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, 1999

                                       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                       1-10995               52-1567009
(STATE OR OTHER JURISDICTION   (COMMISSION FILE NUMBER)      (IRS EMPLOYER
      OF INCORPORATION OR                                    IDENTIFICATION
        ORGANIZATION)                                            NUMBER)

                           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 13, 1999 THERE WERE 36,523,398  OUTSTANDING SHARES OF COMMON STOCK,
PAR VALUE $.01 PER SHARE, OF THE REGISTRANT

<PAGE>

                     CAPITAL RE CORPORATION AND SUBSIDIARIES

                                      INDEX

PART I   FINANCIAL INFORMATION                                           PAGE

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

         CONSOLIDATED BALANCE SHEETS -JUNE 30, 1999 (UNAUDITED) AND
           DECEMBER 31, 1998                                              3

         CONSOLIDATED STATEMENTS OF INCOME - THREE AND SIX MONTHS         4
           ENDED JUNE 30, 1999 (UNAUDITED) AND JUNE 30, 1998
         (UNAUDITED)

         CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - THREE AND SIX  5
           MONTHS  ENDED JUNE 30, 1999 (UNAUDITED) AND JUNE 30, 1998
         (UNAUDITED)

         CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - SIX MONTHS
           ENDED JUNE 30, 1999 (UNAUDITED)                                6

         CONSOLIDATED STATEMENTS OF CASH FLOWS - SIX MONTHS ENDED
         JUNE 30, 1999 (UNAUDITED) AND JUNE 30, 1998 (UNAUDITED)          7

         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)           8-14

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
            AND RESULTS OF OPERATIONS                                     15-32

PART II  OTHER INFORMATION

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS              33

ITEM 5.  OTHER INFORMATION                                                34
         INFORMATION REGARDING SHAREHOLDER PROPOSALS AT THE 2000
           ANNUAL MEETING

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K                                 36-45

SIGNATURES                                                                35

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

<TABLE>
<CAPTION>
                                                                                June 30,   December 31,
                                                                                    1999           1998
                                                                             (Unaudited)
                                                                             -----------   ------------
<S>                                                                          <C>            <C>
Assets
Fixed maturity securities available for sale, at market
   (amortized cost: $1,096,903 in 1999 and $1,036,862 in 1998)               $ 1,093,252    $ 1,086,891
Short-term investments, at cost, which approximates market                       141,796         88,147
                                                                             -----------    -----------
Total Investments                                                              1,235,048      1,175,038

Cash                                                                              14,082          9,893
Accrued investment income                                                         15,167         15,371
Deferred acquisition costs                                                       149,561        135,029
Prepaid reinsurance premiums                                                      45,328         49,603
Reinsurance recoverable on ceded losses                                            3,468          3,292
Funds held under reinsurance agreements                                            6,105          5,033
Premiums receivable, net                                                          15,806         16,997
Amounts receivable on ceded annuity reserves                                           0         53,869
Investment in affiliates                                                          17,930         15,080
Net assets of discontinued operations                                                  0         11,695
Other assets                                                                      28,153         17,873
                                                                             -----------    -----------
   Total Assets                                                              $ 1,530,648    $ 1,508,773
                                                                             ===========    ===========
Liabilities
Deferred premium revenue                                                     $   425,238    $   405,866
Reserve for losses and loss adjustment expenses                                  142,601         87,960
Annuity benefit reserves                                                          49,104         53,869
Accident and health reserves                                                      41,730         17,843
Profit commission liability                                                       63,874         57,389
Deferred federal income taxes payable                                             38,129         79,237
Bank note payable                                                                 25,000         25,000
Long-term debt                                                                    74,875         74,856
Net liabilities of discontinued operations                                        11,958              0
Other liabilities                                                                 28,371         20,927
                                                                             -----------    -----------
   Total Liabilities                                                         $   900,880    $   822,947
                                                                             -----------    -----------
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 1999 and 1998                                                                   --             --
Common stock - $.01 par value per share; 75,000,000 shares
   authorized, 36,523,398 and 31,929,119 shares issued and
   outstanding in 1999 and 1998, respectively                                        369            324
Additional paid-in capital                                                       302,539        227,280
Retained earnings                                                                259,071        355,693
Treasury stock; 428,000 and 428,000 shares in 1999 and 1998, respectively         (4,891)        (4,891)
Other Comprehensive Income
       Net unrealized (loss)/gain on fixed maturities securities available
            for sale, net of reclassification adjustment                          (2,220)        32,520
       Net unrealized loss on foreign exchange translation                          (100)          (100)
                                                                             -----------    -----------
Accumulated Other Comprehensive Income                                            (2,320)        32,420
                                                                             -----------    -----------
Total Stockholders' Equity                                                       554,768        610,826
                                                                             -----------    -----------
Total Liabilities, Preferred Securities of Capital Re LLC and
   Stockholders' Equity                                                      $ 1,530,648    $ 1,508,773
                                                                             ===========    ===========
</TABLE>

