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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 June 30, 1999
Or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ___________________ to _____________________
Commission file number: 0-26456
RISK CAPITAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1424716
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 June 30, 1999
----- ----------------------------
Common Stock, $.01 par value 17,084,893
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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
June 30, 1999 and December 31, 1998
Consolidated Statement of Income and Comprehensive Income 3
For the six month periods ended June 30, 1999 and 1998
Consolidated Statement of Changes in Stockholders' Equity 4
For the six month periods ended June 30, 1999 and 1998
Consolidated Statement of Cash Flows 5
For the six month periods ended June 30, 1999 and 1998
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition
And Results of Operations 18
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 28
PART II. Other Information
Item 1 - Legal Proceedings 29
Item 4 - Submission of Matters to a Vote of Security Holders 29
Item 6 - Exhibits and Reports on Form 8-K 30
Signatures 31
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 subsidiaries as of June 30, 1999 and 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,
1999 to June 30, 1999. 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, 1998, and the related
consolidated statements of income and comprehensive income, of changes in
stockholders' equity, and of cash flows for the year then ended (not presented
herein), and in our report dated January 29, 1999, except as to Note 14, which
is as of March 25, 1999, 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, 1998
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
July 26, 1999
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands, except per share data)
(Unaudited)
June 30, December 31,
1999 1998
--------- ---------
Assets
Investments:
Fixed maturities $ 258,342 $ 174,540
(amortized cost: 1999, $263,710; 1998, $173,379)
Publicly traded equity securities 169,201 154,678
(cost: 1999, $125,332; 1998, $110,598)
Privately held securities 88,805 137,091
(cost: 1999, $82,114; 1998, $109,966)
Short-term investments 89,147 108,809
--------- ---------
Total investments 605,495 575,118
--------- ---------
Cash 11,279 12,037
Accrued investment income 3,929 2,632
Premiums receivable 115,126 88,610
Reinsurance recoverable 59,485 31,087
Deferred policy acquisition costs 27,331 23,515
Investment accounts receivable 8,183 3,928
Deferred income tax asset 1,011
Other assets 26,986 20,903
========= =========
Total Assets $ 858,825 $ 757,830
========= =========
Liabilities
Claims and claims expenses $ 326,916 $ 216,657
Unearned premiums 119,447 102,775
Reinsurance balances payable 11,009 5,396
Investment accounts payable 12,678 3,981
Deferred income tax liability 13,182
Other liabilities 17,195 17,837
--------- ---------
Total Liabilities 487,245 359,828
--------- ---------
Stockholders' Equity Preferred stock, $.01 par value:
20,000,000 shares authorized (none issued)
Common stock, $.01 par value:
80,000,000 shares authorized
(issued: 1999, 17,102,503; 1998, 17,102,503) 171 171
Additional paid-in capital 341,878 341,878
Deferred compensation under stock award plan (668) (1,062)
Retained earnings 1,153 10,261
Less treasury stock, at cost (1999, 17,610; 1998, 15,065 shares) (329) (284)
Accumulated other comprehensive income consisting of unrealized
appreciation of investments, net of income tax 29,375 47,038
--------- ---------
Total Stockholders' Equity 371,580 398,002
--------- ---------
Total Liabilities & Stockholders' Equity $ 858,825 $ 757,830
========= =========
See Notes to Consolidated Financial Statements.
2
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME
(in thousands, except share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Premiums and Other Revenues
Net premiums written $91,517 $52,536 $155,954 $96,944
Increase in unearned premiums (4,529) (4,059) (6,044) (6,965)
---------- ---------- ---------- ----------
Net premiums earned 86,988 48,477 149,910 89,979
Net investment income 4,817 4,331 9,300 7,935
Net investment gains 23,386 2,870 22,234 3,347
---------- ---------- ---------- ----------
Total revenues 115,191 55,678 181,444 101,261
Expenses
Claims and claims expenses 65,438 35,231 146,170 65,484
Commissions and brokerage 22,869 12,724 42,407 22,655
Other operating expenses 3,772 3,852 7,433 8,331
Foreign exchange (gain) loss (450) (51) (62) 59
---------- ---------- ---------- ----------
Total expenses 91,629 51,756 195,948 96,529
Income (Loss) Before Income Taxes, Equity
In Net Income of Investees and
Cumulative Effect of Accounting Change 23,562 3,922 (14,504) 4,732
Federal income taxes:
Current 4,748 2,308 (1,252) 3,871
Deferred 3,127 (1,288) (4,494) (2,854)
---------- ---------- ---------- ----------
Income tax expense (benefit) 7,875 1,020 (5,746) 1,017
---------- ---------- ---------- ----------
Income (Loss) Before Equity in Net Income
of Investees and Cumulative Effect of
Accounting Change 15,687 2,902 (8,758) 3,715
Equity in net income of investees 196 257 33 1,013
---------- ---------- ---------- ----------
Income (Loss) Before Cumulative Effect of
Accounting Change 15,883 3,159 (8,725) 4,728
Cumulative effect of accounting change (383)
---------- ---------- ---------- ----------
Net Income (Loss) 15,883 3,159 (9,108) 4,728
---------- ---------- ---------- ----------
Other Comprehensive Income (Loss), Net of Tax
Change in net unrealized appreciation of
investments, net of tax (7,163) (6,030) (17,663) 9,169
---------- ---------- ---------- ----------
Comprehensive Income (Loss) $8,720 ($2,871) ($26,771) $13,897
========== ========== ========== ==========
Average shares outstanding
Basic 17,085,826 17,061,663 17,086,212 17,060,062
Diluted 17,085,826 17,942,949 17,086,292 17,816,363
Per Share Data
Net Income (Loss) - Basic $0.93 $0.19 ($0.53) $0.28
- Diluted $0.93 $0.18 ($0.53) $0.27
Comprehensive Income (Loss) - Basic $0.51 ($0.17) ($1.57) $0.81
- Diluted $0.51 ($0.17) ($1.57) $0.78
See Notes to Consolidated Financial Statements.
