-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Hm7BruokpM8iZzYooE/e2UubDi+DDgnkMgir5N4kMycky7LYuoJGtc9r44gA80hg BwIayehhrCnwZoDJePVgnA== 0000889906-97-000006.txt : 19971117 0000889906-97-000006.hdr.sgml : 19971117 ACCESSION NUMBER: 0000889906-97-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971113 FILED AS OF DATE: 19971114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPMAC HOLDINGS INC CENTRAL INDEX KEY: 0000889906 STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351] IRS NUMBER: 133670828 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14096 FILM NUMBER: 97719463 BUSINESS ADDRESS: STREET 1: 885 THIRD AVE CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2127551155 MAIL ADDRESS: STREET 1: 885 THIRD AVENUE CITY: NEW YORK STATE: NY ZIP: 10022 10-Q 1 QUARTERLY REPORT FOR CAPMAC HOLDINGS INC. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 1-14096 CapMAC Holdings Inc. (Exact name of registrant as specified in its charter) Delaware (State of Incorporation) 13-3670828 (IRS employer identification no.) 885 Third Avenue New York, New York 10022 (Address of principal executive offices) (212) 755-1155 (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 As of October 31, 1997, 17,331,104 shares (net of treasury shares) of Common Stock, par value $0.01 per share of the Registrant were outstanding. Page 1 of 31 Pages Index to Exhibits on Page 22 CapMAC Holdings Inc. and Subsidiaries INDEX PART I FINANCIAL INFORMATION PAGE Item 1. Consolidated Financial Statements Consolidated Balance Sheets - September 30, 1997 and December 31, 1996...................................................4 Consolidated Statements of Income - three months ended and nine months ended September 30, 1997 and September 30, 1996..................5 Consolidated Statements of Stockholders' Equity - nine months ended September 30, 1997................................................6 Consolidated Statements of Cash Flows - nine months ended September 30, 1997 and September 30, 1996.........................7 Notes to Consolidated Financial Statements..............................8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........................10 PART II OTHER INFORMATION, AS APPLICABLE Item 6. Exhibits and Reports on Form 8-K.................................20 SIGNATURES..................................................................21 INDEX TO EXHIBITS...........................................................22 Part 1 - Financial Information Item 1 - Financial Statements of CapMAC Holdings Inc. and Subsidiaries. ' 2 CapMAC HOLDINGS INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 (Unaudited) 3 CapMAC Holdings Inc. and Subsidiaries Consolidated Balance Sheets (Dollars in thousands) ASSETS
September 30,1997 December 31,1996 (Unaudited) Investments: Bonds at fair value (amortized cost $332,595 at September 30, 1997 and $302,284 at December 31, 1996) $ 337,667 305,422 Short-term investments (at amortized cost which approximates fair value) 37,219 33,752 Common stock 394 - Investment in affiliates 35,673 34,886 Total investments 410,953 374,060 - ------------------------------------------------------------------------------------------------------------- Cash 1,577 966 Accrued investment income 4,097 3,847 Deferred acquisition costs 51,137 45,380 Premiums receivable 7,132 5,141 Prepaid reinsurance 23,348 18,489 Current income taxes 782 - Other assets 14,894 9,351 Total assets $ 513,920 457,234 ============================================================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY Unearned premiums $ 76,023 68,262 Reserve for losses and loss adjustment expenses 15,389 10,985 Ceded reinsurance 5,653 1,738 Accounts payable and other accrued expenses 24,421 15,274 Senior notes 15,000 15,000 Current income taxes - 2,890 Deferred income taxes 13,120 9,590 Total liabilities 149,606 123,739 - ------------------------------------------------------------------------------------------------------------- Minority Interest 23,111 23,108 - ------------------------------------------------------------------------------------------------------------- Stockholders' Equity: Preferred stock - $0.01 par value per share; 20,000,000 shares are authorized; none outstanding at September 30, 1997 and December 31, 1996 - - Common stock - $0.01 par value per share; 50,000,000 shares are authorized; 17,331,189 and 16,425,324 shares issued September 30, 1997, and December 31,1996; 17,331,104 and 16,425,274 shares outstanding at September 30, 1997, and December 31, 1996 173 164 Additional paid-in capital 229,979 226,428 Unrealized appreciation (depreciation) on investments, net of tax 3,254 (71) Retained earnings 112,438 89,310 Unallocated ESOP shares (4,550) (5,430) Cumulative translation adjustment, net of tax (89) (14) Treasury stock (2) - - ------------------------------------------------------------------------------------------------------------- Total stockholders' equity 341,203 310,387 - ------------------------------------------------------------------------------------------------------------- Total liabilities, minority interest, and stockholders' equity $ 513,920 457,234 ============================================================================================================= See accompanying notes to consolidated financial statements.
4 CapMAC Holdings Inc. and Subsidiaries Consolidated Statements of Income (Unaudited) (Dollars in thousands, except per share data)
Three Months Ended Nine Months Ended September 30 September 30 1997 1996 1997 1996 Revenues: Direct premiums written $ 22,345 17,206 57,525 49,983 Assumed premiums written 225 8 1,141 1,032 Ceded premiums written (7,428) (4,129) (18,049) (11,142) - ------------------------------------------------------------------------------------------------------------ Net premiums written 15,142 13,085 40,617 39,873 (Increase) decrease in unearned premiums (1,663) (3,042) (2,903) (11,014) - ------------------------------------------------------------------------------------------------------------ Net premiums earned 13,479 10,043 37,714 28,859 Advisory and other fees 7,268 5,750 17,941 21,327 Net investment income 5,179 4,485 15,589 12,404 Net realized capital (losses) gains - (58) (1,198) 110 Other income 26 53 74 160 - ------------------------------------------------------------------------------------------------------------ Total revenues 25,952 20,273 70,120 62,860 - ------------------------------------------------------------------------------------------------------------ Expenses: Losses and loss adjustment expenses 1,528 1,248 4,404 3,432 Underwriting and operating expenses 7,251 4,916 21,550 14,031 Policy acquisition costs 2,372 2,126 7,425 6,249 Interest expense 300 300 902 902 - ------------------------------------------------------------------------------------------------------------ Total expenses 11,451 8,590 34,281 24,614 - ------------------------------------------------------------------------------------------------------------ Income before income taxes and minority interest 14,501 11,683 35,839 38,246 - ------------------------------------------------------------------------------------------------------------ Income Taxes: Current income tax 2,953 3,758 9,936 10,877 Deferred income tax 2,301 (240) 1,845 1,414 Total income taxes 5,254 3,518 11,781 12,291 - ------------------------------------------------------------------------------------------------------------ Income before minority interest 9,247 8,165 24,058 25,955 - ------------------------------------------------------------------------------------------------------------ Minority interest 223 74 91 519 - ------------------------------------------------------------------------------------------------------------ NET INCOME $ 9,470 8,239 24,149 26,474 ============================================================================================================ Primary earnings per share $ 0.53 0.46 1.34 1.51 Fully diluted earnings per share $ 0.53 0.46 1.34 1.47 ============================================================================================================ See accompanying notes to consolidated financial statements.