See Accompanying Notes to Unaudited Consolidated Financial Statements


                                       3
<PAGE>

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

<TABLE>
<CAPTION>
                                                                       Three Months Ended                 Six Months Ended
                                                                            June 30,                          June 30,
                                                                           (Unaudited)                      (Unaudited)
                                                                 --------------------------------   --------------------------------
                                                                            1999            1998               1999            1998
                                                                 --------------------------------   --------------------------------
<S>                                                                      <C>             <C>               <C>             <C>
Revenues:
Orgination premiums written                                              $60,583         $55,804           $119,039        $117,932
Canceled Reinsurance                                                           0               0              9,567               0
                                                                 --------------------------------   --------------------------------
Gross premiums written                                                   $60,583         $55,804           $109,472        $117,932
Ceded premiums                                                             1,135             440              3,198           1,521
                                                                 --------------------------------   --------------------------------
       Net premiums written                                               59,448          55,364            106,274         116,411
       Increase in deferred premium revenue                              (19,409)        (16,139)           (23,647)        (33,455)
                                                                 --------------------------------   --------------------------------
    Net premiums earned                                                   40,039          39,225             82,627          82,956
Net investment income                                                     17,685          16,187             34,849          32,052
Net realized gain                                                          4,621           1,281              5,028           2,461
Fee income                                                                   664             437                759             617
Other income                                                                  11              23                 21             187
Equity income in affiliate                                                   904             101              2,394             133
                                                                 --------------------------------   --------------------------------
     Total Revenues                                                       63,924          57,254            125,678         118,406
                                                                 --------------------------------   --------------------------------
Expenses:
Loss and loss adjustment expenses                                        175,134           2,606            187,927          12,592
Acquisition costs                                                         14,330          15,747             41,597          34,618
Decrease/(increase) in deferred acquisition costs                            406          (3,896)           (14,533)         (9,248)
Profit commission expense                                                  3,470           7,716              7,228          10,588
Other operating expenses                                                   4,691           3,882              7,989           7,855
Interest expense                                                           1,902           1,851              3,747           3,730
Foreign exchange loss                                                        235             376                724              36
Minority interest in Capital Re LLC                                        1,434           1,434              2,869           2,869
                                                                 --------------------------------   --------------------------------
       Total Expenses                                                    201,602          29,716            237,548          63,040
                                                                 --------------------------------   --------------------------------
        (Loss)/income before provision for federal income taxes         (137,678)         27,538           (111,870)         55,366

(Benefit from)/provision for federal income taxes
     Current                                                             (18,967)          7,229            (18,059)         11,321
     Deferred                                                            (29,119)            626            (23,597)          4,087
                                                                 --------------------------------   --------------------------------
Total (benefit from)/provision for federal income taxes                  (48,086)          7,855            (41,656)         15,408
                                                                 --------------------------------   --------------------------------
Net (loss)/income from continuing operations                            ($89,592)        $19,683           ($70,214)        $39,958

Discontinued operations:
Income from operations                                                         0             503                  0              23
Loss on disposal                                                         (17,222)              0            (23,665)              0
                                                                 --------------------------------   --------------------------------
(Loss)/income from discontinued operations, net of tax                   (17,222)            503            (23,665)             23

Net (Loss)/Income                                                      ($106,814)        $20,186           ($93,879)        $39,981
                                                                 ================================   ================================

Net (Loss)/Income from Continuing Operations
   Per Common Share:
                         Basic                                            ($2.73)          $0.62             ($2.17)          $1.25
                         Diluted                                          ($2.70)          $0.60             ($2.14)          $1.21

Net (Loss)/Income Per Common Share:
                         Basic                                            ($3.26)          $0.63             ($2.90)          $1.26
                         Diluted                                          ($3.22)          $0.61             ($2.87)          $1.21

Weighted Average Number of Shares Outstanding
                         Basic                                            32,795          31,865             32,404          31,849
                         Diluted                                          33,150          33,025             32,748          32,951

Cash dividends per common share                                            $0.04           $0.04              $0.08           $0.08
</TABLE>

See Accompanying Notes to Unaudited Consolidated Financial Statements


                                       4
<PAGE>

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

<TABLE>
<CAPTION>
                                                                             Three Months Ended              Six Months Ended
                                                                                  June 30,                       June 30,
                                                                                 (Unaudited)                    (Unaudited)
                                                                         --------------------------     -------------------------
                                                                              1999            1998             1999         1998
                                                                         --------------------------     -------------------------
<S>                                                                      <C>               <C>             <C>           <C>
Net (Loss)/Income                                                        ($106,814)        $20,186         ($93,879)     $39,981
Other Comprehensive Income, net of tax:
    Unrealized holding losses arising during period                        (21,462)          3,452          (29,712)       2,041
    Reclassification adjustment for (losses)/gains included in net income   (4,621)         (1,281)          (5,028)      (2,461)
                                                                         --------------------------     -------------------------
  Change in net unrealized gain on fixed maturities securities
    available for sale                                                     (26,083)          2,171          (34,740)        (420)
  Change in foreign exchange translation                                        56            (161)               0           23
                                                                         --------------------------     -------------------------
Other Comprehensive (Loss)/Income                                          (26,027)          2,010          (34,740)        (397)
                                                                         --------------------------     -------------------------
Comprehensive (Loss)/Income                                              ($132,841)        $22,196        ($128,619)     $39,584
                                                                         ==========================     =========================
</TABLE>

See Accompanying Notes to Unaudited Consolidated Financial Statements


                                       5
<PAGE>

                     CAPITAL RE CORPORATION AND SUBSIDIARIES
                 Consolidated Statement of Stockholders' Equity

