-----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, VQcdAKYzCuQHy3z9TJfqPf+aEHYEHILKU/7KdnX5CTZtmDF87RlyB961vAAwPyHV gE3wJ86Ww3lISeHU69Upog== 0000950112-96-002880.txt : 19960816 0000950112-96-002880.hdr.sgml : 19960816 ACCESSION NUMBER: 0000950112-96-002880 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: RISK CAPITAL HOLDINGS INC CENTRAL INDEX KEY: 0000947484 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 061424716 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26456 FILM NUMBER: 96614941 BUSINESS ADDRESS: STREET 1: 104 FIELD POINT RD CITY: GREENWICH STATE: CT ZIP: 06830 BUSINESS PHONE: 2038612500 MAIL ADDRESS: STREET 1: 104 FIELD POINT RD CITY: GREENWICH STATE: CT ZIP: 06830 FORMER COMPANY: FORMER CONFORMED NAME: RISK CAPITAL RE INC DATE OF NAME CHANGE: 19950703 10-Q 1 ================================================================================ 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, 1996. 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) 411 West Putnam Avenue Greenwich, Connecticut 06830 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (203) 861-2500 None (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, 1996 ----- ---------------------------- Common Stock, $.01 par value 16,993,725 ================================================================================ RISK CAPITAL HOLDINGS, INC. INDEX Page No. -------- PART I. Financial Information Review Report of Independent Accountants 1 Consolidated Balance Sheet 2 June 30, 1996 and December 31, 1995 Consolidated Statement of Income 3 For the three month and six month periods ended June 30, 1996 Consolidated Statement of Changes in Stockholders' Equity 4 For the six month period ended June 30, 1996 Consolidated Statement of Cash Flows 5 For the six month period ended June 30, 1996 Notes to Consolidated Financial Statements 6 Management's Discussion and Analysis 10 of Financial Condition and Results of Operations PART II. Other Information Item 4. Submission of Matters to a Vote of Security Holders 16 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18 Review Report of Independent Accountants To the Board of Directors and Stockholders of Risk Capital Holdings, Inc. We have reviewed the accompanying interim consolidated balance sheet of Risk Capital Holdings, Inc. and its subsidiary as of June 30, 1996, and the related consolidated statements of income, of changes in stockholders' equity and of cash flows for the period from January 1, 1996 to June 30, 1996. 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 financial statements of Risk Capital Holdings, Inc. and its subsidiary as of December 31, 1995 and for the period from June 23, 1995 (date of inception) to December 31, 1995 (not presented herein), and in our report dated February 15, 1996 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1995, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. Price Waterhouse LLP New York, New York July 31, 1996 RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET (in thousands except share data)
(unaudited) June 30, December 31, 1996 1995 --------- --------- ASSETS Investments: Fixed maturities $ 136,316 $ 132,321 (amortized cost: 1996, $137,265; 1995, $130,949) Publicly traded equity securities 84,355 39,374 (cost: 1996, $83,095; 1995, $36,009) Privately held securities 36,056 19,534 (cost: 1996, $33,527; 1995, $18,531) Short-term investments 86,246 155,116 --------- --------- Total investments 342,973 346,345 Cash 5,185 982 Accrued investment income 2,416 2,442 Premiums receivable 11,302 Reinsurance recoverable on unearned premiums 253 Funds held 938 Deferred policy acquisition costs 2,221 Other assets 1,419 1,217 --------- --------- TOTAL ASSETS $ 366,707 $ 350,986 ========= ========= LIABILITIES Claims and claims expenses $ 3,533 Unearned premiums 18,213 Reinsurance balances payable 34 Investment accounts payable 670 $ 5,895 Deferred income tax liability 1,851 Other liabilities 3,124 3,025 --------- --------- TOTAL LIABILITIES 25,574 10,771 STOCKHOLDERS' EQUITY Preferred stock, $.01 par value: 20,000,000 shares authorized, none issued Common stock, $.01 par value: 80,000,000 shares authorized (1996, 16,993,725; 1995, 16,941,125 issued and outstanding) 170 169 Additional paid-in capital 339,804 338,737 Unrealized appreciation of investments, net of income tax 1,846 3,731 Deferred compensation under stock award plan (3,498) (3,441) Retained earnings 2,811 1,019 --------- --------- TOTAL STOCKHOLDERS' EQUITY 341,133 340,215 --------- --------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 366,707 $ 350,986 ========= =========