5 CapMAC Holdings Inc. and Subsidiaries Consolidated Statement of Stockholders' Equity (Unaudited) (Dollars in thousands)
Nine Months Ended September 30, 1997 Common stock: Balance at beginning of period $ 164 Common stock issued 9 - -------------------------------------------------------------------------------- Balance at end of period 173 - -------------------------------------------------------------------------------- Additional paid-in capital: Balance at beginning of period 226,428 Issuance of common stock 3,551 - -------------------------------------------------------------------------------- Balance at end of period 229,979 - -------------------------------------------------------------------------------- Unrealized appreciation (depreciation) on investments, net of tax: Balance at beginning of period (71) Unrealized appreciation on investments 3,325 Balance at end of period 3,254 - -------------------------------------------------------------------------------- Retained earnings: Balance at beginning of period 89,310 Net income 24,149 Dividends declared - $.02 per share (1,021) Balance at end of period 112,438 - -------------------------------------------------------------------------------- Unallocated ESOP shares: Balance at beginning of period (5,430) Allocation of ESOP shares 880 Balance at end of period (4,550) - -------------------------------------------------------------------------------- Cumulative translation adjustment, net of tax: Balance at beginning of period (14) Translation adjustment (75) - -------------------------------------------------------------------------------- Balance at end of period (89) - -------------------------------------------------------------------------------- Treasury stock: Balance at beginning of period - Treasury shares acquired (2) - -------------------------------------------------------------------------------- Balance at end of period (2) - -------------------------------------------------------------------------------- Total stockholders' equity $ 341,203 ================================================================================ See accompanying notes to consolidated financial statements.
6 CapMAC Holdings Inc. and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) (Dollars in thousands)
Nine Months Ended Nine Months Ended September 30, 1997 September 30, 1996 Cash flows from operating activities: Net income $ 24,149 26,474 - ------------------------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided (used) by operating activities: Reserve for losses and loss adjustment expenses 4,404 3,054 Unearned premiums, net 7,761 15,643 Deferred acquisition costs (5,757) (7,188) Premiums receivable (1,991) (528) Accrued investment income (250) (468) Income taxes payable (1,245) 1,298 Net realized capital (gains) losses 1,198 (110) Accounts payable and other accrued expenses 9,147 8,055 Prepaid reinsurance (4,859) (4,630) Other, net (2,914) (5,520) Total adjustments 5,494 9,606 - ------------------------------------------------------------------------------------------------- Net cash provided by operating activities 29,643 36,080 Cash flows from investing activities: Purchases of investments (156,195) (174,695) Purchases of investments in affiliates - (3,333) Proceeds from sale of investments 74,768 35,389 Proceeds from maturities of investments 49,558 104,447 Net cash used in investing activities (31,869) (38,192) - ------------------------------------------------------------------------------------------------- Cash flows from financing activities: Allocation of ESOP shares 880 801 Minority interest capital contribution to CapMAC Asia - 2,123 Dividends paid (1,021) (960) Exercise of stock options and warrants 2,978 435 Net cash provided by financing activities 2,837 2,399 - ------------------------------------------------------------------------------------------------- Net increase (decrease) in cash 611 287 Cash balance at beginning of period 966 1,033 Cash balance at end of period $ 1,577 1,320 ================================================================================================= Supplemental disclosures of cash flow information: Income taxes paid $ 12,931 10,646 Interest paid $ 564 564 Tax and loss bonds purchased $ 155 131 =================================================================================================
See accompanying notes to consolidated financial statements. 7 CapMAC Holdings Inc. and Subsidiaries Notes to Consolidated Financial Statements September 30, 1997 1. Organization and Ownership CapMAC Holdings Inc. ("Holdings" or the "Company"), a Delaware corporation, is the sole stockholder of Capital Markets Assurance Corporation ("CapMAC"), CapMAC Financial Services Inc. ("CFS"), and CapMAC Investment Management, Inc ("CIM"). CapMAC Assurance, S.A. is a subsidiary of Capital Markets Assurance Corporation, and CapMAC Financial Services (Europe) Limited ("CFS (Europe)") is a subsidiary of CFS. The Company is also a lead investor in CapMAC Asia Ltd. ("CapMAC Asia"). Holdings provides financial guaranty insurance, principally of asset-backed obligations, through CapMAC. CapMAC's claims paying ability is rated triple-A by Moody's Investor Service, Inc., Standard & Poor's Ratings Services, Duff and Phelps Credit Rating Co. and Nippon Investors Service, Inc., a Japanese rating agency. Holdings also provides advisory and structuring services in connection with asset-backed financings through CFS. On December 19, 1995 Holdings sold 2,500,000 new shares of its common stock in an initial public offering. On July 5, 1996, Holdings completed a secondary public offering by some of its stockholders of 3,737,500 shares of common stock. The Company did not receive any proceeds from the offering. 2. Basis of Presentation The Company's consolidated unaudited interim financial statements have been prepared on the basis of generally accepted accounting principles and, in the opinion of management, reflect all adjustments necessary for a fair presentation of the Company's financial condition, results of operations and cash flows for the periods presented. The results of operations for the nine-months ended September 30, 1997 may not be indicative of the results that may be expected for the full year ending December 31, 1997. These consolidated financial statements and notes should be read in conjunction with the financial statements and notes included in the audited financial statements of CapMAC Holdings Inc. and its subsidiaries contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1996, which was filed with the Securities and Exchange Commission on March 31, 1997. 3. Reclassifications Certain prior period balances have been reclassified to conform to the current period presentation. 4. Recent Accounting Pronouncement In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128, Earnings Per Share ("Statement 128"). Statement 128 supersedes APB Opinion No. 15, Earnings Per Share, ("APB Opinion No. 15"), and specifies the computation, presentation, and disclosure requirements for earnings per share for entities with publicly held common stock or potential common stock. Statement 128 was issued to simplify the computation of earnings per share. It requires dual presentation of "basic earnings per share" and "diluted earnings per share" as defined. Statement 128 is effective for financial statements for both interim and annual periods ending after December 15, 1997. Earlier application is not permitted. After adoption, all prior period earnings per share data presented shall be restated to conform with Statement 128. 8 CapMAC Holdings Inc. and Subsidiaries Notes to Consolidated Financial Statements September 30, 1997 Under APB Opinion No. 15, the Company's primary and fully diluted earnings per share amounts are $0.53 and $0.46 per share for the three-month periods ended September 30, 1997 and 1996, respectively. The Company's primary earnings per share amounts are $1.34 and $1.51 per share for the nine-month periods ended September 30, 1997 and 1996, respectively, and the fully diluted earnings per share amounts for the nine-month periods ended September 30, 1997 and 1996 are $1.34 and $1.47 per share, respectively. The basic earnings per share amounts, as computed under Statement 128, are expected to be approximately $0.56 and $0.53 per share for the three-month periods ended September 30, 1997 and 1996, respectively and $1.45 and $1.70 per share for the nine-month periods ended September 30, 1997 and 1996, respectively. The Company anticipates the adoption of Statement 128 will result in the presentation of diluted earnings per share amounts which will not materially differ from the fully diluted amounts previously presented under APB Opinion No. 15. 