1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 0-3565
CAPSURE HOLDINGS CORP.
(Exact name of Registrant as specified in its Charter)
DELAWARE 34-1010356
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
TWO NORTH RIVERSIDE PLAZA, CHICAGO, ILLINOIS 60606
(Address of principal executive offices) (Zip Code)
(312) 879-1900
(Registrant's telephone number, including area code)
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____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
15,408,749 shares of Common Stock, $.05
par value as of July 31, 1995.
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CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
INDEX
Page
----
Part I. Financial Information (Unaudited):
Item 1. Condensed Consolidated Financial Statements:
Consolidated Balance Sheets at June 30, 1995 and December 31, 1994 . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income for the Periods Ended
June 30, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements at June 30, 1995 . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
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CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
June 30, December 31,
1995 1994
----------------- -----------------
ASSETS
Invested assets and cash:
Fixed maturities:
At fair value (amortized cost: 1995 - $235,716; 1994 - $249,328) . . . . . . $ 234,476 $ 235,625
At amortized cost (fair value: 1995 - $10,912; 1994 - $10,326) . . . . . . . 10,846 10,968
Equity securities, at fair value (cost: 1995 - $27,694; 1994 - $29,774) . . . 26,241 28,205
Short-term investments, at cost which approximates fair value . . . . . . . . 36,148 22,079
Other investments, at fair value . . . . . . . . . . . . . . . . . . . . . . . 4,040 4,890
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,188 4,131
--------------- ---------------
315,939 305,898
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . 27,568 25,150
Reinsurance receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,757 39,582
Intangible assets, net of amortization . . . . . . . . . . . . . . . . . . . . . 16,718 18,031
Excess cost over net assets acquired, net of amortization . . . . . . . . . . . . 82,871 84,099
Deferred income taxes, net of valuation allowance . . . . . . . . . . . . . . . . 44,781 54,205
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,024 26,405
--------------- ---------------
$ 555,658 $ 553,370
=============== ===============
LIABILITIES
Reserves:
Unpaid losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . $ 153,343 $ 149,041
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,161 76,630
--------------- ---------------
233,504 225,671
Reinsurance payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,404 3,373
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,000 71,000
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,046 28,461
--------------- ---------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 313,954 328,505
--------------- ---------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share, 5,000,000 shares authorized;
none issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Common stock, par value $.05 per share, 20,000,000 shares authorized;
15,408,749 shares issued at June 30, 1995;
15,407,815 shares issued at December 31, 1994 . . . . . . . . . . . . . . . . 770 770
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . 179,276 179,250
Retained earnings from August 1, 1986 (date of reorganization) . . . . . . . . . 63,429 54,756
Unrealized loss on securities, net of deferred income taxes . . . . . . . . . . . (1,771) (9,830)
Treasury stock, at cost (-0- shares in 1995; 13,666 shares in 1994) . . . . . . . -- (81)
--------------- --------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . 241,704 224,865
--------------- --------------
$ 555,658 $ 553,370
=============== ==============
The accompanying notes are an integral part of these financial statements.
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CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
1995 1994 1995 1994
------------- ------------- ------------- -------------
Revenues:
Net earned premiums . . . . . . . . . . . . $ 24,164 $ 21,741 $ 48,660 $ 44,123
Net investment income . . . . . . . . . . . 5,235 4,809 10,328 9,163
Net investment gains . . . . . . . . . . . . 86 1,259 32 1,628
Other income . . . . . . . . . . . . . . . . 1 -- 5 62
------------- ------------- ------------- -------------
29,486 27,809 59,025 54,976
------------- ------------- ------------- -------------
Expenses:
Net losses and loss adjustment expenses . . 4,236 5,866 9,611 11,861
Net commissions, brokerage and
other underwriting . . . . . . . . . . . . 15,233 12,578 29,591 24,992
Interest expense . . . . . . . . . . . . . . 1,131 1,057 2,504 2,480
Write-off of unamortized deferred
loan fees . . . . . . . . . . . . . . . . . -- -- -- 1,556
Amortization of goodwill and intangibles . . 916 811 1,841 1,626
Other . . . . . . . . . . . . . . . . . . . 683 625 1,223 982
------------- ------------- ------------- -------------
22,199 20,937 44,770 43,497
------------- ------------- ------------- -------------
Income before income taxes . . . . . . . . . . 7,287 6,872 14,255 11,479
Income taxes . . . . . . . . . . . . . . . . . 2,851 2,774 5,582 4,552
------------- ------------- ------------- -------------
Net income . . . . . . . . . . . . . . . . . . $ 4,436 $ 4,098 $ 8,673 $ 6,927
============= ============= ============= =============
Weighted average common and common
equivalent shares outstanding . . . . . . . 15,402 15,086 15,398 15,065
============= ============= ============= =============
Earnings per common and common
equivalent share . . . . . . . . . . . . . . $ .28 $ .27 $ .56 $ .46
============= ============= ============= =============
The accompanying notes are an integral part of these financial statements.