3
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
(Unaudited)
Six Months Ended
June 30,
1999 1998
--------- ---------
Common Stock
Balance at beginning of year $ 171 $ 171
Issuance of common stock
--------- ---------
Balance at end of period $ 171 171
--------- ---------
Additional Paid-in Capital
Balance at beginning of year 341,878 341,162
Issuance of common stock 237
--------- ---------
Balance at end of period 341,878 341,399
--------- ---------
Deferred Compensation Under Stock Award Plan
Balance at beginning of year (1,062) (1,778)
Restricted common stock issued (158)
Compensation expense recognized 394 548
--------- ---------
Balance at end of period (668) (1,388)
--------- ---------
Retained Earnings
Balance at beginning of year 10,261 7,170
Net income (loss) (9,108) 4,728
--------- ---------
Balance at end of period 1,153 11,898
--------- ---------
Treasury Stock, At Cost
Balance at beginning of year (284) (198)
Purchase of treasury stock (45) (53)
--------- ---------
Balance at end of period (329) (251)
--------- ---------
Accumulated Other Comprehensive Income Consisting of
Unrealized Appreciation of Investments,
Net of Income Tax
Balance at beginning of year 47,038 54,504
Change in unrealized appreciation (17,663) 9,169
--------- ---------
Balance at end of period 29,375 63,673
--------- ---------
Total Stockholders' Equity
Balance at beginning of year 398,002 401,031
Issuance of common stock 237
Change in deferred compensation 394 390
Net income (loss) (9,108) 4,728
Purchase of treasury stock (45) (53)
Change in unrealized appreciation
of investments, net of income tax (17,663) 9,169
--------- ---------
Balance at end of period $ 371,580 $ 415,502
========= =========
See Notes to Consolidated Financial Statements.
4
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(Unaudited)
Six Months Ended
June 30,
1999 1998
--------- ---------
Operating Activities
Net income (loss) ($9,108) $4,728
Adjustments to reconcile net income
to net cash provided by operating activities:
Liability for claims and claims expenses 110,259 48,638
Unearned premiums 16,672 6,965
Premiums receivable (26,516) (13,289)
Accrued investment income (1,297) 285
Reinsurance recoverable (28,398) (1,384)
Reinsurance balances payable 5,613 (211)
Deferred policy acquisition costs (3,816) (2,442)
Net investment (gains)/losses (22,234) (3,347)
Deferred income tax asset (4,682) (2,308)
Other liabilities (4,452) 4,731
Other items, net (6,656) (7,986)
--------- ---------
Net Cash Provided by Operating Activities 25,385 34,380
--------- ---------
Investing Activities
Purchases of fixed maturity investments (220,839) (144,412)
Sales of fixed maturity investments 128,133 113,904
Net (purchases)/sales of short-term investments 23,605 4,656
Purchases of equity securities (20,712) (55,430)
Sales of equity securities 63,997 42,012
Purchases of furniture and equipment (282) (156)
--------- ---------
Net Cash Provided By (Used For) Investing Activities (26,098) (39,426)
--------- ---------
Financing Activities
Common stock issued 237
Purchase of treasury stock (45) (53)
Deferred compensation on restricted stock (158)
--------- ---------
Net Cash Provided By (Used For) Financing Activities (45) 26
--------- ---------
Increase (decrease) in cash (758) (5,020)
Cash beginning of year 12,037 9,014
--------- ---------
Cash end of period $11,279 $3,994
========= =========
See Notes to Consolidated Financial Statements
5
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
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. 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.
Class A warrants to purchase an aggregate of 2,531,079 shares of Common Stock
and Class B warrants to purchase an aggregate of 1,920,601 shares of Common
Stock were issued in connection with the direct sales. Class A warrants are
immediately exercisable at $20 per share and expire September 19, 2002. Class B
warrants are exercisable at $20 per share during the seven year period
commencing September 19, 1998, provided that the Common Stock has traded at or
above $30 per share for 20 out of 30 consecutive trading days.
2. GENERAL
The accompanying interim consolidated financial statements have been prepared in
conformity with generally accepted accounting principles ("GAAP") 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 1998
consolidated financial statements and related notes contained in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
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.
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
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. COMPREHENSIVE INCOME (Cont'd)
(In thousands)
Six Months Ended
June 30,
1999 1998
-------- --------
Net income (loss) ($9,108) $ 4,728
Other comprehensive income, net of tax:
Unrealized appreciation (depreciation) of investments:
Unrealized holdings gains arising during period (3,211) 11,345
Less, reclassification adjustment for
net realized (gains) losses
included in net income (14,452) (2,176)
-------- --------
Other comprehensive income (loss) (17,663) 9,169
-------- --------
Comprehensive income (loss) ($26,771) $ 13,897
======== ========
4. EARNINGS PER SHARE DATA
Earnings per share are computed in accordance with FASB Statement No. 128
"Earnings Per Share."
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)
Six Months Ended
June 30,
1999 1998
------------ ------------
Net Income
Basic Earnings Per Share:
Net income (loss) ($9,108) $4,728
Divided by:
Weighted average shares outstanding for
the period 17,086,212 17,060,062
Basic earnings (loss) per share ($0.53) $0.28
Diluted Earnings Per Share:
Net income (loss) ($9,108) $4,728
Divided by:
Weighted average shares outstanding for
the period 17,086,212 17,060,062
Effect of dilutive securities:
Warrants 671,702
Employee stock options 80 84,599
------------ ------------
Total shares 17,086,292 17,816,363
============ ============
Diluted earnings (loss) per share ($0.53) $0.27
7
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. EARNINGS PER SHARE DATA (Cont'd)
(In thousands, except share data)
Six Months Ended
June 30,
1999 1998
------------ ------------
Comprehensive Income
Basic Earnings Per Share:
Comprehensive income (loss) ($26,771) $13,897
Divided by:
Weighted average shares outstanding for the period 17,086,212 17,060,062
Basic earnings (loss) per share ($1.57) $0.81
Diluted Earnings Per Share:
Comprehensive income (loss) ($26,771) $13,897
Divided by:
Weighted average shares outstanding for the period 17,086,212 17,060,062
Effect of dilutive securities:
Warrants 671,702
Employee stock options 80 84,599
------------ ------------
Total shares 17,086,292 17,816,363
============ ============
Diluted earnings (loss) per share ($1.57) $0.78
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 June 30, 1999, the publicly
traded equity portfolio consisted of the following:
8
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENT INFORMATION (Cont'd)
June 30, 1999
--------------------------------------
Estimated
Fair Value Net
and Unrealized
Carrying Gains
Value (Losses) Cost
------------ ------------ --------
Common Stocks:
ACE Limited $9,136 $994 $8,142
Annuity and Life Re (Holdings)
Ltd. 32,570 12,570 20,000
Arthur J. Gallagher 14,850 4,656 10,194
XL Capital Ltd. 14,690 5,815 8,875
E.W. Blanch Holdings, Inc. 24,343 17,022 7,321
Farm Family Holdings, Inc. 3,077 94 2,983
IPC Holdings, Ltd. 10,740 (4,253) 14,993
LaSalle Re Holdings, Ltd. 7,786 (5,608) 13,394
Limit PLC 2,106 (780) 2,886
Meadowbrook Insurance Group 2,837 (852) 3,689
Partner Re, Ltd. 4,261 (700) 4,961
Pennsylvania Mfrs. Corporation 1,018 43 975
Renaissance Re 1,850 140 1,710
Terra Nova Holdings 23,859 15,383 8,476
Trenwick Group Inc. 3,297 (1,313) 4,610
WR Berkley Corp. 2,500 (41) 2,541
Preferred Stock:
St. Paul Companies, 6%
Convertible Preferred 10,281 699 9,582
-------- -------- --------
Total $169,201 $43,869 $125,332
======== ======== ========
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.