9 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General On November 14, 1997, CapMAC Holdings Inc. ("Holdings" or the "Company") entered into an agreement with MBIA, Inc. ("MBIA") to merge the two companies in a stock transaction. Under the agreement, shareholders of Holdings will receive MBIA stock equal to $35 for each share of Holdings stock. If MBIA's stock price falls below $53 per share, shareholders of Holdings will receive a fixed exchange ratio of 0.6604 shares of MBIA stock for each share of Holdings stock, and if MBIA's stock price rises above $70 per share, shareholders of Holdings will receive a fixed exchange ratio of 0.5000 shares of MBIA stock for each Holdings share. The fixed exchange ratio will be determined by the average closing price of MBIA's stock for 15 consecutive days, ending three days prior to the closing of the transaction. It is anticipated that the merger will be structured as a tax-free exchange and accounted for as a "pooling of interests." The transaction, which is subject to regulatory approvals, approval by shareholders of Holdings and other customary conditions, is expected to be completed by the end of the first quarter of 1998. Holdings, a Delaware corporation, is the sole stockholder of Capital Markets Assurance Corporation ("CapMAC"), CapMAC Financial Services Inc. ("CFS"), and CapMAC Investment Management, Inc ("CIM"). CapMAC Assurance, S.A. is a subsidiary of CapMAC, and CapMAC Financial Services (Europe) Limited ("CFS (Europe)") is a subsidiary of CFS. The Company is also a lead investor in CapMAC Asia Ltd. ("CapMAC Asia"). Results of Operations Quarter Ended September 30, 1997 versus Quarter Ended September 30, 1996 The Company reported net income of $9.5 million and primary and fully diluted earnings per share of $0.53 during the third quarter of 1997 representing an increase of 15% from net income of $8.2 million, or $0.46 per share on a primary and fully diluted basis, reported for the third quarter of 1996. Operating earnings, which the Company defines as net income less the effect of net realized gains and losses, were $9.5 million, or $0.53 per share, up from $8.3 million, or $0.46 per share, earned in the third quarter of 1996. Total revenues during the third quarter of 1997 were $26.0 million, an increase of 28% from $20.3 million during the third quarter of 1996. This increase was primarily due to higher premiums earned, advisory and other fees and net investment income. For the third quarter of 1997, gross premiums written were $22.6 million, an increase of 31% from $17.2 million for the same period in 1996. This increase was principally due to higher premiums written of $4.4 million from international transactions and $1.0 million from domestic consumer transactions. The amount of premiums ceded to reinsurers increased by 80% to $7.4 million during the third quarter of 1997 from $4.1 million in the third quarter of 1996. This was a result of upfront premiums collected and ceded for large international transactions during the third quarter of 1997 and premiums ceded for certain secondary market transactions closed in a prior period. Net premiums earned were $13.5 million for the third quarter of 1997, an increase of 35% from $10.0 million for the corresponding period in 1996. CapMAC collects premiums primarily on an installment basis over the term of an insurance policy and, to a lesser extent, on a one-time, up-front basis at the time an insurance policy is issued. Due to the annuity nature of premium income, CapMAC has an embedded future revenue stream which will be collected and recognized as revenue not only in the year an insurance policy is issued, but over the full term such policy is outstanding. CapMAC reflects a relatively 10 small portion of the expected future revenue on the business written in the current period as premium earnings in the same period. To measure the amount of business written in a period, the Company tracks the total estimated present value of future revenues ("PFR"), which includes premiums (net of ceded premiums) and ceding commission income expected to be contractually due to or to be earned by CapMAC in the future under outstanding policies. The amount of PFR generated in any given period is based on the weighted average life of the guarantees issued during the period and the net premium and ceding commissions expected to be earned with respect to such guarantees, whereas "gross par written" is based on the principal amount of guarantees issued and aggregate program limits with respect to commercial paper conduit transactions. Accordingly, an increase or decrease in PFR may not proportionately correspond with an increase or decrease in gross par written. Business originated or renewed in the third quarter of 1997 was estimated to generate $39.5 million of PFR, an increase of 99% over the $19.8 million of PFR generated in the same period in 1996. This increase was due to higher net premium and ceding commissions primarily from certain international and consumer transactions partially offset by a decrease in net premium and ceding commissions from corporate transactions. Correspondingly, gross par written increased to $2.8 billion in the third quarter of 1997 from $2.2 billion in the third quarter of 1996, representing an increase of 30%. At September 30, 1997, CapMAC had 664 policies outstanding which are expected to generate $268.1 million of PFR, up approximately 15% from $232.7 million at December 31, 1996 relating to 607 policies outstanding at such date. The discount rate used for purposes of the PFR calculation was 7% for 1997 and 1996. At September 30, 1997, net par insured and outstanding was $23.2 billion, up 18% from $19.7 billion at December 31, 1996. The remaining weighted average life of the insured portfolio was estimated to be 6.5 years at September 30, 1997 and 6.4 years at December 31, 1996. Advisory and other fees increased 26% to $7.3 million in the third quarter of 1997 from $5.8 million in the third quarter of 1996. Advisory fees are generally received by CFS in relation to the closing of transactions which involve advisory and structuring services provided by CFS. Fees collected for such services amounted to $4.5 million in the third quarter of 1997, compared to $4.0 million in the third quarter of 1996. In addition to advisory fees, CFS also collects recurring fees payable on a monthly and quarterly basis ("other fees") primarily related to arranging for liquidity providers in transactions involving insurance of commercial paper ("liquidity facility fees"), providing financial technology to Mitsui Marine and Fire Insurance Co., Ltd. ("Mitsui Marine") under a cooperation agreement ("technology fees") and administering third-party owned and managed funding vehicles ("administrative fees"). The amount related to other fees was $2.8 million in the third quarter of 1997, compared to $1.8 million in the third quarter of 1996, primarily due to higher technology fees and administrative fees. Because advisory fees are generally earned upon the closing of certain transactions, the timing and number of transactions generating fees, as well as the amount of such fees, may result in significant fluctuations in revenues attributable to such fees from period to period. Net investment income was $5.2 million and $4.5 million in the third quarter of 1997 and 1996, respectively. Average assets available for investment during the third quarter of 1997 increased to $363.3 million from $323.5 million during the third quarter of 1996. The average annualized pre-tax yield on the investment 11 portfolio increased to 6.1% in the third quarter of 1997 from 5.8% in the third quarter of 1996 due to a higher interest rate environment. The average after-tax yield on the investment portfolio was 4.7% in both the third quarter of 1997 and 1996. The amount of tax-exempt securities held in the Company's investment portfolio decreased to 49% at September 30, 1997 from 58% at September 30, 1996. There were no net capital gains realized for the third quarter of 1997 as compared to $0.06 million of net capital losses in the third quarter of 1996. Total expenses were $11.5 million in the third quarter of 1997, an increase of 33% from $8.6 million in the third quarter of 1996. Total expenses included additions to the reserve for losses and loss adjustment expenses, underwriting and operating expenses, policy acquisition costs, and interest expense. CapMAC maintains a reserve for losses and loss adjustment expenses which consists of a supplemental loss reserve ("SLR") and, if appropriate, a case basis loss reserve for expected levels of defaults resulting from credit failures on currently insured issues. The SLR is based on estimates of the portion of earned premiums required to cover those claims. A case basis loss reserve is established for insured