-----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, Bx5Y1xD1QK7XR2CgCFqzgmsHeUbgtvp2BQIVkyJALqemTtlyCOyNGbNsW26GFe2B XHgw7lGJnofGcY7wQQNECQ== 0001005477-99-003622.txt : 19990813 0001005477-99-003622.hdr.sgml : 19990813 ACCESSION NUMBER: 0001005477-99-003622 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990812 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: SEC FILE NUMBER: 000-26456 FILM NUMBER: 99686135 BUSINESS ADDRESS: STREET 1: 20 HORSENECK LANE CITY: GREENWICH STATE: CT ZIP: 06830 BUSINESS PHONE: 2038624300 MAIL ADDRESS: STREET 1: 20 HORSENECK LANE CITY: GREENWICH STATE: CT ZIP: 06830 FORMER COMPANY: FORMER CONFORMED NAME: RISK CAPITAL RE INC DATE OF NAME CHANGE: 19950703 10-Q 1 FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1999 Or |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period ___________________ to _____________________ Commission file number: 0-26456 RISK CAPITAL HOLDINGS, INC. (Exact name of registrant as specified in its charter) Delaware 06-1424716 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 20 Horseneck Lane Greenwich, Connecticut 06830 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (203) 862-4300 ---------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate the number of shares outstanding of each of the issuer's classes of common stock. Class Outstanding at June 30, 1999 ----- ---------------------------- Common Stock, $.01 par value 17,084,893 ================================================================================ RISK CAPITAL HOLDINGS, INC. INDEX Page No. -------- PART I. Financial Information Item 1 - Consolidated Financial Statements Review Report of Independent Accountants 1 Consolidated Balance Sheet 2 June 30, 1999 and December 31, 1998 Consolidated Statement of Income and Comprehensive Income 3 For the six month periods ended June 30, 1999 and 1998 Consolidated Statement of Changes in Stockholders' Equity 4 For the six month periods ended June 30, 1999 and 1998 Consolidated Statement of Cash Flows 5 For the six month periods ended June 30, 1999 and 1998 Notes to Consolidated Financial Statements 6 Item 2 - Management's Discussion and Analysis of Financial Condition And Results of Operations 18 Item 3 - Quantitative and Qualitative Disclosures about Market Risk 28 PART II. Other Information Item 1 - Legal Proceedings 29 Item 4 - Submission of Matters to a Vote of Security Holders 29 Item 6 - Exhibits and Reports on Form 8-K 30 Signatures 31 Review Report of Independent Accountants To the Board of Directors and Stockholders of Risk Capital Holdings, Inc. We have reviewed the accompanying interim consolidated balance sheet of Risk Capital Holdings, Inc. and its subsidiaries as of June 30, 1999 and 1998, and the related consolidated statements of income and comprehensive income, of changes in stockholders' equity and of cash flows for the period from January 1, 1999 to June 30, 1999. This financial information is the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated financial information for it to be in conformity with generally accepted accounting principles. We previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet as of December 31, 1998, and the related consolidated statements of income and comprehensive income, of changes in stockholders' equity, and of cash flows for the year then ended (not presented herein), and in our report dated January 29, 1999, except as to Note 14, which is as of March 25, 1999, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1998 is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. PricewaterhouseCoopers LLP New York, New York July 26, 1999 RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (in thousands, except per share data)
(Unaudited) June 30, December 31, 1999 1998 --------- --------- Assets Investments: Fixed maturities $ 258,342 $ 174,540 (amortized cost: 1999, $263,710; 1998, $173,379) Publicly traded equity securities 169,201 154,678 (cost: 1999, $125,332; 1998, $110,598) Privately held securities 88,805 137,091 (cost: 1999, $82,114; 1998, $109,966) Short-term investments 89,147 108,809 --------- --------- Total investments 605,495 575,118 --------- --------- Cash 11,279 12,037 Accrued investment income 3,929 2,632 Premiums receivable 115,126 88,610 Reinsurance recoverable 59,485 31,087 Deferred policy acquisition costs 27,331 23,515 Investment accounts receivable 8,183 3,928 Deferred income tax asset 1,011 Other assets 26,986 20,903 ========= ========= Total Assets $ 858,825 $ 757,830 ========= ========= Liabilities Claims and claims expenses $ 326,916 $ 216,657 Unearned premiums 119,447 102,775 Reinsurance balances payable 11,009 5,396 Investment accounts payable 12,678 3,981 Deferred income tax liability 13,182 Other liabilities 17,195 17,837 --------- --------- Total Liabilities 487,245 359,828 --------- --------- Stockholders' Equity Preferred stock, $.01 par value: 20,000,000 shares authorized (none issued) Common stock, $.01 par value: 80,000,000 shares authorized (issued: 1999, 17,102,503; 1998, 17,102,503) 171 171 Additional paid-in capital 341,878 341,878 Deferred compensation under stock award plan (668) (1,062) Retained earnings 1,153 10,261 Less treasury stock, at cost (1999, 17,610; 1998, 15,065 shares) (329) (284) Accumulated other comprehensive income consisting of unrealized appreciation of investments, net of income tax 29,375 47,038 --------- --------- Total Stockholders' Equity 371,580 398,002 --------- --------- Total Liabilities & Stockholders' Equity $ 858,825 $ 757,830 ========= =========
See Notes to Consolidated Financial Statements. 2 RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME (in thousands, except share data) (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Premiums and Other Revenues Net premiums written $91,517 $52,536 $155,954 $96,944 Increase in unearned premiums (4,529) (4,059) (6,044) (6,965) ---------- ---------- ---------- ---------- Net premiums earned 86,988 48,477 149,910 89,979 Net investment income 4,817 4,331 9,300 7,935 Net investment gains 23,386 2,870 22,234 3,347 ---------- ---------- ---------- ---------- Total revenues 115,191 55,678 181,444 101,261 Expenses Claims and claims expenses 65,438 35,231 146,170 65,484 Commissions and brokerage 22,869 12,724 42,407 22,655 Other operating expenses 3,772 3,852 7,433 8,331 Foreign exchange (gain) loss (450) (51) (62) 59 ---------- ---------- ---------- ---------- Total expenses 91,629 51,756 195,948 96,529 Income (Loss) Before Income Taxes, Equity In Net Income of Investees and Cumulative Effect of Accounting Change 23,562 3,922 (14,504) 4,732 Federal income taxes: Current 4,748 2,308 (1,252) 3,871 Deferred 3,127 (1,288) (4,494) (2,854) ---------- ---------- ---------- ---------- Income tax expense (benefit) 7,875 1,020 (5,746) 1,017 ---------- ---------- ---------- ---------- Income (Loss) Before Equity in Net Income of Investees and Cumulative Effect of Accounting Change 15,687 2,902 (8,758) 3,715 Equity in net income of investees 196 257 33 1,013 ---------- ---------- ---------- ---------- Income (Loss) Before Cumulative Effect of Accounting Change 15,883 3,159 (8,725) 4,728 Cumulative effect of accounting change (383) ---------- ---------- ---------- ---------- Net Income (Loss) 15,883 3,159 (9,108) 4,728 ---------- ---------- ---------- ---------- Other Comprehensive Income (Loss), Net of Tax Change in net unrealized appreciation of investments, net of tax (7,163) (6,030) (17,663) 9,169 ---------- ---------- ---------- ---------- Comprehensive Income (Loss) $8,720 ($2,871) ($26,771) $13,897 ========== ========== ========== ========== Average shares outstanding Basic 17,085,826 17,061,663 17,086,212 17,060,062 Diluted 17,085,826 17,942,949 17,086,292 17,816,363 Per Share Data Net Income (Loss) - Basic $0.93 $0.19 ($0.53) $0.28 - Diluted $0.93 $0.18 ($0.53) $0.27 Comprehensive Income (Loss) - Basic $0.51 ($0.17) ($1.57) $0.81 - Diluted $0.51 ($0.17) ($1.57) $0.78
See Notes to Consolidated Financial Statements. 3 RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands) (Unaudited) Six Months Ended June 30, 1999 1998 --------- --------- Common Stock Balance at beginning of year $ 171 $ 171 Issuance of common stock --------- --------- Balance at end of period $ 171 171 --------- --------- Additional Paid-in Capital Balance at beginning of year 341,878 341,162 Issuance of common stock 237 --------- --------- Balance at end of period 341,878 341,399 --------- --------- Deferred Compensation Under Stock Award Plan Balance at beginning of year (1,062) (1,778) Restricted common stock issued (158) Compensation expense recognized 394 548 --------- --------- Balance at end of period (668) (1,388) --------- --------- Retained Earnings Balance at beginning of year 10,261 7,170 Net income (loss) (9,108) 4,728 --------- --------- Balance at end of period 1,153 11,898 --------- --------- Treasury Stock, At Cost Balance at beginning of year (284) (198) Purchase of treasury stock (45) (53) --------- --------- Balance at end of period (329) (251) --------- --------- Accumulated Other Comprehensive Income Consisting of Unrealized Appreciation of Investments, Net of Income Tax Balance at beginning of year 47,038 54,504 Change in unrealized appreciation (17,663) 9,169 --------- --------- Balance at end of period 29,375 63,673 --------- --------- Total Stockholders' Equity Balance at beginning of year 398,002 401,031 Issuance of common stock 237 Change in deferred compensation 394 390 Net income (loss) (9,108) 4,728 Purchase of treasury stock (45) (53) Change in unrealized appreciation of investments, net of income tax (17,663) 9,169 --------- --------- Balance at end of period $ 371,580 $ 415,502 ========= ========= See Notes to Consolidated Financial Statements. 4 RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands) (Unaudited) Six Months Ended June 30, 1999 1998 --------- --------- Operating Activities Net income (loss) ($9,108) $4,728 Adjustments to reconcile net income to net cash provided by operating activities: Liability for claims and claims expenses 110,259 48,638 Unearned premiums 16,672 6,965 Premiums receivable (26,516) (13,289) Accrued investment income (1,297) 285 Reinsurance recoverable (28,398) (1,384) Reinsurance balances payable 5,613 (211) Deferred policy acquisition costs (3,816) (2,442) Net investment (gains)/losses (22,234) (3,347) Deferred income tax asset (4,682) (2,308) Other liabilities (4,452) 4,731 Other items, net (6,656) (7,986) --------- --------- Net Cash Provided by Operating Activities 25,385 34,380 --------- --------- Investing Activities Purchases of fixed maturity investments (220,839) (144,412) Sales of fixed maturity investments 128,133 113,904 Net (purchases)/sales of short-term investments 23,605 4,656 Purchases of equity securities (20,712) (55,430) Sales of equity securities 63,997 42,012 Purchases of furniture and equipment (282) (156) --------- --------- Net Cash Provided By (Used For) Investing Activities (26,098) (39,426) --------- --------- Financing Activities Common stock issued 237 Purchase of treasury stock (45) (53) Deferred compensation on restricted stock (158) --------- --------- Net Cash Provided By (Used For) Financing Activities (45) 26 --------- --------- Increase (decrease) in cash (758) (5,020) Cash beginning of year 12,037 9,014 --------- --------- Cash end of period $11,279 $3,994 ========= ========= See Notes to Consolidated Financial Statements 5 RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION Risk Capital Holdings, Inc. ("RCHI"), incorporated in March 1995 under the laws of the State of Delaware, is a holding company whose wholly owned subsidiary, Risk Capital Reinsurance Company ("Risk Capital Reinsurance"), a Nebraska corporation, was formed to provide, on a global basis, property and casualty reinsurance and other forms of capital, either on a stand-alone basis, or as part of integrated capital solutions for insurance companies with capital needs that cannot be met by reinsurance alone. (RCHI and Risk Capital Reinsurance are collectively referred to herein as the "Company.") In September 1995, through its initial public offering, related exercise of the underwriters' over-allotment option and direct sales of an aggregate of 16,750,625 shares of RCHI's common stock, par value $.01 per share (the "Common Stock"), at $20 per share, and the issuance of warrants, RCHI was capitalized with net proceeds of approximately $335.0 million, of which $328.0 million was contributed to the statutory capital of Risk Capital Reinsurance. In July 1998, Risk Capital Reinsurance capitalized its wholly owned subsidiary, Cross River Insurance Company ("Cross River"), with $20 million. Cross River received its Nebraska insurance license in October 1998 and intends to seek authorization to operate in most other states as an excess and surplus lines insurer. Class A warrants to purchase an aggregate of 2,531,079 shares of Common Stock and Class B warrants to purchase an aggregate of 1,920,601 shares of Common Stock were issued in connection with the direct sales. Class A warrants are immediately exercisable at $20 per share and expire September 19, 2002. Class B warrants are exercisable at $20 per share during the seven year period commencing September 19, 1998, provided that the Common Stock has traded at or above $30 per share for 20 out of 30 consecutive trading days. 2. GENERAL The accompanying interim consolidated financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP") and in the opinion of management, reflect all adjustments necessary (consisting of normal recurring accruals) for a fair presentation of results for such periods. These consolidated financial statements should be read in conjunction with the 1998 consolidated financial statements and related notes contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. 3. COMPREHENSIVE INCOME In presenting its financial statements, the Company has adopted the reporting of comprehensive income in a one financial statement approach, consistent with Statement of Financial Accounting Standards No. 130 of the Financial Accounting Standards Board ("FASB"). Comprehensive income is comprised of net income and other comprehensive income, which for the Company consists of the change in net unrealized appreciation or depreciation of investments, net of tax. Comprehensive income for the Company consists of net income (loss) and the change in unrealized appreciation or depreciation, net of income tax, as follows: 6 RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. COMPREHENSIVE INCOME (Cont'd)
(In thousands) Six Months Ended June 30, 1999 1998 -------- -------- Net income (loss) ($9,108) $ 4,728 Other comprehensive income, net of tax: Unrealized appreciation (depreciation) of investments: Unrealized holdings gains arising during period (3,211) 11,345 Less, reclassification adjustment for net realized (gains) losses included in net income (14,452) (2,176) -------- -------- Other comprehensive income (loss) (17,663) 9,169 -------- -------- Comprehensive income (loss) ($26,771) $ 13,897 ======== ========
4. EARNINGS PER SHARE DATA Earnings per share are computed in accordance with FASB Statement No. 128 "Earnings Per Share." Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of shares of Common Stock outstanding for the periods. Diluted earnings per share reflect the potential dilution that could occur if Class A and B warrants and employee stock options were exercised or converted into Common Stock. Diluted per share amounts are computed using basic average shares outstanding when a loss occurs since the inclusion of dilutive securities in dilutive earnings per share would be anti-dilutive. The following table sets forth the computation of basic and diluted earnings per share: (In thousands, except share data) Six Months Ended June 30, 1999 1998 ------------ ------------ Net Income Basic Earnings Per Share: Net income (loss) ($9,108) $4,728 Divided by: Weighted average shares outstanding for the period 17,086,212 17,060,062 Basic earnings (loss) per share ($0.53) $0.28 Diluted Earnings Per Share: Net income (loss) ($9,108) $4,728 Divided by: Weighted average shares outstanding for the period 17,086,212 17,060,062 Effect of dilutive securities: Warrants 671,702 Employee stock options 80 84,599 ------------ ------------ Total shares 17,086,292 17,816,363 ============ ============ Diluted earnings (loss) per share ($0.53) $0.27 7 RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. EARNINGS PER SHARE DATA (Cont'd)
(In thousands, except share data) Six Months Ended June 30, 1999 1998 ------------ ------------ Comprehensive Income Basic Earnings Per Share: Comprehensive income (loss) ($26,771) $13,897 Divided by: Weighted average shares outstanding for the period 17,086,212 17,060,062 Basic earnings (loss) per share ($1.57) $0.81 Diluted Earnings Per Share: Comprehensive income (loss) ($26,771) $13,897 Divided by: Weighted average shares outstanding for the period 17,086,212 17,060,062 Effect of dilutive securities: Warrants 671,702 Employee stock options 80 84,599 ------------ ------------ Total shares 17,086,292 17,816,363 ============ ============ Diluted earnings (loss) per share ($1.57) $0.78
5. INVESTMENT INFORMATION The Company classifies all of its publicly traded fixed maturity and equity securities as "available for sale" and, accordingly, they are carried at estimated fair value. The fair value of publicly traded fixed maturity securities and publicly traded equity securities is estimated using quoted market prices or dealer quotes. Short-term investments, which have a maturity of one year or less at the date of acquisition, are carried at cost, which approximates fair value. All of the Company's publicly traded equity securities and privately held securities were issued by insurance and reinsurance companies or companies providing services to the insurance industry. At June 30, 1999, the publicly traded equity portfolio consisted of the following: 8 RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. INVESTMENT INFORMATION (Cont'd) June 30, 1999 -------------------------------------- Estimated Fair Value Net and Unrealized Carrying Gains Value (Losses) Cost ------------ ------------ -------- Common Stocks: ACE Limited $9,136 $994 $8,142 Annuity and Life Re (Holdings) Ltd. 32,570 12,570 20,000 Arthur J. Gallagher 14,850 4,656 10,194 XL Capital Ltd. 14,690 5,815 8,875 E.W. Blanch Holdings, Inc. 24,343 17,022 7,321 Farm Family Holdings, Inc. 3,077 94 2,983 IPC Holdings, Ltd. 10,740 (4,253) 14,993 LaSalle Re Holdings, Ltd. 7,786 (5,608) 13,394 Limit PLC 2,106 (780) 2,886 Meadowbrook Insurance Group 2,837 (852) 3,689 Partner Re, Ltd. 4,261 (700) 4,961 Pennsylvania Mfrs. Corporation 1,018 43 975 Renaissance Re 1,850 140 1,710 Terra Nova Holdings 23,859 15,383 8,476 Trenwick Group Inc. 3,297 (1,313) 4,610 WR Berkley Corp. 2,500 (41) 2,541 Preferred Stock: St. Paul Companies, 6% Convertible Preferred 10,281 699 9,582 -------- -------- -------- Total $169,201 $43,869 $125,332 ======== ======== ======== Investments in privately held securities, issued by privately and publicly held companies, may include both equity securities and securities convertible into, or exercisable for, equity securities (some of which may have fixed maturities). Privately held securities are subject to trading restrictions or are otherwise illiquid and do not have readily ascertainable market values. The risk of investing in such securities is generally greater than the risk of investing in securities of widely held, publicly traded companies. Lack of a secondary market and resale restrictions may result in the Company's inability to sell a security at a price that would otherwise be obtainable if such restrictions did not exist and may substantially delay the sale of a security which the Company seeks to sell. Such investments are classified as "available for sale" and carried at estimated fair value, except for investments in which the Company believes it has the ability to exercise significant influence (generally defined as investments in which the Company owns 20% or more of the outstanding voting common stock of the issuer), which are carried under the equity method of accounting. Under this method, the Company records its proportionate share of income or loss for such investments in results of operations. 9 RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. INVESTMENT INFORMATION (Cont'd) Goodwill for privately held equity securities carried under the equity method of accounting was $9.3 million at June 30, 1999, compared to $10.6 million at December 31, 1998. The estimated fair value of investments in privately held securities, other than those carried under the equity method or those with quoted market values, is initially equal to the cost of such investments until the investments are revalued based principally on substantive events or other factors which could indicate a diminution or appreciation in value, such as an arm's-length third party transaction justifying an increased valuation or adverse development of a significant nature requiring a write-down. The Company periodically reviews the valuation of investments in privately held securities with Marsh & McLennan Capital, Inc. ("MMCI"), its equity investment advisor. Privately held securities consisted of the following: (In thousands) June 30, December 31, 1999 1998 -------- ------------ Carried under the equity method: The ARC Group, LLC $8,773 $9,448 Arx Holding Corp. 2,564 2,400 Capital Protection Insurance Services, LLC 250 Island Heritage Insurance Company, Ltd. 4,276 3,101 LARC Holdings, Ltd. 24,527 25,349 New Europe Insurance Ventures 1,109 1,083 Sunshine State Holding Corporation 1,798 1,688 -------- -------- Sub-total 43,047 43,319 -------- -------- Carried at fair value: Altus Holdings, Ltd. 6,667 6,667 American Independent Holding Company 5,000 Annuity and Life Re (Holdings), Ltd. (1) 34,243 Arbor Acquisition Corp. (Montgomery & Collins, Inc.) 2,746 500 First American Financial Corporation 9,263 9,805 GuideStar Health Systems, Inc. 1,000 1,000 Sovereign Risk Insurance Ltd. 246 Sorrento Holdings, Inc. 2,832 5,113 Stockton Holdings Limited 10,000 10,000 Terra Nova (Bermuda) Holdings, Ltd. (1) 21,323 TRG Associates, LLC 8,250 4,875 -------- -------- Sub-total 45,758 93,772 -------- -------- Total $88,805 $137,091 ======== ======== (1) As of June 2, 1999, the Company reclassified the above privately held securities as publicly traded equity securities. Pursuant to the existing investment advisory agreement, the Company incurred a fee of $2.5 million payable to MMCI upon the reclassification of such securities. 10 RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. INVESTMENT INFORMATION (Cont'd) During the six month period ended June 30, 1999, the Company received (i) a distribution from The ARC Group, LLC totaling $1.2 million and (ii) dividend distributions from Stockton Holdings, Ltd. of $157,000 and TRG Associates, LLC of $487,500. The Company also received $2,428,000 from Sorrento Holdings, Inc. ("Sorrento") for the redemption of 2,261 shares of preferred stock of Sorrento, which redemption amount included a payment of $1,000 per share and interest income of approximately $167,000. At June 30, 1999, the Company had investment commitments relating to its privately held securities totaling approximately $35 million, compared to $10.4 million at December 31, 1998. The outstanding commitments at June 30, 1999 included $25 million committed to Trident II, L.P., a newly formed investment fund dedicated to making private equity and equity related investments in the global insurance, reinsurance and related industries. In connection with such commitment, the Company is obligated to pay an annual management fee equal to 1.5% of the committed amount as well as a percentage of cumulative net gains on invested funds. Set forth below is certain information relating to the Company's private investment activity for the six month period ended June 30, 1999: Altus Holdings, Ltd./First American Financial Corporation In May 1999, Altus Holdings, Ltd. ("Altus") acquired First American Financial Corporation ("First American") in a share exchange, which closed in July 1999 upon receipt of regulatory approval. At June 30, 1999, the Company reclassified its investment in First American from the equity method of accounting to an investment accounted for at fair value. At March 31, 1999, the carrying value of First American was $11.1 million. During June 1999, loans of $2,928,000 previously funded to First American were repaid to the Company. At June 30, 1999, the carrying value of First American was adjusted to $9.3 million, which reflects the transaction value resulting from the acquisition by Altus. The Company's total investment in First American (excluding repaid demand loans) was $10.4 million. In July 1999, the Company and The Trident Partnership, L.P. funded their investment commitments to Altus (previously secured by letters of credit) of $3.3 million and $5.8 million, respectively, and XL Capital Ltd. ("XL") redeemed its shares in Altus at their original cost. After Altus' acquisition of First American and such additional funding, the Company's economic ownership in Altus decreased from 28.6% to 28% (9.9% voting interest). American Independent Insurance Holding Company In February 1999, the Company loaned $5 million to American Independent Insurance Holding Company ("AIHC"). The promissory note, secured by the stock of AIHC, matures in January 2003, and will accrue interest at rates per annum expected to approximate 6%, depending on the investment returns on proceeds of the loan which are invested by AIHC on the Company's behalf. Principal and interest repayments are subject to prior approval by the Pennsylvania Department of Insurance. In consideration for the loan, the Company received Class A warrants to purchase shares of common stock of AIHC, constituting approximately 4% of AIHC's outstanding common stock on a fully-diluted basis. 