SECURITIES AND EXCHANGE COMMISSION
                             
                             WASHINGTON, D.C. 20549

                             ----------------------
                                   FORM 10-Q
                             ----------------------

          (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
                      FOR THE QUARTER ENDED JUNE 30, 1998

                                       OR

          ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                      SECURITIES AND EXCHANGE ACT OF 1934
                   FOR THE TRANSITION PERIOD FROM ____TO____

             ------------------------------------------------------
                             CAPITAL RE CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
             ------------------------------------------------------

          DELAWARE              001-10995                  52-1567009
    (STATE OR OTHER      COMMISSION FILE NUMBER)         (IRS EMPLOYER
    JURISDICTION OF                                    IDENTIFICATION NUMBER)
    INCORPORATION OR
     ORGANIZATION)

                          1325 AVENUE OF THE AMERICAS
                                   18TH FLOOR
                            NEW YORK, NEW YORK 10019
                                (212) 974-0100

(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY  SECTIONS  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  (REGISTRANT  BECAME SUBJECT TO THE
FILING REQUIREMENTS ON APRIL 8, 1992.)

AS OF AUGUST 10, 1998 THERE WERE 31,914,119  OUTSTANDING SHARES OF COMMON STOCK,
PAR VALUE $.01 PER SHARE, OF THE REGISTRANT.

<PAGE>

<TABLE>

                     CAPITAL RE CORPORATION AND SUBSIDIARIES

                                      INDEX

<S>            <C>                                                                     <C>
PART I         FINANCIAL INFORMATION                                                   PAGE

ITEM 1.        FINANCIAL STATEMENTS (UNAUDITED) CAPITAL RE CORPORATION
                 AND SUBSIDIARIES

               CONSOLIDATED BALANCE SHEETS -JUNE 30, 1998 (UNAUDITED) AND                 3
                 DECEMBER 31, 1997 (UNAUDITED)

               CONSOLIDATED   STATEMENTS  OF  INCOME  -  THREE  AND  SIX  MONTHS
                 ENDED JUNE 30, 1998 (UNAUDITED) AND JUNE 30, 1997                        4

               CONSOLIDATED  STATEMENTS OF COMPREHENSIVE  INCOME - THREE AND SIX
                 MONTHS ENDED  JUNE  30,  1998(UNAUDITED) AND JUNE 30, 1997
                (UNAUDITED)                                                               5

               CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - SIX MONTHS
                 ENDED JUNE 30, 1998 (UNAUDITED)                                          6

               CONSOLIDATED STATEMENTS OF CASH FLOWS - SIX MONTHS ENDED
               JUNE 30, 1998 (UNAUDITED) AND JUNE 30, 1997 (UNAUDITED)                    7

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)                     8-9

ITEM 2.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                 RESULTS OF OPERATIONS                                                    10-19

PART II        OTHER INFORMATION

ITEM 4         SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                        20

ITEM 5         OTHER INFORMATION                                                          21   

ITEM 6         EXHIBITS AND REPORTS ON FORM 8-K                                           21-23

SIGNATURES                                                                                24

</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                     CAPITAL RE CORPORATION AND SUBSIDIARIES
                           Consolidated Balance Sheets
                 (Dollars in thousands except per share amounts)

                                                                                     June 30,          December 31,
                                                                                         1998                  1997
                                                                                --------------       ---------------
ASSETS
<S>                                                                                <C>                   <C>
Fixed maturity securities available for sale, at market
   (amortized cost: $972,136 in 1998 and $887,605 in 1997)                         $1,016,698              $932,823
Short-term investments, at cost, which approximates market                             70,264                78,268
                                                                                --------------       ---------------
Total Investments                                                                   1,086,962             1,011,091

Cash                                                                                   15,414                18,878
Accrued investment income                                                              15,938                13,761
Deferred acquisition costs                                                            152,482               135,332
Prepaid reinsurance premiums                                                           71,724                64,953
Reinsurance recoverable on ceded losses                                                16,350                 7,245
Funds held under reinsurance agreements                                                 4,434                 3,926
Premiums receivable, net                                                               43,149                25,414
Amounts receivable on ceded annuity reserves                                           57,421                58,635
Investment in affiliates                                                               22,003                21,858
Goodwill                                                                                9,846                12,677
Other assets                                                                           10,729                12,032
                                                                                --------------       ---------------
   Total Assets                                                                    $1,506,452            $1,385,802
                                                                                ==============       ===============

LIABILITIES
Deferred premium revenue                                                             $456,790              $402,145
Reserve for losses and loss adjustment expenses                                        53,911                37,900
Annuity benefit reserves                                                               57,421                58,635
Accident and health reserves                                                           16,094                16,367
Profit commission liability                                                            40,466                30,457
Deferred federal income taxes payable                                                  76,670                72,879
Bank note payable                                                                      25,000                25,000
Long-term debt                                                                         74,838                74,819
Other liabilities                                                                      23,776                23,657
                                                                                --------------       ---------------
   Total Liabilities                                                                 $824,966              $741,859
                                                                                --------------       ---------------

COMPANY OBLIGATED MANDATORILY REDEEMABLE
  PREFERRED SECURITIES OF CAPITAL RE LLC                                               75,000                75,000

STOCKHOLDERS' EQUITY
Preferred stock - $.01 par value per share;  25,000,000  shares
  authorized; no shares issued and outstanding
   in 1998 and 1997                                                                       ---                   ---
Common stock - $.01 par value per share; 75,000,000 shares
   authorized, 31,866,622 and 31,826,874 shares issued and
   outstanding in 1998 and 1997, respectively                                             323                   322
Additional paid-in capital                                                            225,505               224,999
Retained earnings                                                                     356,686               319,253
Treasury stock; 428,000 and 428,000 shares in 1998 and 1997,  respectively             (4,891)               (4,891)
Other Comprehensive Income
       Net unrealized gain on fixed maturities securities
            available for sale, net of tax                                             28,972                29,392
       Foreign exchange translation                                                      (109)                 (132)
                                                                                --------------       ---------------
Accumulated Other Comprehensive Income                                                 28,863                29,260
                                                                                --------------       ---------------
Total Stockholders' Equity                                                            606,486               568,943
                                                                                --------------       ---------------
Total Liabilities, Preferred Securities of Capital Re LLC and
   Stockholders' Equity                                                            $1,506,452            $1,385,802
                                                                                --------------       ---------------

</TABLE>

<PAGE>
<TABLE>
<CAPTION>

                    CAPITAL RE CORPORATION AND SUBSIDIARIES
                        Consolidated Statements of Income
                 (Dollars in thousands except per share amounts)