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CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
Six Months Ended
June 30,
------------------------------
1995 1994
------------- -------------
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,673 $ 6,927
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . 2,562 2,209
Accretion of bond discount, net . . . . . . . . . . . . . . . . . . . . . . . . (1,541) (1,429)
Net investment gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (32) (1,628)
Changes in:
Reserve for unpaid losses and loss adjustment expenses . . . . . . . . . . . . 4,302 3,401
Reserve for unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . 3,531 2,307
Deferred income taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . 711 1,022
Other assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . (1,983) 4,640
------------- -------------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . 16,223 17,449
------------- -------------
INVESTING ACTIVITIES:
Securities available-for-sale:
Purchases - fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . (42,520) (39,859)
Sales - fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,012 --
Maturities - fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . 22,196 29,787
Purchases - equity securities . . . . . . . . . . . . . . . . . . . . . . . . . -- (25,476)
Sales - equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,593 4,748
Securities held-to-maturity:
Purchases - fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . (4,640) (1,110)
Maturities - fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . 4,200 --
Change in short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . (14,069) 35,721
Change in other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 850 119
Capital expenditures, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . (895) (916)
------------- -------------
Net cash provided by investing activities . . . . . . . . . . . . . . . . . . . . . . 3,727 3,014
------------- -------------
FINANCING ACTIVITIES:
Proceeds from long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 68,000
Principal payments on long-term debt . . . . . . . . . . . . . . . . . . . . . . . (20,000) (88,214)
Exercise of options and warrants . . . . . . . . . . . . . . . . . . . . . . . . . 107 10
------------- -------------
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . (19,893) (20,204)
------------- -------------
Increase in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 259
Cash at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,131 3,280
------------- -------------
Cash at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,188 $ 3,539
============= =============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,542 $ 1,954
Income taxes, net of refunds . . . . . . . . . . . . . . . . . . . . . . . . . $ 181 $ 130
The accompanying notes are an integral part of these financial statements.
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CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
These unaudited Consolidated Financial Statements should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
included in Capsure Holdings Corp.'s ("Capsure" or the "Company") 1994 Annual
Report on Form 10-K. The following Notes to the Consolidated Financial
Statements highlight significant changes to the Notes included in the 1994
Annual Report on Form 10-K and such interim disclosures as required by the
Securities and Exchange Commission. Certain financial information that is
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles but is not required for interim
reporting purposes has been condensed or omitted. The accompanying unaudited
Consolidated Financial Statements reflect, in the opinion of management, all
adjustments necessary for a fair presentation of the interim financial
statements. All such adjustments are of a normal and recurring nature. The
financial results for interim periods may not be indicative of financial
results for a full year. Certain reclassifications have been made to the 1994
Consolidated Financial Statements to conform with the presentation in the 1995
Consolidated Financial Statements.
2. ACQUISITIONS
On September 22, 1994, Capsure, through its wholly owned subsidiary, Capsure
Financial Group, Inc. ("CFG"), acquired all of the outstanding common stock of
Universal Surety Holding Corp. ("USHC"), the parent company of Universal
Surety of America.
The following pro forma financial information has been prepared as if the
acquisition of USHC had been consummated on January 1, 1993, at the same
purchase price, with the consolidated results of operations being adjusted for
the effects of the transaction in the same manner as subsequent to the
acquisition. In management's opinion, the pro forma financial information is
not indicative of results of operations that may have occurred had the
acquisition taken place on January 1, 1993, or of future results of operations
of the combined companies under the ownership and management of the Company.