                   (Dollars in thousands except share amounts)

                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                                          Accumulated
                                                                       Additional                            Other         Total
                                                              Common    Paid-In     Retained   Treasury  Comprehensive Stockholders'
                                                               Stock    Capital     Earnings     Stock      Income         Equity
                                                              ----------------------------------------------------------------------
<S>                                                            <C>       <C>         <C>        <C>         <C>          <C>
Balance, January 1, 1999                                       $ 324   $ 227,280   $ 355,693  ($  4,891)  $  32,420    $ 610,826

 Net Income                                                       --          --     (93,879)        --          --      (93,879)

Exercise of stock options, including tax benefit
   (169,500 shares)                                                1       2,178          --         --          --        2,179

Fixed maturities securities available for sale adjustments        --          --          --         --     (34,740)     (34,740)

Issuance of common stock (4,424,779 shares) (additional paid
   in capital is net of capital issuance costs of $1,875)         44       73081          --         --          --       73,125

 Dividend ($.08 per common share)                                 --          --      (2,743)        --          --       (2,743)
                                                              ----------------------------------------------------------------------
Balance, June 30, 1999                                         $ 369   $ 302,539   $ 259,071  ($  4,891)  ($  2,320)   $ 554,768
                                                              ======================================================================
</TABLE>

See Accompanying Notes to Unaudited Consolidated Financial Statements.


                                       6
<PAGE>

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

<TABLE>
<CAPTION>
                                                                    Three Months Ended
                                                                         June 30,
                                                                        (Unaudited)
                                                                  ----------------------
                                                                     1999        1998
                                                                  ----------------------
<S>                                                               <C>          <C>
Operating Activities:

  Net income                                                      ($ 93,879)   $  39,981
  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                             (815)        (614)
     (Benefit from)/provision for deferred federal income taxes     (23,597)       4,017
     Acquisition costs deferred                                      41,597      (34,618)
     Amortization of deferred acquisition costs                     (56,130)      25,370
     Equity Income in affiliates                                     (2,394)        (133)
     Change in accrued investment income                                204       (1,309)
     Change in premiums receivable, net                                 698      (12,491)
     Change in deferred premium revenue, net                         23,647       33,455
     Change in outstanding loss reserves, net                       127,456        1,840
     Net realized gain on investments                                (5,028)      (2,461)
     Change in ceded balances payable                                   493          699
     Other                                                            3,662       12,555
                                                                  ---------    ---------
   Net Cash Provided by Operating Activities                         15,934       66,310

Investing Activities:

   Securities available-for-sale:
     Purchases - fixed maturities                                  (715,826)    (398,667)
     Sales-fixed maturites                                          663,049      316,811
  Maturities (purchases) of short-term
   investments, net                                                 (53,641)      10,328
  Discontinued Operations, net                                       23,653        2,000
  Other investing activities                                         (1,540)        (335)
                                                                  ---------    ---------
   Net Cash Used in Investing Activities                            (84,305)     (69,863)

Financing Activities:

  Net proceeds from exercise of stock options                         2,178          506
  Net proceeds from issuance of stock                                73,125            0
  Dividends paid                                                     (2,743)      (2,548)
                                                                  ---------    ---------
   Net Cash Used by Financing Activities                             72,560       (2,042)
(Decrease) Increase in Cash                                           4,189       (5,595)
Cash at Beginning of Period                                           9,893       14,103
                                                                  ---------    ---------
     Cash at End of Period                                        $  14,082    $   8,508
                                                                  =========    =========
</TABLE>

See Accompanying Notes to Unaudited Consolidated Financial Statements.


                                       7
<PAGE>

                     CAPITAL RE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

                                            June 30, 1999

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  1998 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,  1999 may not be
indicative of the results that may be expected for the year ending  December 31,
1999.

As of January 1, 1998, the Corporation adopted Statement of Financial Accounting
Standard  130,  "Reporting  Comprehensive  Income"  ("FAS 130").  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. FAS 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, 1999 and 1998,
total  comprehensive  (loss)/income  amounted to ($132.8)  million and  ($128.6)
million, and $22.2 million and $39.6 million, respectively.

Beginning in the third quarter of 1998, the Corporation's  investment in Lloyd's
which was  previously  consolidated,  is reflected as a  discontinued  operation
based on the Corporation's intention to pursue its divestiture. All prior period
results have been restated for comparative purposes.


                                       8
<PAGE>

2.   REINSURANCE

Ceded  earned  premium for both the three  months and six months  ended June 30,
1999 and 1998 were $3.7  million  and $7.5  million,  and $3.6  million and $7.4
million,  respectively.  Ceded  losses for both the three  months and six months
ended  June 30,  1999 were  ($50.4)  million,  and for the three  months and six
months ended June 30, 1998 were $0.6 million and $1.1 million, respectively.

3.   INCOME TAXES

The  effective tax rate for the six months ended June 30, 1999 and 1998 is lower
than the federal corporate tax rate on ordinary income of 35% due principally to
the effect of tax-exempt  interest income.  No income taxes were paid as of June
30, 1999 and $9.1 million of income taxes were paid as of June 30, 1998.