11 RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. INVESTMENT INFORMATION (Cont'd) In connection with this investment and the Company's prior $3.6 million loan commitment to AIHC (which commitment expired on December 31, 1998), the Company has the option to write an aggregate amount of premiums of at least approximately $300 million over the next seven to eight year period, in addition to premiums ceded to the Company through June 30, 1999. No assurances can be given that any such additional premiums will be written by the Company. Arbor Acquisition Corp. (Montgomery & Collins, Inc) At June 30, 1999, the Company increased the carrying value of its investment in Arbor Acquisition Corp. (Montgomery & Collins, Inc.) from $500,000 to approximately $3.0 million based on the expected net realizable value resulting from the sale of the business and run-off of the operations. The sale of this investment occurred in two transactions which closed in June and July 1999. It is expected that the wind-up of the remaining operations will be substantially completed by the end of 1999. The Company's total investment in Arbor was $3.7 million. Capital Protection Insurance Services, LLC During 1999, the Company wrote off its investment in Capital Protection Insurance Services, LLC and recorded an after-tax realized investment loss of $1.2 million, which represents an estimate of costs associated with terminating leases and divesting physical assets, and other costs to run-off the business of this managing underwriting agency. Island Heritage Insurance Company, Ltd. In February 1999, the Company made an additional investment in Island Heritage Insurance Company, Ltd. in the amount of approximately $1.0 million. Sovereign Risk Insurance Ltd. In June 1999, the Company sold its investment in Sovereign Risk Insurance Ltd. ("Sovereign Risk") to ACE Limited and XL and recorded an after-tax net realized gain of $103,000. The Company retained an option to provide certain reinsurance on business produced by Sovereign Risk for a five-year period. TRG Associates, LLC At June 30, 1999, the Company increased the carrying value of its investment in TRG Associates, LLC from the Company's total investment cost of $4.9 million to $8.3 million based on the expected net realizable value resulting from the expected sale of this investment to Fairfax Financial Holdings Limited. The completion of this sale is subject to the receipt of satisfactory regulatory approvals which are expected to be obtained in the 1999 third quarter. 12 RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. RETROCESSION AGREEMENTS The Company utilizes retrocession agreements for the purpose of limiting its exposure with respect to multiple claims arising from a single occurrence or event. The Company also participates in "common account" retrocessional arrangements for certain treaties. Such arrangements reduce the effect of individual or aggregate losses to all companies participating on such treaties including the reinsurer, such as the Company, and the ceding company. Reinsurance recoverables are recorded as assets, predicated on the retrocessionaires' ability to meet their obligations under the retrocessional agreements. If the retrocessionaries are unable to satisfy their obligations under the agreements, the Company would be liable for such defaulted amounts. The effect of reinsurance on written and earned premiums and claims and claims expenses are as follows: (In thousands) Six Months Ended June 30, 1999 1998 --------- --------- Assumed premiums written $196,790 $103,962 Ceded premiums written 40,836 7,018 --------- --------- Net premiums written $155,954 $96,944 ========= ========= Assumed premiums earned $180,119 $96,997 Ceded premiums earned 30,209 7,018 --------- --------- Net premiums earned $149,910 $89,979 ========= ========= Assumed claims and claims expenses incurred $156,487 $66,613 Ceded claims and claims expenses incurred 10,317 1,129 --------- --------- Net claims and claims expenses incurred $146,170 $65,484 ========= ========= At June 30, 1999, the Company's balance sheet reflects reinsurance recoverable balances as follows: (In thousands) June 30, December 31, 1999 1998 --------- ----------- Reinsurance recoverable balances: Unpaid claims and claim expenses $43,820 $31,087 Unearned premiums 15,665 --------- --------- Total $59,485 $31,087 ========= ========= Ceded balances payable ($11,009) ($5,396) ========= ========= 13 RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. STATUTORY DATA The following table reconciles statutory net loss and surplus of Risk Capital Reinsurance to consolidated GAAP net income (loss) and stockholders' equity: (In thousands) Six Months Ended June 30, 1999 1998 --------- --------- Net Income (Loss): Risk Capital Reinsurance Statutory net loss ($15,937) ($5,728) GAAP adjustments: Dividend income (1,215) (1,285) Deferred acquisition costs 3,816 2,442 Realized loss 5,436 Deferred income taxes 4,494 2,854 Equity in net income of investees 33 1,013 Cumulative effect of accounting change (330) --------- --------- GAAP net income (loss) (9,139) 4,732 RCHI (parent company only) operations 31 (4) --------- --------- Consolidated GAAP net income (loss) ($9,108) $4,728 ========= ========= (In thousands) June 30, December 31, 1999 1998 --------- ----------- Stockholders' Equity: Statutory surplus $320,751 $358,702 GAAP adjustments: Deferred acquisition costs 27,331 23,515 Unrealized appreciation (depreciation) (3,891) 298 Deferred income tax asset (liability), net 1,011 (13,164) Non-admitted assets - privately held investments 9,056 11,080 Other non-admitted assets 3,600 4,190 Other 500 500 --------- --------- Investment in Risk Capital Reinsurance, GAAP 358,358 385,121 RCHI (parent company only): Other net assets 13,222 12,881 --------- --------- Consolidated stockholders' equity, GAAP $371,580 $398,002 ========= ========= 14 RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. INCOME TAXES RCHI, Risk Capital Reinsurance and Cross River file a consolidated federal income tax return and have a tax sharing agreement (the "Tax Sharing Agreement"), allocating the consolidated income tax liability on a separate return basis. Pursuant to the Tax Sharing Agreement, Risk Capital Reinsurance and Cross River make tax sharing payments to RCHI based on such allocation. The provision for federal income taxes has been determined on the basis of a consolidated tax return consisting of RCHI, Risk Capital Reinsurance and Cross River. An analysis of the Company's effective tax rate for the six months ended June 30, 1999 and 1998 follows: (In thousands) Six Months Ended June 30, 1999 1998 -------- -------- Income taxes (benefit) computed on pre-tax income ($5,076) $1,656 Reduction in income taxes resulting from: Tax-exempt investment income (337) (275) Dividend received deduction (563) (404) Other 230 40 -------- -------- Income tax expense (benefit) on pre-tax income ($5,746) $1,017 ======== ======== The Company's current federal tax expense (benefit) for the six months ended June 30, 1999 and 1998 was based on regular taxable income. The net deferred income tax asset reflects temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes, net of a valuation allowance for any portion of the deferred tax asset that management believes will not be realized. Significant components of the Company's deferred income tax assets and liabilities as of June 30, 1999 and December 31, 1998 were as follows: (In thousands) June 30, December 31, 1999 1998 -------- ---------- Deferred income tax assets: Net claim reserve discount $15,757 $10,176 Net unearned premium reserve 7,617 7,194 Compensation liabilities 543 622 Foreign currency 62 84 Equity in net loss of investees, net 2,415 2,328 -------- -------- Total deferred tax assets 26,394 20,404 -------- -------- Deferred income tax liabilities: Deferred policy acquisition cost (9,566) (8,230) Unrealized appreciation of investments (15,817) (25,328) Other (28) -------- -------- Total deferred tax liabilities (25,383) (33,586) -------- -------- Net deferred income tax asset (liability) $1,011 ($13,182) ======== ======== 15 RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. INVESTMENT ADVISORY AGREEMENT Effective July 1, 1999, the Company has amended its investment advisory agreement with MMCI, which governs the management of the Company's portfolios of equity securities (including convertible securities) that are publicly traded and privately held. Pursuant to the amended agreement, which has a term of four years (subject to renewal), MMCI will provide the Company with investment management and advisory services with respect to private equity investments whose value exceeds (i) $10 million during the first year of the term, (ii) $15 million during the second year of the term, and (iii) $20 million during the third and fourth years of the term. The Company will pay MMCI an annual fee equal to 20% (previously 7.5%) of cumulative net realized gains (as defined in the agreement) on private investments managed by MMCI, but will not pay a management fee (previously 1.5% per annum of the quarterly carrying value of the private portfolio). With respect to the management of the Company's public equity portfolio, the Company will pay MMCI a fee equal to 0.50% of the first $50 million under MMCI's management and 0.35% of all amounts in excess of $50 million (subject to a minimum fee of $250,000 per annum). In connection with the amendments to the Company's agreement with MMCI, RCHI will receive from MMCI $1.25 million per annum during the initial four-year term, subject to certain conditions. 10. ACCOUNTING PRONOUNCEMENTS Derivatives and Hedging In June 1998, the FASB issued Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities." This statement requires that all derivative financial instruments be recognized in the statement of financial position as either assets or liabilities and measured at fair value. If a derivative instrument is not designated as a hedging instrument, gains or losses resulting from changes in fair values of such derivative are required to be recognized in earnings in the period of the change. If certain conditions are met, a derivative may be designated as a hedging instrument, in which case the recording of the changes in fair value will depend on the specific exposure being hedged. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes on fair values or cash flows. This statement is effective for fiscal years beginning after June 15, 2000 with initial application as of the beginning of the first quarter of the applicable fiscal year. Retroactive application is prohibited. The Company will adopt this statement in the first quarter of 2001. Generally, the Company has not invested in derivative financial instruments. However, the Company's portfolio includes market sensitive instruments, such as mortgage-backed securities, which are subject to prepayment risk and changes in market value in connection with changes in interest rates. The Company's investments in mortgage-backed securities are classified as available for sale and are not held for trading purposes. Assuming the current investment strategy at the time of adoption, the Company's presentation of financial information under the new statement will not be materially different than the current presentation. 16 RISK CAPITAL HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. ACCOUNTING PRONOUNCEMENTS (Cont'd) Start-Up Costs Effective January 1, 1999, the Company changed its method of accounting for start-up costs in accordance with the Accounting Standards Executive Committee's Statement of Position ("SOP") 98-5 "Reporting on the Costs of Start-Up Activities." This statement requires costs of start-up activities, including organization costs, to be expensed as incurred. Unless another conceptual basis exists under other generally accepted accounting literature to capitalize the cost of an activity, costs of start-up activities cannot be capitalized. Start-up activities are defined broadly as those one-time activities related to opening a new facility, introducing a new product or service, conducting business in a new territory, conducting business with a new class of customer or beneficiary, initiating a new process in an existing facility or commencing some new operation. Start-up activities also include activities related to organizing a new entity. The change in accounting principle resulted in the write-off of the start-up costs capitalized as of January 1, 1999 for the Company and its investee companies carried under the equity method of accounting. The cumulative effect of the write-off, which totals $383,000, after-tax, or $0.02 per share, has been expensed and is included in the 1999 first quarter net loss. The effect of the change on the net loss in the first quarter of 1999 was not material. Market Risk Sensitive Instruments The Securities and Exchange Commission ("SEC") issued Financial Reporting Release ("FRR") No. 48 which included amended rules requiring domestic and foreign issuers to clarify and expand existing disclosure for derivative financial instruments, other financial instruments and derivative commodity instruments (collectively, "market risk sensitive instruments"). The amendments require enhanced disclosure of accounting policies for derivative financial instruments and derivative commodity instruments (collectively, "derivatives"). In addition, the amendments expand existing disclosure requirements to include quantitative and qualitative information about market risk inherent in market risk sensitive instruments, which disclosure will be subject to safe harbor protection under the new SEC rule (see "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Form 10-Q). These amendments are designed to provide additional information about market risk sensitive instruments which investors can use to better understand and evaluate market risk exposures of registrants, including the Company. There have been no material changes in market risk exposures that affect the quantitative and qualitative disclosures presented as of the year ended December 31, 1998. 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. General The Company Risk Capital Holdings, Inc. ("RCHI") is the holding company for Risk Capital Reinsurance Company ("Risk Capital Reinsurance"), RCHI's wholly owned subsidiary which is domiciled in Nebraska. (RCHI and Risk Capital Reinsurance are collectively referred to herein as the "Company.") RCHI was incorporated in March 1995 and commenced operations during September 1995 upon completion of its initial public offering and related exercise of the underwriters' over-allotment option and direct sales of an aggregate of 16,750,625 shares of RCHI's common stock, par value $.01 per share, at $20 per share, and the issuance of warrants (collectively, the "Offerings.") RCHI received aggregate net proceeds from the Offerings of approximately $335.0 million, of which $328.0 million was contributed to the capital of Risk Capital Reinsurance. On November 6, 1995, Risk Capital Reinsurance was licensed under the insurance laws of the State of Nebraska. In July 1998, Risk Capital Reinsurance capitalized its wholly owned subsidiary, Cross River Insurance Company ("Cross River"), with $20 million. Cross River received its Nebraska insurance license in October 1998, and intends to seek authorization to operate in most other states as an excess and surplus lines insurer. Recent Industry Performance Demand for reinsurance is influenced significantly by underwriting results of primary property and casualty insurers and prevailing general economic and market conditions, all of which affect liability retention decisions of primary insurers and reinsurance premium rates. The supply of reinsurance is directly related to prevailing prices and levels of surplus capacity, which, in turn, may fluctuate in response to changes in rates of return on investments being realized in the reinsurance industry. The 1998 year was a difficult period from both a market and earnings perspective for most insurance markets. The property and casualty insurance and reinsurance segments have experienced an increasingly more difficult and highly competitive operating environment characterized by a soft rate structure and overcapitalization. Other factors that have contributed to the prevailing competitive conditions in the reinsurance industry in recent years include new entrants to the reinsurance market (including certain specialized reinsurance operations) and the presence of certain reinsurance companies which operate within tax-advantaged jurisdictions (e.g., Bermuda, Cayman Islands) that benefit from higher after-tax investment returns. In addition, concerns with respect to the financial security of Lloyd's that had adversely impacted the competitive position of that marketplace have apparently been overcome by actions taken at Lloyd's over the last few years, thereby enhancing its competitive position. The industry's profitability can also be affected significantly by volatile and unpredictable developments, including changes in the propensity of courts to grant larger awards, natural disasters (such as catastrophic hurricanes, windstorms, earthquakes, floods and fires), fluctuations in interest rates and other changes in the investment environment that affect market prices of investments and the income and returns on investments, and inflationary pressures that may tend to affect the size of losses experienced by ceding primary insurers. The reinsurance industry is highly competitive and dynamic, and market changes may affect, among other things, demand for the Company's products, changes in investment opportunities (and the performance thereof), changes in the products offered by the Company or changes in the Company's business strategy. (See "Cautionary Note Regarding Forward-Looking Statements.") Reinsurance treaties that are placed by intermediaries are typically for one year terms with a substantial number that are written or renewed on January 1 each year. Other significant renewal dates include April 1, July 1 and October 1. The July 1, 1999 renewal period was marked by continuing intensified competitive conditions in terms of premium rates and treaty terms and conditions in both the property and casualty segments of the marketplace. These conditions have been worsened due to large domestic primary companies retaining more of their business and ceding less premiums to reinsurers. While the Company is initially somewhat disadvantaged compared to many of its competitors, which are larger, have greater resources and longer operating histories than the Company, it believes it has been able to generate attractive opportunities in the marketplace due to its substantial unencumbered capital base, experienced management team, relationship with its equity investment 18 advisor and strategic focus on generating a small number of large reinsurance treaty transactions that may also be integrated with an equity investment in client companies. Commencing in late 1997, in addition to its core business, the Company expanded into specialty classes of reinsurance business, including marine and aviation and space in 1997, surety and fidelity in 1998, and accident and health in 1999. In-Force Business At July 1, 1999, the Company had approximately 435 renewable reinsurance treaties that are in-force, with approximately $285 million of estimated annualized net in-force premiums. Such in-force premiums at July 1, 1999 represent estimated annualized premiums from treaties entered into during 1998 and the 1999 renewal periods that are expected to generate net premiums written during 1999. All of the Company's in-force treaties will be considered for renewal, although there can be no assurance that such treaties will be renewed. Results of Operations The Company had consolidated comprehensive loss for the six month period ended June 30, 1999 of $26.8 million, which was composed of a net loss of $9.1 million and other comprehensive loss of $17.7 million, consisting of the change in after-tax unrealized appreciation of investments. The net loss for the six month period ended June 30, 1999 included after-tax realized investment gains of approximately $14.5 million, equity in net income of investees of approximately $33,000 and a loss of $383,000 from the cumulative effect of an accounting change. These amounts compare with comprehensive income for the six month period ended June 30, 1998 of $13.9 million, which was composed of net income of $4.7 million and the change in after-tax unrealized appreciation of investments of $9.2 million. Net income for the six month period ended June 30, 1998 included after-tax realized investment gains of $2.2 million and equity in net income of investees of $1.0 million. Following is a table of per share data on an after-tax basis: Six Months Ended June 30, 1999 1998 ---------- ---------- Basic earnings per share: Underwriting loss ($1.75) ($0.25) Net investment income 0.39 0.34 Net realized investment gains (losses) 0.85 0.13 Equity in net income (loss) of investees 0.06 Cumulative effect of accounting change (0.02) ---------- ---------- Net income (loss) (0.53) 0.28 Change in net unrealized appreciation of investments (1.04) 0.53 ---------- ---------- Comprehensive income (loss) ($1.57) $0.81 ---------- ---------- Average shares outstanding (000's) 17,086 17,060 ---------- ---------- Diluted earnings per share: Underwriting loss ($1.75) ($0.24) Net investment income 0.39 0.33 Net realized investment gains (losses) 0.85 0.12 Equity in net income (loss) of investees 0.06 Cumulative effect of accounting change (0.02) ---------- ---------- Net income (loss) ($0.53) $0.27 ---------- ---------- Comprehensive income (loss) ($1.57) $0.78 ---------- ---------- Average shares outstanding (000's) 17,086 17,816 ---------- ---------- At June 30, 1999, basic and diluted book value per share was $21.75, which compare with basic and diluted book value per share of $23.29 and $22.75, respectively, at December 31, 1998. 