See Notes to Consolidated Financial Statements 2 RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF INCOME (in thousands, except per share data) (unaudited) ------------------------------------- Three Months Ended Six Months Ended June 30, 1996 June 30, 1996 ------------------ ----------------- Premiums and Other Revenues Net premiums written $ 16,468 $ 23,571 Increase in unearned premiums (12,630) (17,960) ---------- ---------- Net premiums earned 3,838 5,611 Net investment income 3,136 6,544 Net realized investment gains 448 254 ---------- ---------- Total revenues 7,422 12,409 ---------- ---------- Expenses Claims and claims expenses 2,797 4,046 Commissions and brokerage 927 1,489 Other operating expenses 2,633 5,124 ---------- ---------- Total expenses 6,357 10,659 ---------- ---------- Income Before Income Taxes 1,065 1,750 Federal income taxes: Current 809 877 Deferred (729) (919) ---------- ---------- Income tax expense (benefit) 80 (42) ---------- ---------- Net Income $ 985 $ 1,792 ========== ========== Per Share Data Primary and fully diluted: Net income $ 0.06 $ 0.11 ========== ========== Average shares outstanding 16,977,790 16,959,540 ========== ========== See Notes to Consolidated Financial Statements 3 RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands)
(unaudited) Six Months Ended June 30, 1996 ---------------- Common Stock Balance at beginning of year $ 169 Issuance of common stock 1 --------- Balance at end of period 170 --------- Additional Paid-in Capital Balance at beginning of year 338,737 Restricted common stock issued 1,065 Common stock issued from exercise of stock options 2 --------- Balance at end of period 339,804 --------- Unrealized Appreciation (Depreciation) of Investments, Net of Income Tax Balance at beginning of year 3,731 Unrealized appreciation (depreciation) (1,885) --------- Balance at end of period 1,846 --------- Deferred Compensation Under Stock Award Plan Balance at beginning of year (3,441) Restricted stock issued (1,065) Compensation expense recognized 1,008 --------- Balance at end of period (3,498) --------- Retained Earnings Balance at beginning of year 1,019 Net income 1,792 --------- Balance at end of period 2,811 --------- Total Stockholders' Equity Balance at beginning of year 340,215 Common stock issued 1,068 Change in unrealized appreciation of investments, net of income tax (1,885) Change in deferred compensation (57) Net income 1,792 --------- Balance at end of period $ 341,133 =========
See Notes to Consolidated Financial Statements 4 RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands) (unaudited) Six Months Ended June 30, 1996 ---------------- OPERATING ACTIVITIES Net income $ 1,792 Adjustments to reconcile net income to net cash provided by operating activities: Liability for claims and claims expenses, net 3,533 Unearned premiums, net 17,960 Premiums receivable (11,302) Funds held receivable (938) Accrued investment income 26 Reinsurance balances payable 34 Deferred policy acquisition costs (2,221) Net realized investment gains (254) Deferred tax asset (919) Other liabilities 99 Other items, net (738) --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 7,072 --------- INVESTING ACTIVITIES Purchases of fixed maturity investments (168,771) Sales of fixed maturity investments 156,125 Net sales of short-term investments 70,830 Purchases of equity securities (69,931) Sales of equity securities 9,017 Purchases of furniture and equipment (142) --------- NET CASH USED FOR INVESTING ACTIVITIES (2,872) --------- FINANCING ACTIVITIES Common stock issued 1,068 Deferred compensation on restricted stock (1,065) --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 3 --------- Increase in cash 4,203 Cash beginning of period 982 --------- Cash end of period $ 5,185 ========= See Notes to Consolidated Financial Statements 5 RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION Risk Capital Holdings, Inc. ("RCHI"), incorporated in March 1995 under the laws of the State of Delaware, is a holding company whose wholly owned subsidiary, Risk Capital Reinsurance Company ("Risk Capital Reinsurance"), a Nebraska corporation, was formed to provide capital and property and casualty reinsurance to insurers and reinsurers either on a stand-alone basis or as part of integrated capital solutions, on a global basis. (RCHI and Risk Capital Reinsurance are collectively referred to herein as the "Company.") In September 1995, through its initial public offering, related exercise of the underwriters' over-allotment option and direct sales of an aggregate of 16,750,625 shares of RCHI's common stock, par value $.01 per share (the "Common Stock"), at $20 per share, and the issuance of warrants, RCHI was capitalized with net proceeds of approximately $335.0 million, of which $328.0 million was contributed to the statutory capital of Risk Capital Reinsurance. Class A warrants to purchase an aggregate of 2,531,079 shares of Common Stock and Class B warrants to purchase an aggregate of 1,920,601 shares of