In the following table, the amounts are in thousands except per share amounts:
Pro Forma for the Six Months
Ended June 30, 1994
-------------------
Revenues . . . . . . . . . . . . . . . . . . . . . . . . $ 61,629
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 7,553
Net income per common share . . . . . . . . . . . . . . . $ .49
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3. INVESTMENTS
The amortized cost and estimated fair value of investments at June 30, 1995
were as follows (dollars in thousands):
Amortized Gross Gross Estimated
Cost Unrealized Unrealized Fair
or Cost Gains Losses Value
----------------- ------------ ----------- -----------
Available-For-Sale Securities
- -----------------------------
Fixed maturities:
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies:
U.S. Treasury notes . . . . . . . . . . . . . . $ 2,730 $ 58 $ -- $ 2,788
Collateralized mortgage obligations . . . . . . 90,464 520 (1,775) 89,209
Mortgage pass-through securities . . . . . . . . 40,978 236 (77) 41,137
Debt securities of foreign governments . . . . . . 5 -- -- 5
Obligations of states and political subdivisions . 13,309 35 (124) 13,220
Corporate bonds . . . . . . . . . . . . . . . . . . 2,943 31 (28) 2,946
Other collateralized mortgage obligations . . . . . 8,184 182 (41) 8,325
Asset-backed securities:
Second mortgages/home equity loans . . . . . . . 52,571 585 (320) 52,836
Automobile loans . . . . . . . . . . . . . . . . 9,147 151 (519) 8,779
Other underlying assets . . . . . . . . . . . . 15,385 48 (202) 15,231
------------- ----------- ------------ ------------
235,716 1,846 (3,086) 234,476
Equity securities . . . . . . . . . . . . . . . . . 24,178 25 (1,688) 22,515
------------- ----------- ------------ ------------
Total available-for-sale securities. . . . . . $ 259,894 $ 1,871 $ (4,774) $ 256,991
============= =========== ============ ============
Held-To-Maturity Securities
- ---------------------------
Fixed maturities - U.S. Government
treasury securities . . . . . . . . . . . . . . $ 10,846 $ 175 $ (109) $ 10,912
============= =========== ============ ============
Trading Securities
- ------------------
Equity securities . . . . . . . . . . . . . . . . . $ 3,516 $ 257 $ (47) $ 3,726
============= =========== ============ ============
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4. REINSURANCE
The effect of reinsurance on premiums written and earned for the six months
ended June 30, 1995 and 1994 was as follows (dollars in thousands):
1995 1994
-------------------------- ---------------------------
Written Earned Written Earned
---------- ----------- ---------- -----------
Direct . . . . . . . . . . . . . . . . . . . . . $ 58,329 $ 55,291 $ 51,548 $ 49,236
Assumed . . . . . . . . . . . . . . . . . . . . 87 696 126 339
Ceded . . . . . . . . . . . . . . . . . . . . . (7,093) (7,327) (5,372) (5,452)
---------- ----------- ---------- -----------
Net premiums . . . . . . . . . . . . . . . . . . $ 51,323 $ 48,660 $ 46,302 $ 44,123
========== =========== ========== ===========
The effect of reinsurance on losses and loss adjustment expenses incurred for
the six months ended June 30, 1995 and 1994 was as follows (dollars in
thousands):
1995 1994
----------- -----------
Gross losses and loss adjustment expenses . . . . . . . . . . . $ 12,753 $ 13,400
Reinsurance recoveries . . . . . . . . . . . . . . . . . . . . . (3,142) (1,539)
---------- ----------
Net losses and loss adjustment expenses . . . . . . . . . . . . $ 9,611 $ 11,861
========== ==========
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CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
JUNE 30, 1995
GENERAL
The following is a discussion and analysis of the operating results,
financial condition, liquidity, and capital resources of Capsure Holdings Corp.
and subsidiaries ("Capsure" or the "Company") for the three and six months
ended June 30, 1995 compared to the corresponding periods in 1994.