9
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENT INFORMATION (Cont'd)
Goodwill for privately held equity securities carried under the equity method of
accounting was $9.3 million at June 30, 1999, compared to $10.6 million at
December 31, 1998.
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. ("MMCI"), its equity investment advisor.
Privately held securities consisted of the following:
(In thousands)
June 30, December 31,
1999 1998
-------- ------------
Carried under the equity method:
The ARC Group, LLC $8,773 $9,448
Arx Holding Corp. 2,564 2,400
Capital Protection Insurance Services, LLC 250
Island Heritage Insurance Company, Ltd. 4,276 3,101
LARC Holdings, Ltd. 24,527 25,349
New Europe Insurance Ventures 1,109 1,083
Sunshine State Holding Corporation 1,798 1,688
-------- --------
Sub-total 43,047 43,319
-------- --------
Carried at fair value:
Altus Holdings, Ltd. 6,667 6,667
American Independent Holding Company 5,000
Annuity and Life Re (Holdings), Ltd. (1) 34,243
Arbor Acquisition Corp. (Montgomery &
Collins, Inc.) 2,746 500
First American Financial Corporation 9,263 9,805
GuideStar Health Systems, Inc. 1,000 1,000
Sovereign Risk Insurance Ltd. 246
Sorrento Holdings, Inc. 2,832 5,113
Stockton Holdings Limited 10,000 10,000
Terra Nova (Bermuda) Holdings, Ltd. (1) 21,323
TRG Associates, LLC 8,250 4,875
-------- --------
Sub-total 45,758 93,772
-------- --------
Total $88,805 $137,091
======== ========
(1) As of June 2, 1999, the Company reclassified the above privately held
securities as publicly traded equity securities. Pursuant to the existing
investment advisory agreement, the Company incurred a fee of $2.5 million
payable to MMCI upon the reclassification of such securities.
10
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENT INFORMATION (Cont'd)
During the six month period ended June 30, 1999, the Company received (i) a
distribution from The ARC Group, LLC totaling $1.2 million and (ii) dividend
distributions from Stockton Holdings, Ltd. of $157,000 and TRG Associates, LLC
of $487,500.
The Company also received $2,428,000 from Sorrento Holdings, Inc. ("Sorrento")
for the redemption of 2,261 shares of preferred stock of Sorrento, which
redemption amount included a payment of $1,000 per share and interest income of
approximately $167,000.
At June 30, 1999, the Company had investment commitments relating to its
privately held securities totaling approximately $35 million, compared to $10.4
million at December 31, 1998.
The outstanding commitments at June 30, 1999 included $25 million committed to
Trident II, L.P., a newly formed investment fund dedicated to making private
equity and equity related investments in the global insurance, reinsurance and
related industries. In connection with such commitment, the Company is obligated
to pay an annual management fee equal to 1.5% of the committed amount as well as
a percentage of cumulative net gains on invested funds.
Set forth below is certain information relating to the Company's private
investment activity for the six month period ended June 30, 1999:
Altus Holdings, Ltd./First American Financial Corporation
In May 1999, Altus Holdings, Ltd. ("Altus") acquired First American Financial
Corporation ("First American") in a share exchange, which closed in July 1999
upon receipt of regulatory approval.
At June 30, 1999, the Company reclassified its investment in First American from
the equity method of accounting to an investment accounted for at fair value. At
March 31, 1999, the carrying value of First American was $11.1 million. During
June 1999, loans of $2,928,000 previously funded to First American were repaid
to the Company. At June 30, 1999, the carrying value of First American was
adjusted to $9.3 million, which reflects the transaction value resulting from
the acquisition by Altus. The Company's total investment in First American
(excluding repaid demand loans) was $10.4 million.
In July 1999, the Company and The Trident Partnership, L.P. funded their
investment commitments to Altus (previously secured by letters of credit) of
$3.3 million and $5.8 million, respectively, and XL Capital Ltd. ("XL") redeemed
its shares in Altus at their original cost. After Altus' acquisition of First
American and such additional funding, the Company's economic ownership in Altus
decreased from 28.6% to 28% (9.9% voting interest).
American Independent Insurance Holding Company
In February 1999, the Company loaned $5 million to American Independent
Insurance Holding Company ("AIHC"). The promissory note, secured by the stock of
AIHC, matures in January 2003, and will accrue interest at rates per annum
expected to approximate 6%, depending on the investment returns on proceeds of
the loan which are invested by AIHC on the Company's behalf. Principal and
interest repayments are subject to prior approval by the Pennsylvania Department
of Insurance. In consideration for the loan, the Company received Class A
warrants to purchase shares of common stock of AIHC, constituting approximately
4% of AIHC's outstanding common stock on a fully-diluted basis.
11
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENT INFORMATION (Cont'd)
In connection with this investment and the Company's prior $3.6 million loan
commitment to AIHC (which commitment expired on December 31, 1998), the Company
has the option to write an aggregate amount of premiums of at least
approximately $300 million over the next seven to eight year period, in addition
to premiums ceded to the Company through June 30, 1999. No assurances can be
given that any such additional premiums will be written by the Company.
Arbor Acquisition Corp. (Montgomery & Collins, Inc)
At June 30, 1999, the Company increased the carrying value of its investment in
Arbor Acquisition Corp. (Montgomery & Collins, Inc.) from $500,000 to
approximately $3.0 million based on the expected net realizable value resulting
from the sale of the business and run-off of the operations.
The sale of this investment occurred in two transactions which closed in June
and July 1999. It is expected that the wind-up of the remaining operations will
be substantially completed by the end of 1999. The Company's total investment in
Arbor was $3.7 million.
Capital Protection Insurance Services, LLC
During 1999, the Company wrote off its investment in Capital Protection
Insurance Services, LLC and recorded an after-tax realized investment loss of
$1.2 million, which represents an estimate of costs associated with terminating
leases and divesting physical assets, and other costs to run-off the business of
this managing underwriting agency.
Island Heritage Insurance Company, Ltd.
In February 1999, the Company made an additional investment in Island Heritage
Insurance Company, Ltd. in the amount of approximately $1.0 million.
Sovereign Risk Insurance Ltd.