Common Stock were issued in connection with the direct sales. Class A warrants are immediately exercisable at $20 per share and expire September 19, 2002. Class B warrants are exercisable at $20 per share during the seven year period commencing September 19, 1998, provided that the Common Stock has traded at or above $30 per share for 20 out of 30 consecutive trading days. 2. GENERAL The accompanying interim consolidated financial statements have been prepared in conformity with generally accepted accounting principles and in the opinion of management, reflect all adjustments necessary (consisting of normal recurring accruals) for a fair presentation of results for such periods. These consolidated financial statements should be read in conjunction with the 1995 consolidated financial statements and related notes contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. 3. PER SHARE DATA Earnings per share are computed based on the weighted average number of shares of Common Stock and common stock equivalents outstanding during the period using the modified treasury stock method. Stock options and Class A and B warrants to purchase Common Stock are considered to be common stock equivalents. The common stock equivalents were anti-dilutive, and thus not included in the weighted average shares outstanding. 4. 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 6 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, 1996, the publicly traded equity portfolio consisted of 10 investments, with estimated fair values ranging individually from $6.6 million to $10.1 million. Investments in privately held securities include both equity securities and fixed maturity convertible securities issued by privately and publicly held companies. 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 reported using the equity method of accounting. Estimated fair value of investments in privately held securities, other than those reported using the equity method of accounting, is initially cost until the investments are revalued based principally on substantive events or 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 Risk Capital Corp., its equity investment advisor. Privately held securities consisted of the following:
(In thousands) June 30, 1996 December 31, 1995 ------------- ----------------- Equity Securities: Recorded based on the equity method: Peregrine Russell Miller Insurance Investment Fund of Asia Limited ("Asian Fund") $ 9,000 Recorded at fair value: Terra Nova (Bermuda) Holdings, Ltd. ("Terra Nova") 11,121 $ 8,869 Venton Holdings Ltd. ("VHL") 1,063 Island Heritage Insurance Company, Ltd. 4,500 Insurance Investment Group, L.P. 180 ------- ------- Total privately held equities 25,864 8,869 Convertible security, recorded at fair value: Mutual Risk Management, Ltd. ("Mutual Risk") Zero Coupon Subordinated Debenture 10,192 10,665 ======= ======= Total privately held securities $36,056 $19,534 ======= =======
7 The Company's investment commitments relating to its privately held securities were as follows: (In thousands) Commitments: June 30, December 31, 1996 1995 ------- ----------- Insurance Investment Group, L.P. $11,820 Venton Holdings, Ltd. 4,190 -- ======= ======== Total $16,010 -- ------- -------- Set forth below is certain information relating to each of the investments and commitments in privately held securities made by the Company during 1996 (also including the investments in Terra Nova and Mutual Risk made in the fourth quarter of 1995). The Company owns an approximately 45% interest in the Asian Fund, which is a long-term investment to achieve capital growth through investments in listed and unlisted securities of insurance companies incorporated or operating in Asia. The Company's investment in Terra Nova, acquired in October 1995, currently represents a 3.6% interest in Terra Nova, which completed an initial public offering in April 1996. Terra Nova is the parent company of two operating insurance companies headquartered in Bermuda and London that write property and casualty reinsurance. The Company has a 9.9% interest in VHL, a Bermuda-based holding company which owns a managing agent at Lloyd's of London ("Lloyd's") and a corporate capital vehicle at Lloyd's that provides underwriting capacity for VHL's managing agent. VHL may call from time to time up to an aggregate of approximately $4.2 million from the Company to fund capital requirements at Lloyd's. The Company is a co-investor with The Trident Partnership, L.P. The Mutual Risk zero coupon subordinated debenture was acquired in October 1995. The debenture has a maturity date of 2015, effective yield of 5.25% and is convertible into 217,884 shares of common stock at a price of $43.955 per share. Mutual Risk is a publicly held Bermuda company, providing risk management services to client