obligations when, in the judgment of management, a default in the timely payment of debt service is imminent. For defaults considered temporary, a case basis loss reserve is established in an amount equal to the present value of the anticipated defaulted debt service payments over the expected period of default. If the default is judged not to be temporary, the present value of all remaining defaulted debt service payments is recorded as a case basis loss reserve. Anticipated salvage recoveries are considered in establishing case basis loss reserves when such amounts are reasonably estimable. Corresponding to the growth in the insured portfolio, the losses and loss adjustment expenses (in the form of additions to the SLR) were $1.5 million in the third quarter of 1997 compared to $1.2 million in the third quarter of 1996. Apart from additions to the SLR, the Company incurred no losses during the first nine months of 1997 and the year ended December 31, 1996. Underwriting and operating expenses were $7.3 million in the third quarter of 1997, a 48% increase from $4.9 million in the first quarter of 1996. Underwriting and operating expenses consisted of gross underwriting and operating expenses, reduced by the deferral to future periods of certain costs related to CapMAC's acquisition of new business ("Deferred Acquisition Costs" or "DAC") and ceding commission income. Gross underwriting and operating expenses were $10.4 million and $9.5 million in the third quarter of 1997 and 1996, respectively. The increase in underwriting and operating expenses was due to increased operating costs. Staff and benefit-related expenses, including the accrual of discretionary bonuses to employees, constituted approximately 64% of gross underwriting and operating expenses in the third quarter of 1997 compared to 74% in the third quarter of 1996. The Company maintains a discretionary bonus 12 plan under which annual bonuses are awarded to employees. For the three months ended September 30, 1997 and September 30, 1996, $0.6 million and $2.5 million were accrued, respectively, for payment of bonuses under such plan. Underwriting and operating expenses deferred by CapMAC were $3.2 million and $4.6 million in the third quarter of 1997 and 1996, respectively. Policy acquisition costs represent the amortization of DAC, which are those expenses incurred by CapMAC in acquiring new business. The increase in policy acquisition costs to $2.4 million in the third quarter of 1997 from $2.1 million in the third quarter of 1996 related to the increase in premiums earned in the corresponding periods. Interest expense related to the senior debt was $0.3 million in the third quarter of 1997 and 1996. In the third quarter of 1997 and 1996, the Company had net tax expense of $5.3 million and $3.5 million, respectively. The Company's effective tax rate was 35.4% and 29.8% for the third quarter of 1997 and 1996, respectively. During the third quarter of 1997 the effective tax rate was higher than the statutory tax rate of 35% as the Company was not able to utilize certain operating and capital losses it incurred. Additionally, tax exempt interest income as a percentage of earnings before taxes ("EBT") for the third quarter of 1997 was lower than the third quarter of 1996. The effective tax rate during the third quarter of 1996 was lower than the statutory tax rate of 35% primarily due to tax-exempt interest income from the Company's investment portfolio. In the third quarter of 1997, tax-exempt interest income of $2.4 million represented 16% of EBT compared to $2.5 million which represented 21% of EBT in the third quarter of the prior year. Results of Operations Nine Months Ended September 30, 1997 versus Nine Months Ended September 30, 1996 The Company reported net income of $24.1 million and primary and fully diluted earnings per share of $1.34 during the first nine months of 1997. Although the Company recorded growth in net premiums earned and business written during the first nine months of 1997, lower advisory fees and net realized capital losses recorded in the first quarter of 1997 resulted in a decline in net income of 9% from $26.5 million or $1.51 per share on a primary basis and $1.47 on a fully diluted basis in the first nine months of 1996. Operating earnings were $24.9 million, or $1.38 per share on a primary and fully diluted basis for the first nine months of 1997, down from $26.4 million, or $1.50 and $1.47 per share on a primary and fully diluted basis, respectively, earned in the first nine months of 1996. The decline in operating earnings was attributable to lower advisory fees earned during the first quarter of 1997. Total revenues during the first nine months of 1997 were $70.1 million, an increase of 12% from $62.9 million during the first nine months of 1996. This increase was primarily due to higher premiums earned, net investment income and other fees partially offset by lower advisory fees. For the first nine months of 1997, gross premiums written were $58.6 million as compared to $51.0 million for the same period in 1996. This increase was principally due to higher premiums written of $3.4 million from domestic consumer transactions, $2.7 million from international transactions, $2.0 million from corporate transactions, offset by lower premiums written with respect to municipal business of $0.5 million. However, because premiums ceded 13 to reinsurers increased to $18.0 million during the first nine months of 1997 from $11.1 million in the first nine months of 1996, the net amount of premiums written, after giving effect to premiums ceded, was $40.6 million in the first nine months of 1997 as compared to $39.9 million for the first nine months of 1996. The increase in premiums ceded was a result of upfront premiums collected and ceded for large international transactions during the third quarter of 1997 and premiums ceded for certain secondary market transactions closed in a prior period. The amount of premiums ceded to reinsurers in 1996 was reduced in part because on January 1, 1996, CapMAC reassumed the liability for all policies previously reinsured by Winterthur Swiss Insurance Company ("Winterthur"), resulting in the reassumption by CapMAC of approximately $1.4 billion of principal insured by Winterthur as of December 31, 1995. In connection with this reassumption of liability, Winterthur commuted and returned $2.0 million of unearned premiums, net of ceding commission and Federal excise tax. Net premiums earned were $37.7 million for the first nine months of 1997, an increase of 31% from $28.9 million for the corresponding period in 1996. Business originated or renewed in the first nine months of 1997 was estimated to generate $78.8 million of PFR, an increase of 35% over the same period in 1996 due to higher premiums earned and ceding commissions obtained primarily from corporate transactions and international transactions. Correspondingly, the amount of guarantees issued (gross par written) increased to $9.6 billion in the first nine months of 1997 from $7.2 billion in the first nine months of 1996, representing an increase of 33%. Advisory and other fees decreased 16% to $17.9 million in the first nine months of 1997 from $21.3 million in the first nine months of 1996. Advisory fees amounted to $10.3 million in the first nine months of 1997, compared to $17.6 million in the first nine months of 1996. During the second quarter of 1997 advisory fees included $1.6 million paid in connection with the early termination of a transaction. Structured international transactions closed during the first quarter of 1996 contributed to the comparatively large amount of advisory fees collected during that period. Advisory fees related to international business were $6.4 million and $15.7 million in the first nine months of 1997 and 1996, respectively. In addition to advisory fees, CFS also collects recurring fees payable on a monthly and quarterly basis ("other fees") primarily related to arranging for liquidity providers in transactions involving insurance of commercial paper ("liquidity facility fees"), providing financial technology to Mitsui Marine under a cooperation agreement ("technology fee") and administering third-party owned and managed funding vehicles ("administrative fees"). The amount related to other fees was $7.7 million in the first nine months of 1997, compared to $3.7 million in the first nine months of 1996, primarily due to higher liquidity facility fees, technology fees and administrative fees. As advisory fees are generally earned upon the closing of certain transactions, the timing and number of transactions generating fees, as well as the amount of such fees, may result in significant fluctuations in revenues attributable to such fees from period to period. 