                                                                   Three Months Ended                    Six Months Ended
                                                                        June 30,                              June 30,
                                                                      (Unaudited)                           (Unaudited)
                                                             -------------------------------     --------------------------------
                                                                       1998            1997                 1998            1997
                                                             -------------------------------     --------------------------------

REVENUES:

<S>                                                                 <C>             <C>                 <C>             <C>
Gross premiums written                                              $80,286         $60,431             $173,531        $124,956
Ceded premiums                                                        5,471           1,460               20,833           9,716
                                                             -------------------------------     --------------------------------
       Net premiums written                                          74,815          58,971              152,698         115,240
      (Increase)/decrease in deferred premium revenue               (22,589)        (27,097)             (47,729)        (52,817)
                                                             -------------------------------     --------------------------------
    Net premiums earned                                              52,226          31,874              104,969          62,423
Net investment income                                                16,303          13,991               32,433          27,805
Net realized gain/(loss)                                              1,281            (192)               2,461           2,593
Fee income                                                              555             874                1,039           1,319
Other income                                                             25             107                  189             133
Equity income in affiliate                                              101             237                  133             470
                                                             -------------------------------     --------------------------------
     Total Revenues                                                  70,491          46,891              141,224          94,743
                                                             -------------------------------     --------------------------------



EXPENSES:

Loss and loss adjustment expenses                                     9,560           5,031               25,218           9,848
Acquisition costs                                                    21,713          16,069               48,827          33,394
Increase in deferred acquisition costs                               (7,274)         (5,397)             (17,071)        (12,482)
Profit commission expense                                             7,716           1,971               10,588           3,967
Other operating expenses                                              6,672           2,870               11,273           5,916
Amortization of goodwill                                                167             167                  334             334
Interest expense                                                      1,851           1,844                3,730           3,722
Foreign exchange (gain)/loss                                            425            (151)                  85             242
Minority interest in Capital Re LLC                                   1,434           1,434                2,869           2,869
                                                             -------------------------------     --------------------------------
       Total Expenses                                                42,264          23,838               85,853          47,810
                                                             -------------------------------     --------------------------------

        Income before provision for federal income taxes             28,227          23,053               55,371          46,933

Provision for federal income taxes
     Current                                                          7,414           5,034               11,303           8,864
     Deferred                                                           626           1,913                4,087           4,825
                                                             -------------------------------     --------------------------------
Total provision for federal income taxes                              8,040           6,947               15,390          13,689
                                                             -------------------------------     --------------------------------

Net Income                                                          $20,187         $16,106              $39,981         $33,244
                                                             ===============================     --------------------------------

Earnings per common share                                             $0.63           $0.51                $1.26           $1.05
                                                             ===============================     ================================

Diluted Earnings per common share                                     $0.61           $0.50                $1.21           $1.03
                                                             ===============================     ================================

Cash dividends per common share                                       $0.04           $0.04                $0.08           $0.07
                                                             ===============================     ================================
Weighted average number of common
     shares outstanding                                              31,865          31,723               31,849          31,723
                                                             ===============================     ================================
Diluted Weighted average number of common
     shares outstanding                                              33,025          32,388               32,951          32,419
                                                             ===============================     ================================

</TABLE>

SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

<PAGE>
<TABLE>
<CAPTION>

                     CAPITAL RE CORPORATION AND SUBSIDIARIES
                 Consolidated Statements of Comprehensive Income
                             (Dollars in thousands)

                                                           Three Months Ended                        Six Months Ended
                                                                June 30,                                  June 30,
                                                              (unaudited)                               (unaudited)
                                                     -------------------------------       --------------------------------
                                                               1998            1997                   1998            1997
                                                     -------------------------------       --------------------------------

<S>                                                         <C>             <C>                    <C>             <C>
Net Income                                                  $20,187         $16,106                $39,981         $33,244

Other Comprehensive Income, net of tax:
    Change in net unrealized gain on
    fixed maturities securities available for sale            2,171          11,636                   (420)         (1,363)
    Change in foreign exchange translation                     (161)            142                     23            (327)
                                                              -----          ------                  -----         -------
Other Comprehensive Income                                    2,010          11,778                   (397)         (1,690)
                                                              -----          ------                  -----         -------
Comprehensive Income                                        $22,197         $27,884                $39,584         $31,554
                                                            =======         =======                =======         =======


</TABLE>

SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

<PAGE>

<TABLE>
<CAPTION>

                     CAPITAL RE CORPORATION AND SUBSIDIARIES
                 Consolidated Statement of Stockholders' Equity
                   (Dollars in thousands except share amounts)

                                                                                           ADDITIONAL
                                                                            COMMON          PAID-IN          RETAINED
                                                                             STOCK          CAPITAL          EARNINGS
                                                                        -----------------------------------------------

<S>                                                                          <C>          <C>              <C>
Balance, January 1, 1998                                                     $322         $224,999         $319,253

 Net Income                                                                  --               --             39,981

Exercise of stock options, including tax benefit (39,748 shares)                1              506             --

Fixed maturities securities available for sale adjustments                   --               --               --

Foreign exchange translation                                                 --               --               --

 Dividend ($.08 per common share)                                            --               --             (2,548)
                                                                       --------------------------------------------------
Balance, June 30, 1998                                                       $323         $225,505         $356,686
                                                                       ==================================================


                                                                                                     NET UNREALIZED
                                                                                                        GAIN ON
                                                                                                    FIXED MATURITIES
                                                                                                       SECURITIES         TOTAL
                                                                       TREASURY       FOREIGN EXCH.   AVAILABLE FOR   STOCKHOLDERS'
                                                                        STOCK         TRANSLATION         SALE           EQUITY
                                                                ---------------------------------------------------------------

<S>                                                                     <C>               <C>           <C>            <C>
Balance, January 1, 1998                                                ($4,891)          ($132)        $29,392        $568,943

 Net Income                                                                --              --              --            39,981

Exercise of stock options, including tax benefit (39,748 shares)           --              --              --               507

Fixed maturities securities available for sale adjustments                 --              --              (420)           (420)

Foreign exchange translation                                               --                23            --                23

 Dividend ($.08 per common share)                                          --              --              --            (2,548)
                                                               ----------------------------------------------------------------
Balance, June 30, 1998                                                  ($4,891)          ($109)        $28,972        $606,486
                                                               =================================================================

</TABLE>

SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.