companies. In March 1996, the Company committed to pay $12.0 million over the long-term to fund its 40% limited partnership interest in Insurance Investment Group, L.P., a private limited partnership of insurance companies which provides reinsurance and capital to insurance companies. At June 30, 1996, $180,000 had been funded under this commitment . In April 1996, the Company acquired a 33.5% economic interest (9.75% voting interest) in Island Heritage Insurance Company, Ltd. ("Island Heritage"), a Cayman Islands insurer which writes high value personal and commercial property insurance in the Caribbean. Certain directors of the Company and other investors invested in the securities of Island Heritage at the same per share price as that paid by the Company. Messrs. Clements and Mosca are directors of Island Heritage. 8 Reclassification: A convertible security with a fair value of $10.7 million and amortized cost of $9.7 million at December 31, 1995 has been reclassified from fixed maturities to privately held securities to be consistent with the June 30, 1996 presentation. 5. STATUTORY DATA The statutory capital and surplus of Risk Capital Reinsurance at June 30, 1996 was $330.3 million and the statutory net loss for the three month and six month periods ended June 30, 1996 were $0.3 million and $1.4 million, respectively. 9 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. Recent Industry Performance The property and casualty reinsurance industry has been highly cyclical. This cyclically has produced periods characterized by intense price competition due to excessive underwriting capacity as well as periods when shortage of capacity permitted favorable premium levels. Demand for reinsurance is influenced significantly by underwriting results of primary property and casualty insurers and prevailing general economic and market conditions, all of which affect liability retention decisions of primary insurers and reinsurance premium rates. The supply of reinsurance is related directly to prevailing prices and levels of surplus capacity, which, in turn, may fluctuate in response to changes in rates of return on investments being realized in the reinsurance industry. The cyclical trends in the industry and the industry's profitability can also be affected significantly by volatile and unpredictable developments, including changes in the propensity of courts to grant larger awards, natural disasters (such as catastrophic hurricanes, windstorms, earthquakes, floods and fires), fluctuations in interest rates and other changes in the investment environment that affect market prices of investments and the income and returns on investments, and inflationary pressures that may tend to affect the size of losses experienced by ceding primary insurers. Reinsurance treaties that are placed through intermediaries are typically for one year terms with a substantial number that are written or renew on January 1 each year. Other significant renewal dates include April 1, July 1 and October 1. The renewal periods thus far in 1996 were marked by continuing intensified competitive conditions in terms of premium rates and treaty terms and conditions in both the property and casualty segments of the marketplace. While the Company is initially somewhat disadvantaged compared to its competition due to the preliminary start-up phase of its operations, it believes it is well positioned to generate attractive opportunities in the marketplace due to its substantial unencumbered capital base, experienced management team and relationship with its equity investment advisor, as well as its strategic focus on generating a small number of large reinsurance treaty transactions that may also be integrated with equity investments in client companies. 10 Through the July 1, 1996 renewal season, the Company was presented with a total of approximately 159 reinsurance treaty opportunities with effective dates from January 1 to July 1, 1996, of which approximately one-quarter included a possible integrated investment opportunity. The Company has bound 31 reinsurance treaties with approximately $75.0 million of annualized premium revenues for property, casualty, multiline and specialty reinsurance that will be recorded as premiums written within the next 12 to 18 months. Of this amount, approximately one-third is from unearned premium portfolios assumed or other one-time transactions which are non-renewable. Results of Operations For the six months ended June 30, 1996, the Company had consolidated net income of approximately $1.8 million, or $0.11 per share. An after-tax realized investment gain of $0.2 million, or $0.02 per share, was also included in net income for the period. The results of operations are not indicative of future financial results of the Company. Since late September 