19 Net Premiums Written Net premiums written for the six month periods ended June 30, 1999 and 1998 were as follows: (In thousands) Six Months Ended June 30, ------------------------ Percentage Core Business 1999 1998 Change -------- -------- ---------- Property $39,345 $19,420 102.6% Casualty 38,022 31,261 21.6% Multi-line 37,801 27,597 37.0% Other 769 3,085 (75.1%) -------- -------- -------- Sub-total Core Business 115,937 81,363 42.5% -------- -------- -------- Specialty Business Accident & Health 20,752 Aviation & Space 8,365 8,302 0.8% Marine 6,672 7,216 (7.5%) Surety & Fidelity 4,228 63 N/M -------- -------- -------- Sub-total Specialty Business 40,017 15,581 156.8% -------- -------- -------- Total $155,954 $96,944 60.9% ======== ======== ======== The Company's assumed and ceded premiums written for the six months ended June 30, 1999 compared to June 30, 1998 were as follows: (In thousands) Six Months Ended June 30, ------------------------ Percentage 1999 1998 Change -------- -------- ---------- Assumed premiums written $196,790 $103,962 89% Ceded premiums written 40,836 7,018 482% -------- -------- -------- Net premiums written $155,954 $96,944 61% ======== ======== ======== The Company's premium growth resulted from continued efforts in two key strategies, the integration of investment with reinsurance and the diversification into specialty classes of reinsurance. Approximately $40 million, or 26%, of net premiums written for the six months ended June 30, 1999 was produced from specialty lines of business, which accounted for approximately 41% of the increase in net premiums written for the six months ended June 30, 1999 compared to the comparable 1998 period. In addition, approximately 34% of net premiums written for the six months ended June 30, 1999 were generated from treaties integrated with private investment transactions, compared to 32% for all of 1998. Net premiums written for the six months ended June 30, 1999 includes approximately $12 million related to a group of property reinsurance treaties covering crop hail business underwritten on behalf of a start-up entity formed by Trident II, L.P. The Company expects to record an additional $12 million of net premiums written in the second half of 1999 related to these treaties. This business is protected by extensive aggregate excess of loss retrocession and is subject to a profit commission payable by the Company based upon underwriting results. The Company does not expect to renew these treaties in 2000. Net premiums written for the six months ended June 30, 1999 for other business was reduced by $10.6 million for the retrocession of a treaty which covers future multiple rocket launches that was recorded in 1996. The reduction of net premiums written resulting from this retrocession increased the commission and operating expense ratio components of the statutory composite ratio by 1.6%, but had no impact on operating results. Approximately 12.1% of net premiums written for the six months ended June 30, 1999 was from non-United States clients, compared to 26% for the six months ended June 30, 1998 and 32% for the 1998 year. 20 The Company's ceded premiums increased to $40.8 million for the six months ended June 30, 1999, compared to $7.0 million for the comparable 1998 period. Such ceded premiums primarily relate to the Company's marine, aviation and space reinsurance business. Since the fourth quarter of 1998, the Company has purchased additional retrocessional protection to reduce its exposures to both space and aviation risks. Effective July 1, 1999, the Company has also purchased a retrocessional treaty for a one year period covering earthquake, wind and other property catastrophe perils for $10 million in excess of a $15 million retention per occurrence. Set forth below are the Company's statutory composite ratios for the six month periods ended June 30, 1999 and 1998: Six Months Ended June 30, --------------------- 1999 1998 ------ ------ Claims and claims expenses 97.5% 72.8% Commissions and brokerage 29.6% 25.9% Other operating expenses 4.6% 8.3% ------ ------ Statutory composite ratio 131.7% 107.0% ====== ====== The Company's statutory combined ratio for the six months ended June 30, 1999 was 131.7%, compared with 107.0% for the comparable 1998 period. The 1999 ratio was adversely affected by underwriting results from the sources identified below, which added 26.9 points to the combined ratio (dollars in millions): Net After-tax Per Premiums Earned Underwriting Share Composite Sources of Business: Written Premiums Loss Loss Effect(1) -------- -------- ------------ ----- ---------- Managing underwriting agency $3.9 $5.5 $14.9 $0.87 15.2% Satellite business 2.3 2.0 5.2 0.31 5.0 Aviation 6.1 2.9 4.5 0.27 4.0 Satellite retrocession (10.6) 1.6 ------ ------ ------ ------ ------ 1.7 10.4 24.6 1.45 25.8 1.1(1) ------ ------ ------ ------ ------ All items $1.7 $10.4 $24.6 $1.45 26.9% ====== ====== ====== ====== ====== (1) The composite effect of each item separately is as shown above and sums to 25.8%. When such items are aggregated together and excluded from underwriting results, the impact is 26.9% due to the exclusion of the related written and earned premiums. As identified above, during 1999, the Company recorded an after-tax underwriting loss of $14.9 million, or $0.87 per share, from reinsurance on business produced by the managing underwriting agency, and a related after-tax investment loss of $1.2 million, or $0.07 per share, recorded in net realized investment losses. Such amounts compare to the preliminary after-tax loss estimate previously disclosed on March 18, 1999 of $18 million, or $1.07 per share. Included in the reserve for claims and claims expenses is an undiscounted premium deficiency reserve of $3.7 million relating to the $2.8 million unearned premium reserve for this business as of June 30, 1999. The total estimated ultimate net premiums written for all business produced on behalf of the Company by the managing underwriting agency recorded through June 30, 1999 is approximately $21 million. The Company has discontinued its underwriting relationship with the managing underwriting agency, which is in the process of running-off its business and operations. 21 As identified above, during 1999, the Company recorded an after-tax underwriting loss of $5.2 million, or $0.31 per share, for satellite business. In order to mitigate the impact of possible future loss activity, in the fourth quarter of 1998, the Company commenced the process of re-underwriting and reducing its satellite business. After the completion of this process, at June 30, 1999, the Company currently estimates that it has net exposure of approximately $22 million to satellite losses (net of reinstatement premiums and retrocessions) for expired treaties and treaties expiring during 1999. Included in the 1999 after-tax underwriting loss of $4.5 million, or $0.27 per share, for aviation business are incurred losses for the 1998 Swiss Air and Korean Air crashes and the 1999 American Airlines crash. The additional loss recorded for the Swiss Air crash was based on a reallocation of the $642 million expected industry loss between the plane manufacturer and Swiss Air. This reallocation adversely affected the Company's gross loss. The gross loss associated with the Swiss Air crash reported as of December 31, 1998 had exhausted the Company's retrocessional protections applicable to this occurrence. Therefore, none of such additional loss reported as of June 30, 1999 was ceded to retrocessionaires. To the extent that either the expected industry loss increases or additional loss is allocated to the plane manufacturer, the Company could record additional losses. For example, if the expected industry loss increases by approximately $100 million, and assuming additional loss reallocations such that one-third of the industry loss is allocated to the plane manufacturer, the Company could record additional aggregate loss of approximately $4.9 million. However, the Company cannot be certain of the ultimate industry loss or the final allocation of liability between the plane manufacturer and Swiss Air, and there can be no assurances that the ultimate industry loss will not be larger or that the plane manufacturer will not be allocated a greater proportion of the industry loss. With respect to all other reinsured crashes, the Company currently believes that there is no reasonable scenario in which the Company's reinsurance protections would be exhausted. In pricing its reinsurance treaties, the Company focuses on many factors, including exposure to claims and commissions and brokerage expenses. Commissions and brokerage expenses are acquisition costs that generally vary by the type of treaty and line of business, and are considered by the Company's underwriting and actuarial staff in evaluating the adequacy of premium writings. The claims and commissions and brokerage ratios reflect the Company's business mix. For the six months ended June 30, 1999, the statutory operating expense ratio improved to 4.6%, compared with 8.3% for the comparable 1998 period. The improvement in the Company's operating expense ratio was due to the increase in its net premiums written. In addition, commencing in 1999, the Company allocated certain compensation and other operating expenses related to investment activities in the amount of $1.3 million to net investment income based on internal time studies. Such allocations were not made in prior periods. Due to such allocations, the 1999 statutory operating expense ratio improved by approximately 1 point and net investment income was reduced by approximately $0.05 per share, with no overall effect on operating results. On a pro-forma basis, the statutory operating expense ratio for the first half of 1998 would have been 7.1%. Pre-tax foreign exchange gains and losses are recorded separately from statutory underwriting results and are therefore excluded from the statutory composite ratio. Unhedged monetary assets and liabilities are translated at the exchange rate in effect at the balance sheet date, with the resulting foreign exchange gains or losses recognized in income. For the six months ended June 30, 1999 and 1998, pre-tax foreign exchange gains/(losses) were $62,000 and ($59,000), respectively. Such future gains or losses are unpredictable, and could be material. Investment Results At June 30, 1999, approximately 56% of the Company's invested assets consisted of fixed maturity and short-term investments, compared to 48% at the end of 1998. Net investment income for the first six months of 1999 was approximately $9.3 million, compared to $7.9 million for the prior year period. Such amounts are net of investment expenses of $3.0 million and $1.6 million, respectively. In addition to the aforementioned inclusion of $1.3 million allocation of certain expenses in 1999, the investment expense amounts include advisory fees of 22 $1.6 million and $1.5 million, respectively. Such advisory fees are expected to diminish commencing July 1, 1999 in connection with amendments to the Company's investment advisory agreement with MMCI. Under such amendments, the Company will pay MMCI an annual fee equal to 20% (7.5% prior to the amendments) of cumulative net realized gains (as defined in the agreement) on private investments, which is recorded in net realized gains, but the Company will not pay a management fee to MMCI (prior to the amendments, the Company paid a management fee equal to 1.5% per annum of the quarterly carrying value of the private portfolio, which amount has been recorded in investment expenses). In addition, RCHI will receive from MMCI $1.25 million per annum during the initial four year term, subject to certain conditions. Such amount will be recorded as a reduction to investment expenses. (See Note 9 under the caption "Investment Advisory Agreement" of the accompanying Notes to the Consolidated Financial Statements of the Company.) The Company's pre-tax and net of tax investment yields for the six months ended June 30, 1999 were 3.5% and 2.6%, respectively, compared to 3.5% and 2.6%, respectively, for the same prior year period. Assuming a stable interest rate environment, the Company anticipates the 1999 yields to moderately increase as funds invested in short-term investments and proceeds from the sales of public equity securities are allocated into fixed maturity investments. The amount of investment income from quarter to quarter could vary and diminish as the Company continues to employ its strategy of investing a substantial portion of its investment portfolio in publicly traded and privately held equity securities of insurance companies which generally yield less current investment income than fixed maturity investments. Unrealized appreciation or depreciation of such investments to the extent that it occurs is recorded in a separate component of stockholders' equity, net of related deferred income taxes. Gains or losses are recorded in net income to the extent investments are sold, but the recognition of such gains and losses is unpredictable and not indicative of future operating results. For the six months ended June 30, 1999, the Company's equity in net income of investee companies was $33,000, compared to $1.0 million in the prior year period. Net income for the six months ended June 30, 1999 includes after-tax net realized investment gains of approximately $14.5 million, primarily due to the sale by the Company of approximately $50 million of publicly traded equity securities. The 1999 change in net unrealized appreciation includes an after-tax unrealized gain of $4.5 million related to the expected divestment of three privately held investments. (See Note 5 under the caption "Investment Information" of the accompanying Notes to the Consolidated Financial Statements of the Company). Income Taxes The net deferred income tax benefits for the first six months of 1999 and 1998 of approximately $4.5 million and $2.9 million, respectively, which are assets considered recoverable from future taxable income, resulted principally from temporary differences between financial and taxable income. Temporary differences include, among other things, charges for restricted stock grants which are not deductible for income tax purposes until vested (vesting of existing restricted stock grants will occur over a five-year period), as well as charges for a portion of unearned premiums and claims reserves and equity in net income (loss) of investees. Investments A principal component of the Company's investment strategy is investing a significant portion of invested assets in publicly traded and privately held equity securities, primarily issued by insurance and reinsurance companies and companies providing services to the insurance industry. Cash and fixed maturity investments and, if necessary, the sale of marketable equity securities will be used to support shorter-term liquidity requirements. 23 As a significant portion of the Company's investment portfolio will generally consist of equity securities issued by insurance and reinsurance companies and companies providing services to the insurance industry, the equity portfolio will lack industry diversification and will be particularly subject to the performance of the insurance industry. Unlike fixed income securities, equity securities such as common stocks, including the equity securities in which the Company may invest, generally are not and will not be rated by any nationally recognized rating service. The values of equity securities generally are more dependent on the financial condition of the issuer and less dependent on fluctuations in interest rates than are the values of fixed income securities. The market value of equity securities generally is regarded as more volatile than the market value of fixed income securities. The effects of such volatility on the Company's equity portfolio could be exacerbated to the extent that such portfolio is concentrated in the insurance industry and in relatively few issuers. (For additional discussion, see "--Market Sensitive Instruments and Risk Management.") As the Company's investment strategy is to invest a significant portion of its investment portfolio in equity securities, its investment income in any fiscal period may be smaller, as a percentage of investments, and less predictable than that of other insurance and/or reinsurance companies, and net realized and unrealized gains (losses) on investments may have a greater effect on the Company's results of operations or stockholders' equity at the end of any fiscal period than other insurance and/or reinsurance companies. Since the realization of gains and losses on equity investments is not generally predictable, such gains and losses may differ significantly from period to period. Variability and declines in the Company's results of operations could be further exacerbated by private equity investments in start-up companies, which are accounted for under the equity method. Such start-up companies may be expected initially to generate operating losses. Investments that are or will be included in the Company's private portfolio include securities issued by privately held companies and publicly traded companies that are generally restricted as to resale or are otherwise illiquid and do not have readily ascertainable market values. The risk of investing in such securities is generally greater than the risk of investing in securities of widely held, publicly traded companies. Lack of a secondary market and resale restrictions may result in an inability by the Company to sell a security at a price that would otherwise be obtainable if such restrictions did not exist and may substantially delay the sale of a security the Company seeks to sell. At June 30, 1999, cash and invested assets totaled approximately $616.8 million, consisting of $100.4 million of cash and short-term investments, $258.3 million of publicly traded fixed maturity investments, $169.2 million of publicly traded equity securities, and $88.8 million of privately held securities. Included in privately held securities are investments totaling $43.0 million which are carried under the equity method of accounting. During the first six months of 1999, the Company completed one integrated transaction with an existing client, a follow-on investment in an existing investee and one additional investment commitment. In addition, the Company divested four investments. (See Note 5 under the caption "Investment Information" of the accompanying Notes to the Consolidated Financial Statements.) The private equity portfolio includes 14 investments, totaling approximately $88.8 million of invested capital at June 30, 1999. At June 30, 1999, approximately 91% of fixed maturity and short-term investments were rated investment grade by Moody's Investors Service, Inc. or Standard & Poor's Corporation and have an average duration of approximately 3.7 years. See Note 5 under the caption "Investment Information" of the accompanying Notes to the Consolidated Financial Statements for certain information regarding the Company's privately held securities and their carrying values. During the remainder of 1999 and over the long-term, the Company intends to continue to maintain a substantial portion of its investments in publicly traded and privately held equity securities. At June 30, 1999, the publicly traded equity portfolio consisted of investments in 17 publicly traded insurers, reinsurers or companies providing services to the insurance industry. The estimated fair values of such investments ranged individually from $1 million to $32.6 million. (See Note 5 under the caption "Investment Information" of the accompanying Notes to the Consolidated Financial Statements.) 24 The Company has not invested in derivative financial instruments such as futures, forward contracts, swaps, or options or other financial instruments with similar characteristics such as interest rate caps or floors and fixed-rate loan commitments. The Company's portfolio includes market sensitive instruments, such as mortgage-backed securities, which are subject to prepayment risk and changes in market value in connection with changes in interest rates. The Company's investments in mortgage-backed securities, which amounted to approximately $30.2 million at June 30, 1999, or 4.9% of cash and invested assets, are classified as available for sale and are not held for trading purposes. Market Sensitive Instruments and Risk Management In accordance with the SEC's Financial Reporting Release No. 48, the Company performed a sensitivity analysis to determine the effects that market risk exposures could have on the future earnings, fair values or cash flows of the Company's financial instruments as of December 31, 1998. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Company's 1998 Annual Report on Form 10-K.) Market risk represents the risk of changes in the fair value of a financial instrument and is comprised of several components, including liquidity, basis and price risks. At June 30, 1999, there have been no material changes in market risk exposures that affect the quantitative and qualitative disclosures presented as of December 31, 1998. Ratings In May 1999, A.M. Best Company ("A.M. Best") revised its rating of Risk Capital Reinsurance Company from A (Excellent) to A- (Excellent). While several factors were identified, the rating action principally reflects the poor underwriting results reported by the Company in late 1998 and the first quarter of 1999 on its satellite book of business and the business produced by the managing underwriting agency. The objective of A.M. Best's rating system is to provide an overall opinion of an insurance company's ability to meet its obligations to policyholders. A.M. Best's ratings reflect their independent opinion of the financial strength, operating performance and market profile of an insurer relative to standards established by A. M. Best. A.M. Best's ratings are not a warranty of an insurer's current or future ability to meet its obligations to policyholders, nor are they a recommendation of a specific policy form, contract, rate or claim practice. Liquidity and Capital Resources RCHI is a holding company and has no significant operations or assets other than its ownership of all of the capital stock of Risk Capital Reinsurance, whose primary and predominant business activity is providing reinsurance and other forms of capital to insurance and reinsurance companies and making investments in insurance-related companies. RCHI will rely on cash dividends and distributions from Risk Capital Reinsurance to pay any cash dividends to stockholders of RCHI and to pay any operating expense that RCHI may incur. The payment of dividends by RCHI will be dependent upon the ability of Risk Capital Reinsurance to provide funds to RCHI. The ability of Risk Capital Reinsurance to pay dividends or make distributions to RCHI is dependent upon its ability to achieve satisfactory underwriting and investment results and to meet certain regulatory standards of the State of Nebraska. There are presently no contractual restrictions on the payment of dividends or the making of distributions by Risk Capital Reinsurance to RCHI. Nebraska insurance laws provide that, without prior approval of the Nebraska Director of Insurance (the "Nebraska Director"), Risk Capital Reinsurance cannot pay a dividend or make a distribution (together with other dividends or distributions paid during the preceding 12 months) that exceeds the greater of (i) 10% of statutory surplus as of the preceding December 31 or (ii) statutory net income from operations from the preceding calendar year not including realized capital gains. Net income (exclusive of realized capital gains) not previously distributed or paid as dividends from the preceding two calendar years may be carried forward for dividends and distribution purposes. Any proposed dividend or distribution in excess of such amount is called an "extraordinary" dividend or distribution and may not be paid until either it has been approved, or a 30-day waiting period has passed during which it has not been disapproved, by the Nebraska Director. 