The Company operates in the property and casualty insurance business through
its subsidiaries, Western Surety Company ("Western Surety"), acquired in August
1992, United Capitol Insurance Company ("United Capitol"), acquired in February
1990, and Universal Surety of America ("Universal Surety"), acquired in
September 1994.
RESULTS OF OPERATIONS
The components of net income for each period are summarized as follows
(dollars in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- -------------------------
1995 1994 1995 1994
----------- ----------- ----------- ----------
Underwriting income . . . . . . . . . . . . . . . $ 4,695 $ 3,297 $ 9,458 $ 7,270
Net investment income . . . . . . . . . . . . . . 5,235 4,809 10,328 9,163
Net investment gains . . . . . . . . . . . . . . 86 1,259 32 1,628
Interest expense . . . . . . . . . . . . . . . . (1,131) (1,057) (2,504) (2,480)
Write-off of unamortized deferred loan fees . . . -- -- -- (1,556)
Amortization of goodwill and intangibles . . . . (916) (811) (1,841) (1,626)
Other expenses, net . . . . . . . . . . . . . . . (682) (625) (1,218) (920)
----------- ----------- ---------- ----------
Income before income taxes . . . . . . . . . . . 7,287 6,872 14,255 11,479
Income taxes . . . . . . . . . . . . . . . . . . 2,851 2,774 5,582 4,552
----------- ----------- ---------- ----------
Net income . . . . . . . . . . . . . . . . . $ 4,436 $ 4,098 $ 8,673 $ 6,927
=========== =========== ========== ==========
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INSURANCE UNDERWRITING
Underwriting results for the three months ended June 30, 1995 and 1994 are
summarized in the following table (dollars in thousands):
Three Months Ended June 30,
---------------------------------------------------------------------------------------
Surety and Fidelity Excess and Surplus Lines Consolidated
---------------------------- --------------------------- ----------------------------
1995 1994 1995 1994 1995 1994
------------ ------------ ----------- ----------- ------------ ------------
Gross written premiums . . $ 22,321 $ 17,365 $ 4,298 $ 6,977 $ 26,619 $ 24,342
============ =========== =========== =========== ============ ============
Net written premiums . . . $ 21,454 $ 17,037 $ 2,274 $ 4,553 $ 23,728 $ 21,590
============ =========== =========== =========== ============ ============
Net earned premiums . . . . $ 20,838 $ 17,150 $ 3,326 $ 4,591 $ 24,164 $ 21,741
------------ ----------- ----------- ----------- ------------ ------------
Net losses and loss adjustment 3,056 2,851 1,180 3,015 4,236 5,866
Underwriting expenses . . . 14,194 11,614 1,039 964 15,233 12,578
------------ ----------- ----------- ----------- ------------ ------------
Total losses and expenses . 17,250 14,465 2,219 3,979 19,469 18,444
------------ ----------- ----------- ----------- ------------ ------------
Underwriting income . . . . $ 3,588 $ 2,685 $ 1,107 $ 612 $ 4,695 $ 3,297
============ =========== =========== =========== ============ ============
Loss ratio . . . . . . . . 14.7% 16.6% 35.5% 65.7% 17.5% 27.0%
Expense ratio . . . . . . . 68.1 67.7 31.2 21.0 63.1 57.8
------------ ------------ ----------- ----------- ------------ ------------
Combined ratio . . . . . . 82.8% 84.3% 66.7% 86.7% 80.6% 84.8%
============ ============ ============ =========== ============ ============
Surety and fidelity represents the combined results of Western Surety and
Universal Surety, since its September 22, 1994 acquisition. Surety and
fidelity are the principal lines of business of Western Surety and Universal
Surety. Excess and surplus lines represents the results of United Capitol.
United Capitol's principal lines of business are other liability, product
liability and commercial property primarily written on an excess and surplus
lines basis.
Gross written premiums for the three months ended June 30, 1995 increased
9.4%, or $2.3 million, principally due to the inclusion of the results of
Universal Surety in 1995. Universal Surety contributed $4.5 million of gross
written premiums in the second quarter of 1995. United Capitol's gross written
premiums decreased 38.4% in the second quarter of 1995, as its premium volume,
particularly in the increasingly competitive asbestos abatement line, continued
to be significantly affected by prolonged soft market conditions.