14 Net investment income was $15.6 million in the first nine months of 1997 and $12.4 million for the corresponding period in 1996. Average assets available for investment increased to $351.0 million during the nine-month period ended September 30, 1997 from $312.3 million during the nine-month period ended September 30, 1996. The average annualized pre-tax yield on the investment portfolio increased to 6.0% in the first nine months of 1997 from 5.7% in the first nine months of 1996. The average after-tax yield on the investment portfolio was 4.7% in the first nine months of 1997 and 4.6% in the corresponding period in 1996. Net realized capital (losses) gains in the first nine months of 1997 and 1996 were ($1.2 million) and $0.1 million, respectively. In the first quarter of 1997, the Company recorded a pre-tax capital loss of $3.7 million (in addition to a $2.0 million loss realized in the fourth quarter of 1996) related to Holdings' investment in three derivatives products subsidiaries of The Mutual Life Assurance Company of Canada (such subsidiaries, the "TMG Group"). Holdings was committed to purchase common stock in TMG Group for approximately $11 million and fund its investment in TMG Group no later than February 27, 2000 at which time the commitment amount would have contractually increased to approximately $13 million. On July 8, 1997, Holdings sold its interest in the TMG Group at its March 31, 1997 carrying value of $5.5 million. As a result, no additional realized losses or gains were recognized in connection with the sale. Holdings has no remaining commitment to purchase stock in the TMG Group. Total expenses were $34.3 million in the first nine months of 1997, an increase of 39% from $24.6 million in the first nine months of 1996. Total expenses included additions to the reserve for losses and loss adjustment expenses, underwriting and operating expenses, policy acquisition costs, and interest expense. Corresponding to the growth in the insured portfolio, the losses and loss adjustment expenses (in the form of additions to the supplemental loss reserve) were $4.4 million in the first nine months of 1997 compared to $3.4 million in the first nine months of 1996. Underwriting and operating expenses were $21.5 million in the first nine months of 1997, a 54% increase from $14.0 million in the first nine months of 1996. Underwriting and operating expenses consisted of gross underwriting and operating expenses, reduced by DAC and ceding commission income. Gross underwriting and operating expenses were $34.7 million and $27.5 million in the first nine months of 1997 and 1996, respectively. The increase in underwriting and operating expenses was due to increased compensation costs and other operating costs. Staff and benefit-related expenses, including the accrual of discretionary bonuses to employees, constituted approximately 69% of gross underwriting and operating expenses in the first nine months of 1997 compared to 74% in the first nine months of 1996. The Company maintains a discretionary bonus plan under which annual bonuses are awarded to employees. As of September 30, 1997 and 1996, $6.7 million and $7.4 million were accrued, respectively, for payment of bonuses under such plan. Underwriting and operating expenses deferred by CapMAC were $13.2 million and $13.4 million in the first nine months of 1997 and 1996, respectively. 15 The increase in policy acquisition costs to $7.4 million in the first nine months of 1997 from $6.2 million in the first nine months of 1996 corresponds to the increase in premiums earned in the corresponding periods. Interest expense related to the senior debt was $0.9 million in the first nine months of 1997 and 1996. In the first nine months of 1997 and 1996, the Company had net tax expense of $11.8 million and $12.3 million, respectively. The Company's effective tax rate was 33% and 32% for the first nine months of 1997 and 1996, respectively. The effective tax rates during these periods were lower than the statutory tax rate of 35% in 1997 and 1996 primarily due to tax-exempt interest income. For the nine months ended September 30, 1997, tax-exempt interest income of $7.1 million represented 20% of EBT compared to $7.3 million representing 19% of EBT in the first nine months of the prior year. Liquidity and Capital Resources The Company and Holdings. The operations of the Company are conducted primarily through CapMAC and CFS, wholly owned subsidiaries of Holdings. In addition, the Company has commenced conducting operations through CIM, its investment advisory subsidiary which was capitalized in the first quarter of 1997. The liquidity of Holdings both on a short-term (less than twelve months) and long-term (twelve months or longer) basis will be dependent on several factors, including borrowings, equity issuances and dividends from CFS. Holdings requires liquidity for payment of dividends to shareholders, investment in international and other business ventures and debt service. While CFS has from time to time paid dividends to Holdings, currently no dividends are expected to be received by Holdings from CapMAC. The Company's investment portfolio consists of both equity investments and high quality, intermediate-term taxable and tax-exempt securities, and investment in subordinated tranches of collateralized bond obligations in connection with its financial engineering activities to obtain an optimal portfolio mix of liquidity, quality, maturity and earnings. The average contractual maturity of securities within the investment portfolio was 6.0 years at September 30, 1997 and 6.1 years at December 31, 1996. The average duration of the investment portfolio at September 30, 1997 and December 31, 1996 was 4.2 years and 4.3 years, respectively. At September 30, 1997, the amortized cost of the Company's investment portfolio was approximately $370.2 million (fair value of $375.3 million). The foregoing discussion excludes equity investments. Holdings' equity investments include investments in P.T. ABS Finance Indonesia and CapMAC Asia as well as other equity investments which are not liquid such as investments in specialized finance companies. Holdings has also agreed to invest, if required, an additional amount of $4.9 million in CapMAC Asia. Management believes that the Company's operating liquidity needs, both on a short-term basis and long-term basis, can be funded exclusively from its operating cash flow. The Company has a number of sources of liquidity which it expects to have available to pay claims on CapMAC insurance policies on a short-term and long-term basis: the cash flow from its written premiums, advisory fees collected, its investment portfolio and the earnings thereon, its bank line of credit, its reinsurance arrangements with third-party reinsurers, the capital markets and, under certain circumstances, realizations from collateral underlying its insured transactions. The Company has no material commitments for capital expenditures, except for the CapMAC Asia investment commitment referred to above. The total liquidity resources of the Company represented by its investment income, premiums, advisory fees and liquidity arrangements are, in management's opinion, adequate to meet the Company's cash needs. 16 In the second quarter of 1997, the Company issued 725,539 new shares of common stock in connection with the exercise and purchase of warrants. The warrants had given the holders the right to purchase approximately 1.5 million shares of common stock at a price of $13.33 per share. The number of shares issued to warrant holders in connection with the Company's purchase or exercise of warrants was based on the average closing price of the Company's common stock on each of the ten business days preceding and including the purchase or exercise date. As discussed in "General" above, the Company has signed an agreement to merge with MBIA, Inc. Any such merger, if consummated, is anticipated to increase the sources of liquidity available to the Company. CapMAC. CapMAC's primary sources of funds are from premiums received and earnings from its investment portfolio. Currently CapMAC's primary use of funds is to pay operating expenses. In the event of a default by an issuer of an insured obligation which results in a claim on a CapMAC insurance policy, after exhaustion of other liquidity sources which may be available in the transaction, such as the cash flow from the collateral underlying such obligations, funds from CapMAC's investment portfolio may be required to satisfy claims. CapMAC generally insures asset-backed transactions which have been structured to address liquidity risks through, among other measures, the addition of other liquidity sources, such as banks, to transactions. The insurance policies issued by CapMAC provide, in general, that