25 Notwithstanding the foregoing, Nebraska insurance laws provide that any distribution that is a dividend may be paid by Risk Capital Reinsurance only out of earned surplus arising from its business, which is defined as unassigned funds (surplus) as reported in the statutory financial statement filed by Risk Capital Reinsurance with the Nebraska Insurance Department for the most recent year. In addition, Nebraska insurance laws also provide that any distribution that is a dividend and that is in excess of Risk Capital Reinsurance's unassigned funds, exclusive of any surplus arising from unrealized capital gains or revaluation of assets, will be deemed an "extraordinary" dividend subject to the foregoing requirements. RCHI, Risk Capital Reinsurance and Cross River file consolidated federal income tax returns, and have entered into a tax sharing agreement (the "Tax Sharing Agreement"), allocating the consolidated income tax liability on a separate return basis. Pursuant to the Tax Sharing Agreement, Risk Capital Reinsurance and Cross River make tax sharing payments to RCHI based on such allocation. Net cash flow from operating activities for the six months ended June 30, 1999 was $25.4 million, compared with $34.4 million for the prior year period. Cash flow was reduced in 1999 for the purchases of additional retrocessional protection, including the ceded premium paid for the retrocession of a treaty covering multiple future rocket launches. The primary sources of liquidity for Risk Capital Reinsurance are net cash flow from operating activities, principally premiums received, the receipt of dividends and interest on investments and proceeds from the sale or maturity of investments. The Company's cash flow is also affected by claims payments, some of which could be large. Therefore, the Company's cash flow could fluctuate significantly from period to period. The Company does not currently have any material commitments for any capital expenditures over the next 12 months other than in connection with the further development of the Company's infrastructure. The Company expects that its financing and operational needs for the foreseeable future will be met by the Company's balance of cash and short-term investments, as well as by funds generated from operations. However, no assurance can be given that the Company will be successful in the implementation of its business strategy. At June 30, 1999, the Company's consolidated stockholders' equity totaled $371.6 million, or $21.75 per share. At such date, statutory surplus of Risk Capital Reinsurance was approximately $320.7 million. Based on data available as of March 31, 1999 from the Reinsurance Association of America, Risk Capital Reinsurance is the sixteenth largest domestic broker market oriented reinsurer as measured by statutory surplus. In March 1998, the National Association of Insurance Commissioners adopted the codification of statutory accounting principles project that will generally be applied to all insurance and reinsurance company financial statements filed with insurance regulatory authorities as early as the 2001 statutory filings. Although the codification is not expected to materially affect many existing statutory accounting practices presently followed by most insurers and reinsurers such as the Company, there are several accounting practices that will be changed. The most significant change involves accounting for deferred income taxes, which change would require a deferred tax liability to be recorded for unrealized appreciation of invested assets, net of available deferred tax assets, that would result in a reduction to statutory surplus. Accounting Pronouncements In June 1998, the FASB issued Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities." This statement is effective for fiscal years beginning after June 15, 2000, with initial application as of the beginning of the first quarter of the applicable fiscal year. Retroactive application is prohibited. The Company will adopt this statement in the first quarter of 2001. (See Note 10 of the accompanying notes to the Consolidated Financial Statements of the Company.) Effective January 1, 1999, the Company changed its method of accounting for start-up costs in accordance with the Accounting Standards Executive Committee's Statement of Position ("SOP") 98-5 "Reporting on the Costs of Start-Up Activities." This statement requires costs of start-up activities, including organization costs, to be 26 expensed as incurred. The change in accounting principle resulted in the write-off of the start-up costs capitalized as of January 1, 1999 for the Company and its investee companies carried under the equity method of accounting. The cumulative effect of the write-off, which totals $383,000, after-tax, or $0.02 per share, has been expensed and is included in the 1999 first quarter net loss. The effect of the change on the net loss of the first quarter of 1999 was not material. (See Note 10 of the accompanying notes to the Consolidated Financial Statements of the Company.) The Year 2000 Issues Many existing computer programs use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at the year 2000. The year 2000 issue affects virtually all companies and organizations. The Company instituted a comprehensive year 2000 compliance plan designed to help avoid unexpected interruption in conducting its business. The Company's year 2000 initiative includes the following strategic steps: o Inventory of business systems and operating facilities; o Assessment of potential year 2000 problems; o Repair/replacement of non-compliant systems and facilities; o Testing of systems and facilities; and o Implementation of year 2000 compliant systems and facilities. The Company has substantially completed its testing and implementation of compliant components for its internal business systems and operating facilities. The Company's significant internal systems and facilities have been deemed compliant. The Company does not currently anticipate any material year 2000 compliance problems with respect to its internal business systems and operating facilities. The Company's historical and expected future costs of this internal compliance effort will not have a material adverse effect on the Company's financial position or results of operations. However, due to the interdependent nature of systems and facilities, the Company may be adversely impacted depending upon whether its business partners and vendors address this issue successfully. Therefore, the Company has continued to survey its key business partners and vendors in an attempt to determine their respective level of year 2000 compliance. The Company is also evaluating the year 2000 exposures to issuers included in the Company's investment portfolio. The effect, if any, on the Company's financial position or results of operations from the possible failure of these entities to be year 2000 compliant is not determinable. The Company has not established a contingency plan for noncompliance of its internal systems and operating facilities as the Company does not currently expect any material year 2000 compliance problems with respect to such internal systems and facilities. At this time, the Company is not aware of any material business partners or vendors that will not be year 2000 compliant. If the Company becomes aware of non-compliant business partners or vendors, one option will be to evaluate replacing the non-compliant business partners and vendors. The Company intends to continue to assess and attempt to mitigate its risks in the event these third parties fail to be year 2000 compliant, and will consider appropriate contingency arrangements for such potential noncompliance by such entities. In certain instances, the establishment of a contingency plan is not possible or is cost prohibitive. In these situations, noncompliance by the Company's material business partners or vendors could have a material adverse impact on the Company's financial position and results of operations. In addition, property and casualty reinsurance companies, like the Company, may have underwriting exposure related to the year 2000. The year 2000 issue is a risk for some of the Company's reinsureds and is therefore considered during the underwriting process similar to any other risk to which the Company's clients may be exposed. Due to a significant number of variables associated with the extent and severity of the year 2000 27 problem, the Company's potential underwriting exposure to year 2000 losses cannot be determined at this time. These variables include, but are not limited to, actual pervasiveness and severity of year 2000 system flaws, the magnitude of the amount of costs and expenses directly attributable to year 2000 failures, the portion of such amount (if any) that constitutes insurable losses, and the extent of governmental intervention. The Company's underwriting staff has considered the risks with respect to the year 2000 problem that might be associated with underwriting their various lines of business, and have developed internal guidelines intended to minimize these risks. The Company seeks to minimize its potential year 2000 underwriting exposures by (i) assisting clients in the evaluation of their potential year 2000 underwriting exposures, (ii) performing underwriting evaluations of its clients' potential year 2000 exposure, (iii) structuring contract language to mitigate potential exposure where appropriate and (iv) recommending technical support as appropriate. However, the Company cannot be certain that these steps will adequately minimize its year 2000 underwriting exposures. Given the possible extent and severity of the year 2000 problem, the Company may incur a significant amount of year 2000 related losses, and such losses may have a material adverse impact on the Company's financial condition or results of operations. Cautionary Note Regarding Forward-Looking Statements Except for the historical information and discussions contained herein, statements included in this Report may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements address matters that involve risks, uncertainties and other factors that could cause actual results or performance to differ materially from those indicated in such statements. The Company believes that these factors include, but are not limited to, acceptance in the market of the Company's reinsurance products; competition from new products (including products that may be offered by the capital markets); the availability of investments on attractive terms; competition, including increased competition (both as to underwriting and investment opportunities); changes in the performance of the insurance sector of the public equity markets or market professionals' views as to such sector; the amount of underwriting capacity from time to time in the market; general economic conditions and conditions specific to the reinsurance and investment markets in which the Company operates; regulatory changes and conditions; rating agency policies and practices; claims development, including as to the frequency or severity of claims and the timing of payments; and loss of key personnel. Changes in any of the foregoing may affect the Company's ability to realize its business strategy or may result in changes in the Company's business strategy. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included herein or elsewhere in the Company's filings with the SEC. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Reference is made to the information appearing above under the subheading "Market Sensitive Instruments and Risk Management" under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations," which information is hereby incorporated by reference. 28 PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is subject to litigation and arbitration in the ordinary course of business. Item 4. Submission of Matters to a Vote of Security Holders (a) The 1999 Annual Meeting of Stockholders ("Annual Meeting") of the Company was held on May 11, 1999. (b) Proxies for the Annual Meeting were solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934, as amended. There was no solicitation in opposition to management's nominees as listed in the Company's Proxy Statement, dated April 12, 1999. (c) The stockholders of the Company re-elected the Class I Directors of RCHI to hold office until the 2002 annual meeting of stockholders and until their successors are elected and qualified. Set forth below are the number of votes cast for and withheld for each such Director: Election of Directors FOR WITHHELD --- -------- Thomas V.A. Kelsey 15,106,163 122,172 Philip L. Wroughton 15,106,163 122,172 At the Annual Meeting, the stockholders also (i) approved the Company's 1999 Long Term Incentive and Share Award Plan and (ii) ratified the selection of PricewaterhouseCoopers LLP as independent accountants for the fiscal year ending December 31, 1999. Set forth below are the voting results for such proposals: Approval of the Company's 1999 Long Term Incentive and Share Award Plan FOR AGAINST ABSTAIN --- ------- ------- 11,567,740 2,063,097 22,800 Ratification of Selection of PricewaterhouseCoopers LLP as Independent Accountants FOR AGAINST ABSTAIN --- ------- ------- 15,226,213 622 1,500 29 PART II. OTHER INFORMATION (Con't) Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. Exhibit No. Description ----------- ----------- 10.1.1 Change in Control Agreement (as amended) - President 10.1.2 Change in Control Agreements (as amended) - Managing Directors 10.1.3 Form of Change in Control Agreements (as amended) - Senior Vice Presidents 10.1.4 Change in Control Severance Plan (as amended) 10.2 Investment Advisory Agreement, among Risk Capital Holdings, Inc., Risk Capital Reinsurance Company and Alliance Capital Management L.P. 15 Accountants' Awareness Letter and Limitation of Liability (regarding unaudited interim financial information) 27 Financial Data Schedule (b) Reports on Form 8-K. There were no reports filed on Form 8-K for the three month period ended June 30, 1999. Omitted from this Part II are items which are inapplicable or to which the answer is negative for the period covered. 30 SIGNATURES ================================================================================ Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RISK CAPITAL HOLDINGS, INC. ------------------------------------- (Registrant) /s/ Mark D. Mosca ------------------------------------- Date: August 12, 1999 MARK D. MOSCA President and Chief Executive Officer /s/ Paul J. Malvasio ------------------------------------- Date: August 12, 1999 PAUL J. MALVASIO Chief Financial Officer EXHIBIT INDEX Exhibit No. Description ----------- ----------- 10.1.1 Change in Control Agreement (as amended) - President 10.1.2 Change in Control Agreements (as amended) - Managing Directors 10.1.3 Form of Change in Control Agreements (as amended) - Senior Vice Presidents 10.1.4 Change in Control Severance Plan (as amended) 10.2 Investment Advisory Agreement, among Risk Capital Holdings, Inc., Risk Capital Reinsurance Company and Alliance Capital Management L.P. 15 Accountants' Awareness Letter and Limitation of Liability (regarding unaudited interim financial information) 27 Financial Data Schedule EX-10.1.1 2 CHANGE IN CONTROL AGREEMENT (AS AMENDED) Exhibit 10.1.1 CHANGE IN CONTROL AGREEMENT (AMENDED) -- PRESIDENT CHANGE IN CONTROL AGREEMENT Agreement, made as of the 25th day of February, 1999, by and between Risk Capital Holdings, Inc., a Delaware corporation (the "Company"), and Mark D. Mosca (the "Executive"). WHEREAS, the Executive is a key employee of the Company or one of its subsidiaries; and WHEREAS, the Board of Directors of the Company (the "Board") considers the maintenance of a sound management to be essential to protecting and enhancing the best interests of the Company and its stockholders and recognizes that the possibility of a change in control raises uncertainty and questions among key employees and may result in the departure or distraction of such key employees to the detriment of the Company and its stockholders; and WHEREAS, the Board wishes to assure that it will have the continued dedication of the Executive and the availability of his or her advice and counsel notwithstanding the possibility, threat or occurrence of a bid to take over control of the Company, and to induce the Executive to remain in the employ of the Company; and WHEREAS, the Executive is willing to continue to serve the Company or one of its subsidiaries taking into account the provisions of this Agreement; NOW, THEREFORE, in consideration of the foregoing, and the respective covenants and agreements of the parties herein contained, the parties agree as follows: 1. Change in Control. Benefits shall be provided hereunder only in the event there shall have occurred a "Change in Control," as such term is defined below, and, in the case of benefits described in Section 4 below, the Executive's employment by the Company and its subsidiaries shall thereafter have terminated in accordance with Section 3 below within the Protection Period. No benefits shall be paid under Section 4 of this Agreement if the Executive's employment terminates outside of a Protection Period. (i) For purposes of this Agreement, a "Change in Control" shall mean: (A) any person (within the meaning of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than a Permitted Person or an Initial Investor, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of Voting Securities representing 35% or more of the total voting power of all the then outstanding Voting Securities; or (B) any Initial Investor is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of Voting Securities representing 50% or more of the total voting power of all the then outstanding Voting Securities; or (C) the individuals who, as of the date hereof, constitute the Board together with those who become directors subsequent to such date and whose recommendation, election or nomination for election to the Board was approved by a vote of at least a majority of the directors then still in office who either were directors as of such date or whose recommendation, election or nomination for election was previously so approved, cease for any reason to constitute a majority of the members of the Board; or (D) the required stockholders of the Company approve a merger, consolidation, recapitalization, liquidation, sale or disposition by the Company of all or substantially all of the Company's assets, or reorganization of the Company (provided that all material regulatory approvals have been obtained), or consummation of any such transaction, other than any such transaction which would (x) result in at least 60% of the total voting power represented by the voting securities of the surviving entity outstanding immediately after such transaction being beneficially owned by the former stockholders of the Company and (y) not otherwise be deemed a Change in Control under subparagraphs (A), (B), (C) or (E) of this paragraph (i); or (E) the Board adopts a resolution to the effect that, for purposes hereof, a Change in Control has occurred. (ii) The "Change in Control Date" shall be any date during the term of this Agreement on which a Change in Control occurs. (iii) "Initial Investors" means (A) X.L. Insurance Company, Ltd.; (B) The Trident Partnership, L.P.; (C) Marsh & McLennan Risk Capital Holdings, Ltd.; or (D) any majority-owned subsidiary or parent (or equivalent in the case of a non-corporate entity) of the foregoing. (iv) "Permitted Persons" means (A) the Company; (B) any Related Party; or (C) any group (as defined in Rule 13d-3 under the Exchange Act) comprised of any or all of the foregoing. (v) "Protection Period" means the period beginning on the Change in Control Date and ending on the second anniversary of the Change in Control Date. (vi) "Related Party" means (A) a majority-owned subsidiary of the Company; (B) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any majority-owned subsidiary of the Company; or (C) a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportion as their ownership of Voting Securities. (vii) "Voting Security" means any security of the Company which carries the right to vote generally in the election of directors. 2. Acceleration of Vesting Upon Change in Control. All stock options and restricted stock issued under the Company's 1995 Long Term Incentive and Share Award Plan (or any successor plan) shall become immediately vested in full and, in the case of stock options, immediately exercisable in full, upon a Change in Control in accordance with the applicable restricted stock agreements and stock option agreements. 2 3. Termination Following Change in Control. The Executive shall be entitled to the benefits provided in Section 4 hereof upon any termination of his or her employment with the Company and its subsidiaries within a Protection Period, except a termination of employment (a) because of his or her death, (b) because of a "Disability," (c) by the Company or any of its subsidiaries for "Cause," or (d) by the Executive other than due to "Constructive Termination." (i) Disability. The Executive's employment shall be deemed to have terminated because of a "Disability" if the Executive applies for and is determined to be eligible to receive disability benefits under the Company's Long-Term Disability Plan. (ii) Cause. Termination of the Executive's employment by the Company or any of its subsidiaries for "Cause" shall mean termination by reason of the Executive's willful engagement in conduct which involves dishonesty or moral turpitude in connection with his or her employment and which is demonstrably and materially injurious to the financial condition or reputation of the Company. An act or omission shall be deemed "willful" only if done, or omitted to be done, in bad faith and without reasonable belief that it was in the best interest of the Company. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Executive a written notice of termination from the Compensation Committee of the Board (the "Committee") after reasonable notice to the Executive and an opportunity for him or her, together with his or her counsel, to be heard before the Committee. (iii) Without Cause. The Company or any of its subsidiaries may terminate the employment of the Executive without Cause during a Protection Period only by giving the Executive written notice of termination to that effect. In that event, the Executive's employment shall terminate on the last day of the month in which such notice is given (or such later date as may be specified in such notice), and the benefits set forth in Section 4 hereof shall be provided to the Executive. (iv) Constructive Termination. Termination of employment by the Executive during a Protection Period due to "Constructive Termination" shall mean termination by the Executive subsequent to any of the following: (A) the assignment of duties and responsibilities inconsistent in any material and adverse respect with the Executive's position or a significant diminution in his/her duties or responsibilities; provided, however, that Constructive Termination shall not be deemed to occur upon a change in duties or responsibilities that is solely and directly a result of the Company no longer being a publicly traded entity, and does not involve any other event set forth in this definition; (B) a reduction in the Executive's base salary or bonus opportunity; (C) the requirement that the Executive work at a location outside of Fairfield County, Connecticut, or Westchester County, New York; (D) the failure to provide the Executive with benefits and incentive compensation opportunities at least as favorable, in the aggregate, as the benefits and 3 incentive compensation opportunities available to the Executive immediately prior to a Change in Control; or (E) if the Company has failed to obtain the assumption of the obligations contained in this Agreement by any successor as contemplated in Section 9(c) hereof. The Executive shall exercise his or her right to terminate employment due to Constructive Termination by giving the Company a written notice of termination specifying in reasonable detail the circumstances constituting such Constructive Termination. In that event, the Executive's employment shall terminate on the last day of the month in which such notice is given unless an earlier date is specified in writing by the Executive. A termination of employment by the Executive within a Protection Period shall be due to Constructive Termination if one of the occurrences specified in this subsection (iv) shall have occurred, notwithstanding that the Executive may have other reasons for terminating employment, including employment by another employer which the Executive desires to accept. 