4.   SEGMENT REPORTING

The Corporation  provides  reinsurance to primary insurers in various  specialty
insurance markets. For segment reporting purposes, the Corporation's reinsurance
lines of  business  are  organized  into  four  discrete  segments  -  municipal
financial  guaranty,  nonmunicipal  financial  guaranty,  each of which  include
credit  default  swap  transactions,  mortgage  guaranty and trade  credit.  Two
additional  lines,  financial  solutions and title reinsurance are combined into
"Other" for segment  reporting  purposes.  Operating  procedures  and  corporate
resources  are  tailored to the business  and  regulatory  needs of each line of
business or segment as necessary. In cases where practical,  the same procedures
and or resources may be utilized for more than one line of business.

Financial guaranty insurance of municipal and nonmunicipal debt obligations,  is
a form of credit enhancement  which, as a specialized class of surety,  provides
for the  unconditional  and  irrevocable  guarantee of the  obligor's  scheduled
payment  of  principal   and  interest  on   investment   grade   municipal  and
non-municipal   debt  obligations.   The  premiums  related  to  municipal  bond
reinsurance are generally paid in full at the time of policy issuance,  credited
to a deferred  premium  account and then recognized as revenues over the life of
the reinsured  obligation.  As a result,  only a small portion of annual premium
revenue  is  derived  from  premiums  written  in any one  year.  Given the zero
expected loss underwriting standard,  this multi-year revenue translates into an
annuity  of earned  premiums,  which is itself  supplemented  by the  investment
income  derived  from the deferred  premiums  account.  Non-municipal  financial
guaranty  premiums  are  generally  paid in  installments  over  the life of the
underlying obligation, also providing an annuity of earned premiums.


                                       9
<PAGE>

Mortgage  guaranty  insurance  is  a  specialized  class  of  credit  insurance,
providing  protection to mortgage  lenders  against  default by borrowers on low
down-payment  residential  mortgage loans.  For the  Corporation's  proportional
mortgage guaranty business, reinsurance premiums are paid on a monthly basis and
fully  recognized  when  written.  A certain level of losses is expected in this
business.  For the  non-proportional  mortgage guaranty  business,  premiums are
generally paid in full at contract  inception and earned over the life,  usually
ten years. Generally,  losses are not expected in this non-proportional mortgage
guaranty  business.  Credit insurance  protects  suppliers of goods and services
from the risk of non-payment by their  customers.  Some level of losses are also
expected in this business.  This business is centered on blending  participation
in excess of loss  reinsurance  programs with  traditional  proportional  treaty
lines.  These  contracts  are  generally of a one year duration and premiums are
typically received in installments throughout the coverage period.

For  purposes  of  financial  planning,   resource  allocation  and  performance
evaluation,  segments are measured based on net  underwriting  profits and other
income directly  attributable to the segments.  For segment reporting  purposes,
investment  income,  net  realized   gains/losses,   operating  expenses  (i.e.,
salaries,  rent,  etc.),  interest expense and income taxes are allocated to the
segments.  The mortgage  segment  includes equity income from an investment in a
subsidiary  engaged in mortgage related  products.  Management does not allocate
assets  to  the  Corporation's  segments.   Rather,  assets  are  managed  as  a
consolidated pool.

For marketing  purposes,  the Corporation  aggregates its  reinsurance  lines of
business  into two  divisions,  Financial  Guaranty  and  Financial  Risks.  The
municipal and  non-municipal  lines including credit default swaps, are combined
to represent  Financial  Guaranty while the Financial  Risks  division  includes
mortgage, credit, title and financial solutions.

The  following  tables  summarize  the  operating  results of the  Corporation's
segments:

<TABLE>
<CAPTION>
                                                      Three Months Ended June 30, 1999
                                                             Reportable Segments
                                           -------------------------------------------------------------------------
                                           Municipal          Non     Mortgage      Credit       Other  Consolidated
                                                        Municipal
                                           -------------------------------------------------------------------------
<S>                                         <C>          <C>          <C>         <C>          <C>         <C>
    Origination Written Premiums            $ 13,205     $ 10,084     $ 24,513    $  8,135     $  4,647    $ 60,584
    Canceled Reinsurance                           0            0            0           0            0           0
                                           -------------------------------------------------------------------------
    Gross Written Premiums                    13,205       10,084       24,513       8,135        4,647      60,584
    Net Premiums Written                      12,250       10,023       24,513       8,034        4,630      59,450
    Net Premiums Earned                        5,770        8,090       12,851       8,489        4,838      40,038
    Net Underwriting (Loss)/Profit and
     Other
           Segment Related (Loss)/Income    ($11,190)    ($55,756)    $    635    ($ 2,627)    ($82,549)  ($151,487)
</TABLE>


                                       10
<PAGE>

<TABLE>
<CAPTION>
                                                  Six Months Ended June 30, 1999
                                                       Reportable Segments
                                           -------------------------------------------------------------------------
                                           Municipal          Non     Mortgage      Credit       Other  Consolidated
                                                        Municipal
                                           -------------------------------------------------------------------------
<S>                                         <C>          <C>          <C>         <C>          <C>         <C>
Origination Written Premiums                $ 33,637     $ 22,353     $ 36,641    $ 17,195     $  9,213    $119,039
Canceled Reinsurance                               0        9,567            0           0            0       9,567
                                           -------------------------------------------------------------------------
Gross Written Premiums                        33,637       12,786       36,641      17,195        9,213     109,472
Net Premiums Written                          31,661       11,792       36,641      16,984        9,196     106,274
Net Premiums Earned                           15,377       14,706       25,637      17,537        9,369      82,626
Net Underwriting (Loss)/Profit and
Other
       Segment Related (Loss)/Income        ($ 6,711)    ($51,532)    $  5,515    ($ 1,330)    ($81,158)   ($135,216)
</TABLE>