1995, the Company has been in the early stages of a start-up operation with a limited number of professional underwriting staff, temporary office facilities, and one insurance license. During 1996, the Company intends to continue to build its staff (growing to approximately 25 employees by the end of the year), write reinsurance treaties, and locate its employees in permanent office space with modern information systems. Underwriting Results Net premiums written during the first six months of 1996 were $23.6 million, as follows: (In millions) ------------- Property $ 6.5 Casualty 5.5 Multiline 1.5 Specialty 10.1 ------- $23.6 ======= Included in specialty premiums written is the entire premium of $9.5 million from a contract pursuant to which the Company reinsures a portion of one underlying policy for multiple years covering the launching of commercial satellites. Such premium will be earned over the multiple year periods as the exposures expire. Approximately 56% of net premiums written for the first six months of 1996 was from non-U.S. clients. Excluding the premium from the multiple year contract, 25% of net premiums written for such period was from non-U.S. clients, reflecting business arising from four syndicates at Lloyd's of London. Unhedged monetary assets and liabilities in foreign currencies are translated at the exchange rate in effect at the balance sheet date with the resulting foreign exchange gains and losses recognized in income, which may be material. 11 On a statutory basis, the combined ratios for 1996 were as follows:
Six Months Ended Three Months Ended Three Months Ended June 30, 1996 June 30, 1996 March 31, 1996 ---------------- ------------------ ------------------ Claims and claims expense ratio 72.1% 72.9% 70.4% Commissions and brokerage ratio 15.7% 9.1% 31.2% Operating expense ratio 21.3% 15.6% 34.3% ---------------- ------------------ ------------------ Statutory combined ratio 109.1% 97.6% 135.9% ================ ================== ==================
Excluding premiums written from the multiple year contract, the statutory combined ratios for the three month and six month periods ended June 30, 1996 were 132.0% and 134.5%, respectively, reflecting a "start-up" operating expense ratio that is expected to decline as additional premium revenues are generated throughout the year. On an absolute basis, operating expenses will increase as a result of additional costs for increased personnel, marketing activities, introduction of employee benefit plans, additional licenses and the investment in expanded office facilities and equipment. Given the low level of premium volume the Company may initially generate and the long-term nature of the casualty business which the Company seeks to write, it is likely that earned premiums will be insufficient to cover claims costs, acquisition costs and operating expenses, thereby resulting in underwriting losses in 1996. Investment Results At June 30, 1996, approximately 65% of the Company's invested assets consisted of fixed maturity and short-term investments. Net investment income for the first six months of 1996 was approximately $6.5 million. 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 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. Income Taxes The Company's effective tax rate of (2.4%) in the first six months of 1996 is less than the 35% statutory rate on pre-tax operating income due to tax exempt income and the dividends received deductions. The gross deferred income tax benefit of $919,000, which is an asset considered recoverable from future taxable income, results principally from temporary differences between financial and taxable income. Temporary differences include 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. 12 Investments A principal component of the Company's investment strategy is investing a significant portion of invested assets in publicly traded and privately held equity securities, primarily issued by insurance and reinsurance companies and companies providing services to the insurance industry. Cash and fixed maturity investments and, if necessary, the sale of publicly traded equity securities will be used to support shorter-term liquidity requirements. Because a significant portion of the Company's investment portfolio will generally be equity securities issued by insurance and reinsurance companies and companies providing services to the insurance industry, the equity portfolio lacks industry diversification and will be particularly subject to the cyclically of the insurance industry. Unlike fixed income securities, equity securities such as common stocks, including the equity securities in which the Company may invest, generally are not and will not be rated by any nationally recognized rating service. The values of equity securities generally are