4. Benefits Upon Termination Within Protection Period. If, within a Protection Period, the Executive's employment by the Company and its subsidiaries shall be terminated (a) by the Company or any of its subsidiaries other than for Cause and other than because of a Disability or death, or (b) by the Executive due to Constructive Termination, the Executive shall be entitled to the benefits provided for below: (i) The Company shall pay to the Executive, through the date of the Executive's termination of employment, salary at the rate then in effect, together with salary in lieu of vacation accrued to the date on which his or her employment terminates, in accordance with the standard payroll practices of the Company; (ii) The Company shall pay to the Executive an amount equal to the product of (A) the Executive's notional target annual bonus amount of 100% of the Executive's annual base salary in effect on the Change in Control Date (or the date of termination, if higher), multiplied by (B) a fraction, the numerator of which is the number of days elapsed in the calendar year through the date of termination of the Executive's employment, and the denominator of which is 365; and such payment shall be made in a lump sum within 10 business days after the date of such termination of employment; (iii) The Company shall pay to the Executive an amount equal to 2.99 times the sum of (A) the Executive's annual base salary in effect on the Change in Control Date (or the date of termination, if higher), and (B) the Executive's notional target annual bonus amount of 100% of the Executive's annual base salary in effect on the Change in Control Date (or the date of termination, if higher); and such payment shall be made in a lump sum within 10 business days after the date of such termination of employment; and (iv) The Company shall continue to cover the Executive and his or her dependents under, or provide the Executive and his or her dependents with insurance coverage no less favorable than, the Company's life, disability, health and dental benefit plans or programs (as in effect on the day immediately preceding the Protection Period or, at the option of the Executive, on the date of termination of employment) for a period equal to the lesser of (x) 36 months following the date of termination or (y) until the Executive is provided by another employer with benefits substantially comparable (with no preexisting condition limitations) to the benefits provided by such plans or programs. To the extent any such benefits cannot be 4 provided under the benefit plans or programs of the Company or any of its subsidiaries, the Executive will be entitled to receive, on a monthly basis following termination, cash payments in an amount equal to the monthly cost of such benefits. The statutory health care continuation coverage period under Section 4980B of the Internal Revenue Code of 1986, as amended (the "Code"), will commence at the end of such 36-month period. 5. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, policies or programs provided by the Company or any of its subsidiaries and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any stock option or other agreements with the Company or any of its subsidiaries; provided, however, that amounts payable hereunder are in lieu of any severance benefit payable under any other severance plan or agreement of the Company or its subsidiaries in effect on the date hereof. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, practice, policy or program of the Company or any of its subsidiaries at or subsequent to the date of termination of the Executive's employment shall be payable in accordance with such plan, practice, policy or program. 6. Full Settlement; Legal Expenses. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company or any of its subsidiaries may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and amounts payable hereunder will not be reduced by compensation the Executive receives from other employment. The Company agrees to pay, upon written demand therefor by the Executive, all legal fees and expenses which the Executive may reasonably incur as a result of any dispute or contest by or with the Company or others regarding the validity or enforceability of, or liability under, any provision of this Agreement (including as a result of any contest by the Executive about the amount of any payment hereunder), plus in each case interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code, unless the Company prevails on all causes of action in the dispute or contest. In any such action brought by the Executive for damages or to enforce any provisions of this Agreement, the Executive shall be entitled to seek both legal and equitable relief and remedies, including, without limitation, specific performance of the Company's obligations hereunder, in the Executive's sole discretion. 7. Limitation on Payments by the Company. Anything in this Agreement to the contrary notwithstanding, in the event that any payment or distribution made, or benefit provided (including, without limitation, the acceleration of any payment, distribution or benefit and the acceleration of exercisability of any stock option) by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) would be subject to the excise tax imposed by Section 4999 of the Code as an "excess parachute payment" (within the meaning of Section 280G of the Code), the payment set forth in Section 4(iii) hereof shall be reduced to the smallest extent possible such that no amount payable hereunder constitutes an "excess parachute payment" (within the meaning of Section 280G of the Code). 8. Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company and its subsidiaries all secret or confidential information, knowledge or data relating to the Company or any of its subsidiaries, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its subsidiaries (except for information, knowledge or data which shall be or subsequently become known 5 or generally available to the public other than by acts of the Executive or his or her representatives in violation of this Agreement). After the date of termination of the Executive's employment with the Company or any of its subsidiaries, the Executive shall not, without the prior written consent of the Company, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by the Company. The Executive shall return to the Company at the time of the termination of the Executive's employment with the Company or any of its subsidiaries all tangible property of the Company or any its subsidiaries in the Executive's possession, including, but not limited to, confidential information relating to the Company or any of its subsidiaries. In the event of a breach or threatened breach by the Executive of any provision of this Section 8, the Executive acknowledges that the Company and its subsidiaries shall be entitled to an injunction restraining the Executive from such act or threatened act, in addition to monetary damages and any other available remedies. The Executive hereby expressly consents and agrees that, for any breach or threatened breach of any provision of this Section 8, a restraining order and/or an injunction may be issued against the Executive in addition to any other rights the Company or any of its subsidiaries may have with respect to such violation or breach. In no event shall an asserted violation of the provisions of this Section 8 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. The provisions of this Section 8 shall apply to the Executive whether or not there has been a Change in Control. 9. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives or successors in interest. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees (or is required hereunder to assume and agree) to perform this Agreement by operation of law or otherwise. A subsequent Change in Control of a successor shall be considered a Change in Control under Section 1 hereof upon termination of Executive's employment with the successor within a Protection Period. 10. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. 6 (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: [Address of Executive] If to the Company: Risk Capital Holdings, Inc. 20 Horseneck Lane Greenwich, CT 06830 Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company or any of its subsidiaries may withhold from any amounts payable under this Agreement such federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's failure to insist upon strict compliance with any provision hereof shall not be deemed to be a waiver of such provision or any other provision thereof. (f) This Agreement contains the entire understanding of the Company and the Executive with respect to the subject matter hereof but, except as otherwise expressly stated herein, does not supersede or override the provisions of any stock option, employee benefit or other plan, program, policy or practice in which the Executive is a participant or under which the Executive is a beneficiary. 7 IN WITNESS WHEREOF, the Executive has hereunto set his/her hand and, pursuant to the authorization from its Board of Directors, the Company has caused this Agreement to be executed as of the date first above written. RISK CAPITAL HOLDINGS, INC. By: /s/ Peter A. Appel ----------------------------------------- Name: Peter A. Appel Title: Managing Director, General Counsel and Secretary /s/ Mark D. Mosca ----------------------------------------- Mark D. Mosca 8 EX-10.1.2 3 CHANGE IN CONTROL AGREEMENTS (AS AMENDED) Exhibit 10.1.2 CHANGE IN CONTROL AGREEMENTS (amended) - MANAGING DIRECTORS Paul J. Malvasio, Managing Director of Risk Capital Holdings, Inc. ("RCHI") has entered into a Change of Control Agreement with RCHI that is substantially identical in all material respects to the Change in Control Agreement dated as of February 25, 1999, between RCHI and Peter A. Appel, a copy of which is being filed herewith as Exhibit 10.1.2. * * * * CHANGE IN CONTROL AGREEMENT Agreement, made as of the 25th day of February, 1999, by and between Risk Capital Holdings, Inc., a Delaware corporation (the "Company"), and Peter A. Appel (the "Executive"). WHEREAS, the Executive is a key employee of the Company or one of its subsidiaries; and WHEREAS, the Board of Directors of the Company (the "Board") considers the maintenance of a sound management to be essential to protecting and enhancing the best interests of the Company and its stockholders and recognizes that the possibility of a change in control raises uncertainty and questions among key employees and may result in the departure or distraction of such key employees to the detriment of the Company and its stockholders; and WHEREAS, the Board wishes to assure that it will have the continued dedication of the Executive and the availability of his or her advice and counsel notwithstanding the possibility, threat or occurrence of a bid to take over control of the Company, and to induce the Executive to remain in the employ of the Company; and WHEREAS, the Executive is willing to continue to serve the Company or one of its subsidiaries taking into account the provisions of this Agreement; NOW, THEREFORE, in consideration of the foregoing, and the respective covenants and agreements of the parties herein contained, the parties agree as follows: 1. Change in Control. Benefits shall be provided hereunder only in the event there shall have occurred a "Change in Control," as such term is defined below, and, in the case of benefits described in Section 4 below, the Executive's employment by the Company and its subsidiaries shall thereafter have terminated in accordance with Section 3 below within the Protection Period. No benefits shall be paid under Section 4 of this Agreement if the Executive's employment terminates outside of a Protection Period. (i) For purposes of this Agreement, a "Change in Control" shall mean: (A) any person (within the meaning of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than a Permitted Person or an Initial Investor, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of Voting Securities representing 35% or more of the total voting power of all the then outstanding Voting Securities; or (B) any Initial Investor is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of Voting Securities representing 50% or more of the total voting power of all the then outstanding Voting Securities; or (C) the individuals who, as of the date hereof, constitute the Board together with those who become directors subsequent to such date and whose recommendation, election or nomination for election to the Board was approved by a vote of at least a 2 majority of the directors then still in office who either were directors as of such date or whose recommendation, election or nomination for election was previously so approved, cease for any reason to constitute a majority of the members of the Board; or (D) the required stockholders of the Company approve a merger, consolidation, recapitalization, liquidation, sale or disposition by the Company of all or substantially all of the Company's assets, or reorganization of the Company (provided that all material regulatory approvals have been obtained), or consummation of any such transaction, other than any such transaction which would (x) result in at least 60% of the total voting power represented by the voting securities of the surviving entity outstanding immediately after such transaction being beneficially owned by the former stockholders of the Company and (y) not otherwise be deemed a Change in Control under subparagraphs (A), (B), (C) or (E) of this paragraph (i); or (E) the Board adopts a resolution to the effect that, for purposes hereof, a Change in Control has occurred. (ii) The "Change in Control Date" shall be any date during the term of this Agreement on which a Change in Control occurs. (iii) "Initial Investors" means (A) X.L. Insurance Company, Ltd.; (B) The Trident Partnership, L.P.; (C) Marsh & McLennan Risk Capital Holdings, Ltd.; or (D) any majority-owned subsidiary or parent (or equivalent in the case of a non-corporate entity) of the foregoing. (iv) "Permitted Persons" means (A) the Company; (B) any Related Party; or (C) any group (as defined in Rule 13d-3 under the Exchange Act) comprised of any or all of the foregoing. (v) "Protection Period" means the period beginning on the Change in Control Date and ending on the second anniversary of the Change in Control Date. (vi) "Related Party" means (A) a majority-owned subsidiary of the Company; (B) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any majority-owned subsidiary of the Company; or (C) a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportion as their ownership of Voting Securities. (vii) "Voting Security" means any security of the Company which carries the right to vote generally in the election of directors. 2. Acceleration of Vesting Upon Change in Control. All stock options and restricted stock issued under the Company's 1995 Long Term Incentive and Share Award Plan (or any successor plan) shall become immediately vested in full and, in the case of stock options, immediately exercisable in full, upon a Change in Control in accordance with the applicable restricted stock agreements and stock option agreements. 3. Termination Following Change in Control. The Executive shall be entitled to the benefits provided in Section 4 hereof upon any termination of his or her employment with the Company 3 and its subsidiaries within a Protection Period, except a termination of employment (a) because of his or her death, (b) because of a "Disability," (c) by the Company or any of its subsidiaries for "Cause," or (d) by the Executive other than due to "Constructive Termination." (i) Disability. The Executive's employment shall be deemed to have terminated because of a "Disability" if the Executive applies for and is determined to be eligible to receive disability benefits under the Company's Long-Term Disability Plan. (ii) Cause. Termination of the Executive's employment by the Company or any of its subsidiaries for "Cause" shall mean termination by reason of the Executive's willful engagement in conduct which involves dishonesty or moral turpitude in connection with his or her employment and which is demonstrably and materially injurious to the financial condition or reputation of the Company. An act or omission shall be deemed "willful" only if done, or omitted to be done, in bad faith and without reasonable belief that it was in the best interest of the Company. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Executive a written notice of termination from the Compensation Committee of the Board (the "Committee") after reasonable notice to the Executive and an opportunity for him or her, together with his or her counsel, to be heard before the Committee. (iii) Without Cause. The Company or any of its subsidiaries may terminate the employment of the Executive without Cause during a Protection Period only by giving the Executive written notice of termination to that effect. In that event, the Executive's employment shall terminate on the last day of the month in which such notice is given (or such later date as may be specified in such notice), and the benefits set forth in Section 4 hereof shall be provided to the Executive. (iv) Constructive Termination. Termination of employment by the Executive during a Protection Period due to "Constructive Termination" shall mean termination by the Executive subsequent to any of the following: (A) the assignment of duties and responsibilities inconsistent in any material and adverse respect with the Executive's position or a significant diminution in his/her duties or responsibilities; provided, however, that Constructive Termination shall not be deemed to occur upon a change in duties or responsibilities that is solely and directly a result of the Company no longer being a publicly traded entity, and does not involve any other event set forth in this definition; (B) a reduction in the Executive's base salary or bonus opportunity; (C) the requirement that the Executive work at a location outside of Fairfield County, Connecticut, or Westchester County, New York; (D) the failure to provide the Executive with benefits and incentive compensation opportunities at least as favorable, in the aggregate, as the benefits and incentive compensation opportunities available to the Executive immediately prior to a Change in Control; or 4 (E) if the Company has failed to obtain the assumption of the obligations contained in this Agreement by any successor as contemplated in Section 9(c) hereof. The Executive shall exercise his or her right to terminate employment due to Constructive Termination by giving the Company a written notice of termination specifying in reasonable detail the circumstances constituting such Constructive Termination. In that event, the Executive's employment shall terminate on the last day of the month in which such notice is given unless an earlier date is specified in writing by the Executive. A termination of employment by the Executive within a Protection Period shall be due to Constructive Termination if one of the occurrences specified in this subsection (iv) shall have occurred, notwithstanding that the Executive may have other reasons for terminating employment, including employment by another employer which the Executive desires to accept. 4. Benefits Upon Termination Within Protection Period. If, within a Protection Period, the Executive's employment by the Company and its subsidiaries shall be terminated (a) by the Company or any of its subsidiaries other than for Cause and other than because of a Disability or death, or (b) by the Executive due to Constructive Termination, the Executive shall be entitled to the benefits provided for below: (i) The Company shall pay to the Executive, through the date of the Executive's termination of employment, salary at the rate then in effect, together with salary in lieu of vacation accrued to the date on which his or her employment terminates, in accordance with the standard payroll practices of the Company; (ii) The Company shall pay to the Executive an amount equal to the product of (A) the amount of the Executive's target annual bonus for the year including the Change in Control Date (or the year including the termination date, if higher), multiplied by (B) a fraction, the numerator of which is the number of days elapsed in the calendar year through the date of termination of the Executive's employment, and the denominator of which is 365; and such payment shall be made in a lump sum within 10 business days after the date of such termination of employment; (iii) The Company shall pay to the Executive an amount equal to 2.25 times the sum of (A) the Executive's annual base salary in effect on the Change in Control Date (or the date of termination, if higher), and (B) the Executive's target annual bonus for the year including the Change in Control Date (or the year including the termination date, if higher); and such payment shall be made in a lump sum within 10 business days after the date of such termination of employment; and (iv) The Company shall continue to cover the Executive and his or her dependents under, or provide the Executive and his or her dependents with insurance coverage no less favorable than, the Company's life, disability, health and dental benefit plans or programs (as in effect on the day immediately preceding the Protection Period or, at the option of the Executive, on the date of termination of employment) for a period equal to the lesser of (x) 27 months following the date of termination or (y) until the Executive is provided by another employer with benefits substantially comparable (with no preexisting condition limitations) to the benefits provided by such plans or programs. To the extent any such benefits cannot be provided under the benefit plans or programs of the Company or any of its subsidiaries, the Executive will be entitled to receive, on a monthly basis following termination, cash payments in an amount equal to the monthly cost of such benefits. The statutory health care continuation 5 coverage period under Section 4980B of the Internal Revenue Code of 1986, as amended (the "Code"), will commence at the end of such 27-month period. 5. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, policies or programs provided by the Company or any of its subsidiaries and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any stock option or other agreements with the Company or any of its subsidiaries; provided, however, that amounts payable hereunder are in lieu of any severance benefit payable under any other severance plan or agreement of the Company or its subsidiaries in effect on the date hereof. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, practice, policy or program of the Company or any of its subsidiaries at or subsequent to the date of termination of the Executive's employment shall be payable in accordance with such plan, practice, policy or program. 6. Full Settlement; Legal Expenses. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company or any of its subsidiaries may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and amounts payable hereunder will not be reduced by compensation the Executive receives from other employment. The Company agrees to pay, upon written demand therefor by the Executive, all legal fees and expenses which the Executive may reasonably incur as a result of any dispute or contest by or with the Company or others regarding the validity or enforceability of, or liability under, any provision of this Agreement (including as a result of any contest by the Executive about the amount of any payment hereunder), plus in each case interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code, unless the Company prevails on all causes of action in the dispute or contest. In any such action brought by the Executive for damages or to enforce any provisions of this Agreement, the Executive shall be entitled to seek both legal and equitable relief and remedies, including, without limitation, specific performance of the Company's obligations hereunder, in the Executive's sole discretion. 7. Limitation on Payments by the Company. Anything in this Agreement to the contrary notwithstanding, in the event that any payment or distribution made, or benefit provided (including, without limitation, the acceleration of any payment, distribution or benefit and the acceleration of exercisability of any stock option) by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) would be subject to the excise tax imposed by Section 4999 of the Code as an "excess parachute payment" (within the meaning of Section 280G of the Code), the payment set forth in Section 4(iii) hereof shall be reduced to the smallest extent possible such that no amount payable hereunder constitutes an "excess parachute payment" (within the meaning of Section 280G of the Code). 