In June 1999, the Company sold its investment in Sovereign Risk Insurance Ltd.
("Sovereign Risk") to ACE Limited and XL and recorded an after-tax net realized
gain of $103,000. The Company retained an option to provide certain reinsurance
on business produced by Sovereign Risk for a five-year period.
TRG Associates, LLC
At June 30, 1999, the Company increased the carrying value of its investment in
TRG Associates, LLC from the Company's total investment cost of $4.9 million to
$8.3 million based on the expected net realizable value resulting from the
expected sale of this investment to Fairfax Financial Holdings Limited. The
completion of this sale is subject to the receipt of satisfactory regulatory
approvals which are expected to be obtained in the 1999 third quarter.
12
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 effect of reinsurance on written and earned premiums and claims and claims
expenses are as follows:
(In thousands)
Six Months Ended
June 30,
1999 1998
--------- ---------
Assumed premiums written $196,790 $103,962
Ceded premiums written 40,836 7,018
--------- ---------
Net premiums written $155,954 $96,944
========= =========
Assumed premiums earned $180,119 $96,997
Ceded premiums earned 30,209 7,018
--------- ---------
Net premiums earned $149,910 $89,979
========= =========
Assumed claims and claims expenses incurred $156,487 $66,613
Ceded claims and claims expenses incurred 10,317 1,129
--------- ---------
Net claims and claims expenses incurred $146,170 $65,484
========= =========
At June 30, 1999, the Company's balance sheet reflects reinsurance recoverable
balances as follows:
(In thousands)
June 30, December 31,
1999 1998
--------- -----------
Reinsurance recoverable balances:
Unpaid claims and claim expenses $43,820 $31,087
Unearned premiums 15,665
--------- ---------
Total $59,485 $31,087
========= =========
Ceded balances payable ($11,009) ($5,396)
========= =========
13
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. STATUTORY DATA
The following table reconciles statutory net loss and surplus of Risk Capital
Reinsurance to consolidated GAAP net income (loss) and stockholders' equity:
(In thousands)
Six Months Ended
June 30,
1999 1998
--------- ---------
Net Income (Loss):
Risk Capital Reinsurance
Statutory net loss ($15,937) ($5,728)
GAAP adjustments:
Dividend income (1,215) (1,285)
Deferred acquisition costs 3,816 2,442
Realized loss 5,436
Deferred income taxes 4,494 2,854
Equity in net income of investees 33 1,013
Cumulative effect of accounting
change (330)
--------- ---------
GAAP net income (loss) (9,139) 4,732
RCHI (parent company only) operations 31 (4)
--------- ---------
Consolidated GAAP net income (loss) ($9,108) $4,728
========= =========
(In thousands)
June 30, December 31,
1999 1998
--------- -----------
Stockholders' Equity:
Statutory surplus $320,751 $358,702
GAAP adjustments:
Deferred acquisition costs 27,331 23,515
Unrealized appreciation
(depreciation) (3,891) 298
Deferred income tax asset
(liability), net 1,011 (13,164)
Non-admitted assets - privately
held investments 9,056 11,080
Other non-admitted assets 3,600 4,190
Other 500 500
--------- ---------
Investment in Risk Capital
Reinsurance, GAAP 358,358 385,121
RCHI (parent company only):
Other net assets 13,222 12,881
--------- ---------
Consolidated stockholders' equity, GAAP $371,580 $398,002
========= =========
14
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES
RCHI, Risk Capital Reinsurance and Cross River file a consolidated federal
income tax return and have a tax sharing agreement (the "Tax Sharing
Agreement"), allocating the consolidated income tax liability on a separate
return basis. Pursuant to the Tax Sharing Agreement, Risk Capital Reinsurance
and Cross River make tax sharing payments to RCHI based on such allocation.
The provision for federal income taxes has been determined on the basis of a
consolidated tax return consisting of RCHI, Risk Capital Reinsurance and Cross
River.
An analysis of the Company's effective tax rate for the six months ended June
30, 1999 and 1998 follows:
(In thousands)
Six Months Ended
June 30,
1999 1998
-------- --------
Income taxes (benefit) computed on pre-tax income ($5,076) $1,656
Reduction in income taxes resulting from:
Tax-exempt investment income (337) (275)
Dividend received deduction (563) (404)
Other 230 40
-------- --------
Income tax expense (benefit) on pre-tax income ($5,746) $1,017
======== ========
The Company's current federal tax expense (benefit) for the six months ended
June 30, 1999 and 1998 was based on regular taxable income.
The net deferred income tax asset reflects temporary differences between the
carrying amounts of assets and liabilities for financial reporting and income
tax purposes, net of a valuation allowance for any portion of the deferred tax
asset that management believes will not be realized. Significant components of
the Company's deferred income tax assets and liabilities as of June 30, 1999 and
December 31, 1998 were as follows:
(In thousands)
June 30, December 31,
1999 1998
-------- ----------
Deferred income tax assets:
Net claim reserve discount $15,757 $10,176
Net unearned premium reserve 7,617 7,194
Compensation liabilities 543 622
Foreign currency 62 84
Equity in net loss of investees, net 2,415 2,328
-------- --------
Total deferred tax assets 26,394 20,404
-------- --------
Deferred income tax liabilities:
Deferred policy acquisition cost (9,566) (8,230)
Unrealized appreciation of investments (15,817) (25,328)
Other (28)
-------- --------
Total deferred tax liabilities (25,383) (33,586)
-------- --------
Net deferred income tax asset (liability) $1,011 ($13,182)
======== ========
15
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INVESTMENT ADVISORY AGREEMENT
Effective July 1, 1999, the Company has amended its investment advisory
agreement with MMCI, which governs the management of the Company's portfolios of
equity securities (including convertible securities) that are publicly traded
and privately held.
Pursuant to the amended agreement, which has a term of four years (subject to
renewal), MMCI will provide the Company with investment management and advisory
services with respect to private equity investments whose value exceeds (i) $10
million during the first year of the term, (ii) $15 million during the second
year of the term, and (iii) $20 million during the third and fourth years of the
term. The Company will pay MMCI an annual fee equal to 20% (previously 7.5%) of
cumulative net realized gains (as defined in the agreement) on private
investments managed by MMCI, but will not pay a management fee (previously 1.5%
per annum of the quarterly carrying value of the private portfolio). With
respect to the management of the Company's public equity portfolio, the Company
will pay MMCI a fee equal to 0.50% of the first $50 million under MMCI's
management and 0.35% of all amounts in excess of $50 million (subject to a
minimum fee of $250,000 per annum).
In connection with the amendments to the Company's agreement with MMCI, RCHI
will receive from MMCI $1.25 million per annum during the initial four-year
term, subject to certain conditions.