<TABLE>
<CAPTION>
                                                 Three Months Ended June 30, 1998
                                                        Reportable Segments
                                           -------------------------------------------------------------------------
                                           Municipal          Non     Mortgage      Credit       Other  Consolidated
                                                        Municipal
                                           -------------------------------------------------------------------------
<S>                                         <C>          <C>          <C>         <C>          <C>         <C>
Origination Written Premiums                $ 16,475     $  6,192     $ 21,041    $  9,829     $  2,268    $ 55,805
Canceled Reinsurance                               0            0            0           0            0           0
                                           -------------------------------------------------------------------------
Gross Written Premiums                        16,475        6,192       21,041       9,829        2,268      55,805
Net Premiums Written                          16,087        6,192       21,041       9,777        2,268      55,365
Net Premiums Earned                            9,828        4,842       14,680       7,429        2,447      39,226
Net Underwriting Profit and Other
       Segment Related Income               $  6,316     $  4,455     $  8,198    $    797     $    580    $ 20,346
</TABLE>


                                       11
<PAGE>

<TABLE>
<CAPTION>
                                                  Six Months Ended June 30, 1998
                                                        Reportable Segments
                                           -------------------------------------------------------------------------
                                           Municipal          Non     Mortgage      Credit       Other  Consolidated
                                                        Municipal
                                           -------------------------------------------------------------------------
<S>                                         <C>          <C>          <C>         <C>          <C>         <C>
Origination Written Premiums                $ 38,694     $ 12,186     $ 41,238    $ 18,284     $  7,530    $117,932
Canceled Reinsurance                               0            0            0           0            0           0
                                           -------------------------------------------------------------------------
Gross Written Premiums                        38,694       12,186       41,238      18,284        7,530     117,932
Net Premiums Written                          37,354       12,186       41,161      18,180        7,530     116,411
Net Premiums Earned                           19,199        8,763       32,633      14,595        7,767      82,957
Net Underwriting Profit and Other
       Segment Related Income               $ 13,273     $  6,723     $ 15,157    $  2,729     $  1,952    $ 39,834
</TABLE>

                                         Three Months Ended
                                              June 30,
Reconciliation to Consolidated Results          1999         1998
                                         ---------------------------

Net Segment Income                         ($151,487)    $  20,346
Investment Income and Net Realized
    Gains                                     22,305        17,468
Other Income                                   1,579           561
Operating Expense, net                        (6,738)       (7,551)
Interest Expense & Minority Int in Subs       (3,337)       (3,286)
                                         ---------------------------
Consolidated Income Before Taxes           ($137,678)    $  27,538
                                         ---------------------------

                                          Six Months Ended
                                              June 30,
Reconciliation to Consolidated Results          1999         1998
                                         ---------------------------
Net Segment Income                         ($135,216)    $  39,834
Investment Income and Net Realized
    Gains                                     39,877        34,513
Other Income                                   3,174           937
Operating Expense, net                       (13,089)      (13,319)
Interest Expense & Minority Int in Subs       (6,616)       (6,599)
                                         ---------------------------
Consolidated Income Before Taxes           ($111,870)    $  55,366
                                         ---------------------------


                                       12
<PAGE>

5.   CAPITAL INVESTMENT

In February  1999,  ACE Bermuda  Insurance  Ltd., a  subsidiary  of ACE Limited,
agreed to invest $75  million in the  Corporation  through a purchase  of common
stock.  The  proceeds  will be used to augment the surplus of the  Corporation's
operating  subsidiaries.  Under the stock purchase  agreement,  as amended,  the
purchase price is $16.95. The transaction closed on June 15, 1999.

6.   MERGER

On June 14, 1999 a definitive  agreement was executed whereby ACE Limited agreed
to purchase the remaining  outstanding shares of the Corporation.  The intent to
merge was  originally  announced  on May 27,  1999 and it is  expected  that the
merger  will be  completed  in the second  half of 1999.  Under the terms of the
agreement,  the  Corporation's  shareholders  would  receive  0.6  shares of ACE
Limited for each share of the Corporation at closing, subject to a maximum value
of the  Corporation's  shareholders of $22 per share. The transaction is subject
to customary regulatory approvals,  final approval by Capital Re's shareholders,
confirmation  of  specified  financial  strength  ratings  of the  Corporation's
principal operating subsidiaries and other customary conditions.