more dependent on the financial condition of the issuer and less dependent on fluctuations in interest rates than are the values of fixed income securities. The market value of equity securities generally is regarded as more volatile than the market value of fixed income securities. The effects of such volatility on the Company's equity portfolio could be exacerbated to the extent that such portfolio is concentrated in the insurance industry and in relatively few issuers. As the Company's investment strategy is to invest a significant portion of its investment portfolio in equity securities, its investment income in any fiscal period may be smaller, as a percentage of investments, and less predictable than that of other insurance companies, and net realized and unrealized gains (losses) on investments may have a greater effect on the Company's results of operations or stockholders' equity at the end of any fiscal period than other insurance and/or reinsurance companies. Because the realization of gains and losses on equity investments is not generally predictable, such gains and losses may differ significantly from period to period. Investments included in the Company's private portfolio include securities issued by privately held companies and securities issued by public companies that are generally restricted as to resale or are otherwise illiquid and do not have readily ascertainable market values. The risk of investing in such securities is generally greater than the risk of investing in securities of widely held, publicly traded companies. Lack of a secondary market and resale restrictions may result in the Company's inability to sell a security at a price that would otherwise be obtainable if such restrictions did not exist and may substantially delay the sale of a security the Company seeks to sell. At June 30, 1996, cash and invested assets totaled approximately $348.2 million, consisting of $91.4 million of cash and short-term investments, $136.3 million of publicly traded fixed maturity investments, $84.4 million of publicly traded equity securities, and $36.1 million of privately held securities. During the first six months of 1996, the Company allocated approximately $45.3 million from its short term portfolio to publicly traded equity securities, and an additional $14.9 million to fund investments in privately held securities. See Note 4 under the caption "Investment Information" of the accompanying Notes to Consolidated Financial Statements for certain information 13 regarding the Company's privately held securities and their carrying values, and commitments made by the Company relating to its privately held securities. During the remainder of 1996 and over the long-term, the Company intends to continue to allocate a substantial portion of its cash and short-term investments into publicly traded and privately held equity securities, subject to market conditions and opportunities in the marketplace. At June 30, 1996, the publicly traded equity portfolio consisted of investments in 10 publicly traded domestic insurers, reinsurers, or companies providing services to the insurance industry. The estimated fair values of such investments ranged individually from $6.6 million to $10.1 million. The fixed maturity and short-term investments were all rated investment grade by Moody's Investors Service, Inc. or Standard & Poor's Corporation and have an average quality rating of AA and an average duration of approximately 2.1 years. The Company's pre-tax and net of tax investment yields in the first six months of 1996 were 3.9% and 2.9%, respectively. Assuming a stable interest rate environment, the Company anticipates such yields to moderately decline as funds invested in short-term securities are allocated into equity securities. The Company has not invested in derivative financial instruments such as futures, forward contracts, swaps, or options or other financial instruments with similar characteristics such as interest rate caps or floors and fixed-rate loan commitments. Liquidity and Capital Resources RCHI is a holding company and has no significant operations or assets other than its ownership of all of the capital stock of Risk Capital Reinsurance, whose primary and predominant business activity is providing capital and/or reinsurance 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 cash dividends to stockholders of RCHI and to pay any operating expense that RCHI may incur. There are currently no contractual restrictions on the payment of dividends or the making of distributions by Risk Capital Reinsurance to RCHI. 