<PAGE>
<TABLE>
<CAPTION>

                     CAPITAL RE CORPORATION AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
                             (Dollars in thousands)

                                                                      SIX MONTHS ENDED
                                                                           JUNE 30,
                                                       ---------------------------------------
                                                                   1998                1997
                                                       ---------------------------------------
OPERATING ACTIVITIES:

<S>                                                             <C>                 <C>
  Net income                                                    $39,981             $33,244
  Adjustments to reconcile net income to
    net cash provided by operating activities:
     Amortization of bond discount on long-term debt                 19                  19
     Net amortization of security premiums                         (612)               (374)
     Provision for deferred federal income taxes                  4,028               4,825
     Acquisition costs deferred                                 (48,827)            (33,394)
     Amortization of deferred acquisition costs                  31,730              20,905
     Equity Income in affiliates                                   (145)               (470)
     Change in accrued investment income                         (2,172)               (297)
     Change in premiums receivable, net                         (27,283)            (33,779)
     Change in deferred premium revenue, net                     47,775              52,839
     Change in outstanding loss reserves, net                     6,871               1,578
     Net realized (gain) on investments                          (2,461)             (2,593)
     Change in ceded balances payable                             9,654               6,901
     Other                                                       10,847               3,880
                                                              ---------           ---------
   Net Cash Provided by Operating Activities                     69,405              53,284


INVESTING ACTIVITIES:

   Securities available-for-sale:
     Purchases - fixed maturities                              (398,667)           (589,254)
     Sales-fixed maturities                                     316,811             579,785
  Maturities (purchases) of short-term
   investments, net                                               8,404             (76,468)
   investments in Affiliates                                          0             (11,000)
  Other investing activities                                      2,624              37,565
                                                              ---------           ---------
   Net Cash Used in Investing Activities                        (70,828)            (59,372)

FINANCING ACTIVITIES:

  Net proceeds from exercise of stock options                       507                 856
  Purchase of treasury stock at cost                                  0              (1,021)
  Dividends paid                                                 (2,548)             (2,222)
                                                              ---------           ---------
   Net Cash Used by Financing Activities                         (2,041)             (2,387)
   Effect of exchange rate changes on cash                            0                   0
                                                              ---------           ---------
(Decrease) Increase in Cash                                      (3,464)             (8,475)
Cash at Beginning of Period                                      18,878              15,285
                                                              ---------           ---------
     Cash at End of Period                                      $15,414              $6,810
                                                              =========           =========

</TABLE>

SEE ACCOMPANYING NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.

<PAGE>

                     CAPITAL RE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                  June 30, 1998

1.   BASIS OF PRESENTATION

The accompanying  unaudited consolidated financial statements and footnotes have
been  prepared  in  accordance  with  the  instructions  to  Form  10-Q  and the
preparation  of  unaudited  interim  financial  statements  under  the Rules and
Regulations of the Securities and Exchange Commission and do not include all the
information  and   disclosures   required  by  generally   accepted   accounting
principles.  These  statements  should be read in  conjunction  with the audited
consolidated  financial  statements of Capital Re Corporation  and  Subsidiaries
(the  "Corporation")  included in the  Corporation's  1997 Annual Report on Form
10-K. The accompanying  unaudited  consolidated financial statements include all
adjustments,  consisting  only of normal  recurring  adjustments,  necessary  to
present fairly the Corporation's  financial  position and results of operations.
The  results of  operations  for the six months  ended June 30,  1998 may not be
indicative of the results that may be expected for the year ending  December 31,
1998.

As  of  January  1,  1998,  the  Company  adopted   Statement  130,   "Reporting
Comprehensive Income". Statement 130 establishes new rules for the reporting and
display of  comprehensive  income and its components;  however,  the adoption of
this Statement had no impact on the Corporation income or shareholders'  equity.
Statement  130  requires   unrealized  gains  or  losses  on  the  Corporation's
available-for-sale  securities  and foreign  currency  translation  adjustments,
which prior to adoption were reported  separately in shareholders'  equity to be
included in other  comprehensive  income.  Prior year financial  statements have
been reclassified to conform to the requirements of Statement 130. For the three
months and six months ended June 30, 1998 and 1997, total  comprehensive  income
amounted  to $22.2  million  and  $39.6  million,  and $27.9  million  and $31.6
million, respectively.

2.   REINSURANCE

Ceded  earned  premium for the three and six months ended June 30, 1998 and 1997
were  $7.9  million  and  $14.2  million,  and $4.5  million  and $8.3  million,
respectively.  Ceded losses for the same  periods  were $10.4  million and $11.6
million $0.9 million and $1.8 million, respectively.

3.   INCOME TAXES

The  effective tax rate for the six months ended June 30, 1998 and 1997 is lower
than the federal corporate tax rate on ordinary income of 35% due principally to
the effect of tax-exempt  interest income.  Income taxes paid for the six months
ended June 30, 1998 and 1997 were $9.1 million and $7.7 million, respectively.

4.   OTHER

Interest paid for the six months ended June 30, 1998 and 1997 was $3.7 million.

<PAGE>

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

Capital Re Corporation  (the  "Corporation")  was  incorporated  in the State of
Delaware  in  December  1991,  and is the  successor  by  merger  to a  Maryland
corporation  incorporated  in 1986.  The  Corporation  is an  insurance  holding
company and has six wholly owned  operating  subsidiaries.  Capital  Reinsurance
Company ("Capital Reinsurance"),  domiciled in the State of Maryland,  commenced
operations in January 1988.  Capital  Reinsurance  is engaged in the business of
financial  guaranty  reinsurance,  primarily  the  reinsurance  of municipal and
non-municipal bond insurance  obligations.  Capital Mortgage Reinsurance Company
("Capital  Mortgage"),  a New York domiciled  company,  commenced  operations in
February 1994.  Capital Mortgage  reinsures only residential  mortgage  guaranty
insurance   obligations.   KRE  Reinsurance  Ltd.   (formerly  Capital  Mortgage
Reinsurance  Company  (Bermuda)  Ltd.)  ("KRE"),  a Bermuda  domiciled  company,
commenced operations in March 1994. KRE is engaged in the business of reinsuring
financial guaranty,  mortgage guaranty,  financial  insurance,  trade credit and
other  specialty lines of insurance,  both as a direct  reinsurer of third party
primary  insurers  and as a  retrocessionaire  of Capital  Reinsurance,  Capital
Mortgage, Capital Credit Reinsurance Company Ltd. ("Capital Credit") and Capital
Title Reinsurance  Company  ("Capital  Title").  Capital Credit,  also a Bermuda
domiciled  insurance  company,  commenced  operations in February 1990.  Capital
Credit  reinsures trade credit,  political  risk, and other specialty  insurance
lines   concentrated   in  Western  Europe  and  the  United  States  and  is  a
retrocessionaire of Capital  Reinsurance and Capital Mortgage.  Capital Title, a
New York  domiciled  insurance  company,  commenced  operations  in March  1996.
Capital Title is engaged in the business of reinsuring title insurance policies.