10. 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, 2000 with
initial application as of the beginning of the first quarter of the applicable
fiscal year. Retroactive application is prohibited.
The Company will adopt this statement in the first quarter of 2001. 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.
16
RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. ACCOUNTING PRONOUNCEMENTS (Cont'd)
Start-Up Costs
Effective January 1, 1999, the Company changed its method of accounting for
start-up costs in accordance with the Accounting Standards Executive Committee's
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.
The change in accounting principle resulted in the write-off of the start-up
costs capitalized as of January 1, 1999 for the Company and its investee
companies carried under the equity method of accounting. The cumulative effect
of the write-off, which totals $383,000, after-tax, or $0.02 per share, has been
expensed and is included in the 1999 first quarter net loss. The effect of the
change on the net loss in the first quarter of 1999 was not material.
Market Risk Sensitive Instruments
The Securities and Exchange Commission ("SEC") issued Financial Reporting
Release ("FRR") No. 48 which included amended rules requiring domestic and
foreign issuers to clarify and expand existing disclosure 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 (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this Form
10-Q). These amendments are designed to provide additional information about
market risk sensitive instruments which investors can use to better understand
and evaluate market risk exposures of registrants, including the Company. There
have been no material changes in market risk exposures that affect the
quantitative and qualitative disclosures presented as of the year ended December
31, 1998.
17
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 directly
related 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 1998 year was a difficult period from
both a market and earnings perspective for most insurance markets. The property
and casualty insurance and reinsurance segments have experienced an increasingly
more difficult and highly competitive operating environment characterized by a
soft rate structure and overcapitalization. Other factors that have contributed
to the prevailing competitive conditions in the reinsurance industry in recent
years include new entrants to the reinsurance market (including certain
specialized reinsurance operations) and the presence of certain reinsurance
companies which operate within tax-advantaged jurisdictions (e.g., Bermuda,
Cayman Islands) that benefit from higher after-tax investment returns. In
addition, concerns with respect to the financial security of Lloyd's that had
adversely impacted the competitive position of that marketplace have apparently
been overcome by actions taken at Lloyd's over the last few years, thereby
enhancing its competitive position.
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. The reinsurance industry is highly competitive and dynamic,
and market changes may affect, among other things, demand for the Company's
products, changes in investment opportunities (and the performance thereof),
changes in the products offered by the Company or changes in the Company's
business strategy. (See "Cautionary Note Regarding Forward-Looking Statements.")
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 July 1, 1999 renewal period was marked by continuing intensified
competitive conditions in terms of premium rates and treaty terms and conditions
in both the property and casualty segments of the marketplace. These conditions
have 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
18
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. Commencing in late 1997, in addition to its core business, the
Company expanded into specialty classes of reinsurance business, including
marine and aviation and space in 1997, surety and fidelity in 1998, and accident
and health in 1999.
In-Force Business
At July 1, 1999, the Company had approximately 435 renewable reinsurance
treaties that are in-force, with approximately $285 million of estimated
annualized net in-force premiums. Such in-force premiums at July 1, 1999
represent estimated annualized premiums from treaties entered into during 1998
and the 1999 renewal periods that are expected to generate net premiums written
during 1999. 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.
Results of Operations
The Company had consolidated comprehensive loss for the six month period ended
June 30, 1999 of $26.8 million, which was composed of a net loss of $9.1 million
and other comprehensive loss of $17.7 million, consisting of the change in
after-tax unrealized appreciation of investments. The net loss for the six month
period ended June 30, 1999 included after-tax realized investment gains of
approximately $14.5 million, equity in net income of investees of approximately
$33,000 and a loss of $383,000 from the cumulative effect of an accounting
change. These amounts compare with comprehensive income for the six month period
ended June 30, 1998 of $13.9 million, which was composed of net income of $4.7
million and the change in after-tax unrealized appreciation of investments of
$9.2 million. Net income for the six month period ended June 30, 1998 included
after-tax realized investment gains of $2.2 million and equity in net income of
investees of $1.0 million.
Following is a table of per share data on an after-tax basis:
Six Months Ended
June 30,
1999 1998
---------- ----------
Basic earnings per share:
Underwriting loss ($1.75) ($0.25)
Net investment income 0.39 0.34
Net realized investment gains (losses) 0.85 0.13
Equity in net income (loss) of investees 0.06
Cumulative effect of accounting change (0.02)
---------- ----------
Net income (loss) (0.53) 0.28
Change in net unrealized appreciation of
investments (1.04) 0.53
---------- ----------
Comprehensive income (loss) ($1.57) $0.81
---------- ----------
Average shares outstanding (000's) 17,086 17,060
---------- ----------
Diluted earnings per share:
Underwriting loss ($1.75) ($0.24)
Net investment income 0.39 0.33
Net realized investment gains (losses) 0.85 0.12
Equity in net income (loss) of investees 0.06
Cumulative effect of accounting change (0.02)
---------- ----------
Net income (loss) ($0.53) $0.27
---------- ----------
Comprehensive income (loss) ($1.57) $0.78
---------- ----------
Average shares outstanding (000's) 17,086 17,816
---------- ----------
At June 30, 1999, basic and diluted book value per share was $21.75, which
compare with basic and diluted book value per share of $23.29 and $22.75,
respectively, at December 31, 1998.
19
Net Premiums Written
Net premiums written for the six month periods ended June 30, 1999 and 1998 were
as follows:
(In thousands)
Six Months Ended June 30,
------------------------ Percentage
Core Business 1999 1998 Change
-------- -------- ----------
Property $39,345 $19,420 102.6%
Casualty 38,022 31,261 21.6%
Multi-line 37,801 27,597 37.0%
Other 769 3,085 (75.1%)
-------- -------- --------
Sub-total Core Business 115,937 81,363 42.5%
-------- -------- --------
Specialty Business
Accident & Health 20,752
Aviation & Space 8,365 8,302 0.8%
Marine 6,672 7,216 (7.5%)
Surety & Fidelity 4,228 63 N/M
-------- -------- --------
Sub-total Specialty Business 40,017 15,581 156.8%
-------- -------- --------
Total $155,954 $96,944 60.9%
======== ======== ========
The Company's assumed and ceded premiums written for the six months ended June
30, 1999 compared to June 30, 1998 were as follows:
(In thousands)
Six Months Ended June 30,
------------------------ Percentage
1999 1998 Change
-------- -------- ----------
Assumed premiums written $196,790 $103,962 89%
Ceded premiums written 40,836 7,018 482%
-------- -------- --------
Net premiums written $155,954 $96,944 61%
======== ======== ========
The Company's premium growth resulted from continued efforts in two key
strategies, the integration of investment with reinsurance and the
diversification into specialty classes of reinsurance. Approximately $40
million, or 26%, of net premiums written for the six months ended June 30, 1999
was produced from specialty lines of business, which accounted for approximately
41% of the increase in net premiums written for the six months ended June 30,
1999 compared to the comparable 1998 period. In addition, approximately 34% of
net premiums written for the six months ended June 30, 1999 were generated from
treaties integrated with private investment transactions, compared to 32% for
all of 1998.