7.   LOSSES

The Corporation  reported loss and loss adjustment expenses of $187.9 million as
of June 30,1999. The $187.9 million is principally  comprised of (i) an addition
of $45.1  million  to  incurred  losses  for  reinsurance  exposure  to  certain
asset-backed  securities issued by or on behalf of Commercial Financial Services
(the "CFS Securities").  In 1998, the Corporation  established a loss reserve in
the amount of $44.1 million for expected losses on this non-municipal  financial
guaranty  transaction.  The  increase  in  losses  incurred  in 1999 is based on
revised  collection  estimates  on the  assets  underlying  the  CFS  Securities
following a recently completed transfer of all servicing to the back-up servicer
under the transaction documents. On an ever to date basis, total incurred losses
for the CFS Securities  total $90 million;  (ii) $74 million for incurred losses
in the  financial  solutions  line of  business  related  to  three  reinsurance
transactions of International  Financial Services Life Insurance Company ("IFS")
that the Corporation secured. This loss represents  non-recoverable  reinsurance
from IFS relating to  reinsurance  ceded on certain blocks of single premium and
flexible  premium  deferred  annuities.  In the second  quarter of 1999, IFS was
placed under an order of rehabilitation by the Missouri  insurance  authorities.
The order of rehabilitation indicated that a substantial portion of the invested
asset  portfolio  of IFS,  and its  affiliates,  could not be located  and IFS's
ability to pay claims was severely compromised; (iii) $28.5 million of losses in
the financial guaranty line of business of which approximately $14.6 million was
for certain reinsured municipal  obligations and approximately $13.9 million for
certain  reinsured  non-municipal  obligations.  These  financial  guaranty loss
reserves were recorded  following  various  events  occurring  during the second
quarter  and  evaluated  as  part  of  the   Corporation's   ongoing   portfolio
surveillance efforts, (iv) $8.5 million of incurred losses related to the credit
line of business.  The addition to the incurred losses was based on an actuarial
review of the trade  credit line of business  conducted  in the second  quarter,
which   revealed  a  deficiency  in  such


                                       13
<PAGE>

reserves  associated  with  certain  underwriting  years and (v) $6.5 million of
incurred losses for the mortgage line of business.  Of that amount, $3.6 million
was  recorded  after  a  review  of the  emerging  loss  frequency  for  several
underwriting years covered under a specific excess of loss reinsurance contract.
The balance of the  mortgage  reserves  are  associated  with paid and  incurred
losses  consistent with the  Corporation's  second quarter  actuarial review and
analysis of the reinsured mortgage portfolio.

8.   OTHER

Interest  paid for the six months  ended June 30, 1999 and 1998 was $3.6 million
and $3.7 million, respectively.


                                       14
<PAGE>

Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations.

General

Capital Re Corporation  (the "Company" or "Capital Re") is an insurance  holding
company  for  a  group  of  reinsurance   companies  that  provide   value-added
reinsurance products in several specialty insurance markets. The Company has two
principal  divisions:  financial  guaranty and  financial  risks.  The financial
guaranty division is composed of municipal and non-municipal  financial guaranty
reinsurance  and credit default swaps.  The financial risks division is composed
of mortgage guaranty  reinsurance,  trade credit reinsurance,  title reinsurance
and financial solutions. In both of its divisions,  the Company seeks to provide
innovative  reinsurance  solutions  to satisfy  the diverse  risk and  financial
management  demands of its clients.  The Company believes that its future growth
will be  generated  through  application  of its core  credit  expertise  to new
products and markets in its two existing divisions.

The  Company  participates  in its  business  lines  through  five  wholly-owned
insurance   subsidiaries  and  two  joint  venture  vehicles.  Its  wholly-owned
subsidiaries are: Capital Reinsurance Company ("Capital  Reinsurance"),  Capital
Credit Reinsurance Company Ltd. ("Capital Credit"), Capital Mortgage Reinsurance
Company ("Capital  Mortgage"),  KRE Reinsurance Ltd. ("KRE"),  and Capital Title
Reinsurance Company ("Capital Title"). The Company owns a fifty percent economic
interest in ACE Capital Re Ltd. ("ACRE"), a non-consolidated, Bermuda domiciled,
joint venture  insurance  company.  The Company's  joint venture partner in ACRE
is-ACE Bermuda Insurance, Ltd. ("ACE Bermuda"), a subsidiary of ACE Limited. The
Company also owns a fifty percent interest in Lenders  Residential Asset Company
LLC   (formerly,   Lenders   Mortgage   Alliance   Company  LLC)   ("LRAC"),   a
non-consolidated  Delaware limited liability company.  During the Second Quarter
of 1999, the Company completed a reorganization  of its operating  subsidiaries.
As part of the  reorganization  Capital  Credit was merged  into KRE.  KRE,  the
surviving  company,  is now a direct  wholly-owned  subsidiary  of the  Company.
Capital Mortgage and Capital Title are direct  wholly-owned  subsidiaries of KRE
and KRE also holds the Company's  equity interest in ACRE. In August,  1999, ACE
Bermuda  contributed  an  additional  $85  million  in  equity  to ACRE  and the
Company's economic interest in ACRE was thereby reduced to 13.4 percent.

The  Company's  financial  guaranty  division  conducts its  business  primarily
through Capital Reinsurance.  Capital Reinsurance is a professional  reinsurance
company  dedicated  to serving the U.S.  domestic  and  international  financial
guaranty  insurance  markets and has established  itself as a leading  specialty
reinsurer  (by market share) of financial  guaranties  of investment  grade debt
obligations, principally municipal debt obligations. Capital Reinsurance applies
a "zero expected loss" standard to its underwriting  process,  which is premised
on a general  policy of reinsuring  only those  obligations  that are investment
grade on the date  reinsured  and where there is no  expectation  of loss on the
risk  reinsured.  Nevertheless,  losses  can be  expected  to occur  in  Capital
Reinsurance's


                                       15
<PAGE>

existing and future reinsurance and credit default swap portfolios.  At the same
time,  consistent with its "zero expected loss" underwriting  policies,  Capital
Reinsurance has pursued the reinsurance of investment grade  non-municipal  debt
obligations and directed its capacity to the reinsurance of financial guaranties
of asset-backed securities. In addition, Capital Reinsurance sells municipal and
non-municipal credit risk protection on a facultative basis to a wide variety of
counterparties  through credit default swap  transactions.  Credit default swaps
are  underwritten in accordance with the same "zero expected loss" standard that
applies to Capital Reinsurance's  municipal and non-municipal financial guaranty
business.