In November 1996, the  Corporation  acquired,  through a United Kingdom  holding
company,  Capital Re (UK)  Holdings,  100% of the issued  shares of Tower Street
Holdings Limited (now known as RGB Holdings,  Ltd.), the holding company for RGB
Underwriting  Agencies  Ltd.  ("RGB").  RGB is a managing  agency and  presently
manages five syndicates operating in the Lloyd's of London ("Lloyd's") insurance
market. In November 1997, RGB Holdings,  Ltd. acquired 100% of C.I. de Rougemont
Group  Limited,  the ultimate  holding  company for C.I. de Rougemont & Co. Ltd.
("CIDR"),  another Lloyd's  managing  agency.  CIDR manages two syndicates,  one
marine and the other non-marine.  Effective January 1, 1998, the CIDR non-marine
syndicate was merged with the  non-marine  syndicate of RGB. In connection  with
its acquisition of RGB, the Corporation established a corporate name at Lloyd's,
CRC  Capital  Ltd.  ("CRC"),  to provide  underwriting  capacity  to the managed
syndicates commencing with the 1997 year of account. CRC currently  participates
in a marine, a non-marine and two life syndicates. At June 30, 1998, the results
of RGB, CIDR and CRC are consolidated in the Corporation's financial statements.

In December 1996, the Corporation entered into a joint venture with GCR Holdings
Ltd.  ("GCR"),  to form a Bermuda based  insurer,  Capital  Global  Underwriters
Limited  ("CGUL"),  which specializes in financial lines  reinsurance.  In April
1997, EXEL Limited ("EXEL")  acquired GCR. In March 1998, EXEL sold its share of
CGUL to Bermuda  based ACE Limited and CGUL was renamed ACE Capital Re Ltd.  The
Corporation,  through its subsidiary,  KRE, owns a fifty-percent interest in ACE
Capital Re Ltd. and controls 9.9% of its voting stock. The Corporation  accounts
for its investment in ACE Capital Re Ltd. under the equity method.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 1998 VERSUS THREE MONTHS ENDED JUNE 30, 1997

Net income for the three  months  ended June 30, 1998  increased  25.5% to $20.2
million  from $16.1  million  for the same period of 1997.  The Company  adopted
Statement of Financial  Standards No. 128,  "Earnings per Share" ("FAS 128"), as
of December 31, 1997. FAS 128 requires the calculation  and  presentation on the
face of the income  statement of basic  earnings  per share and, if  applicable,
diluted earnings per share.  Basic earnings per share is calculated based on the
weighted average common shares outstanding.  All potentially dilutive securities
such as stock  options and  convertible  securities  are excluded from the basic
earnings per share calculation.  In calculating  diluted earnings per share, the
number of shares is increased to include all  potentially  dilutive  securities,
including  stock  options and  convertible  securities.  On June 30,  1998,  the
Corporation  completed  a two for one  stock  split  of its  outstanding  common
shares.  Prior period financial  results have been restated to reflect the stock
split. On a per share basis, basic and diluted net income increased to $0.63 and
$0.61,  respectively,  for the three  months  ended June 30, 1998 from $0.51 and
$0.50,  respectively,  for  the  same  period  of  1997,  or  23.5%  and  22.0%,
respectively.  In addition,  net operating income (net income excluding realized
gains and losses and foreign exchange gains and losses) increased 21.7% to $19.6
million for the three months ended June 30, 1998 from $16.1 million for the same
period in 1997.  On a per share basis,  basic and diluted net  operating  income
increased to $0.62 and $0.59, respectively,  for the three months ended June 30,
1998 from $0.51 and $0.50,  respectively,  for the same period of 1997, or 21.6%
and 18.0%,  respectively.  Growth in net premiums  earned to $52.2  million from
$31.9 million,  or 63.6%,  and growth in net investment  income to $16.3 million
from $14.0 million,  or 16.4%,  were the principal causes of the increase in net
income.

Gross  premiums  written  increased  32.9% to $80.3 million for the three months
ended June 30, 1998 from $60.4  million  for the same period of 1997.  Growth in
gross premiums  written was experienced  across all lines of business except for
the mortgage guaranty  reinsurance line.  Mortgage guaranty  reinsurance premium
declined to $21.0  million for the three  months  ended June 30, 1998 from $24.6
million for the same period of 1997.  This decline  reflects  the  Corporation's
shift away from producing quota share business and toward  producing  structured
excess of loss business. In 1997, the Company added a financial reinsurance line
of business.  This line consists of structured financial  transactions involving
the reinsurance of annuity and accident and health reserves. The following table
shows gross premiums written by line of business for the three months ended June
30, 1998 and June 30, 1997.

                         Gross Premiums Written
                           Three Months Ended
                               June 30,
                            1998      1997
                            ----      ----
                         (dollars in millions)

Municipal                  $16.5     $11.7
Non-Municipal                6.2       3.9
Financial Lines              1.4       0.0
Mortgage                    21.0      24.6
Title                        0.9       0.7
Credit and Specialty         9.8       4.7
Lloyd's                     24.5      14.8
                           -----     -----
                           $80.3     $60.4

Net premiums  written  increased by 26.8% to $74.8  million for the three months
ended  June 30,  1998  from  $59.0  million  for the same  period  in 1997.  The
following  table shows net  premiums  written by line of business  for the three
months ended June 30, 1998 and June 30, 1997.


                         Net Premiums Written
                         Three Months Ended
                               June 30,
                            1998      1997
                            ----      ----
                         (dollars in millions)

Municipal                  $16.1     $11.5
Non-Municipal                6.2       3.8
Financial Lines              1.4       0.0
Mortgage                    21.0      24.5
Title                        0.9       0.7
Credit and Specialty         9.8       4.7
Lloyd's                     19.4      13.8
                           -----     -----
                           $74.8     $59.0

For the three months ended June 30, 1998, net premiums earned increased 63.6% to
$52.2 million from $31.9 million for the comparable  1997 period.  This increase
was primarily  due to growth in net premiums  earned across all product lines of
business.  For the three months ended June 30, 1998, net refunded earned premium
increased to $4.3 from $1.9 million for the comparable period in 1997. Excluding
the effects of net  refunded  municipal  earned  premium,  net  premiums  earned
increased  59.7% to $47.9  million for the three months ended June 30, 1998 from
$30.0 million for the three months ended June 30, 1997. A refunding extinguishes
the  Corporation's  reinsurance  liability for the refunded  obligation  and the
Corporation  then  recognizes  revenue equal to the remaining  related  deferred
premium revenue. For the three months ended June 30, 1998 and 1997, ceded earned
premium was $7.9 million and $4.5 million,  respectively.  The  following  table
shows net  premiums  earned by line of business  for the three months ended June
30, 1998 and June 30, 1997.