Net premiums written for the six months ended June 30, 1999 includes
approximately $12 million related to a group of property reinsurance treaties
covering crop hail business underwritten on behalf of a start-up entity formed
by Trident II, L.P. The Company expects to record an additional $12 million of
net premiums written in the second half of 1999 related to these treaties. This
business is protected by extensive aggregate excess of loss retrocession and is
subject to a profit commission payable by the Company based upon underwriting
results. The Company does not expect to renew these treaties in 2000.
Net premiums written for the six months ended June 30, 1999 for other business
was reduced by $10.6 million for the retrocession of a treaty which covers
future multiple rocket launches that was recorded in 1996. The reduction of net
premiums written resulting from this retrocession increased the commission and
operating expense ratio components of the statutory composite ratio by 1.6%, but
had no impact on operating results.
Approximately 12.1% of net premiums written for the six months ended June 30,
1999 was from non-United States clients, compared to 26% for the six months
ended June 30, 1998 and 32% for the 1998 year.
20
The Company's ceded premiums increased to $40.8 million for the six months ended
June 30, 1999, compared to $7.0 million for the comparable 1998 period. Such
ceded premiums primarily relate to the Company's marine, aviation and space
reinsurance business. Since the fourth quarter of 1998, the Company has
purchased additional retrocessional protection to reduce its exposures to both
space and aviation risks.
Effective July 1, 1999, the Company has also purchased a retrocessional treaty
for a one year period covering earthquake, wind and other property catastrophe
perils for $10 million in excess of a $15 million retention per occurrence.
Set forth below are the Company's statutory composite ratios for the six month
periods ended June 30, 1999 and 1998:
Six Months Ended
June 30,
---------------------
1999 1998
------ ------
Claims and claims expenses 97.5% 72.8%
Commissions and brokerage 29.6% 25.9%
Other operating expenses 4.6% 8.3%
------ ------
Statutory composite ratio 131.7% 107.0%
====== ======
The Company's statutory combined ratio for the six months ended June 30, 1999
was 131.7%, compared with 107.0% for the comparable 1998 period. The 1999 ratio
was adversely affected by underwriting results from the sources identified
below, which added 26.9 points to the combined ratio (dollars in millions):
Net After-tax Per
Premiums Earned Underwriting Share Composite
Sources of Business: Written Premiums Loss Loss Effect(1)
-------- -------- ------------ ----- ----------
Managing underwriting
agency $3.9 $5.5 $14.9 $0.87 15.2%
Satellite business 2.3 2.0 5.2 0.31 5.0
Aviation 6.1 2.9 4.5 0.27 4.0
Satellite retrocession (10.6) 1.6
------ ------ ------ ------ ------
1.7 10.4 24.6 1.45 25.8
1.1(1)
------ ------ ------ ------ ------
All items $1.7 $10.4 $24.6 $1.45 26.9%
====== ====== ====== ====== ======
(1) The composite effect of each item separately is as shown above and sums to
25.8%. When such items are aggregated together and excluded from
underwriting results, the impact is 26.9% due to the exclusion of the
related written and earned premiums.
As identified above, during 1999, the Company recorded an after-tax underwriting
loss of $14.9 million, or $0.87 per share, from reinsurance on business produced
by the managing underwriting agency, and a related after-tax investment loss of
$1.2 million, or $0.07 per share, recorded in net realized investment losses.
Such amounts compare to the preliminary after-tax loss estimate previously
disclosed on March 18, 1999 of $18 million, or $1.07 per share. Included in the
reserve for claims and claims expenses is an undiscounted premium deficiency
reserve of $3.7 million relating to the $2.8 million unearned premium reserve
for this business as of June 30, 1999.
The total estimated ultimate net premiums written for all business produced on
behalf of the Company by the managing underwriting agency recorded through June
30, 1999 is approximately $21 million. The Company has discontinued its
underwriting relationship with the managing underwriting agency, which is in the
process of running-off its business and operations.
21
As identified above, during 1999, the Company recorded an after-tax underwriting
loss of $5.2 million, or $0.31 per share, for satellite business. In order to
mitigate the impact of possible future loss activity, in the fourth quarter of
1998, the Company commenced the process of re-underwriting and reducing its
satellite business. After the completion of this process, at June 30, 1999, the
Company currently estimates that it has net exposure of approximately $22
million to satellite losses (net of reinstatement premiums and retrocessions)
for expired treaties and treaties expiring during 1999.
Included in the 1999 after-tax underwriting loss of $4.5 million, or $0.27 per
share, for aviation business are incurred losses for the 1998 Swiss Air and
Korean Air crashes and the 1999 American Airlines crash. The additional loss
recorded for the Swiss Air crash was based on a reallocation of the $642 million
expected industry loss between the plane manufacturer and Swiss Air. This
reallocation adversely affected the Company's gross loss. The gross loss
associated with the Swiss Air crash reported as of December 31, 1998 had
exhausted the Company's retrocessional protections applicable to this
occurrence. Therefore, none of such additional loss reported as of June 30, 1999
was ceded to retrocessionaires. To the extent that either the expected industry
loss increases or additional loss is allocated to the plane manufacturer, the
Company could record additional losses. For example, if the expected industry
loss increases by approximately $100 million, and assuming additional loss
reallocations such that one-third of the industry loss is allocated to the plane
manufacturer, the Company could record additional aggregate loss of
approximately $4.9 million. However, the Company cannot be certain of the
ultimate industry loss or the final allocation of liability between the plane
manufacturer and Swiss Air, and there can be no assurances that the ultimate
industry loss will not be larger or that the plane manufacturer will not be
allocated a greater proportion of the industry loss. With respect to all other
reinsured crashes, the Company currently believes that there is no reasonable
scenario in which the Company's reinsurance protections would be exhausted.
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.
For the six months ended June 30, 1999, the statutory operating expense ratio
improved to 4.6%, compared with 8.3% for the comparable 1998 period. The
improvement in the Company's operating expense ratio was due to the increase in
its net premiums written. In addition, commencing in 1999, the Company allocated
certain compensation and other operating expenses related to investment
activities in the amount of $1.3 million to net investment income based on
internal time studies. Such allocations were not made in prior periods. Due to
such allocations, the 1999 statutory operating expense ratio improved by
approximately 1 point and net investment income was reduced by approximately
$0.05 per share, with no overall effect on operating results. On a pro-forma
basis, the statutory operating expense ratio for the first half of 1998 would
have been 7.1%.