8. Confidential Information; Nonsolicitation of Employees and Customers. The Executive shall hold in a fiduciary capacity for the benefit of the Company and its subsidiaries all secret or confidential information, knowledge or data relating to the Company or any of its subsidiaries, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its subsidiaries (except for information, knowledge or data which shall be or subsequently become known or generally available to the public other than by acts of the Executive or his or her representatives in violation of this Agreement). After the date of termination of the Executive's employment with the Company or any of its subsidiaries, the Executive 6 shall not, without the prior written consent of the Company, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by the Company. The Executive shall return to the Company at the time of the termination of the Executive's employment with the Company or any of its subsidiaries all tangible property of the Company or any its subsidiaries in the Executive's possession, including, but not limited to, confidential information relating to the Company or any of its subsidiaries. The Executive shall not, during the term of his employment by the Company or any of its subsidiaries and for one year thereafter, directly or indirectly, on behalf of the Executive or any other person or entity, (i) induce, or seek to induce, any employee of the Company or any of its subsidiaries to terminate employment with the Company or any of its subsidiaries or (ii) solicit business from any person, firm or company which is (during the period the Executive is employed by the Company or any of its subsidiaries), or at the time of the termination of the Executive was, a customer of the Company or any of its subsidiaries, or induce, or seek to induce, any such customer of the Company or any of its subsidiaries to cease doing business with the Company or any of its subsidiaries. In the event of a breach or threatened breach by the Executive of any provision of this Section 8, the Executive acknowledges that the Company and its subsidiaries shall be entitled to an injunction restraining the Executive from such act or threatened act, in addition to monetary damages and any other available remedies. The Executive hereby expressly consents and agrees that, for any breach or threatened breach of any provision of this Section 8, a restraining order and/or an injunction may be issued against the Executive in addition to any other rights the Company or any of its subsidiaries may have with respect to such violation or breach. In no event shall an asserted violation of the provisions of this Section 8 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. The provisions of this Section 8 shall apply to the Executive whether or not there has been a Change in Control. 9. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives or successors in interest. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees (or is required hereunder to assume and agree) to perform this Agreement by operation of law or otherwise. A subsequent Change in Control of a successor shall be considered a Change in Control under Section 1 hereof upon termination of Executive's employment with the successor within a Protection Period. 10. Miscellaneous. 7 (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: [Address of Executive] If to the Company: Risk Capital Holdings, Inc. 20 Horseneck Lane Greenwich, CT 06830 Attention: Chief Financial Officer or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company or any of its subsidiaries may withhold from any amounts payable under this Agreement such federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's failure to insist upon strict compliance with any provision hereof shall not be deemed to be a waiver of such provision or any other provision thereof. (f) This Agreement contains the entire understanding of the Company and the Executive with respect to the subject matter hereof but, except as otherwise expressly stated herein, does not supersede or override the provisions of any stock option, employee benefit or other plan, program, policy or practice in which the Executive is a participant or under which the Executive is a beneficiary. 8 IN WITNESS WHEREOF, the Executive has hereunto set his/her hand and, pursuant to the authorization from its Board of Directors, the Company has caused this Agreement to be executed as of the date first above written. RISK CAPITAL HOLDINGS, INC. By: /s/ Mark D. Mosca -------------------------------------------- Name: Mark D. Mosca Title: President and Chief Executive Officer /s/ Peter A. Appel -------------------------------------------- Peter A. Appel 9 EX-10.1.3 4 FORM OF CHANGE IN CONTROL AGREEMENT (AS AMENDED) Exhibit 10.1.3 FORM OF CHANGE IN CONTROL AGREEMENT (AMENDED) -- SENIOR VICE PRESIDENT CHANGE IN CONTROL AGREEMENT Agreement, made as of the 25th day of February, 1999, by and between Risk Capital Holdings, Inc., a Delaware corporation (the "Company"), and _____________ (the "Executive"). WHEREAS, the Executive is a key employee of the Company or one of its subsidiaries; and WHEREAS, the Board of Directors of the Company (the "Board") considers the maintenance of a sound management to be essential to protecting and enhancing the best interests of the Company and its stockholders and recognizes that the possibility of a change in control raises uncertainty and questions among key employees and may result in the departure or distraction of such key employees to the detriment of the Company and its stockholders; and WHEREAS, the Board wishes to assure that it will have the continued dedication of the Executive and the availability of his or her advice and counsel notwithstanding the possibility, threat or occurrence of a bid to take over control of the Company, and to induce the Executive to remain in the employ of the Company; and WHEREAS, the Executive is willing to continue to serve the Company or one of its subsidiaries taking into account the provisions of this Agreement; NOW, THEREFORE, in consideration of the foregoing, and the respective covenants and agreements of the parties herein contained, the parties agree as follows: 1. Change in Control. Benefits shall be provided hereunder only in the event there shall have occurred a "Change in Control," as such term is defined below, and, in the case of benefits described in Section 4 below, the Executive's employment by the Company and its subsidiaries shall thereafter have terminated in accordance with Section 3 below within the Protection Period. No benefits shall be paid under Section 4 of this Agreement if the Executive's employment terminates outside of a Protection Period. (i) For purposes of this Agreement, a "Change in Control" shall mean: (A) any person (within the meaning of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than a Permitted Person or an Initial Investor, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of Voting Securities representing 35% or more of the total voting power of all the then outstanding Voting Securities; or (B) any Initial Investor is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of Voting Securities representing 50% or more of the total voting power of all the then outstanding Voting Securities; or (C) the individuals who, as of the date hereof, constitute the Board together with those who become directors subsequent to such date and whose recommendation, election or nomination for election to the Board was approved by a vote of at least a majority of the directors then still in office who either were directors as of such date or whose recommendation, election or nomination for election was previously so approved, cease for any reason to constitute a majority of the members of the Board; or (D) the required stockholders of the Company approve a merger, consolidation, recapitalization, liquidation, sale or disposition by the Company of all or substantially all of the Company's assets, or reorganization of the Company (provided that all material regulatory approvals have been obtained), or consummation of any such transaction, other than any such transaction which would (x) result in at least 60% of the total voting power represented by the voting securities of the surviving entity outstanding immediately after such transaction being beneficially owned by the former stockholders of the Company and (y) not otherwise be deemed a Change in Control under subparagraphs (A), (B), (C) or (E) of this paragraph (i); or (E) the Board adopts a resolution to the effect that, for purposes hereof, a Change in Control has occurred. (ii) The "Change in Control Date" shall be any date during the term of this Agreement on which a Change in Control occurs. (iii) "Initial Investors" means (A) X.L. Insurance Company, Ltd.; (B) The Trident Partnership, L.P.; (C) Marsh & McLennan Risk Capital Holdings, Ltd.; or (D) any majority-owned subsidiary or parent (or equivalent in the case of a non-corporate entity) of the foregoing. (iv) "Permitted Persons" means (A) the Company; (B) any Related Party; or (C) any group (as defined in Rule 13d-3 under the Exchange Act) comprised of any or all of the foregoing. (v) "Protection Period" means the period beginning on the Change in Control Date and ending on the second anniversary of the Change in Control Date. (vi) "Related Party" means (A) a majority-owned subsidiary of the Company; (B) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any majority-owned subsidiary of the Company; or (C) a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportion as their ownership of Voting Securities. (vii) "Voting Security" means any security of the Company which carries the right to vote generally in the election of directors. 2. Acceleration of Vesting Upon Change in Control. All stock options and restricted stock issued under the Company's 1995 Long Term Incentive and Share Award Plan (or any successor plan) shall become immediately vested in full and, in the case of stock options, immediately exercisable in full, upon a Change in Control in accordance with the applicable restricted stock agreements and stock option agreements. 2 3. Termination Following Change in Control. The Executive shall be entitled to the benefits provided in Section 4 hereof upon any termination of his or her employment with the Company and its subsidiaries within a Protection Period, except a termination of employment (a) because of his or her death, (b) because of a "Disability," (c) by the Company or any of its subsidiaries for "Cause," or (d) by the Executive other than due to "Constructive Termination." (i) Disability. The Executive's employment shall be deemed to have terminated because of a "Disability" if the Executive applies for and is determined to be eligible to receive disability benefits under the Company's Long-Term Disability Plan. (ii) Cause. Termination of the Executive's employment by the Company or any of its subsidiaries for "Cause" shall mean termination by reason of the Executive's willful engagement in conduct which involves dishonesty or moral turpitude in connection with his or her employment and which is demonstrably and materially injurious to the financial condition or reputation of the Company. An act or omission shall be deemed "willful" only if done, or omitted to be done, in bad faith and without reasonable belief that it was in the best interest of the Company. (iii) Without Cause. The Company or any of its subsidiaries may terminate the employment of the Executive without Cause during a Protection Period only by giving the Executive written notice of termination to that effect. In that event, the Executive's employment shall terminate on the last day of the month in which such notice is given (or such later date as may be specified in such notice), and the benefits set forth in Section 4 hereof shall be provided to the Executive. (iv) Constructive Termination. Termination of employment by the Executive during a Protection Period due to "Constructive Termination" shall mean termination by the Executive subsequent to any of the following: (A) the assignment of duties and responsibilities inconsistent in any material and adverse respect with the Executive's position or a significant diminution in his/her duties or responsibilities; provided, however, that Constructive Termination shall not be deemed to occur upon a change in duties or responsibilities that is solely and directly a result of the Company no longer being a publicly traded entity, and does not involve any other event set forth in this definition; (B) a reduction in the Executive's base salary or bonus opportunity; (C) the requirement that the Executive work at a location outside of Fairfield County, Connecticut, or Westchester County, New York; (D) the failure to provide the Executive with benefits and incentive compensation opportunities at least as favorable, in the aggregate, as the benefits and incentive compensation opportunities available to the Executive immediately prior to a Change in Control; or (E) if the Company has failed to obtain the assumption of the obligations contained in this Agreement by any successor as contemplated in Section 9(c) hereof. 3 The Executive shall exercise his or her right to terminate employment due to Constructive Termination by giving the Company a written notice of termination specifying in reasonable detail the circumstances constituting such Constructive Termination. In that event, the Executive's employment shall terminate on the last day of the month in which such notice is given unless an earlier date is specified in writing by the Executive. A termination of employment by the Executive within a Protection Period shall be due to Constructive Termination if one of the occurrences specified in this subsection (iv) shall have occurred, notwithstanding that the Executive may have other reasons for terminating employment, including employment by another employer which the Executive desires to accept. 4. Benefits Upon Termination Within Protection Period. If, within a Protection Period, the Executive's employment by the Company and its subsidiaries shall be terminated (a) by the Company or any of its subsidiaries other than for Cause and other than because of a Disability or death, or (b) by the Executive due to Constructive Termination, the Executive shall be entitled to the benefits provided for below: (i) The Company shall pay to the Executive, through the date of the Executive's termination of employment, salary at the rate then in effect, together with salary in lieu of vacation accrued to the date on which his or her employment terminates, in accordance with the standard payroll practices of the Company; (ii) The Company shall pay to the Executive an amount equal to the product of (A) the amount of the Executive's target annual bonus for the year including the Change in Control Date (or the year including the termination date, if higher), multiplied by (B) a fraction, the numerator of which is the number of days elapsed in the calendar year through the date of termination of the Executive's employment, and the denominator of which is 365; and such payment shall be made in a lump sum within 10 business days after the date of such termination of employment; (iii) The Company shall pay to the Executive an amount equal to 2.0 times the sum of (A) the Executive's annual base salary in effect on the Change in Control Date (or the date of termination, if higher), and (B) the Executive's target annual bonus for the year including the Change in Control Date (or the year including the termination date, if higher); and such payment shall be made in a lump sum within 10 business days after the date of such termination of employment; and (iv) The Company shall continue to cover the Executive and his or her dependents under, or provide the Executive and his or her dependents with insurance coverage no less favorable than, the Company's life, disability, health and dental benefit plans or programs (as in effect on the day immediately preceding the Protection Period or, at the option of the Executive, on the date of termination of employment) for a period equal to the lesser of (x) 24 months following the date of termination or (y) until the Executive is provided by another employer with benefits substantially comparable (with no preexisting condition limitations) to the benefits provided by such plans or programs. To the extent any such benefits cannot be provided under the benefit plans or programs of the Company or any of its subsidiaries, the Executive will be entitled to receive, on a monthly basis following termination, cash payments in an amount equal to the monthly cost of such benefits. The statutory health care continuation coverage period under Section 4980B of the Internal Revenue Code of 1986, as amended (the "Code"), will commence at the end of such 24-month period. 4 5. Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, policies or programs provided by the Company or any of its subsidiaries and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any stock option or other agreements with the Company or any of its subsidiaries; provided, however, that amounts payable hereunder are in lieu of any severance benefit payable under any other severance plan or agreement of the Company or its subsidiaries in effect on the date hereof. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, practice, policy or program of the Company or any of its subsidiaries at or subsequent to the date of termination of the Executive's employment shall be payable in accordance with such plan, practice, policy or program. 6. Full Settlement; Legal Expenses. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company or any of its subsidiaries may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and amounts payable hereunder will not be reduced by compensation the Executive receives from other employment. The Company agrees to pay, upon written demand therefor by the Executive, all legal fees and expenses which the Executive may reasonably incur as a result of any dispute or contest by or with the Company or others regarding the validity or enforceability of, or liability under, any provision of this Agreement (including as a result of any contest by the Executive about the amount of any payment hereunder), plus in each case interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code, unless the Company prevails on all causes of action in the dispute or contest. In any such action brought by the Executive for damages or to enforce any provisions of this Agreement, the Executive shall be entitled to seek both legal and equitable relief and remedies, including, without limitation, specific performance of the Company's obligations hereunder, in the Executive's sole discretion. 7. Limitation on Payments by the Company. Anything in this Agreement to the contrary notwithstanding, in the event that any payment or distribution made, or benefit provided (including, without limitation, the acceleration of any payment, distribution or benefit and the acceleration of exercisability of any stock option) by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) would be subject to the excise tax imposed by Section 4999 of the Code as an "excess parachute payment" (within the meaning of Section 280G of the Code), the payment set forth in Section 4(iii) hereof shall be reduced to the smallest extent possible such that no amount payable hereunder constitutes an "excess parachute payment" (within the meaning of Section 280G of the Code). 8. Confidential Information; Nonsolicitation of Employees and Customers. The Executive shall hold in a fiduciary capacity for the benefit of the Company and its subsidiaries all secret or confidential information, knowledge or data relating to the Company or any of its subsidiaries, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its subsidiaries (except for information, knowledge or data which shall be or subsequently become known or generally available to the public other than by acts of the Executive or his or her representatives in violation of this Agreement). After the date of termination of the Executive's employment with the Company or any of its subsidiaries, the Executive shall not, without the prior written consent of the Company, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by the Company. The Executive shall return to the Company at the time of the termination of the Executive's 5 employment with the Company or any of its subsidiaries all tangible property of the Company or any its subsidiaries in the Executive's possession, including, but not limited to, confidential information relating to the Company or any of its subsidiaries. The Executive shall not, during the term of his employment by the Company or any of its subsidiaries and for one year thereafter, directly or indirectly, on behalf of the Executive or any other person or entity, (i) induce, or seek to induce, any employee of the Company or any of its subsidiaries to terminate employment with the Company or any of its subsidiaries or (ii) solicit business from any person, firm or company which is (during the period the Executive is employed by the Company or any of its subsidiaries), or at the time of the termination of the Executive was, a customer of the Company or any of its subsidiaries, or induce, or seek to induce, any such customer of the Company or any of its subsidiaries to cease doing business with the Company or any of its subsidiaries. In the event of a breach or threatened breach by the Executive of any provision of this Section 8, the Executive acknowledges that the Company and its subsidiaries shall be entitled to an injunction restraining the Executive from such act or threatened act, in addition to monetary damages and any other available remedies. The Executive hereby expressly consents and agrees that, for any breach or threatened breach of any provision of this Section 8, a restraining order and/or an injunction may be issued against the Executive in addition to any other rights the Company or any of its subsidiaries may have with respect to such violation or breach. In no event shall an asserted violation of the provisions of this Section 8 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. The provisions of this Section 8 shall apply to the Executive whether or not there has been a Change in Control. 9. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives or successors in interest. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees (or is required hereunder to assume and agree) to perform this Agreement by operation of law or otherwise. A subsequent Change in Control of a successor shall be considered a Change in Control under Section 1 hereof upon termination of Executive's employment with the successor within a Protection Period. 10. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written 6 agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: [Address of Executive] If to the Company: Risk Capital Holdings, Inc. 20 Horseneck Lane Greenwich, CT 06830 Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company or any of its subsidiaries may withhold from any amounts payable under this Agreement such federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's failure to insist upon strict compliance with any provision hereof shall not be deemed to be a waiver of such provision or any other provision thereof. (f) This Agreement contains the entire understanding of the Company and the Executive with respect to the subject matter hereof but, except as otherwise expressly stated herein, does not supersede or override the provisions of any stock option, employee benefit or other plan, program, policy or practice in which the Executive is a participant or under which the Executive is a beneficiary. 7 IN WITNESS WHEREOF, the Executive has hereunto set his/her hand and, pursuant to the authorization from its Board of Directors, the Company has caused this Agreement to be executed as of the date first above written. RISK CAPITAL HOLDINGS, INC. By: /s/ Peter A. Appel ------------------------------------- Name: Peter A. Appel Title: Managing Director, General Counsel and Secretary ------------------------------------- Name of Executive EX-10.1.4 5 CHANGE IN CONTROL SEVERANCE PLAN (AS AMENDED) Exhibit 10.1.4 RISK CAPITAL HOLDINGS, INC. AMENDED AND RESTATED CHANGE IN CONTROL SEVERANCE PLAN AND SUMMARY PLAN DESCRIPTION 1. Name of Plan. Risk Capital Holdings, Inc. Change in Control Severance Plan (the "Plan"). 