                          Net Premiums Earned
                          Three Months Ended
                                June 30,
                            1998      1997
                            ----      ----
                         (dollars in millions)

Municipal                   $9.8      $7.2
Non-Municipal                4.9       2.3
Financial Lines              1.4       0.0
Mortgage                    14.7      13.8
Title                        1.0       0.7
Credit and Specialty         7.4       3.9
Lloyd's                     13.0       4.0
                           -----     -----
                           $52.2     $31.9

For the three months ended June 30, 1998, net investment  income increased 16.4%
to $16.3 million from $14.0 million for the comparable period in 1997. Growth in
investment income was primarily  attributable to a larger  investment  portfolio
caused by an increase in invested  assets  from  positive  operating  cash flows
during the twelve  months ended June 30,  1998.  In  addition,  the  Corporation
recognized  net  realized  gains of $1.3 million for the three months ended June
30, 1998  compared  to $0.2  million of net  realized  losses for same period in
1997.

Loss and loss  adjustment  expenses  increased to $9.6 million from $5.0 million
for the three months ended June 30, 1998 and 1997, respectively. Losses recorded
for the three months ended June 30, 1998 were primarily attributable to the loss
recognition associated with the Lloyd's line of business and the addition of the
financial  line of business,  as well as normal loss  development  in the credit
reinsurance  line of business.  Ceded losses for the three months ended June 30,
1998 and 1997 were $10.4 million and $0.9 million, respectively.

Total expenses,  including loss and loss adjustment expenses, increased 77.7% to
$42.3  million for the three months  ended June 30, 1998 from $23.8  million for
the same  period  of 1997.  This  increase  was  primarily  attributable  to the
amortization  of acquisition  expenses  associated  with the increased  level of
premiums  earned across all lines of business and normal loss  development  from
the credit and  financial  lines of  business.  In  addition,  the  increase  in
expenses was  attributable  to an increase in overhead to support  growth in the
Company's lines of businesses as well as operating and loss expenses  associated
with the  consolidation,  for  accounting  purposes,  of the  Company's  Lloyd's
operations with the Company's reinsurance operations.  Furthermore, the combined
ratio, excluding expenses associated with non-insurance operations, increased to
72.9% for the three  months  ended June 30,  1998 from 63.9% for the  comparable
1997  period.   This  increase  is  an  expected  result  of  the  Corporation's
diversification  strategy,  which is  producing  more  business  from lines with
relatively   higher  combined  ratios  than  that  of  the  financial   guaranty
reinsurance business.

For the three  months  ended June 30,  1998,  the total  federal  tax  provision
increased  to $8.0  million  from $6.9  million for the same period in 1997.  In
addition,  the effective tax rate  decreased to 28.5% for the three months ended
June 30, 1998 from 30.1% for the same period of 1997.

SIX MONTHS ENDED JUNE 30, 1998 VERSUS SIX MONTHS ENDED JUNE 30, 1997

Net income  for the six months  ended  June 30,  1998  increased  20.5% to $40.0
million  from $33.2  million  for the same period of 1997.  The Company  adopted
Statement of Financial  Standards No. 128,  "Earnings per Share" ("FAS 128"), as
of December 31, 1997. FAS 128 requires the calculation  and  presentation on the
face of the income  statement of basic  earnings  per share and, if  applicable,
diluted earnings per share.  Basic earnings per share is calculated based on the
weighted average common shares outstanding.  All potentially dilutive securities
such as stock  options and  convertible  securities  are excluded from the basic
earnings per share calculation.  In calculating  diluted earnings per share, the
number of shares is increased to include all  potentially  dilutive  securities,
including  stock  options and  convertible  securities.  On June 30,  1998,  the
Corporation  completed  a two for one  stock  split  of its  outstanding  common
shares.  Prior period financial  results have been restated to reflect the stock
split. On a per share basis, basic and diluted net income increased to $1.26 and
$1.21,  respectively,  for the six  months  ended  June 30,  1998 from $1.05 and
$1.03,  respectively,  for  the  same  period  of  1997,  or  20.0%  and  17.5%,
respectively.  In addition,  net operating income (net income excluding realized
gains and losses and foreign exchange gains and losses) increased 21.1% to $38.4
million for the six months  ended June 30, 1998 from $31.7  million for the same
period in 1997.  On a per share basis,  basic and diluted net  operating  income
increased  to $1.21 and $1.17,  respectively,  for the six months ended June 30,
1998 from $1.00 and $0.98,  respectively,  for the same period of 1997, or 21.0%
and 19.4%,  respectively.  Growth in net premiums  earned to $105.0 million from
$62.4 million,  or 68.3%,  and growth in net investment  income to $32.4 million
from $27.8 million,  or 16.5%,  were the principal causes of the increase in net
income.

Gross  premiums  written  increased  38.8% to $173.5  million for the six months
ended June 30,  1998 from  $125.0  million  for the same  period of 1997.  Gross
premiums written  increased  across all product lines. In addition,  in 1997 the
Company  added a financial  reinsurance  line of  business.  This line  includes
structured  financial  transactions  involving  the  reinsurance  of annuity and
accident and health  reserves.  The following table shows gross premiums written
by line of business for the six months ended June 30, 1998 and June 30, 1997.

                           Gross Premiums Written
                             Six Months Ended
                                 June 30,
                             1998       1997
                             ----       ----
                          (dollars in millions)

Municipal                   $38.7      $29.6
Non-Municipal                12.2        7.2
Financial Lines               5.5        0.0
Mortgage                     41.2       40.4
Title                         2.0        1.5
Credit and Specialty         18.3       11.0
Lloyd's                      55.6       35.3
                           ------     ------
                           $173.5     $125.0

Net premiums  written  increased  by 32.6% to $152.7  million for the six months
ended  June 30,  1998 from  $115.2  million  for the same  period in 1997.  This
increase is commensurate  with the increase in gross premiums written  explained
above.  The following  table shows net premiums  written by line of business for
the six months ended June 30, 1998 and June 30, 1997.