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 statutory and regulatory standards, including those of the State of Nebraska. Current 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. Prior to amendments adopted in March 1996, dividends or distributions were deemed "extraordinary" if they exceeded the lesser, rather than greater, of 14 the above limitations. Notwithstanding the foregoing, 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. Net cash flow provided by operating activities in the first six months of 1996 was $7.1 million, consisting principally of investment income and premiums received, offset by operating expenses. The primary sources of liquidity for Risk Capital Reinsurance are net cash flow from the operating activities of Risk Capital Reinsurance, 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 will also be 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 including personnel, systems and office facilities. 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, 1996, the Company's consolidated stockholders' equity totaled $341.1 million, or $20.07 per share. At such date, statutory surplus of Risk Capital Reinsurance was $330.3 million, ranking it as the eighth largest domestic broker-market oriented reinsurer as measured by statutory surplus (based on data available as of March 31, 1996 from the Reinsurance Association of America). 15 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders (a) The 1995 Annual Meeting of Shareholders ("Annual Meeting") of Risk Capital Holdings, Inc. ("RCHI") was held on May 21,1996. (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 RCHI's Proxy Statement, dated April 8, 1996. (c) The shareholders of RCHI re-elected the Class I Directors of RCHI to hold office until the 1999 annual meeting of shareholders 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 --- -------- Mark N. Williamson 15,322,086 56,700 Philip L. Wroughton 15,320,086 58,700 At the Annual Meeting, the shareholders also approved (i) RCHI's 1995 Employee Stock Purchase Plan and (ii) RCHI's 1995 Long Term Incentive and Share Award Plan and (iii) ratified the selection of Price Waterhouse LLP as independent accountants for the fiscal year ending December 31, 1996. Set forth below are the voting results for such proposals: Approval of RCHI's 1995 Employee Stock Purchase Plan FOR AGAINST ABSTAIN --- ------- ------- 14,472,536 797,800 17,350 Approval of RCHI's 1995 Long Term Incentive and Share Award Plan FOR AGAINST ABSTAIN --- ------- ------- 12,188,986 3,071,750 20,250 Ratification of Selection of Price Waterhouse LLP as Independent Accountants FOR AGAINST ABSTAIN --- ------- ------- 15,372,436 650 5,700 16 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. Exhibit No. Description ----------- ----------- 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, 1996. Omitted from this Part II are items which are inapplicable or to which the answer is negative for the period covered. 17 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 13, 1996 MARK D. MOSCA President /s/ PAUL J. MALVASIO -------------------------------- Date: August 13, 1996 PAUL J. MALVASIO Chief Financial Officer 18 EXHIBIT INDEX Exhibit No. Description - ------- ----------- 15 Accountants' Awareness Letter and Limitation of Liability (regarding unaudited interim financial information) 27 Financial Data Schedule EX-15 2 EXHIBIT 15 Accountants' Awareness Letter and Limitation of Liability We are aware of the incorporation by reference in the Registration Statement on Form S-8 (Registration No. 33-99974) of Risk Capital Holdings, Inc. of our report dated July 31, 1996 (issued pursuant to the provisions of Statement on Auditing Standards No. 71) appearing in this Form 10-Q. We are also aware of our responsibilities under the Securities Act of 1933. We are not subject to the liability provisions of section 11 of the Securities Act of 1933 for our report dated July 31, 1996 (issued pursuant to the provisions of Statement on Auditing Standards No. 71) on the unaudited interim consolidated financial information of Risk Capital Holdings, Inc. because our report is not a "report" or a "part" of the Registration Statement on Form S-8 (Registration No. 33-99974) prepared or certified by us within the meaning of sections 7 and 11 of the Securities Act of 1933. Price Waterhouse LLP New York, New York August 13, 1996 EX-27 3
7 RISK CAPTIAL HOLDINGS, INC Article 7 of Regulation S-X Insurance Companies Six month period ended June 30, 1996 (Dollars in thousands, except per share amounts) THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM BALANCE SHEET OF RISK CAPITAL HOLDINGS, INC. AND ITS SUBSIDIARY AS OF JUNE 30, 1996 AND THE RELATED CONSOLIDATED STATEMENT OF INCOME, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-31-1996 JUN-30-1996 136,316 0 0 120,411 0 0 342,973 5,185 0 2,221 366,707 3,533 18,213 0 0 0 0 0 0 341,133 366,707 5,611 6,544 254 0 4,046 1,489 5,124 1,750 (42) 1,792 0 0 0 1,792 .11 .11 0 0 0 514 0 3,533 0
-----END PRIVACY-ENHANCED MESSAGE-----