
payments provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company or any of its
subsidiaries may have against the Executive or others. In no event shall the
Executive be obligated to seek other employment or take any other action by way
of mitigation of the amounts payable to the Executive under any of the
provisions of this Agreement, and amounts payable hereunder will not be reduced
by compensation the Executive receives from other employment. The Company agrees
to pay, upon written demand therefor by the Executive, all legal fees and
expenses which the Executive may reasonably incur as a result of any dispute or
contest by or with the Company or others regarding the validity or
enforceability of, or liability under, any provision of this Agreement
(including as a result of any contest by the Executive about the amount of any
payment hereunder), plus in each case interest at the applicable federal rate
provided for in Section 7872(f)(2) of the Code, unless the Company prevails on
all causes of action in the dispute or contest.
-6-
<PAGE>
In any such action brought by the Executive for damages or to enforce any
provisions of this Agreement, the Executive shall be entitled to seek both legal
and equitable relief and remedies, including, without limitation, specific
performance of the Company's obligations hereunder, in the Executive's sole
discretion.
7. Limitation on Payments by the Company. Anything in this Agreement to
the contrary notwithstanding, in the event that any payment or distribution
made, or benefit provided (including, without limitation, the acceleration of
any payment, distribution or benefit and the acceleration of exercisability of
any stock option) by the Company to or for the benefit of the Executive (whether
paid or payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise) would be subject to the excise tax imposed by Section
4999 of the Code as an "excess parachute payment" (within the meaning of Section
280G of the Code), the payment set forth in Section 4(iii) hereof shall be
reduced to the smallest extent possible such that no amount payable hereunder
constitutes an "excess parachute payment" (within the meaning of Section 280G of
the Code).
8. Confidential Information; Nonsolicitation of Employees and Customers.
The Executive shall hold in a fiduciary capacity for the benefit of the Company
and its subsidiaries all secret or confidential information, knowledge or data
relating to the Company or any of its subsidiaries, and their respective
businesses, which shall have been obtained by the Executive during the
Executive's employment by the Company or any of its subsidiaries (except for
information, knowledge or data which shall be or subsequently become known or
generally available to the public other than by acts of the Executive or his or
her representatives in violation of this Agreement). After the date of
termination of the Executive's employment with the Company or any of its
subsidiaries, the Executive shall not, without the prior written consent of the
Company, communicate or divulge any such information, knowledge or data to
anyone other than the Company and those designated by the Company. The Executive
shall return to the Company at the time of the termination of the Executive's
employment with the Company or any of its subsidiaries all tangible property of
the Company or any its subsidiaries in the Executive's possession, including,
but not limited to, confidential information relating to the Company or any of
its subsidiaries. The Executive shall not, during the term of his employment by
the Company or any of its subsidiaries and for one year thereafter, directly or
indirectly, on behalf of the Executive or any other person or entity, (i)
induce, or seek to induce, any employee of the Company or any of its
subsidiaries to terminate employment with the Company or any of its subsidiaries
or (ii) solicit business from any person, firm or company which is (during the
period the Executive is employed by the Company or any of its subsidiaries), or
at the time of the termination of the Executive was, a customer of the Company
or any of its subsidiaries, or induce, or seek to induce, any such customer of
the Company or any of its subsidiaries to cease doing business with the Company
or any of its subsidiaries. In the event of a breach or threatened breach by the
Executive of any provision of this Section 8, the Executive acknowledges that
the Company and its subsidiaries shall be entitled to an injunction restraining
the Executive from such act or threatened act, in addition to monetary damages
and any other available remedies. The Executive hereby expressly consents and
agrees that, for any breach or threatened breach of any provision of this
Section 8, a restraining order and/or an injunction may be issued against the
Executive in addition to any other rights the Company or any of its subsidiaries
may have with respect to such violation or breach. In no event shall an asserted
violation of the provisions of this Section 8 constitute a basis for deferring
or withholding any amounts otherwise payable to the Executive under this
Agreement. The provisions of this Section 8 shall apply to the Executive whether
or not there has been a Change in Control.
9. Successors.
(a) This Agreement is personal to the Executive and without the
prior written consent of the Company shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution.
This Agreement shall inure to the benefit of and be enforceable by the
Executive's legal representatives or successors in interest.
-7-
<PAGE>
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform it if no
such succession had taken place. As used in this Agreement, "Company"
shall mean the Company as hereinbefore defined and any successor to its
business and/or assets as aforesaid which assumes and agrees (or is
required hereunder to assume and agree) to perform this Agreement by
operation of law or otherwise. A subsequent Change in Control of a
successor shall be considered a Change in Control under Section 1 hereof
upon termination of Executive's employment with the successor within a
Protection Period.