Pre-tax foreign exchange gains and losses are recorded separately from statutory
underwriting results and are 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. For the six months ended June 30, 1999 and
1998, pre-tax foreign exchange gains/(losses) were $62,000 and ($59,000),
respectively. Such future gains or losses are unpredictable, and could be
material.
Investment Results
At June 30, 1999, approximately 56% of the Company's invested assets consisted
of fixed maturity and short-term investments, compared to 48% at the end of
1998. Net investment income for the first six months of 1999 was approximately
$9.3 million, compared to $7.9 million for the prior year period. Such amounts
are net of investment expenses of $3.0 million and $1.6 million, respectively.
In addition to the aforementioned inclusion of $1.3 million allocation of
certain expenses in 1999, the investment expense amounts include advisory fees
of
22
$1.6 million and $1.5 million, respectively. Such advisory fees are expected to
diminish commencing July 1, 1999 in connection with amendments to the Company's
investment advisory agreement with MMCI. Under such amendments, the Company will
pay MMCI an annual fee equal to 20% (7.5% prior to the amendments) of cumulative
net realized gains (as defined in the agreement) on private investments, which
is recorded in net realized gains, but the Company will not pay a management fee
to MMCI (prior to the amendments, the Company paid a management fee equal to
1.5% per annum of the quarterly carrying value of the private portfolio, which
amount has been recorded in investment expenses). In addition, RCHI will receive
from MMCI $1.25 million per annum during the initial four year term, subject to
certain conditions. Such amount will be recorded as a reduction to investment
expenses. (See Note 9 under the caption "Investment Advisory Agreement" of the
accompanying Notes to the Consolidated Financial Statements of the Company.)
The Company's pre-tax and net of tax investment yields for the six months ended
June 30, 1999 were 3.5% and 2.6%, respectively, compared to 3.5% and 2.6%,
respectively, for the same prior year period. Assuming a stable interest rate
environment, the Company anticipates the 1999 yields to moderately increase as
funds invested in short-term investments and proceeds from the sales of public
equity securities are allocated into fixed maturity investments.
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 six months ended June 30, 1999, the Company's equity in net income of
investee companies was $33,000, compared to $1.0 million in the prior year
period.
Net income for the six months ended June 30, 1999 includes after-tax net
realized investment gains of approximately $14.5 million, primarily due to the
sale by the Company of approximately $50 million of publicly traded equity
securities.
The 1999 change in net unrealized appreciation includes an after-tax unrealized
gain of $4.5 million related to the expected divestment of three privately held
investments. (See Note 5 under the caption "Investment Information" of the
accompanying Notes to the Consolidated Financial Statements of the Company).
Income Taxes
The net deferred income tax benefits for the first six months of 1999 and 1998
of approximately $4.5 million and $2.9 million, 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.
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 marketable equity securities will be
used to support shorter-term liquidity requirements.
23
As a significant portion of the Company's investment portfolio will generally
consist of equity securities issued by insurance and reinsurance companies and
companies providing services to the insurance industry, the equity portfolio
will lack industry diversification and will be particularly subject to the
performance 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. (For additional discussion, see "--Market Sensitive Instruments and
Risk Management.")
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. Since 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 publicly traded
companies that are generally restricted as to resale or are otherwise illiquid
and do not have readily ascertainable market values. The risk of investing in
such securities is generally greater than the risk of investing in securities of
widely held, publicly traded companies. Lack of a secondary market and resale
restrictions may result in an inability by the Company to sell a security at a
price that would otherwise be obtainable if such restrictions did not exist and
may substantially delay the sale of a security the Company seeks to sell.
At June 30, 1999, cash and invested assets totaled approximately $616.8 million,
consisting of $100.4 million of cash and short-term investments, $258.3 million
of publicly traded fixed maturity investments, $169.2 million of publicly traded
equity securities, and $88.8 million of privately held securities. Included in
privately held securities are investments totaling $43.0 million which are
carried under the equity method of accounting.
During the first six months of 1999, the Company completed one integrated
transaction with an existing client, a follow-on investment in an existing
investee and one additional investment commitment. In addition, the Company
divested four investments. (See Note 5 under the caption "Investment
Information" of the accompanying Notes to the Consolidated Financial
Statements.) The private equity portfolio includes 14 investments, totaling
approximately $88.8 million of invested capital at June 30, 1999.
At June 30, 1999, approximately 91% 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 3.7 years.
See Note 5 under the caption "Investment Information" of the accompanying Notes
to the Consolidated Financial Statements for certain information regarding the
Company's privately held securities and their carrying values. During the
remainder of 1999 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 June 30, 1999, the publicly traded equity portfolio consisted of investments
in 17 publicly traded insurers, reinsurers or companies providing services to
the insurance industry. The estimated fair values of such investments ranged
individually from $1 million to $32.6 million. (See Note 5 under the caption
"Investment Information" of the accompanying Notes to the Consolidated Financial
Statements.)
24
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 $30.2 million at June 30, 1999, or 4.9% of cash and invested
assets, are classified as available for sale and are not held for trading
purposes.
Market Sensitive Instruments and Risk Management
In accordance with the SEC's Financial Reporting Release No. 48, the Company
performed a sensitivity analysis to determine the effects that market risk
exposures could have on the future earnings, fair values or cash flows of the
Company's financial instruments as of December 31, 1998. (See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in the Company's 1998 Annual Report on Form 10-K.) Market risk
represents the risk of changes in the fair value of a financial instrument and
is comprised of several components, including liquidity, basis and price risks.
At June 30, 1999, there have been no material changes in market risk exposures
that affect the quantitative and qualitative disclosures presented as of
December 31, 1998.
Ratings
In May 1999, A.M. Best Company ("A.M. Best") revised its rating of Risk Capital
Reinsurance Company from A (Excellent) to A- (Excellent). While several factors
were identified, the rating action principally reflects the poor underwriting
results reported by the Company in late 1998 and the first quarter of 1999 on
its satellite book of business and the business produced by the managing
underwriting agency.
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.
25
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 six months ended June 30, 1999
was $25.4 million, compared with $34.4 million for the prior year period. Cash
flow was reduced in 1999 for the purchases of additional retrocessional
protection, including the ceded premium paid for the retrocession of a treaty
covering multiple future rocket launches.