payment of principal, interest and other amounts insured by CapMAC may not be accelerated by the holder of the obligation but are paid by CapMAC in accordance with the obligation's original payment schedule or, at CapMAC's option, on an accelerated basis. These policy provisions prohibiting acceleration of certain claims are mandatory under Article 69 of the New York Insurance Law and serve to reduce CapMAC's liquidity requirements. CapMAC has a conservative investment strategy of investing in U.S. government and agency obligations and securities that are rated "A" or better by the major rating agencies. CapMAC has readily marketable, high quality, fixed income securities and short-term investments in its investment portfolio. The average contractual maturity of securities within the investment portfolio was 6.3 years and 6.1 years at September 30, 1997 and December 31, 1996, respectively. The average duration of the investment portfolio at September 30, 1997 and December 31, 1996 was 4.5 years and 4.3 years, respectively. At September 30, 1997, the amortized cost of CapMAC's investment portfolio was approximately $344.2 million (fair value of $349.2 million). CapMAC manages its investments with the objectives of preserving its capital and claims-paying ability, maintaining a high level of liquidity, minimizing taxes and, within these constraints, optimizing long-term total return. CapMAC has available a $150 million, standby corporate liquidity facility presently scheduled to terminate in June 12, 2000 which, if necessary, is available (subject to satisfaction of customary drawing conditions) to provide funds for any claims payments under its policies. The liquidity facility is provided by a consortium of banks headed by Bank of Montreal, as agent, which is rated A1+ and P1 by Standard & Poor's Ratings Services (S&P) and Moody's Investors Service, Inc., respectively. As of September 30, 1997, CapMAC has never borrowed under this corporate liquidity facility. Reinsurance arrangements provide a further source of liquidity to CapMAC. CapMAC actively pursues reinsurance as a means of diversifying and reducing risk, enhancing return on capital and adding underwriting capacity. In addition to its facultative and treaty reinsurance agreements, CapMAC has several "stop-loss" reinsurance treaties. Effective January 1, 1997 the stop-loss reinsurance coverage increased to $75 million in excess of incurred losses above $150 million. This coverage increases annually based on increases in CapMAC's statutory qualified capital. The stop-loss reinsurance is provided by Mitsui, Marine and Fire Insurance Co., Ltd. ("Mitsui"), AXA Re Finance S.A. ("AXA Re"), and Munchener 17 Ruckversicherungs-Gesellschaft ("Munich Re"). At September 30, 1997, the majority of CapMAC's reinsurance capacity was held by reinsurers who were rated AA or better by S&P. CapMAC monitors the creditworthiness of all of its reinsurers on a regular basis. At September 30, 1997, CapMAC had statutory qualified capital, which consisted of statutory capital, unassigned surplus and contingency reserves, of $278.6 million up from $260.2 million at December 31, 1996. CapMAC's policyholders' leverage ratio, which is measured by the ratio of net principal and interest insured to statutory qualified capital, was 98 to 1 at September 30, 1997 and 90 to 1 at December 31, 1996. These ratios were within aggregate limits permissible under New York State Financial Guaranty Law. CapMAC's claims-paying resources as defined by the Company (which includes statutory qualified capital, PFR and stop-loss reinsurance) stood at $621.7 million and $542.9 million at September 30, 1997 and December 31, 1996, respectively. In early 1997, CapMAC made an investment of 50 million French francs (approximately 10 million U.S. dollars) in CapMAC Assurance, S.A. an insurance subsidiary established in Paris, France. CapMAC Assurance, S.A., is licensed to write financial guarantee insurance in the European Union member states. In the third quarter of 1997, CapMAC Assurance, S.A. closed its first transaction. CapMAC Financial Services. The primary sources of funds for CFS are payments by Holdings, CapMAC and CFS (Europe) under a service agreement (the "CFS Servicing Agreement") and the collection of advisory fees for providing advisory and structuring services to third parties. In addition, both CFS and CFS (Europe) generate earnings from their respective investment portfolios. At September 30, 1997, the amortized cost and fair value of the consolidated CFS portfolio was $10.6 million. The entire portfolio was highly liquid with maturities of less than one year. The primary use of the funds of CFS is to pay its operating expenses. All of the Company's personnel (except employees of CIM) are employed by CFS. Under the CFS Servicing Agreement, CFS allocates expenses to Holdings, CapMAC and CFS (Europe) for services provided to these entities. It is intended that a portion of CFS' funds be used to pay dividends to Holdings in order that Holdings will have funds available to pay dividends and satisfy its obligations. CapMAC Investment Management. CIM is a registered investment advisor and has been formed for the purpose of establishing investment funds and providing investment advice regarding asset-backed structures, mortgage-backed securities, foreign and domestic fixed income and equity securities and certain other securities based on the investment objectives of its clients. CIM has been initially capitalized with approximately $2 million and has commenced operations in the first quarter of 1997. At September 30, 1997, CIM had approximately $151 million of assets under management. CIM generates revenues through fees charged for assets under management. Recent Accounting Pronouncement In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share ("Statement 128"). Statement 128 supersedes APB Opinion No. 15, Earnings Per Share, ("APB Opinion No. 15"), and specifies the computation, presentation, and disclosure requirements for earnings per share for entities with publicly held common stock or potential common stock. Statement 128 was issued to simplify the computation of earnings per share. It requires dual presentation of "basic earnings per share" and "diluted earnings per share" as defined. Statement 128 is effective for financial statements for both interim and annual periods ending after December 15, 1997. Earlier application is not permitted. After adoption, all prior period earnings per share data presented shall be restated to conform with Statement 128. 18 Under APB Opinion No. 15, the Company's primary and fully diluted earnings per share amounts are $0.53 and $0.46 per share for the nine-month periods ended September 30, 1997 and 1996, respectively. The Company's primary earnings per share amounts are $1.34 and $1.51 per share for the nine-month periods ended September 30, 1997 and 1996, respectively, and the fully diluted earnings per share amounts for the nine-month periods ended September 30, 1997 and 1996 are $1.34 and $1.47 per share, respectively. The basic earnings per share amounts, as computed under Statement 128, are expected to be approximately $0.56 and $0.53 per share for the three-month periods ended September 30, 1997 and 1996, respectively, and $1.45 and $1.70 per share for the nine-month periods ended September 30, 1997 and 1996, respectively. The Company anticipates the adoption of Statement 128 will result in the presentation of diluted earnings per share amounts which will not materially differ from the fully diluted amounts previously presented under APB Opinion No. 15. SFAS No. 130, Reporting Comprehensive Income, ("Statement 130") was issued in June 1997 and establishes standards for the reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income encompasses all changes in shareholders' equity (except those arising from transactions with owners) and includes net income, net unrealized capital gains or losses on available for sale securities and foreign currency translation adjustments. As this new standard only requires additional information in a financial statement, it will not affect the Company's financial position or results of operations. Statement 130 is effective for fiscal years beginning after December 15, 1997, with earlier application permitted. The Company is currently evaluating the presentation alternatives permitted by the statement. SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, ("Statement 131") was issued in June 1997 and establishes standards for the reporting of information relating to operating segments in annual financial statements, as well as disclosure of selected information in interim financial reports. This statement supersedes SFAS No. 14, Financial Reporting for Segments of a Business Enterprise, which requires reporting segment information by industry and geographic area (industry approach). Under Statement 131, operating segments are defined as components of a company for which separate financial information is available and is used by management to allocate resources and assess performance (management approach). This statement is effective for year-end 1998 financial statements. Interim financial information will be required beginning in 1999 (with comparative 1998 information). The Company is currently evaluating the segment information disclosures required by Statement 131. 