10. Miscellaneous.
(a) This Agreement shall be governed by and construed in accordance
with the laws of the State of Connecticut, without reference to principles
of conflict of laws. The captions of this Agreement are not part of the
provisions hereof and shall have no force or effect. This Agreement may
not be amended or modified otherwise than by a written agreement executed
by the parties hereto or their respective successors and legal
representatives.
(b) All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive:
Peter A. Appel
[Address of Executive]
If to the Company:
Risk Capital Holdings, Inc.
20 Horseneck Lane
Greenwich, CT 06830
Attention: Chief Financial Officer
or to such other address as either party shall have furnished to the other
in writing in accordance herewith. Notice and communications shall be
effective when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provision of this Agreement.
(d) The Company or any of its subsidiaries may withhold from any
amounts payable under this Agreement such federal, state or local taxes as
shall be required to be withheld pursuant to any applicable law or
regulation.
(e) The Executive's failure to insist upon strict compliance with
any provision hereof shall not be deemed to be a waiver of such provision
or any other provision thereof.
(f) This Agreement contains the entire understanding of the Company
and the Executive with respect to the subject matter hereof but, except as
otherwise expressly stated herein, does not supersede or override the
provisions of any stock option, employee benefit or other plan, program,
-8-
<PAGE>
policy or practice in which the Executive is a participant or under which
the Executive is a beneficiary.
-9-
<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set his/her hand and,
pursuant to the authorization from its Board of Directors, the Company has
caused this Agreement to be executed as of the date first above written.
RISK CAPITAL HOLDINGS, INC.
By: /s/ Mark D. Mosca
-----------------------------------
Name: Mark D. Mosca
Title: President
/s/ Peter A. Appel
----------------------------------
Peter A. Appel
-10-
Exhibit 15
Accountants' Awareness Letter and Limitation of Liability
We are aware of the incorporation by reference in the Registration Statement on
Form S-3 (Registration No. 33-34499) and in the Registration Statement on Form
S-8 (Registration No. 33-99974) of Risk Capital Holdings, Inc. of our report
dated October 23, 1998 (issued pursuant to the provisions of Statement on
Auditing Standards No. 71) appearing in this Form 10-Q. We are also aware of our
responsibilities under the Securities Act of 1933.
We are not subject to the liability provisions of section 11 of the Securities
Act of 1933 for our report dated October 23, 1998 (issued pursuant to the
provisions of Statement on Auditing Standards No. 71) on the unaudited interim
consolidated financial information of Risk Capital Holdings, Inc. because our
report is not a "report" or a "part" of the Registration Statement on Form S-3
(Registration No. 33-34499) or of the Registration Statement on Form S-8
(Registration No. 33-99974) prepared or certified by us within the meaning of
sections 7 and 11 of the Securities Act of 1933.
PricewaterhouseCoopers LLP
New York, New York
November 13, 1998
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
RISK CAPITAL HOLDINGS, INC.
Article 7 of Regulation S-X
Insurance Companies
Nine month period ended September 30, 1998 (Dollars in thousand,
except per share amounts )
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF RISK CAPITAL HOLDINGS, INC. AND ITS SUBSIDIARY AT
SEPTEMBER 30, 1998, AND THE RELATED STATEMENT OF INCOME, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 175,502
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 322,766
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 548,428
<CASH> 4,685
<RECOVER-REINSURE> 24,033
<DEFERRED-ACQUISITION> 22,698
<TOTAL-ASSETS> 710,229
<POLICY-LOSSES> 177,262
<UNEARNED-PREMIUMS> 95,157
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 171
<OTHER-SE> 391,956
<TOTAL-LIABILITY-AND-EQUITY> 710,229
142,649
<INVESTMENT-INCOME> 11,930
<INVESTMENT-GAINS> 2,922
<OTHER-INCOME> 0
<BENEFITS> 116,891
<UNDERWRITING-AMORTIZATION> 33,295
<UNDERWRITING-OTHER> 11,677
<INCOME-PRETAX> (4,362)
<INCOME-TAX> (2,492)
<INCOME-CONTINUING> (1,903)<F1>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,903)<F1>
<EPS-PRIMARY> (.11)<F1>
<EPS-DILUTED> (.11)<F1>
<RESERVE-OPEN> 70,768
<PROVISION-CURRENT> 116,952
<PROVISION-PRIOR> (61)
<PAYMENTS-CURRENT> 18,916
<PAYMENTS-PRIOR> 15,048
<RESERVE-CLOSE> 153,695<F2>
<CUMULATIVE-DEFICIENCY> (61)
<FN>
<F1> Includes equity in net loss of investees of $33. Net income
excludes Other Comprehensive income (loss) which the Company adopted 1st
Qtr 1998 in a one financial statement approach. Comprehensive loss was
$6,725 or $.39 per share Basic and Diluted .
<F2> Loss reserves net of reinsurance.
</FN>
</TABLE>