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 June 30, 1999, the Company's consolidated stockholders' equity totaled $371.6
million, or $21.75 per share. At such date, statutory surplus of Risk Capital
Reinsurance was approximately $320.7 million. Based on data available as of
March 31, 1999 from the Reinsurance Association of America, Risk Capital
Reinsurance is the sixteenth 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.
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, 2000, with initial application as of the
beginning of the first quarter of the applicable fiscal year. Retroactive
application is prohibited. The Company will adopt this statement in the first
quarter of 2001. (See Note 10 of the accompanying notes to the Consolidated
Financial Statements of the Company.)
Effective January 1, 1999, the Company changed its method of accounting for
start-up costs in accordance with the Accounting Standards Executive Committee's
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
26
expensed as incurred. The change in accounting principle resulted in the
write-off of the start-up costs capitalized as of January 1, 1999 for the
Company and its investee companies carried under the equity method of
accounting. The cumulative effect of the write-off, which totals $383,000,
after-tax, or $0.02 per share, has been expensed and is included in the 1999
first quarter net loss. The effect of the change on the net loss of the first
quarter of 1999 was not material. (See Note 10 of the accompanying notes to the
Consolidated Financial Statements of the Company.)
The 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 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 substantially completed its testing and implementation of
compliant components for its internal business systems and operating facilities.
The Company's significant internal systems and facilities have been deemed
compliant. The Company does not currently anticipate any material year 2000
compliance problems with respect to its internal business systems and operating
facilities. The Company's historical and expected future costs of this internal
compliance effort will not have a material adverse effect on the Company's
financial position or 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 has continued to
survey its key business partners and vendors in an attempt to determine their
respective level of year 2000 compliance. The Company is also evaluating the
year 2000 exposures to issuers included in the Company's investment portfolio.
The effect, if any, on the Company's financial position or results of operations
from the possible failure of these entities to be year 2000 compliant is not
determinable.
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 internal
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 non-compliant business partners or vendors, one option
will be to evaluate replacing the non-compliant business partners and vendors.
The Company intends to continue to assess and attempt to mitigate its risks in
the event these third parties 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 operations.
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. Due to a significant number of variables associated with the
extent and severity of the year 2000
27
problem, the Company's potential underwriting exposure to year 2000 losses
cannot be determined at this time. These variables include, but are not limited
to, actual pervasiveness and severity of year 2000 system flaws, the magnitude
of the amount of costs and expenses directly attributable to year 2000 failures,
the portion of such amount (if any) that constitutes insurable losses, and the
extent of governmental intervention. The Company's underwriting staff has
considered the risks with respect to the year 2000 problem that might be
associated with underwriting their various lines of business, and have developed
internal guidelines intended to minimize these risks. The Company seeks to
minimize its potential year 2000 underwriting exposures by (i) assisting clients
in the evaluation of their potential year 2000 underwriting exposures, (ii)
performing underwriting evaluations of its clients' potential year 2000
exposure, (iii) structuring contract language to mitigate potential exposure
where appropriate and (iv) recommending technical support as appropriate.
However, the Company cannot be certain that these steps will adequately minimize
its year 2000 underwriting exposures. Given the possible extent and severity of
the year 2000 problem, the Company may incur a significant amount of year 2000
related losses, and such losses may have a material adverse impact on the
Company's financial condition or results of operations.
Cautionary Note Regarding Forward-Looking Statements
Except for the historical information and discussions contained herein,
statements included in this Report 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to the information appearing above under the subheading
"Market Sensitive Instruments and Risk Management" under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," which information is hereby incorporated by reference.
28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to litigation and arbitration in the ordinary
course of business.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The 1999 Annual Meeting of Stockholders ("Annual Meeting") of the Company
was held on May 11, 1999.
(b) Proxies for the Annual Meeting were solicited pursuant to Regulation 14
under the Securities Exchange Act of 1934, as amended. There was no
solicitation in opposition to management's nominees as listed in the
Company's Proxy Statement, dated April 12, 1999.
(c) The stockholders of the Company re-elected the Class I Directors of RCHI
to hold office until the 2002 annual meeting of stockholders and until
their successors are elected and qualified. Set forth below are the number
of votes cast for and withheld for each such Director:
Election of Directors
FOR WITHHELD
--- --------
Thomas V.A. Kelsey 15,106,163 122,172
Philip L. Wroughton 15,106,163 122,172
At the Annual Meeting, the stockholders also (i) approved the Company's
1999 Long Term Incentive and Share Award Plan and (ii) ratified the
selection of PricewaterhouseCoopers LLP as independent accountants for the
fiscal year ending December 31, 1999. Set forth below are the voting
results for such proposals:
Approval of the Company's 1999 Long Term Incentive and Share Award Plan
FOR AGAINST ABSTAIN
--- ------- -------
11,567,740 2,063,097 22,800
Ratification of Selection of PricewaterhouseCoopers LLP as Independent
Accountants
FOR AGAINST ABSTAIN
--- ------- -------
15,226,213 622 1,500
29
PART II. OTHER INFORMATION (Con't)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit No. Description
----------- -----------
10.1.1 Change in Control Agreement (as amended) - President
10.1.2 Change in Control Agreements (as amended) - Managing Directors
10.1.3 Form of Change in Control Agreements (as amended) - Senior
Vice Presidents
10.1.4 Change in Control Severance Plan (as amended)
10.2 Investment Advisory Agreement, among Risk Capital Holdings,
Inc., Risk Capital Reinsurance Company and Alliance Capital
Management L.P.
15 Accountants' Awareness Letter and Limitation of Liability
(regarding unaudited interim financial information)
27 Financial Data Schedule
(b) Reports on Form 8-K.
There were no reports filed on Form 8-K for the three month period ended
June 30, 1999.
Omitted from this Part II are items which are inapplicable or to which the
answer is negative for the period covered.
30
SIGNATURES
================================================================================
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RISK CAPITAL HOLDINGS, INC.
-------------------------------------
(Registrant)
/s/ Mark D. Mosca
-------------------------------------
Date: August 12, 1999 MARK D. MOSCA
President and Chief Executive Officer
/s/ Paul J. Malvasio
-------------------------------------
Date: August 12, 1999 PAUL J. MALVASIO
Chief Financial Officer
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
10.1.1 Change in Control Agreement (as amended) - President
10.1.2 Change in Control Agreements (as amended) - Managing Directors
10.1.3 Form of Change in Control Agreements (as amended) - Senior
Vice Presidents
10.1.4 Change in Control Severance Plan (as amended)
10.2 Investment Advisory Agreement, among Risk Capital Holdings,
Inc., Risk Capital Reinsurance Company and Alliance Capital
Management L.P.
15 Accountants' Awareness Letter and Limitation of Liability
(regarding unaudited interim financial information)
27 Financial Data Schedule