Net earned premiums increased $2.4 million for the three months ended June
30, 1995, principally due to the inclusion of the results of Universal Surety
in 1995. Universal Surety contributed net earned premiums of $3.4 million in
the second quarter of 1995. Western Surety's net earned premiums increased
1.7% in the second quarter of 1995 compared to the same period in 1994. United
Capitol's net earned premiums decreased 27.6%, or $1.3 million in the second
quarter of 1995, reflecting decreases in both gross written premiums and net
retentions. The lower net retentions are due primarily to the increased use of
reinsurance for primary casualty risks in an effort to limit the potential loss
volatility associated with a diminished premium base. United Capitol's net
earned premiums for the three months ended June 30, 1995 and 1994 included $0.5
million and $0.6 million, respectively, of contingent premiums recognized under
its reinsurance agreements.
Underwriting income for the three months ended June 30, 1995 increased 42.4%
as compared to the prior year quarter, principally due to the addition of $0.7
million in underwriting income from Universal Surety and improved claims
experience at United Capitol. The consolidated combined ratio decreased to
80.6% in the second quarter of 1995 from 84.8% in the same period in 1994. The
consolidated loss ratio
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decreased to 17.5% in the second quarter of 1995 from 27.0% in 1994. The
surety and fidelity loss ratio decreased to 14.7% in the second quarter of 1995
from 16.6% in 1994, primarily due to favorable development of prior years' loss
reserves and increased salvage recoveries at Western Surety. United Capitol's
loss ratio decreased to 35.5% in the second quarter of 1995 from 65.7% in 1994
on reduced net earned premiums, reflecting improved current accident year
claims experience and continued favorable development of prior years' loss
reserves.
The consolidated expense ratio increased to 63.1% in the second quarter of
1995, compared to 57.8% in the second quarter of 1994. The surety and fidelity
expense ratio increased slightly to 68.1% in the second quarter of 1995 from
67.7% in 1994, reflecting increased operating expenses, particularly, wage and
postal expense increases. United Capitol's expense ratio increased to 31.2% in
the second quarter of 1995 compared to 21.0% in 1994. This was principally due
to the decrease in net earned premiums, but also reflected increased
underwriting expenses.
Underwriting results for the six months ended June 30, 1995 and 1994 are
summarized in the following table (dollars in thousands):
Six Months Ended June 30,
---------------------------------------------------------------------------------------
Surety and Fidelity Excess and Surplus Lines Consolidated
---------------------------- --------------------------- ----------------------------
1995 1994 1995 1994 1995 1994
------------ ------------ ----------- ----------- ------------ ------------
Gross written premiums . . $ 47,736 $ 37,733 $ 10,680 $ 13,941 $ 58,416 $ 51,674
============ =========== =========== =========== ============ ============
Net written premiums . . . $ 45,765 $ 37,013 $ 5,558 $ 9,289 $ 51,323 $ 46,302
============ =========== =========== =========== ============ ============
Net earned premiums . . . . $ 41,526 $ 34,068 $ 7,134 $ 10,055 $ 48,660 $ 44,123
------------ ----------- ----------- ----------- ------------ ------------
Net losses and loss adjustment 6,180 5,718 3,431 6,143 9,611 11,861
Underwriting expenses . . . 28,381 22,855 1,210 2,137 29,591 24,992
------------ ----------- ----------- ----------- ------------ ------------
Total losses and expenses . 34,561 28,573 4,641 8,280 39,202 36,853
------------ ----------- ----------- ----------- ------------ ------------
Underwriting income . . . . $ 6,965 $ 5,495 $ 2,493 $ 1,775 $ 9,458 $ 7,270
============ =========== =========== =========== ============ ============
Loss ratio . . . . . . . . 14.9% 16.8% 48.1% 61.1% 19.8% 26.9%
Expense ratio . . . . . . . 68.3 67.1 17.0 21.2 60.8 56.6
------------ ----------- ----------- ----------- ------------ ------------
Combined ratio . . . . . . 83.2% 83.9% 65.1% 82.3% 80.6% 83.5%
============ =========== =========== =========== ============ ============
The following discussion highlights significant variances for the six months
ended June 30, 1995 as compared to the corresponding period in 1994. Unless
otherwise provided, explanations are consistent with those described in the
preceding quarterly discussion.