2. Purpose of Plan. The purpose of the Plan is to provide change in control benefits to eligible Employees as described below. 3. Participation. The Plan covers all employees of Risk Capital Holdings, Inc. (the "Company"), Risk Capital Reinsurance Company, or any other subsidiaries of the Company designated by the Company from time to time as participating employers in this Plan, who have executed and returned to the Company the Acknowledgment attached as Exhibit A hereto ("Employees"); provided, however, that any Employee who has a separate Change in Control Agreement with the Company or its subsidiaries shall receive change in control severance benefits only as set forth in such Agreement. Employees and former employees who are eligible to receive, are receiving or have received benefits under this Plan are referred to as "Participants." 4. Change in Control. Benefits shall be provided under the Plan only in the event there shall have occurred a "Change in Control," as such term is defined below, and, in the case of benefits described in Section 7 below, a Participant's employment by the Company and its subsidiaries shall thereafter have terminated in accordance with Section 6 below within the Protection Period. No benefits shall be paid under Section 7 of this Plan if a Participant's employment terminates outside of a Protection Period. (i) For purposes of the Plan, a "Change in Control" shall mean: (A) any person (within the meaning of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), other than a Permitted Person or an Initial Investor, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of Voting Securities representing 35% or more of the total voting power of all the then outstanding Voting Securities; or (B) any Initial Investor is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of Voting Securities representing 50% or more of the total voting power of all the then outstanding Voting Securities; or (C) the individuals who, as of the date hereof, constitute the Board of Directors of the Company (the "Board") together with those who become directors subsequent to such date and whose recommendation, election or nomination for election to the Board was approved by a vote of at least a majority of the directors then still in office who either were directors as of such date or whose recommendation, election or nomination for election was previously so approved, cease for any reason to constitute a majority of the members of the Board; or (D) the required stockholders of the Company approve a merger, consolidation, recapitalization, liquidation, sale or disposition by the Company of all or substantially all of the Company's assets, or reorganization of the Company (provided that all material regulatory approvals have been obtained), or consummation of any such transaction, other than any such transaction which would (x) result in at least 60% of the total voting power represented by the voting securities of the surviving entity outstanding immediately after such transaction being beneficially owned by the former stockholders of the Company and (y) not otherwise be deemed a Change in Control under subparagraphs (A), (B), (C) or (E) of this paragraph (i); or (E) the Board adopts a resolution to the effect that, for purposes hereof, a Change in Control has occurred. (ii) The "Change in Control Date" shall be any date during the term of this Plan on which a Change in Control occurs. (iii) "Initial Investors" means (A) X.L. Insurance Company, Ltd.; (B) The Trident Partnership, L.P.; (C) Marsh & McLennan Risk Capital Holdings, Ltd.; or (D) any majority-owned subsidiary or parent (or equivalent in the case of a non-corporate entity) of the foregoing. (iv) "Permitted Persons" means (A) the Company; (B) any Related Party; or (C) any group (as defined in Rule 13d-3 under the Exchange Act) comprised of any or all of the foregoing. (v) "Protection Period" means (A) in the case of each Participant who is an officer, the period beginning on the Change in Control Date and ending on the first anniversary of the Change in Control Date and (B) in the case of each Participant who is a non-officer, the period beginning on the Change in Control Date and ending six months after the Change in Control Date. (vi) "Related Party" means (A) a majority-owned subsidiary of the Company; (B) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any majority-owned subsidiary of the Company; or (C) a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportion as their ownership of Voting Securities. (vii) "Voting Security" means any security of the Company which carries the right to vote generally in the election of directors. 5. Acceleration of Vesting Upon Change in Control. All stock options and restricted stock issued under the Company's 1995 Long Term Incentive and Share Award Plan (or any successor plan) shall become immediately vested in full and, in the case of stock options, immediately exercisable in full, upon a Change in Control in accordance with the applicable restricted stock agreements and stock option agreements. 6. Termination Following Change in Control. A Participant shall be entitled to the benefits provided in Section 7 of the Plan upon any termination of his or her employment with the 2 Company and its subsidiaries within a Protection Period, except a termination of employment (a) because of his or her death, (b) because of a "Disability," (c) by the Company or any of its subsidiaries for "Cause," or (d) by a Participant (other than, in the case of officers only, termination by the Participant due to Constructive Termination). (i) Disability. A Participant's employment shall be deemed to have terminated because of a "Disability" if the Participant applies for and is determined to be eligible to receive disability benefits under the Company's Long-Term Disability Plan. (ii) Cause. Termination of a Participant's employment by the Company or any of its subsidiaries for "Cause" shall mean termination by reason of the Participant's willful engagement in conduct which involves dishonesty or moral turpitude in connection with his or her employment and which is demonstrably and materially injurious to the financial condition or reputation of the Company. An act or omission shall be deemed "willful" only if done, or omitted to be done, in bad faith and without reasonable belief that it was in the best interest of the Company. (iii) Without Cause. The Company or any of its subsidiaries may terminate the employment of a Participant without Cause during a Protection Period only by giving the Participant written notice of termination to that effect. In that event, the Participant's employment shall terminate on the last day of the month in which such notice is given (or such later date as may be specified in such notice), and the benefits set forth in Section 7 hereof shall be provided to the Participant. (iv) Constructive Termination. Termination of employment by an officer during a Protection Period due to "Constructive Termination" shall mean termination by the officer subsequent to any of the following: (A) the assignment of duties and responsibilities inconsistent in any material and adverse respect with the officer's position or a significant diminution in his/her duties or responsibilities; provided, however, that Constructive Termination shall not be deemed to occur upon a change in duties or responsibilities that is solely and directly a result of the Company no longer being a publicly traded entity, and does not involve any other event set forth in this definition; (B) a reduction in the officer's base salary or bonus opportunity; (C) the requirement that the officer work at a location outside of Fairfield County, Connecticut, or Westchester County, New York; (D) the failure to provide the officer with benefits and incentive compensation opportunities at least as favorable, in the aggregate, as the benefits and incentive compensation opportunities available to the officer immediately prior to a Change in Control; or (E) if the Company has failed to obtain the assumption of the obligations contained in the Plan by any successor as contemplated in Section 17 hereof. An officer shall exercise his or her right to terminate employment due to Constructive Termination by giving the Company a written notice of termination specifying in reasonable detail the circumstances constituting such Constructive Termination. In that event, the officer's employment shall terminate on the last day of the month in which such notice is given unless an earlier date is specified in writing by the officer. A termination of employment by the officer within a Protection Period shall be due to Constructive Termination if one of the occurrences specified in this subsection (iv) shall have occurred, notwithstanding that the officer may have other reasons for terminating employment, including employment by another employer which the officer desires to accept. 3 7. Benefits Upon Termination Within Protection Period. If, within a Protection Period, a Participant's employment by the Company and its subsidiaries shall be terminated (a) by the Company or any of its subsidiaries other than for Cause and other than because of a Disability or death, or (b) in the case of an officer, by the officer due to Constructive Termination, the Participant shall be entitled to the benefits provided for below: (i) The Company shall pay to the Participant, through the date of the Participant's termination of employment, salary at the rate then in effect, together with salary in lieu of vacation accrued to the date on which his or her employment terminates, in accordance with the standard payroll practices of the Company; (ii) The Company shall pay to the Participant an amount equal to the product of (A) the amount of the Participant's target annual bonus for the year including the Change in Control Date (or the year of termination, if higher), multiplied by (B) a fraction, the numerator of which is the number of days elapsed in the calendar year through the date of termination of the Participant's employment, and the denominator of which is 365; and such payment shall be made in a lump sum within 10 business days after the date of such termination of employment; (iii) The Company shall pay as severance to the Participant an amount as set forth below, which payment shall be made in equal monthly installments over 18 months, in the case of a Participant described in paragraph (A) below, 12 months, in the case of a Participant described in paragraph (B) below, and six months, in the case of a Participant described in paragraph (C) below, beginning within 10 business days after the date of such termination of employment; provided, however, that a Participant will have a duty to mitigate such payments by seeking new employment, and the severance payments will be reduced by any salary from such other employment received or receivable during the period of severance: (A) in the case of an officer of the level of Vice President or higher, an amount equal to 1.5 times the sum of (1) the Participant's annual base salary in effect on the Change in Control Date (or the date of termination, if higher) and (2) the Participant's target annual bonus for the year including the Change in Control Date (or the year of termination, if higher), (B) in the case of an officer below the level of Vice President, an amount equal to 1.0 times the sum of (1) the Participant's annual base salary in effect on the Change in Control Date (or the date of termination, if higher) and (2) the Participant's target annual bonus for the year including the Change in Control Date (or the year of termination, if higher), and (C) in the case of each Participant who is a non-officer, an amount equal to 0.5 times the sum of (1) the Participant's annual base salary in effect on the Change in Control Date (or the date of termination, if higher) and (2) the Participant's target annual bonus for the year including the Change in Control Date (or the year of termination, if higher); and (iv) The Company shall continue to cover the Participant and his or her dependents under, or provide the Participant and his or her dependents with insurance coverage no less favorable than, the Company's life, disability, health and dental benefit plans or programs (as 4 in effect on the day immediately preceding the Protection Period or, at the option of the Participant, on the date of termination of employment) for a period equal to the lesser of (x) the number of months following the date of termination equal to the number of months of severance which the Participant is entitled to under the previous paragraph or (y) until the Participant is provided by another employer with benefits substantially comparable (with no preexisting condition limitations) to the benefits provided by such plans or programs. To the extent any such benefits cannot be provided under the benefit plans or programs of the Company or any of its subsidiaries, the Participant will be entitled to receive, on a monthly basis following termination, cash payments in an amount equal to the monthly cost of such benefits. 8. Non-Exclusivity of Rights. Nothing in this Plan shall prevent or limit the Participant's continuing or future participation in any benefit, bonus, policies or programs provided by the Company or any of its subsidiaries and for which the Participant may qualify, nor shall anything herein limit or otherwise affect such rights as the Participant may have under any stock option or other agreements with the Company or any of its subsidiaries; provided, however, that amounts payable hereunder are in lieu of any severance benefit payable under any other severance plan or agreement of the Company or its subsidiaries in effect on the date hereof. Amounts which are vested benefits or which a Participant is otherwise entitled to receive under any plan, practice, policy or program of the Company or any of its subsidiaries at or subsequent to the date of termination of a Participant's employment shall be payable in accordance with such plan, practice, policy or program. 9. Limitation on Payments by the Company. Anything in this Plan to the contrary notwithstanding, in the event that any payment or distribution made, or benefit provided (including, without limitation, the acceleration of any payment, distribution or benefit and the acceleration of exercisability of any stock option) by the Company to or for the benefit of the Participant (whether paid or payable or distributed or distributable pursuant to the terms of this Plan or otherwise) would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), as an "excess parachute payment" (within the meaning of Section 280G of the Code), the payment set forth in Section 7(iii) hereof shall be reduced to the smallest extent possible such that no amount payable hereunder constitutes an "excess parachute payment" (within the meaning of Section 280G of the Code). 10. Confidential Information; Nonsolicitation of Employees and Customers. Each Participant shall hold in a fiduciary capacity for the benefit of the Company and its subsidiaries all secret or confidential information, knowledge or data relating to the Company or any of its subsidiaries, and their respective businesses, which shall have been obtained by the Participant during his or her employment by the Company or any of its subsidiaries (except for information, knowledge or data which shall be or subsequently become known or generally available to the public other than by acts of the Participant or his or her representatives in violation of this Plan). After the date of termination of a Participant's employment with the Company or any of its subsidiaries, the Participant shall not, without the prior written consent of the Company, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by the Company. The Participant shall return to the Company at the time of the termination of the Participant's employment with the Company or any of its subsidiaries all tangible property of the Company or any its subsidiaries in the Participant's possession, including, but not limited to, confidential information relating to the Company or any of its subsidiaries. The Participant shall not, during the term of his or her employment by the Company or any of its subsidiaries and for one year thereafter, directly or indirectly, on behalf of the Participant or any other person or entity, (i) induce, 5 or seek to induce, any employee of the Company or any of its subsidiaries to terminate employment with the Company or any of its subsidiaries or (ii) solicit business from any person, firm or company which is (during the period the Participant is employed by the Company or any of its subsidiaries), or at the time of the termination of the Participant was, a customer of the Company or any of its subsidiaries, or induce, or seek to induce, any such customer of the Company or any of its subsidiaries to cease doing business with the Company or any of its subsidiaries. In the event of a breach or threatened breach by a Participant of any provision of this Section 10, the Participant acknowledges that the Company and its subsidiaries shall be entitled to an injunction restraining the Participant from such act or threatened act, in addition to monetary damages and any other available remedies. Each Participant hereby expressly consents and agrees that, for any breach or threatened breach of any provision of this Section 10, a restraining order and/or an injunction may be issued against the Participant in addition to any other rights the Company or any of its subsidiaries may have with respect to such violation or breach. In no event shall an asserted violation of the provisions of this Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to a Participant under this Plan. The provisions of this Section 10 shall apply to Participants whether or not there has been a Change in Control. The invalidity or unenforceability of any provision of this Section 10 shall not affect the validity or enforceability of any other provision of this Plan. 11. Choice of Law. This Plan shall be governed by and construed in accordance with the laws of the State of Connecticut, without reference to principles of conflict of laws. The captions of this Plan are not part of the provisions hereof and shall have no force or effect. 12. Withholding. The Company or any of its subsidiaries may withhold from any amounts payable under the Plan such federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. 13. Non-Uniform Determinations. The determinations of the Plan Administrator (as defined below) under this Plan need not be uniform and may be made by it selectively among the persons who receive, or are eligible to receive, awards hereunder, whether or not such persons are similarly situated. 14. Plan Interpretation. The Plan Administrator has the final authority and responsibility with respect to the construction of the terms of the Plan and the eligibility for Plan benefits. Its decisions in all such matters are final and binding. 15. Effective Date. The Plan is effective as of February 25, 1999. 16. Plan Amendment or Termination. Prior to a Change in Control, this Plan may be amended, modified or terminated by action of the Board of Directors of the Company. During a Protection Period and for 18 months thereafter, this Plan may not be amended, modified or terminated in a manner that would adversely affect the Participants without written consent of such Participants. 17. Successors. This Plan will be binding on any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company. The Company will require any such successor to assume expressly and agree to perform this Plan in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Plan, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and 6 agrees (or is required hereunder to assume and agree) to perform this Plan by operation of law or otherwise. 18. Type of Plan. The Plan is a change in control severance pay plan, a type of welfare benefit plan. 19. Plan Number. The number assigned to this Plan is 504. 20. Plan Year. The plan year is the calendar year. 21. Name and Address of Employer: Risk Capital Holdings, Inc. 20 Horseneck Lane Greenwich, CT 06830 22. Taxpayer Identification Number of Employer: 06-1424716. 23. Plan Administrator and Named Fiduciary. The Plan shall be administered by the Company (the "Plan Administrator" or the "administrator"). The Company is the named fiduciary of the Plan. 24. Source of Plan Benefits. All severance payments to be made to eligible Participants pursuant to this Plan are to be made from the general assets of the Company. Benefits under the Plan are not insured under Title IV of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), because this is a welfare benefit plan to which that Title does not apply. 25. Agent for Service of Legal Process. Plan Administrator (see above). 26. Procedure for Claiming Benefits. Severance benefits are awarded in appropriate circumstances without application. The Company's obligation to make the payments provided for in this Plan and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company or any of its subsidiaries may have against a Participant or others. However, if a Participant believes that he or she is entitled to severance benefits under the Plan and such benefits are not awarded, the Participant must present a written claim for such benefits to the Plan Administrator. If the Plan Administrator determines that the claim should be denied, the Plan Administrator must provide the Participant with notice of the denial, written in clear and precise terms and giving specific reasons for the denial. Within 90 days after a Participant is notified of the denial of his or her application, the Participant also has the right to appeal to the Plan Administrator for a full and fair review of any such denial. A Participant also has the right to review any relevant documents and to submit issues and comments in writing to the Plan Administrator. If the Participant needs more time, the Plan Administrator may allow the Participant more than 90 days to file a request for review. The Plan Administrator shall conduct a hearing and/or take such other steps as the Plan Administrator deems appropriate for a full and fair review of the appeal from the denial of a claim and, usually within 60 days after the request for review is received, shall issue a final written decision, which shall include specific reasons for the decision and references to the pertinent plan provisions and which shall be written in a manner calculated to be understood by the Participant. If the Plan Administrator needs more time, the Plan Administrator's decision may be delayed until 120 days after the request for review is received. 