                            Net Premiums Written
                              Six Months Ended
                                 June 30,
                             1998       1997
                             ----       ----
                           (dollars in millions)

Municipal                   $37.4      $27.1
Non-Municipal                12.2        7.2
Financial Lines               5.5        0.0
Mortgage                     41.2       40.2
Title                         2.0        1.5
Credit and Specialty         18.2       11.0
Lloyd's                      36.2       28.2
                           ------     ------
                           $152.7     $115.2

For the six months ended June 30, 1998, net premiums  earned  increased 68.3% to
$105.0 million from $62.4 million for the comparable 1997 period.  This increase
was primarily  due to growth in net premiums  earned across all product lines of
business.  For the six months ended June 30, 1998,  net refunded  earned premium
increased to $7.9 from $2.4 million for the comparable period in 1997. Excluding
the effects of net  municipal  refunded  earned  premium,  net  premiums  earned
increased  61.8% to $97.1  million  for the six months  ended June 30, 1998 from
$60.0  million for the six months ended June 30, 1997. A refunding  extinguishes
the  Corporation's  reinsurance  liability for the refunded  obligation  and the
Corporation  then  recognizes  revenue equal to the remaining  related  deferred
premium  revenue.  For the six months ended June 30, 1998 and 1997, ceded earned
premium was $14.2 million and $8.3 million,  respectively.  The following  table
shows net premiums  earned by line of business for the six months ended June 30,
1998 and June 30, 1997.

                           Net Premiums Earned
                            Six Months Ended
                                 June 30,
                             1998      1997
                             ----       ----
                         (dollars in millions)

Municipal                   $19.2     $14.3
Non-Municipal                 8.8       5.3
Financial Lines               5.5       0.0
Mortgage                     32.7      27.4
Title                         2.2       1.4
Credit and Specialty         14.6       8.3
Lloyd's                      22.0       5.7
                           ------     -----
                           $105.0     $62.4

For the six months ended June 30, 1998, net investment income increased 16.5% to
$32.4 million from $27.8 million for the  comparable  period in 1997.  Growth in
investment income was primarily  attributable to a larger  investment  portfolio
caused by an increase in invested  assets  from  positive  operating  cash flows
during the twelve  months ended June 30,  1998.  In  addition,  the  Corporation
recognized  net realized gains of $2.5 million for the six months ended June 30,
1998 compared to $2.6 million for same period in 1997.

Loss and loss adjustment  expenses  increased to $25.2 million from $9.8 million
for the six months ended June 30, 1998 and 1997,  respectively.  Losses recorded
for the six months ended June 30, 1998 were primarily  attributable  to the loss
recognition associated with the Lloyd's line of business and the addition of the
financial  line of business,  as well as normal loss  development  in the credit
reinsurance  line of  business.  Ceded  losses for the six months ended June 30,
1998 and 1997 were $11.6 million and $1.8 million, respectively.

Total expenses,  including loss and loss adjustment expenses, increased 79.7% to
$85.9  million for the six months ended June 30, 1998 from $47.8 million for the
same  period  of  1997.   This  increase  was  primarily   attributable  to  the
amortization  of acquisition  expenses  associated  with the increased  level of
premiums  earned across all lines of business and normal loss  development  from
the credit and  financial  lines of  business.  In  addition,  the  increase  in
expenses was  attributable  to an increase in overhead to support  growth in the
Company's lines of businesses as well as operating and loss expenses  associated
with the  consolidation,  for  accounting  purposes,  of the  Company's  Lloyd's
operations with the Company's reinsurance operations.  Furthermore, the combined
ratio, excluding expenses associated with non-insurance operations, increased to
74.5% for the six months ended June 30, 1998 from 64.0% for the comparable  1997
period. This increase is an expected result of the Corporation's diversification
strategy,  which is producing  more business from lines with  relatively  higher
combined ratios than that of the financial guaranty reinsurance business.

For the six  months  ended  June 30,  1998,  the  total  federal  tax  provision
increased to $15.4  million from $13.7  million for the same period in 1997.  In
addition,  the  effective  tax rate  decreased to 27.8% for the six months ended
June 30, 1998 from 29.2% for the same period of 1997.

LIQUIDITY AND CAPITAL RESOURCES

The Corporation relies on dividends from Capital Reinsurance to fund its payment
of dividends  on its capital  stock and interest on its  outstanding  debt.  The
major  sources of liquidity for Capital  Reinsurance  are funds  generated  from
reinsurance premiums,  net investment income and maturing  investments.  Capital
Reinsurance is domiciled in the State of Maryland, and, under Maryland insurance
law, the amount of the surplus of Capital Reinsurance available for distribution
as dividends is subject to certain statutory restrictions.  The amount available
for  distribution  from  Capital  Reinsurance  during  1998 with  notice to, but
without prior approval of, the Maryland Insurance Commissioner is limited to 10%
of Capital  Reinsurance's  policyholders'  surplus as of December 31,  1997,  or
approximately  $34.6  million.  For the six months ended June 30, 1998,  Capital
Reinsurance paid $5.0 million in dividends to the Corporation.

Credit Re Corporation,  a wholly owned subsidiary of the Corporation,  relies on
dividends  from its wholly owned  subsidiary,  Capital  Credit,  for funds to be
provided to the  Corporation.  Capital  Credit's  major sources of liquidity are
funds generated from reinsurance  premiums,  net investment  income and maturing
investments.  Capital Credit is a Bermuda domiciled insurer whose  distributions
are  governed  by Bermuda  law.  Under  Bermuda  law and the  by-laws of Capital
Credit,  dividends  may be paid out of the  profits of the  company  (defined as
accumulated realized profits less accumulated realized losses). Distributions to
shareholders  may  also be paid  out of  Capital  Credit's  surplus  limited  by
requirements  that such company must at all times (i) maintain the minimum share
capital  required  under Bermuda law and (ii) have relevant  assets in an amount
equal to or greater  than 75% of  relevant  liabilities,  all as  defined  under
Bermuda law.  Since its  organization,  Capital Credit has not declared nor paid
any dividends.

Capital Mortgage is subject to the dividend  restrictions imposed under New York
insurance law.  Accordingly,  dividends may only be declared and distributed out
of earned surplus (as defined under New York insurance  law).  Additionally,  no
dividend may be declared or distributed by Capital  Mortgage in an amount which,
together with all dividends  declared or distributed by Capital  Mortgage during
the preceding twelve months, exceeds the lesser of 10% of such company's surplus
to policyholders  as shown by its last Annual  Statutory  Statement on file with
the New York insurance department, or 100% of adjusted net investment income (as
defined under New York  insurance  law) during such period,  unless,  upon prior
application,  the New  York  Superintendent  of  Insurance  approves  a  greater
dividend  distribution  based upon his finding that Capital Mortgage will retain
sufficient surplus to support its obligations and writings.  KRE's dividends and
distributions to its sole shareholder, Capital Mortgage, are governed by Bermuda
law and are  subject  to the same  restrictions  as  those  for  Capital  Credit
described in the preceding paragraph. To date, Capital Mortgage and KRE have not
declared  nor paid any  dividends.  The  maximum  dividend  payable  by  Capital
Mortgage  during 1998 is $0 since its earned  surplus  was ($0.4)  million as of
December 31, 1997.