Gross written premiums increased 13.0%, or $6.7 million, for the six months
ended June 30, 1995, primarily due to the inclusion of $8.3 million for
Universal Surety, partially offset by reduced premium volume at United Capitol.
Net earned premiums increased by 10.3%, or $4.5 million, for the six months
ended June 30, 1995, reflecting the inclusion of $6.9 million for Universal
Surety, partially offset by a decrease of $2.9 million at United Capitol.
Underwriting income for the six months ended June 30, 1995 increased 30.1% as
compared to the comparable period in 1994, principally due to the addition of
$1.2 million in underwriting income from Universal Surety and improved claims
experience at United Capitol. United Capitol's loss ratio decreased to 48.1%
in the first six months of 1995 from 61.1% in 1994 on reduced net earned
premiums, reflecting improved current accident year claims experience and
continued favorable development of prior years' loss reserves. The
consolidated loss ratio decreased to 19.8% in the first half of 1995 from 26.9%
in the comparable period in 1994. United Capitol's expense ratio for the first
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half of 1995 decreased to 17.0% from 21.2% in the first six months of 1994,
principally due to the recognition of $0.5 million in contingent commission
income at United Capitol's Fischer Underwriting Group, Incorporated ("Fischer")
subsidiary during the first quarter of 1995. Profit commission arrangements
are generally included in the Company's reinsurance and underwriting management
agreements. Such commissions are recognized when fully earned. The Company
does not anticipate recognizing further material contingent commission income
in 1995. However, the consolidated expense ratio for the six months ended June
30, 1995 increased to 60.8% from 56.6% in the comparable period in 1994,
principally due to reduced net earned premiums at United Capitol, partially
offset by this contingent commission income.
INVESTMENT INCOME
Net investment income for the three months ended June 30, 1995 and 1994 was
$5.2 million and $4.8 million, respectively. The 8.9% increase reflected the
addition of Universal Surety, as well as higher investment yields. The average
pretax yields of the portfolio for the three months ended June 30, 1995 and
1994 were 6.8% and 6.3%, respectively. Net investment income for the six
months ended June 30, 1995 and 1994 was $10.3 million and $9.2 million,
respectively. The average pretax yields of the portfolio for the six months
ended June 30, 1995 and 1994 were 6.7% and 5.9%, respectively.
Capsure's insurance companies invest funds provided by operations
predominantly in high-quality, short-duration, taxable fixed income securities.
Beginning in 1994, the Investment Committees of the Board of Directors of the
Company and its insurance subsidiaries have approved for the investment of up
to $26 million in the aggregate by the insurance subsidiaries and at the parent
company level in publicly traded nonaffiliated real estate investment trust
("REIT") equity securities. At June 30, 1995 and December 31, 1994, the
carrying value of the Company's REIT portfolio was approximately $21.7 million
and $24.3 million, respectively.
ANALYSIS OF OTHER OPERATIONS
Net investment gains were $0.1 million and $1.3 million for the three months
ended June 30, 1995 and 1994, respectively. Net investment gains of $0.1 in
the second quarter of 1995 and $1.5 million in the second quarter of 1994
resulted from the sale of equity securities in the investment portfolio at the
parent company level and net investment losses of $(0.2) million in the second
quarter of 1995 from the insurance operations. Included in 1995 and 1994
second quarter net investment gains were $0.2 million and $(0.2) million,
respectively, of net unrealized investment gains (losses) on the trading
securities portfolio held at the parent company level. Net investment gains
were nominal in the first half of 1995 compared to $1.6 million in the first
six months of 1994, which primarily resulted from the sale of equity securities
in the investment portfolio at the parent company level.
Amortization expense was $0.9 million and $0.8 million for the three months
ended June 30, 1995 and 1994, respectively. Amortization expense in the second
quarter of 1995 and 1994 included $0.3 million of amortization of intangible
assets and $0.6 million and $0.5 million, respectively, of amortization of
excess cost over net assets acquired related to the acquisitions of Western
Surety, Universal Surety, United Capitol and Fischer. Excess cost over net
assets acquired is amortized substantially over 40 years. Other intangible
assets are amortized over periods ranging from three to 20 years. Amortization
expense was $1.8 million and $1.6 million for the six months ended June 30,
1995 and 1994, respectively.