The Company's  financial risks division conducts its business  primarily through
KRE and its subsidiaries Capital Mortgage and Capital Title (collectively,  "KRE
Financial  Risks").  KRE  Financial  Risks is a leading  reinsurer  of  mortgage
guaranty insurance.  The mortgage guaranty reinsurance strategy of KRE Financial
Risks is based on the development of creative  reinsurance  programs targeted to
the individual  capital,  risk and portfolio  management  demands of the primary
mortgage guaranty insurers.  Mortgage guaranty  reinsurance is underwritten with
the expectation that losses will occur regularly.

KRE  Financial  Risks writes trade  credit  reinsurance  in the U.S. and Europe.
Trade  credit  insurance  protects  those who sell goods and  services on credit
terms against default by the purchaser on its payment obligations.  Trade credit
reinsurance  is an extension of the  Company's  underwriting  focus,  relying on
credit  analysis  and  portfolio  diversification  techniques  similar  to those
employed in  financial  guaranty and mortgage  guaranty  reinsurance.  Portfolio
losses will also be expected to occur  regularly in the  Company's  trade credit
reinsurance business.

KRE Financial Risks provides title reinsurance designed to aid title insurers in
managing  portfolio  risk,  meeting  capital  adequacy  concerns  and to achieve
desired   claims-paying   ability  ratings  from  nationally  recognized  rating
agencies.  Capital  Title  offers  excess  of loss and quota  share  reinsurance
products  on  both  a  treaty  and  facultative   basis.  Title  reinsurance  is
underwritten  without the expectation of any significant loss;  however,  losses
can be expected to occur in the existing and future  reinsured  title  insurance
portfolio.

The financial  solutions business of KRE Financial Risks is focused on providing
highly structured solutions to problems of financial and risk management through
reinsurance, including credit enhancement, excess of loss and surplus management
covers.  The principle  target market is life,  accident and health insurers and
reinsurers,  although  specialty  property  and  casualty  markets  also provide
opportunities. The underwriting process places significant emphasis on actuarial
analysis.  Transactions are underwritten to be risk remote or finite,  standards
that are compatible with the Company's  "zero expected loss" financial  guaranty
underwriting standard. Losses can be expected to occur in the Company's existing
and future financial solutions portfolio.

KRE  Financial   Risks  also  assumes   financial   guaranty  risk,  both  as  a
retrocessionaire  of Capital  Reinsurance  and  directly  from  certain  primary
financial guaranty insurers.

LRAC provides marketing and consulting  services to mortgage lenders with regard
to the  origination  and closing of  residential  mortgages and the sale of such
mortgages into the capital


                                       16
<PAGE>

markets.  In  addition,  by  providing  direct  access to lenders,  it generates
markets for the sale of the Company's other products.  The Company also owns RGB
Underwriting  Agencies Ltd. ("RGB"),  a Lloyd's of London  ("Lloyd's")  managing
agency  which  presently  manages  four  syndicates  operating  in  the  Lloyd's
insurance  market,  and CRC Capital Ltd.  ("CRC  Capital"),  a corporate name at
Lloyd's,  which provides underwriting capacity to the syndicates managed by RGB.
The  Company  has  commenced a plan of  divestiture  of its Lloyd's  operations.
Accordingly,  commencing in 1998, the Company began reflecting its participation
in  Lloyd's  as a  discontinued  operation.  All 1999  and  prior  year  figures
presented herein reflect Lloyd's as a discontinued operation.

The Capital Re corporate group also includes  Capital Re Solutions  Incorporated
(formerly,  Capital Re Management Company), a New York reinsurance intermediary,
ACE Capital Re Managers Ltd., a Bermuda based management company, and Capital Re
LLC, a Turks & Caicos Islands finance subsidiary  organized in 1993 to issue $75
million  of Company  guaranteed  mandatorily  redeemable  preferred  stock,  the
proceeds  of which were  loaned to Capital  Re.  Capital Re  Financial  Products
Company,  a newly formed Delaware business  Company,  and Capital Risk Assurance
Company ("Capital Risk"), a Maryland surety insurer.

Results of Operations

Three Months Ended June 30, 1999 versus Three Months Ended June 30, 1998

The Company  recorded a ($89.6) million net loss from continuing  operations for
the three months ended June 30, 1999.  For the same period of 1998,  the Company
recorded net income from continuing  operations of $19.1 million. On a per share
basis,  the basic and diluted net loss from  continuing  operations were ($2.73)
and ($2.70),  respectively,  for the three  months ended June 30, 1999.  For the
same  period of 1998,  on a per share  basis,  basic and diluted net income from
continuing  operations  were $0.60 and $0.58,  respectively.  The losses for the
1999 period are primarily  attributable  to loss reserve  additions for specific
reinsured transactions and portfolio exposures.