Capital  Title  is  subject  to the New  York  insurance  laws  and  regulations
governing  title  insurers.  Accordingly,  dividends  may only be  declared  and
distributed  out of earned  surplus as defined under New York  insurance law and
only if such  dividends do not reduce the company's  surplus to less than 50% of
its  outstanding  capital  shares,  i.e.,  the value of its  outstanding  common
equity.  Additionally,  no dividend may be declared or  distributed in an amount
which, together with all dividends declared or distributed by the company during
the preceding twelve months,  exceeds 10% of the company's  outstanding  capital
shares, unless, after deducting such dividends,  it has a surplus at least equal
to 50% of its  statutory  reinsurance  reserve  or a surplus  at least  equal to
$250,000,  whichever is greater.  During 1997,  Capital Title paid a dividend in
the amount of $1.1  million to its  immediate  parent,  KRE. As of December  31,
1997,  Capital  Title's  maximum  amount  payable as a dividend  during  1998 is
approximately $1.3 million.

In January 1994, the Corporation formed and capitalized, through the purchase of
common shares,  Capital Re LLC.  Capital Re LLC exists solely for the purpose of
issuing preferred and common shares and lending the proceeds of such issuance to
the Corporation to fund its business operations. In January 1994, Capital Re LLC
issued  $75.0  million of company  obligated  mandatorily  redeemable  preferred
securities,  the  proceeds  of  which  were  loaned  to  the  Corporation.   The
Corporation  has,  among  other  undertakings,  unconditionally  guaranteed  all
legally declared and unpaid  dividends of Capital Re LLC. The company  obligated
mandatorily  redeemable  preferred  securities  were issued at $25 par value per
share and pay monthly  dividends  at a rate of 7.65% per annum.  Also in January
1994,  Capital  Reinsurance  and Capital Credit  invested an aggregate of $120.0
million to capitalize  Capital Mortgage.  Of the total original  contribution of
$120.0 million,  Capital  Reinsurance  invested $94.8 million and Capital Credit
invested $25.2 million.

On  February  12,  1996,  the   Corporation   completed  a  public  offering  of
approximately  3.5 million shares of common stock. Of the 3.5 million shares, an
institutional  shareholder  sold 2.6  million  shares and the  Corporation  sold
853,120 shares in the public offering generating net proceeds to the Corporation
of  approximately  $25.9 million of which $21.5 million was used to complete the
$25 million capitalization of Capital Title. The remaining $4.4 million was used
for  Corporation  expenses  associated  with the  public  offering  and  general
corporate purposes.  The Corporation received no proceeds from the institutional
shareholder's sale of shares.

In June 1997, Capital  Reinsurance  invested  approximately $10.9 million in CGA
Group, Ltd. ("CGA").  CGA was formed to provide financial  guaranty insurance of
structured  securities,  including  commercial  real  estate  and  asset  backed
transactions.  Capital Reinsurance also has a commitment to invest an additional
$7.5  million in CGA to the extent that such  investment  would be  necessary in
order for CGA's operating  subsidiary,  Commercial Guaranty  Assurance,  Ltd, to
maintain  a  triple-A  rating  from Duff &  Phelps.  Also,  Capital  Reinsurance
invested $0.1 million in St. George  Holdings Ltd. ("St.  George").  Through its
operating  subsidiary,  St. George  Investments  Ltd.,  St. George will purchase
securities to be held to maturity,  selectively  resold,  or repackaged with CGA
insurance and then resold.

In December 1997, the Corporation's Board of Directors authorized an increase of
the quarterly  common stock dividend rate to $0.04 per share, or $0.16 annually.
For the six months ended June 30, 1998,  common dividends were declared and paid
in the amount of $2.6 million or $0.08 per share.

Cash flows from  operations  for the six  months  ended June 30,  1998 and 1997,
consisting of reinsurance premiums collected net of expenses,  investment income
and income  taxes,  were $69.4  million  and $53.3  million,  respectively.  The
Corporation  believes that current levels of cash flow from  operations  provide
the  Corporation  with  sufficient  liquidity to meet its operating  needs.  The
Corporation's  non-operating  cash  outflows  are  primarily  dedicated  to  (i)
fixed-income  investment  activity,  (ii) the payment of dividends on its common
shares, (iii) payments of interest on long-term debt and (iv) the payment of its
loan obligations to Capital Re LLC.

At June 30, 1998, cash and investments  approximated $1.10 billion,  an increase
of $70.0 million,  or 6.8%, from $1.03 billion at December 31, 1997. In managing
its investment portfolio,  the Corporation places a high priority on quality and
liquidity.  As of June 30, 1998, the entire investment portfolio was invested in
highly rated fixed income securities.

At June 30, 1998,  approximately  $185.0 million, or 16.8%, of the Corporation's
investment portfolio was comprised of mortgage-backed securities ("MBS"). Of the
MBS portfolio,  approximately $160.6 million, or 86.8%, is backed by agencies or
entities sponsored by the U.S. government as to the full amount of principal and
interest. As of June 30, 1998, the entire MBS portfolio was invested in triple A
rated securities.

Prepayment  risk is an  inherent  risk of holding  MBS.  However,  the degree of
prepayment  risk is particular to the type of MBS held. The  Corporation  limits
its exposure to prepayments by purchasing less volatile types of MBS. As of June
30, 1998, $3.7 million, or approximately 2.0%, of the MBS portfolio was invested
in  collateralized  mortgage  obligations  ("CMOs") which are  characterized  as
planned  amortization class CMOs ("PACs").  PACs are securities whose cash flows
are  designed  to  remain  constant  over  a  variety  of  mortgage   prepayment
environments.  Other  classes in the CMO security are  structured  to accept the
volatility of mortgage prepayment changes,  thereby insulating the PAC class. Of
the  remaining  MBS  portfolio,  $181.3  million,  or  98.0%,  was  invested  in
mortgage-backed  pass-throughs or sequential CMOs.  Pass-throughs are securities
in which the monthly cash flows of principal  and interest  (both  scheduled and
prepayments) generated by the underlying mortgages are distributed on a pro-rata
basis to the holders of securities. A sequential MBS is structured to divide the
CMO security into sequentially  ordered classes.  Receipt of principal  payments
within classes is contingent on the retirement of all previously paying classes.
Generally,  interest  payments are made  currently  on all classes.  While these
securities  are more  sensitive  to  prepayment  risk  than  PACs,  they are not
considered  highly  volatile  securities.  While the  Corporation  may  consider
investing  in  any  tranche  of a  sequential  MBS,  the  individual  security's
characteristics  (duration,  relative value, underlying collateral,  etc.) along
with aggregate  portfolio risk management  determine which tranche of sequential
MBS will be purchased.  At June 30, 1998, the Corporation had no securities such
as interest only securities,  principal only  securities,  or MBS purchased at a
substantial  premium to par that have the  potential  for loss of a  significant
portion of the original  investment due to changes in the prepayment rate of the
underlying loans supporting the security.