Interest expense was $1.1 million for the three months ended June 30, 1995 and
1994, and $2.5 million for the first six months of both years. The Company's
average debt outstanding for the three months ended June 30, 1995 was
approximately $55.3 million compared to $66.2 million in the second quarter of
1994. The weighted average interest rates were 7.1% and 5.1% for the three
months ended June 30, 1995 and 1994, respectively. The Company's average debt
outstanding for the six months ended June 30, 1995 was
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approximately $61.6 million compared to $75.1 million in 1994. The weighted
average interest rates were 7.1% and 5.5% for the six months ended June 30,
1995 and 1994, respectively. In connection with the early retirement of the
Company's bank term loans in 1994, the Company incurred a $1.6 million
write-off of unamortized deferred loan fees in the six months ended June 30,
1994.
INCOME TAXES
Income taxes were $2.9 million and $2.8 million for the three months ended
June 30, 1995 and 1994, respectively. Income taxes were $5.6 million and $4.6
million for the six months ended June 30, 1995 and 1994, respectively. The
effective income tax rates for the six months ended June 30, 1995 and 1994
were 39.2% and 39.7%, respectively. The Company's income tax expense does not
approximate actual taxes paid, primarily due to the utilization of the
Company's net operating tax loss carryforwards. Actual income taxes paid were
$0.2 million and $0.1 million for the six months ended June 30, 1995 and 1994,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's insurance subsidiaries are highly liquid. The insurance
operations derive liquidity from net premium collections, reinsurance
recoveries and investment earnings and use these funds to pay claims and
operating expenses. The operations of an insurance company generally result in
cash being collected from customers in the form of premiums in advance of cash
outlays for claims. Each insurance company invests its collected premiums,
generating investment income, until such time cash is needed to pay claims and
associated expenses.
Cash flow at the parent company level is derived principally from dividend
and tax sharing payments from its insurance subsidiaries.
The Company's consolidated net cash flow provided by operating activities was
$16.2 million and $17.4 million for the six months ended June 30, 1995 and
1994, respectively. Consolidated operating cash flow (pretax income excluding
the write-off of deferred loan fees, net investment gains and amortization of
goodwill and intangibles) for the six months ended June 30, 1995, was $16.1
million as compared to $13.0 million in 1994.
On March 29, 1994, the Company formed a direct, wholly owned subsidiary,
Capsure Financial Group, Inc. ("CFG"), to which Capsure contributed
substantially all its assets and liabilities. Concurrently, CFG entered into a
senior reducing revolving credit agreement with a syndicate of banks for $135
million (the "Credit Facility"). At closing, $68 million of funds drawn under
the Credit Facility, together with a portion of the Company's cash, were used
to repay $84.6 million of previously existing bank term debt. Paydowns of $45
million and borrowings of $28 million for the acquisition of Universal Surety
have occurred since then. The remaining availability under the Credit Facility
of $84 million at June 30, 1995 may be used to finance future acquisitions and
for general corporate purposes. The Company continues to pursue acquisitions
of financial services businesses with a particular focus on the insurance
industry. Although the emphasis is on financial services and insurance, the
Company may consider other investments that would further enhance the Company's
value.
Principal and interest payments required under the Credit Facility are funded
principally by dividend and intercompany tax sharing payments received from
Capsure's insurance subsidiaries. In the six months ended June 30, 1995 and
1994, Capsure received $14.2 million (including $7.0 million of dividends
requiring prior approval from state regulatory authorities) and $4.3 million,
respectively, in dividends from its insurance subsidiaries. Capsure received
tax sharing payments from its subsidiaries of $5.8 million and $6.2 million in
the six months ended June 30, 1995 and 1994, respectively.
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CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
27--Financial Data Schedule
(b) Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPSURE HOLDINGS CORP.
(Registrant)
/s/ Mary Jane Robertson
--------------------------------
Mary Jane Robertson
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ John S. Heneghan
--------------------------------
John S. Heneghan
Controller
(Principal Accounting Officer)
Date: August 10, 1995
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