7 27. Participant Rights Under ERISA. A Participant in the Plan is entitled to certain rights and protection under ERISA. ERISA provides that all Plan Participants shall be entitled to: Examine without charge, at the Plan Administrator's office and other specified locations, such as worksites, all plan documents and copies of all documents filed by the Plan with the United States Department of Labor, such as detailed annual reports and plan descriptions. Obtain copies of all plan documents and other plan information upon written request to the Plan Administrator. The administrator may make a reasonable charge for the copies. Receive a summary of the Plan's annual financial report, if any. The Plan Administrator is required by law to furnish each Participant with a copy of any such summary annual report. Obtain a statement telling the Participant whether he or she has a right to receive a plan benefit upon termination of employment and if so, what the benefits under the Plan would be if the Participant stops working now. If the Participant does not have a right to a benefit, the statement will state when, if ever, the Participant will have earned the right to a benefit. This statement must be requested in writing and is not required to be given more than once a year. The Plan must provide the statement free of charge. In addition to created rights for Plan Participants, ERISA imposes duties upon the people who are responsible for the operation of the Plan. The people who operate the Plan (called "fiduciaries" of the Plan) have a duty to do so prudently and in the interest of Plan Participants and beneficiaries. No one, including the employer or any other person, may fire a Participant or otherwise discriminate against the Participant in any way to prevent him or her from obtaining a benefit from the Plan or exercising his or her rights under ERISA. If the Participant's claim for a benefit under the Plan is denied in whole or in part, the Participant must receive a written explanation of the reason for the denial. The Participant must have the right to have the Plan Administrator review and reconsider the claim. Under ERISA, there are steps a Participant can take to enforce the above rights. For instance, if the Participant requests materials from the Plan and does not receive them within 30 days, the Participant may file suit in a federal court. In such a case, the court may require the Plan Administrator to provide the materials and pay the Participant up to $100 a day until the materials are received, unless the materials were not sent because of reasons beyond the control of the administrator. If the Participant has a claim for benefits which is denied or ignored, in whole or in part, the Participant may file suit in a state or federal court. If it should happen that Plan fiduciaries misuse the Plan's money, or if the Participant is discriminated against for asserting his or her rights, the Participant may seek assistance from the United States Department of Labor or the Participant may file suit in a federal court. The court will decide who should pay court costs and legal fees. If the Participant is successful, the court may order the person the Participant sued to pay these costs and fees. If the Participant loses, the court may order the Participant to pay these costs and fees, for example, if it finds that the claim is frivolous. If the Participant has any questions about the Plan, the Participant should contact the Plan Administrator. If the Participant has any questions about this statement or about the Participant's rights 8 under ERISA, he or she should contact the nearest area office of the Pension and Welfare Benefits Administration, United States Department of Labor, listed in a telephone directory or the Division of Technical Assistance and Inquiries, Pension and Welfare Benefits Administration, United States Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C. 20210. * * * * 9 Exhibit A RISK CAPITAL HOLDINGS, INC. AMENDED AND RESTATED CHANGE IN CONTROL SEVERANCE PLAN Acknowledgment I, an employee of Risk Capital Holdings, Inc. or a subsidiary, acknowledge that I have received a copy of the Amended and Restated Risk Capital Holdings, Inc. Change in Control Severance Plan and Summary Plan Description, and I agree to its terms. I understand that the confidentiality and nonsolicitation terms set forth in Section 10 thereof will apply to me whether or not a Change in Control actually occurs. Date:____________ ____________________________________ Print name: ________________________ EX-10.2 6 INVESTMENT ADVISORY AGREEMENT Exhibit 10.2 ALLIANCE CAPITAL MANAGEMENT L.P. Discretionary Investment Advisory Agreement with Risk Capital Holdings. Inc. Risk Capital Reinsurance Company -------------------------------- (Name of Client) Dated April 22, 1999 (Effective Date) Alliance Capital Management L.P. (the "Adviser") and the undersigned (the "Client") hereby agree as of the above date tint the Adviser shall act as discretionary investment manager with respect to assets of the Client described below (the "Investment Account") on the following terms and conditions: 1. The Investment Account The Investment Account shall initially consist of cash, cash equivalents, stocks, bonds, and other securities or assets the Client places in the Investment Account or which shall become part of the Investment Account as a result of transactions. The Client may make additions to and withdrawals from the investment Account provided the Adviser receives prior written notice of withdrawals. All cash, securities and other assets in the Investment Account shall be held by such other party as the Client shall designate as trustee or custodian (the "Custodian"). The Adviser shall not be responsible for any custodial arrangements involving any assets of the Investment Account or for the payment of any custodial charges and fees, nor shall the Adviser have possession or custody of any such assets. All payments, distributions and other transactions in cash, securities or other assets in respect of the Investment Account shall be made directly to or from the Custodian, and the Adviser shall have no responsibility or liability with respect to transmittal or safekeeping of such cash, securities or other assets of the Investment Account, or the acts or omissions of the Custodian or others with respect thereto. The Client shall direct the Custodian to furnish to the Adviser from time to time such reports concerning assets, receipts and disbursements with respect to the Investment Account as the Adviser shall reasonably request. 2. Services of Adviser By execution of this Agreement, the Adviser accept appointment as investment manager for the Investment Account with full discretion and agrees to supervise and direct the investments of the Investment Account in accordance with the written investment objectives, policies and restrictions of the Client previously furnished to the Adviser as the same may be amended by the Client from time to time. In the performance of its services, the Adviser will not be liable for any error in judgment or any acts or omissions to act except those resulting from the Adviser's negligence, wilful misconduct or malfeasance. Nothing herein shall in any way constitute a waiver or limitation of any right of any person under the Federal Securities Laws or any State Securities Laws. The Adviser will render to the Client at least quarterly a written report and inventory of the investments in the Investment Account. It is agreed that the Adviser, in the maintenance of its records, does not assume responsibility for the accuracy of information furnished by the Client or any other person. 3. Funding Policy The Client shall from time to time inform the Adviser in writing of the funding policy applicable wit respect to the Client and of its cash disbursement requirements. The Adviser shall make its investment decisions for the Investment Account in accordance with such funding policy and requirements. 4. Investment Objectives, Policies and Restrictions It will be the Client's responsibility to notify the Adviser in writing of the investment objectives and policies of the Investment Account, and of any modifications therein, as well as any specific investment restrictions applicable thereto and to give the Adviser prompt written notice if the Client deems any investments made for the Investment Account to be inconsistent with such objectives, policies or restrictions. The Client is also required to notify the Adviser in writing of specific restrictions governing the Investment Account under the current or future laws of any jurisdiction or by virtue of the terms of any other contract or instrument purporting to bind the Client or Adviser. 5. Delivery of Client Documentation No later than the date of this Agreement, the Client will provide the Adviser with copies of all documents relevant to the Adviser's management of the Investment Account, (i.e. trust agreement, pension plan documents, by-laws, etc. but only to the extent such documents are relevant to the Adviser's management of the Investment Account), including the written statement of the Client's investment objectives, policies and restrictions referred to above. The Client further agrees to promptly deliver to the Adviser true and complete copies of all amendments or supplements to such documents. The Adviser will be indemnified and held harmless against any and all losses, costs, claims and liabilities which it may suffer or incur arising out of any failure by the Client to provide to the Adviser the documents required to be furnished in accordance with the above provisions. 6. Discretionary Authority The Adviser, whenever it deems appropriate and without prior consultation with the Client, but subject to the client's investment objectives, policies and restrictions referred to above and other terms hereof, may (i) buy, sell, exchange, convert, liquidate or otherwise trade in any stock, bonds and other securities (including money market instruments) and (ii), subject to the provisions of paragraph 7 hereof, place orders for the execution of such transactions with or through such brokers, dealers or issuers as the Adviser in its absolute discretion may select. It is understood that, to the extent permitted by the written statement of investment objectives, policies and restrictions referred to above, the Adviser may also effect transactions for the Investment Account in options and financial futures, stock market index futures and other commodity contracts. In such event, the Client will execute any additional documentation which the Adviser deems necessary to enable it to engage in such transactions on behalf of the Investment Account. 7. Allocation of Brokerage When placing orders for the execution of transactions for the Investment Account, the Adviser may, unless the Client otherwise directs, allocate such transactions to such broker-dealers, for execution on such markets, at such prices and at such commission rates, as in the good faith judgment of the Adviser will be in the best interests of the Client In the selection of such broker-dealers, the Adviser will take into consideration not only the available prices and rates of brokerage commissions, but also other relevant factors (such as, without limitation, execution capabilities, research and other services provided by such broker-dealers which are expected to enhance the general portfolio management capabilities of the Adviser, and the value of an ongoing relationship of the Adviser with such broker-dealers) without having to demonstrate that such factors are of a direct benefit to the Investment Account. As a result, the commissions charged the Investment Account with respect to a particular transaction may be somewhat higher than those another broker-dealer might charge for the same transaction. The Adviser will exercise good faith in negotiating the commissions paid by the Investment Account and will seek to obtain the best price and execution for each transaction for the Investment Account, taking into consideration the value of any brokerage and research services provided by the broker-dealer effecting the transaction. As set forth in Part II of the Adviser's Form ADV Registration Statement on file with the Securities and Exchange Commission ("Form ADV"), the Adviser will not implement other arrangements governing the use or selection of affiliated broker-dealers or their correspondents to effect transactions for the Investment Account without first obtaining express written consent or direction from the Client, which consent or direction will constitute a modification to this Agreement. 8. Aggregation of Transactions The Client authorizes the Adviser in its discretion to aggregate purchases and sales of securities for the Investment Account with purchases and sales of securities of the same issuer for other clients of the Adviser occurring on the same day. When transactions are so aggregated, the actual prices applicable to the aggregated transactions will be averaged, and the Investment Account and the accounts of other participating clients of the Adviser will be deemed to have been purchased or sold their proportionate share of the securities involved at the average price so obtained. 9. Transaction Procedures All transactions will be settled by payment to, or delivery by, the Custodian of all cash, securities or other assets due to or from the Investment Account. The Adviser may issue such instructions to the Custodian as may be appropriate in connection with the settlement of transactions initiated by the Adviser. Instructions of the Adviser to the Custodian shall be transmitted in writing or, at the option of the Adviser, orally and confirmed in writing as soon as practical thereafter. The Adviser will take reasonable measures to insure that broker-dealers and issuers selected by the Adviser perform their obligations wit respect to the Investment Account. 10. Fees The compensation of the Adviser for its services under this Agreement shall be calculated and paid in accordance with the attached Fee Schedule, as the same may be amended from time to time by mutual agreement between the Client and the Adviser. It is understood that, in the event that such fees are to be billed to and paid by the Custodian, the Client will provide written authorization to the Custodian to pay the fees of the Adviser directly from the Investment Account. 11. Confidential Relationship All information provided by the Client or the Custodian to the Adviser shall be held as confidential by the Adviser; provided, however, as is necessary to carry out the purposes of this Agreement or as may be required by law, the Adviser shall be permitted to disclose or communicate to a proper party any information received from the Client or the Custodian or developed by the Adviser under the terms of this Agreement. All recommendations, advice and other work product of the Adviser developed under the terms of this Agreement and disclosed to the Client or the Custodian shall be held as confidential, except as required by law, regulations, legal process or listing or quotation requirements of any exchange or quotation system on which securities of Client or its parent may be listed or quoted. 12. Services to Other Clients It is understood that the Adviser performs investment advisory services for various clients including investment companies. The Client agrees that the Adviser may give advice and take action with respect to any of its other clients which may differ from advice given, or the timing or nature of action taken, with respect to the Investment Account, so long as it is the Adviser's policy, to the extent practical, to allocate investment opportunities to the Investment Account over a period of time on a fair and equitable basis relative to other clients. Nothing in this Agreement shall limit or restrict the Adviser or any of its directors, officers, affiliates or employees from buying, selling or trading in any securities or other assets for its or their own account or accounts, and the Client acknowledges that the Adviser, its directors, officers, affiliates and employees, and other clients of the Adviser, may at any time have, acquire, increase, decrease or dispose of positions in investments which are at the same time being acquired, held or disposed of for the Investment Account. The Adviser will not have any obligation to initiate the purchase or sale, or to recommend for purchase or sale, for the Investment Account any security or other asset which the Adviser, its directors, officers, affiliates or employees may purchase, hold or sell for its or their own accounts or for the accounts of any other clients of the Adviser. 13. Information Required by Adviser The Client agrees to provide or instruct the Custodian to provide to the Adviser such information as the Adviser may reasonably request as being necessary or appropriate to the performance of the Adviser's responsibilities to the Client under this Agreement. 14. Non-Public Information The Adviser will have no obligation to purchase or sell for the Investment Account the securities of any issuer on the basis of any material non-public information as may come into its possession. 15. Proxies Unless otherwise directed by the Client in writing, the Adviser will not be required to take any action or render any advice with respect to the voting of proxies solicited by or with respect to the issuers of securities in which assets of the Investment Account may be invested from time to time. 16. Representations by Client The Client represents and warrants that the employment of the Adviser is authorized by the governing documents relating to the Investment Account and that the terms of this Agreement do not violate any obligation by which the Client is bound, whether arising by contract, operation of law or otherwise and, if the Client is a person other than a natural person, that (i) this Agreement has been duly authorized by appropriate action and when executed and delivered will be binding upon the Client in accordance with its terms and (ii) the Client will deliver to the Adviser such evidence of such authority as the Adviser may reasonably require, whether by way of a certified resolution or otherwise. 17. Representations by Adviser The Adviser represents that it is registered as an investment adviser under the Investment Advisers Act of 1940. 18. Indemnification The Client and the Adviser agree to indemnify and hold each other harmless from any and all expenses, damages, costs and fees, including reasonable attorney's fees, which may be incurred by reason of the gross negligence, willful misconduct or malfeasance on the part of the offending party. 19. Valuation In computing the market value of any security held in the Investment Account which is listed on a national securities exchange, such security shall be valued at the last quoted sale price on the valuation date on the principal exchange on which the security is traded. Any other security or asset shall be valued in a manner determined in good faith by the Advises and Client to reflect its fair market value. 20. Receipt of Disclosure Statement The Client acknowledges receipt of Part II of the Adviser's Form ADV in compliance with Rule 204-3(b) under the Investment Advisers Act of 1940, as amended ("Advisers Act") more than 48 hours prior to the date of execution of this Agreement. 21. Notices Unless otherwise specified herein, all notices, instructions and advises with respect to security transactions or any other matters contemplated by this Agreement shall be deemed duly given when received by the Adviser, the Client and the Custodian, as applicable, at their respective addresses appearing below. The Adviser may rely upon any notice (written or oral) from any person which the Adviser reasonably believes to be an authorized representative of the Client. 22. Specimen Signatures The Adviser will forward from time to time to the Client and the Custodian a list of names and specimen signatures of persons authorized to act on behalf of the Adviser. The Client will forward to the Adviser a list of names and specimen signatures of persons authorized to act on Client's behalf and shall cause the Custodian to forward a like list and specimen signatures to the Adviser. 23. Invalid Provisions If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future law, such provision shall be fully severable, and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part of this Agreement, and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or its severance from this Agreement. 24. Termination; Assignment; Amendment This Agreement may be terminated at any time by either party giving to the other at least thirty (30) days' prior written notice of such termination. Fees paid in advance of the effectiveness of the termination will be prorated to the date of termination specified in the notice of termination, and any unearned portion thereof will be refunded to the Client. No assignment as that term is defined in the Advisers Act, shall be made by the Adviser without the written consent of the Client. No assignment shall be deemed to result from changes in the directors, officers or employees of the Adviser except as may be provided in the Advisers Act. The Adviser agrees that it will notify the Client of any change in the membership of the general partners of the Adviser within a reasonable time after such change. This Agreement may be amended or modified at any time by mutual agreement in writing. 25. Counterparts This Agreement may be executed in two or more counterparts, each one of which shall be deemed to be an original. 26. Governing Law To the extent Federal law does not apply, this Agreement shall be construed in accordance with and governed by the laws of the State of New York, without regard to principles or conflicts of law. 27. Entire Agreement This Agreement constitutes the entire agreement of the parties with respect to management of the Investment Account. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective representatives as of the date first above written. NAME OF Risk Capital Holdings, Inc. CLIENT: Risk Capital Reinsurance Company ---------------------------------- BY: /s/ Paul J. Malvasio -------------------------------------- Paul J. Malvasio, Managing Director and Chief Financial Officer ADDRESS: 20 Horseneck Lane Greenwich, CT 06830 ALLIANCE CAPITAL MANAGEMENT L.P. BY: ALLIANCE CAPITAL MANAGEMENT CORPORATION, ITS GENERAL PARTNER BY: /s/ Mark R. Manley -------------------------------------- Mark R. Manley Assistant Secretary ADDRESS: 1345 Avenue of the Americas New York, N.Y. 10105 ALLIANCE CAPITAL MANAGEMENT L.P. Fee Schedule The fee for management of the assets in the Investment Account is billed and payable on the last day of each calendar quarter based upon the value of the assets in the Investment Account. On an annualized basis our fee is as follows: .40% - first $10 million .25% - next $20 million .20% - next $20 million .15% - excess over $50 million Alliance Investment Company Fees Whenever assets in a client's account are invested in an investment company managed by Alliance Capital Management L.P., the assets in the account invested in the investment company are subjected to the management fee of such company and the above fee schedule is then applied in full to the remaining assets in the account (excluding the portion invested in. the investment company). In such event, the client will incur a higher total management fee if the investment company's management fee rate exceeds the rates reflected in the above schedule. In order to avoid a duplicative charge in respect of the advisory fee paid directly to Adviser by the Fund, a dollar-for-dollar credit in the amount of the Fund's advisory fee attributable to the client's investment in the Fund will be reflected in the quarterly fee statement. Information regarding the investment companies managed by Alliance and their respective advisory fees is available upon request. EX-15 7 ACCOUNTANTS' AWARENESS LETTER Exhibit 15 Accountants' Awareness Letter and Limitation of Liability We are aware of the incorporation by reference in the Registration Statement on Form S-3 (Registration No. 33-34499) and in the Registration Statement on Form S-8 (Registration No. 33-99974) of Risk Capital Holdings, Inc. of our report dated July 26, 1999 (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 26, 1999 (issued pursuant to the provisions of Statement on Auditing Standards No. 71) on the unaudited interim consolidated financial information of Risk Capital Holdings, Inc. because our report is not a "report" or a "part" of the Registration Statement on Form S-3 (Registration No. 33-34499) or of the Registration Statement on Form S-8 (Registration No. 33-99974) prepared or certified by us within the meaning of sections 7 and 11 of the Securities Act of 1933. PricewaterhouseCoopers LLP New York, New York August 12, 1999 EX-27 8 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET OF RISK CAPITAL HOLDINGS, INC. AND ITS SUBSIDIARY AT JUNE 30, 1999, AND THE RELATED STATEMENT OF INCOME, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 258,342 0 0 258,006 0 0 605,495 11,279 59,485 27,331 858,825 326,916 119,447 0 0 0 0 0 171 371,409 858,825 149,910 9,300 22,234 0 146,170 42,407 7,371 (14,504) (5,746) (9,108) 0 0 0 (9,108) (0.53) (0.53) 186,189 120,732 25,937 10,380 35,050 286,928 25,939 Includes equity in net income of investees of $33 and a cumulative change in accounting of -383. Net income excludes Other Comprehensive income (loss) which the Company adopted 1st Qtr 1998 in a one financial statement approach. Comprehensive loss was $26,771 or $1.57 per share Basic and Diluted. Loss reserves net of reinssurance.
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