On January 22,  1998,  the  Corporation  extended its  existing  agreement  with
Deutsche Bank AG for the provision of a $25.0  million  liquidity  facility (the
"DB Liquidity Facility") which is available for general corporate purposes.  The
DB  Liquidity  Facility  was extended for one year and is scheduled to expire on
January 22, 1999.  Capital  Reinsurance also renewed an agreement on January 27,
1998 with Deutsche Bank AG for a credit  facility (the "DB Credit  Facility") of
up to $75.0 million  specifically  designed to provide  rating agency  qualified
capital to further support Capital Reinsurance's  claims-paying resources.  This
agreement  expires  January 27, 2005.  The  Corporation  has not borrowed  under
either the DB Liquidity Facility or the DB Credit Facility.

In addition, on August 20, 1996, the Corporation entered into a credit agreement
with Chase  Manhattan Bank for the provision of a $25.0 million credit  facility
(the  "Chase  Facility")  which is  available  for general  corporate  purposes.
Furthermore,  on August 26, 1996,  the  Corporation  utilized $16 million of the
Chase  Facility  for  purposes  of paying  subordinated  notes  which  came due.
Interest on the bank note issued under the Chase  Facility is payable  quarterly
based upon the Corporation's  chosen interest rate option under the terms of the
Chase  Facility.  In November  1996, the  Corporation  utilized the remaining $9
million of the Chase Facility for purposes of acquiring RGB.

The  Corporation is addressing the Year 2000 issue.  The Company has initiated a
plan to review its internal computer systems. It also has initiated  discussions
with its  significant  clients and other  entities to ensure that those  parties
have appropriate plans to correct Year 2000 issues where their systems interface
with the  Corporation's  systems or otherwise  impact its operations.  While the
Corporation  believes its planning efforts are adequate to address its Year 2000
concerns, there can be no guarantee that the systems of other companies on which
the  Corporation's  systems and  operations  rely will be  converted on a timely
basis.  In conclusion,  the  Corporation  does not expect that there will be any
major Year 2000 impact to its computer systems, nor does it expect that the cost
of the Year 2000 initiative will be material.

<PAGE>

PART II -  OTHER INFORMATION

ITEM 4     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At the annual meeting of the  Corporation's  shareholders  held on May 20, 1998,
the nine nominees  listed below were elected as directors of the  Corporation to
hold office until the 1999 annual meeting and until their  successors shall have
been elected and  qualified.  The number of votes cast for,  against or withheld
and the number of  abstentions  with  respect to each such  matters is set forth
below, as are the number of broker non-votes, where applicable.

Name                         Votes For       Votes Withheld
----                         ---------       --------------
Michael E. Satz              14,274,046         3,043
Harrison W. Conrad, Jr.      14,274,046         3,043
Richard L. Huber             14,274,046         3,043
Steven D. Kesler             14,273,826         3,263
Philip H. Robinson           14,273,846         3,243
Edwin L. Russell             14,273,826         3,263
Dan R. Skowronski            14,273,826         3,263
Barbara D. Stewart           14,274,046         3,043
Jeffrey F. Stuermer          14,274,046         3,043


ITEM 5     OTHER INFORMATION

Information Regarding Shareholder Proposals at the 1999 Annual Meeting

In order to present a proposal at the 1999  Annual  Meeting of  Stockholders,  a
Capital Re  Stockholder  must  provide  written  notice of the  proposal  to the
Company no later than March 6, 1999.  The Company  intends to use  discretionary
voting  authority with respect to any matter that brought before the 1999 annual
meeting of stockholders of which the Company has not received  written notice by
March 6, 1999.

Capital Re Corporation
1325 Avenue of the Americas
New York, NY 10019
Attn.:  Alan S. Roseman
        Senior Vice President,
        General Counsel and Secretary


ITEM 6  -  EXHIBITS AND REPORTS ON FORM 8-K

           (A) THE FOLLOWING IS ANNEXED AS AN EXHIBIT:

           EXHIBIT
           NUMBER   DESCRIPTION
           ------   -----------

             11     STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (UNAUDITED)

           (B) REPORTS ON FORM 8-K: NONE

<PAGE>

                                INDEX TO EXHIBITS

EXHIBIT
NUMBER     DESCRIPTION                                                    PAGE

11         STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (UNAUDITED)      23





<PAGE>
<TABLE>
<CAPTION>

                     CAPITAL RE CORPORATION AND SUBSIDIARIES
           EXHIBIT 11 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
                                   (UNAUDITED)
                 (Dollars in thousands except per share amounts)

                                                                          THREE MONTHS ENDED              SIX MONTHS ENDED
                                                                               JUNE 30,                       JUNE 30,

                                                                     -------------------------      -------------------------
                                                                         1998            1997            1998           1997
                                                                     -------------------------      -------------------------
EARNINGS PER COMMON SHARE (BASIC AND DILUTED)

<S>                                                                    <C>             <C>             <C>             <C>
Net Income                                                             20,187          16,106          39,981          33,244

Basic weighted average shares outstanding during the period            31,865          31,723          31,849          31,723
Potentially dilutive employee stock options                             1,160             665           1,102             696
                                                                       ------          ------          ------          ------
Diluted weighted average shares outstanding during the period          33,025          32,388          32,951          32,419
                                                                       ======          ======          ======          ======

Basic earnings per common share                                         $0.63           $0.51           $1.26           $1.05
                                                                       ======          ======          ======          ======
Diluted earnings per common share                                       $0.61           $0.50           $1.21           $1.03
                                                                       ======          ======          ======          ======
</TABLE>

<PAGE>


                                   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.




                                   CAPITAL RE CORPORATION

DATE: AUGUST 10, 1998              BY:  /S/ DAVID A. BUZEN
                                          ------------------
                                          DAVID A. BUZEN
                                          EXECUTIVE VICE PRESIDENT AND
                                          CHIEF FINANCIAL OFFICER



DATE: AUGUST 10, 1998              BY: /S/ ALAN S. ROSEMAN
                                          -------------------
                                          ALAN S. ROSEMAN
                                          SENIOR VICE PRESIDENT,
                                          GENERAL COUNSEL AND SECRETARY