19 PART II - OTHER INFORMATION Items 1 through 5 are omitted either because they are inapplicable or because the answer to such questions is negative. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 11 Computation of Earnings Per Share 27 Financial Data Schedule 99 Additional Exhibits - Capital Markets Assurance Corporation Financial Statements (b) Reports on Form 8-K - No Reports on Form 8-K were filed in this quarter. 20 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. CapMAC Holdings Inc. Registrant Date: November 14, 1997 /s/ Paul V. Palmer Paul V. Palmer Managing Director and Chief Financial Officer Date: November 14, 1997 /s/ Gerard Edward Murray Gerard Edward Murray Senior Vice President and Controller (Principal Accounting Officer) 21 Exhibit Index Page Number in Sequential Exhibit No. Exhibit Number Copy 11 Computation of Earnings Per Share 23 27 Financial Data Schedule 25 99 Capital Markets Assurance Corporation Financial Statements 26 22 Exhibit 11a CapMAC Holdings Inc. and Subsidiaries Statement Re Computation of Per Share Earnings (Dollars in thousands, except Per Share Amounts)
Three Months Ended Nine Months Ended September 30 September 30 1997 1996 1997 1996 E.P.S. - Fully Diluted - ---------------------------------------------------- ---------- ------------ ---------- -------- Net Income $ 9,470 8,240 $ 24,149 26,474 - ---------------------------------------------------- ---------- ------------ ---------- -------- Average number of common shares outstanding 16,977 15,627 16,672 15,548 Assumed exercise of dilutive stock options 975 2,420 1,304 2,421 Fully diluted number of shares 17,952 18,047 17,976 17,969 Earnings per share assuming full dilution $ .53 .46 $ 1.34 1.47 - ---------------------------------------------------- ---------- ------------ ---------- -------- Common stock equivalents 2,080 4,319 2,080 4,319 Proceeds from exercise of all equivalents $ 32,137 62,897 $ 32,137 62,897 Purchase of treasury stock 995 1,899 995 1,899 Market value per share $ 32.313 33.13 $ 32.313 33.13 - ---------------------------------------------------- ---------- ------------ ---------- -------- As of September 30, 1997 approximately 2,080,000 dilutive stock options had been granted and were outstanding. Based upon various exercise prices, the total consideration for the common stock equivalents will be approximately $32.1 million. Using the Treasury Stock Method, it is assumed that the proceeds from the exercised common stock equivalents would be used to purchase outstanding shares using a market value of $32.31 per share for nine months ended September 30, 1997. The dilution would be the equivalent of approximately 975,000 shares. The Treasury Stock Method is used to calculate EPS for periods during 1997, the Modified Treasury Method is used for EPS calculation during periods in 1996.
23 Exhibit 11b CapMAC Holdings Inc. and Subsidiaries Statement Re Computation of Per Share Earnings (Dollars in thousands, except Per Share Amounts)
Three Months Ended Nine Months Ended September 30 September 30 1997 1996 1997 1996 E.P.S. - Primary - ----------------------------------------------------- ---------- ------------ ---------- --------- Net Income $ 9,470 8,240 $ 24,149 26,474 - ----------------------------------------------------- ---------- ------------ ---------- --------- Average number of common shares outstanding 16,977 15,627 16,672 15,548 Assumed exercise of dilutive stock options 1,017 2,216 1,374 2,015 - ----------------------------------------------------- ---------- ------------ ---------- --------- Fully diluted number of shares 17,994 17,843 18,406 17,563 Earnings per share assuming full dilution $ .53 .46 $ 1.34 1.51 - ----------------------------------------------------- ---------- ------------ ---------- --------- Common stock equivalents 2,080 4,319 2,080 4,319 Proceeds from exercise of all equivalents $ 32,137 62,897 $ 32,167 62,897 Purchase of treasury stock 1,061 2,103 1,063 2,304 Average market value per share $ 30.30 29.91 $ 30.22 27.30 - ----------------------------------------------------- ---------- ------------ ---------- --------- As of September 30, 1997 approximately 2,080,000 dilutive stock options had been granted and were outstanding. Based upon various exercise prices, the total consideration for the common stock equivalents will be approximately $32.1 million. Using the Treasury Stock Method, it is assumed that the proceeds from the exercised common stock equivalents would be used to purchase outstanding shares using an average market value of $30.30 per share for nine months ended September 30, 1997. The dilution would be the equivalent of approximately 2,080,000 shares. The Treasury Stock Method is used to calculate EPS for periods during 1997, the Modified Treasury Method is used for EPS calculation during periods in 1996. 24
EX-27 2 FDS --
7 This schedule contains summary financial information extracted from CapMAC Holdings Inc. and Subsidiaries Consolidated Balance Sheets for the quarter ending September 30, 1997 and the consolidated statements of income, stockholders' equity and cash flows, for the quarter then ended and the notes thereto and is qualified in its entirety by reference to such financial statements. 0000889906 CapMAC Holdings Inc. 1000 US Dollar 9-mos Dec-31-1996 Jan-01-1997 Sep-30-1997 1 374886 0 0 394 0 0 410953 1577 0 51137 513920 15389 76023 0 0 15000 0 0 173 513747 513920 37714 15589 (1198) 18015 4404 7425 21550 35839 11781 0 0 0 0 24149 1.34 1.34 10985 0 0 0 0 15389 0
EX-99 3 CAPITAL MARKETS ASSURANCE CORPORATION CAPITAL MARKETS ASSURANCE CORPORATION AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS September 30, 1997 (Unaudited) 26 Capital Markets Assurance Corporation and Subsidiary Consolidated Balance Sheets (Dollars in thousands) ASSETS
September 30, 1997 December 31, 1996 (Unaudited) - ----------------------------------------------------------------------------------------------------- Investments: Bonds at fair value (amortized cost $323,043 at September 30, 1997 and $294,861 at December 31, 1996) $ 328,035 297,893 Short-term investments (at amortized cost which approximates fair value) 21,119 16,810 - ----------------------------------------------------------------------------------------------------- Total investments 349,154 314,703 - ----------------------------------------------------------------------------------------------------- Cash 999 371 Accrued investment income 3,998 3,807 Deferred acquisition costs 51,137 45,380 Premiums receivable 7,132 5,141 Prepaid reinsurance 23,348 18,489 Other assets 5,666 6,424 - ----------------------------------------------------------------------------------------------------- Total assets $ 441,434 394,315 ===================================================================================================== LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities: Unearned premiums $ 76,023 68,262 Reserve for losses and loss adjustment expenses 15,389 10,985 Ceded reinsurance 5,653 1,738 Accounts payable and other accrued expenses 14,270 8,019 Current income taxes 626 679 Deferred income taxes 17,383 15,139 - ----------------------------------------------------------------------------------------------------- Total liabilities 129,344 104,822 - ----------------------------------------------------------------------------------------------------- Stockholder's Equity: Common stock - $1.00 par value per share; 15,000,000 shares are authorized, issued and outstanding at September 30, 1997 and December 31, 1996 15,000 15,000 Additional paid-in capital 208,475 208,475 Unrealized appreciation on investments, net of tax 3,251 1,970 Retained earnings 85,440 64,048 Cumulative translation adjustment, net of tax (76) - - ----------------------------------------------------------------------------------------------------- Total stockholder's equity 312,090 289,493 - ----------------------------------------------------------------------------------------------------- Total liabilities and stockholder's equity $ 441,434 394,315 ===================================================================================================== See accompanying notes to consolidated financial statements.
27 Capital Markets Assurance Corporation and Subsidiary Consolidated Statements of Income (Unaudited) (Dollars in thousands)
Three Months Ended Nine Months Ended September 30 September 30 1997 1996 1997 1996 Revenues: Direct premiums written $ 22,345 17,206 57,525 49,983 Assumed premiums written 225 8 1,141 1,032 Ceded premiums written (7,428) (4,129) (18,049) (11,142) - ----------------------------------------------------------------------------------------------- Net premiums written 15,142 13,085 40,617 39,873 Increase in unearned premiums (1,663) (3,042) (2,903) (11,014) - ----------------------------------------------------------------------------------------------- Net premiums earned 13,479 10,043 37,714 28,859 Net investment income 4,958 4,307 14,344 12,296 Net realized capital gains (loss) - (57) 2,549 111 Other income 51 25 139 104 - ----------------------------------------------------------------------------------------------- Total revenues 18,488 14,318 54,746 41,370 - ----------------------------------------------------------------------------------------------- Expenses: Losses and loss adjustment expenses 1,528 1,248 4,404 3,432 Underwriting and operating expenses 4,430 3,780 13,309 11,142 Policy acquisition costs 2,372 2,126 7,425 6,249 - ----------------------------------------------------------------------------------------------- Total expenses 8,330 7,154 25,138 20,823 - ----------------------------------------------------------------------------------------------- Income before income taxes 10,158 7,164 29,608 20,547 - ----------------------------------------------------------------------------------------------- Income Taxes: Current income tax 2,502 1,027 6,652 3,008 Deferred income tax 172 718 1,564 2,689 - ----------------------------------------------------------------------------------------------- Total income taxes 2,674 1,745 8,216 5,697 - ----------------------------------------------------------------------------------------------- Net Income $ 7,484 5,419 21,392 14,850 =============================================================================================== See accompanying notes to consolidated financial statements.
28 Capital Markets Assurance Corporation and Subsidiary Consolidated Statement of Stockholder's Equity (Unaudited) (Dollars in thousands)
Nine Months Ended September 30, 1997 Common stock: Balance at beginning of period $ 15,000 - -------------------------------------------------------------------------------- Balance at end of period 15,000 - -------------------------------------------------------------------------------- Additional paid-in capital: Balance at beginning of period 208,475 - -------------------------------------------------------------------------------- Balance at end of period 208,475 Unrealized appreciation on investments, net of tax: Balance at beginning of period 1,970 Unrealized appreciation on investments 1,281 - -------------------------------------------------------------------------------- Balance at end of period 3,251 - -------------------------------------------------------------------------------- Retained earnings: Balance at beginning of period 64,048 Net income 21,392 - -------------------------------------------------------------------------------- Balance at end of period 85,440 - -------------------------------------------------------------------------------- Cumulative translation adjustment, net of tax: Balance at beginning of period - Translation adjustment (76) - -------------------------------------------------------------------------------- Balance at end of period (76) - -------------------------------------------------------------------------------- Total stockholder's equity $ 312,090 ================================================================================ See accompanying notes to consolidated financial statements.
29 Capital Markets Assurance Corporation and Subsidiary Consolidated Statements of Cash Flows (Unaudited) (Dollars in thousands)
Nine Months Ended Nine Months Ended September 30, 1997 September 30, 1996 - ------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 21,392 14,850 - ------------------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided (used) by operating activities: Reserve for losses and loss adjustment expenses 4,404 3,054 Unearned premiums, net 7,761 15,643 Deferred acquisition costs (5,757) (7,188) Premiums receivable (1,991) (528) Accrued investment income (191) (468) Income taxes payable 1,511 2,341 Net realized capital gains (2,549) (111) Accounts payable and other accrued expenses 6,251 5,445 Prepaid reinsurance (4,859) (4,630) Other, net 5,089 (381) - ------------------------------------------------------------------------------------------- Total adjustments 9,669 13,177 - ------------------------------------------------------------------------------------------- Net cash provided by operating activities 31,061 28,027 - ------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchases of investments (137,369) (154,308) Proceeds from sales of investments 74,768 35,388 Proceeds from maturities of investments 32,168 91,063 - ------------------------------------------------------------------------------------------- Net cash used in investing activities (30,433) (27,857) - ------------------------------------------------------------------------------------------- Net increase in cash 628 170 Cash balance at beginning of period 371 344 - ------------------------------------------------------------------------------------------- Cash balance at end of period $ 999 514 =========================================================================================== Supplemental disclosures of cash flow information: Income taxes paid $ 6,550 3,225 Tax and loss bonds purchased $ 155 131 =========================================================================================== See accompanying notes to consolidated financial statements.
30 Capital Markets Assurance Corporation and Subsidiary Notes to Unaudited Consolidated Financial Statements September 30, 1997 1. Background Capital Markets Assurance Corporation ("CapMAC") is a New York-domiciled monoline stock insurance company which engages only in the business of financial guaranty and surety insurance. CapMAC is a wholly owned subsidiary of CapMAC Holdings Inc. ("Holdings"). In early 1997, CapMAC made an investment of 50 million French francs (approximately 10 million U.S. dollars) in CapMAC Assurance, S.A., an insurance subsidiary to be established in Paris, France. CapMAC Assurance, S.A., is licensed to write financial guarantee insurance in the European Union member states. CapMAC is licensed in all 50 states in addition to the District of Columbia, the Commonwealth of Puerto Rico and the territory of Guam. CapMAC insures structured asset-backed, corporate, municipal and other financial obligations in the U.S. and international capital markets. CapMAC also provides financial guaranty reinsurance for structured asset-backed, corporate, municipal and other financial obligations written by other major insurance companies. CapMAC's claims-paying ability is rated triple-A by Moody's Investors Service, Inc., Standard & Poor's Ratings Services, Duff & Phelps Credit Rating Co., and Nippon Investors Service, Inc., a Japanese rating agency. Such ratings reflect only the views of the respective rating agencies, are not recommendations to buy, sell or hold securities and are subject to revision or withdrawal at any time by such rating agencies. 2. Basis of Presentation CapMAC's consolidated unaudited interim financial statements have been prepared on the basis of generally accepted accounting principles and, in the opinion of management, reflect all adjustments necessary for a fair presentation of the CapMAC's financial condition, results of operations and cash flows for the periods presented. The results of operations for the nine months ended September 30, 1997 may not be indicative of the results that may be expected for the full year ending December 31, 1997. These consolidated financial statements and notes should be read in conjunction with the financial statements and notes included in the audited financial statements of CapMAC as of December 31, 1996 and 1995, and for each of the years in the three-year period ended December 31, 1996. 3. Reclassifications Certain prior period balances have been reclassified to conform to the current period presentation. 31 -----END PRIVACY-ENHANCED MESSAGE-----