The  Company   recorded  a  ($106.8)   million  net  loss  including  loss  from
discontinued  operations  for the three months ended June 30, 1999. For the same
period  of  1998,  the  Company   recorded  net  income  including  income  from
discontinued  operations of $20.2 million.  On a per share basis, both basic and
diluted net income including loss from discontinued  operations were ($3.26) and
($3.22), respectively. These losses were primarily attributable to the additions
to loss reserves  described above as well as negative results from the Company's
discontinued  Lloyd's  operations.  For the same period of 1998,  on a per share
basis,  both basic and diluted  net income  including  income from  discontinued
operations were $0.63 and $0.61, respectively.

Origination  premiums  written  (i.e.,  gross premiums  written before  canceled
reinsurance) increased 8.6% to $60.6 million for the three months ended June 30,
1999 from $55.8 million for the same period of 1998.  Non-municipal  origination
premiums written  increased to $10.1 million for the three months ended June 30,
1999 from  $6.2  million  for the  three  months  ended  June 30,  1998 due to a
significant  increase in premiums  written in the credit default swaps sector of
that business.  A credit default swap is a transaction  whereby one counterparty
pays a periodic fee in fixed basis  points on a notional  amount in return for a
contingent  payment by the other  counterparty  in the event one or more


                                       17
<PAGE>

defined  credit events occurs with respect to one or more third party  reference
securities  or loans.  A credit event is generally  defined as a failure to pay,
bankruptcy,  cross  acceleration  (generally  accompanied  by a failure to pay),
repudiation,  restructuring,  or similar  nonpayment event.  Credit default swap
premium  grew to $5.2 million for the three months ended June 30, 1999 from $1.5
million in the prior year.  Mortgage guaranty  reinsurance  premium increased to
$24.5  million in the second  quarter of 1999  compared to $21.0  million in the
second quarter of 1998 because of a large excess of loss reinsurance transaction
recorded in the second  quarter of 1999. The following  table shows  origination
premiums  written by line of business  for the three  months ended June 30, 1999
and June 30, 1998.

                               Origination Premiums Written
                                    Three Months Ended
                                        June 30,
                                     1999      1998
                                     ----      ----
                                  (dollars in millions)
Financial Guaranty Division:
   Municipal                        $13.2     $16.5
   Non-Municipal                     10.1       6.2

Financial Risks Division:
  Mortgage                           24.5      21.0
  Credit                              8.1       9.8
  Financial Solutions                 3.3       1.4
  Title                               1.4       0.9
                                    -----     -----
Total Origination
Premiums Written                    $60.6     $55.8

Net premiums  written  increased  by 7.2% to $59.4  million for the three months
ended  June 30,  1999 from  $55.4  million  for the same  period  of 1998.  This
increase is commensurate  with the explanation  described above for the increase
in origination  premium.  The following table shows net premiums written by line
of business for the three months ended June 30, 1999 and June 30, 1998.

                                 Net Premiums Written
                                   Three Months Ended
                                       June 30,
                                    1999      1998
                                    ----      ----
                                 (dollars in millions)
Financial Guaranty Division:
   Municipal                       $12.2     $16.1
   Non-Municipal                    10.0       6.2

Financial Risks Division:
  Mortgage                          24.5      21.0
  Credit                             8.0       9.8
  Financial Solutions                3.3       1.4
  Title                              1.4       0.9
                                   -----     -----

Total Net
Premiums Written                   $59.4     $55.4


                                       18
<PAGE>

For the three months ended June 30, 1999, net premiums earned  increased 2.0% to
$40.0 million from $39.2 million for the comparable  1998 period.  For the three
months  ended June 30,  1999 and June 30 1998,  ceded  earned  premium  was $3.7
million and $3.6 million,  respectively.  The following table shows net premiums
earned by line of business for the three months ended June 30, 1999 and June 30,
1998.

                                   Net Premiums Earned
                                    Three Months Ended
                                        June 30,
                                     1999       1998
                                  (dollars in millions)
Financial Guaranty Division:
 Municipal                        $   5.8    $   9.7
 Non-Municipal                        8.0        4.8

Financial Risks Division:
 Mortgage                            12.8       14.7
 Credit                               8.5        7.4
 Financial Solutions                  3.3        1.4
 Title                                1.6        1.0
                                    -----      -----

Total Net
Premiums Earned                   $  40.0    $  39.2

For the three months ended June 30, 1999, net investment  income  increased 9.3%
to $17.7 million from $16.2 million for the comparable period of 1998. 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,  1999.  The  Company  recognized  net
realized gains of $4.6 million for the three months ended June 30, 1999 compared
to $1.3 million for the same period of 1998.

Loss and loss adjustment  expenses increased to $175.1 million from $2.6 million
for the three  months  ended June 30,  1999 and 1998,  respectively.  The $175.1
million is principally comprised of (i) an addition of $45.1 million to incurred
losses for reinsurance exposure to certain asset-backed  securities issued by or
on behalf of Commercial Financial Services (the "CFS Securities").  In 1998, the
Company  established  a loss reserve in the amount of $44.1 million for expected
losses on this  non-municipal  financial guaranty  transaction.  The increase in
losses incurred in 1999 is based on revised  collection  estimates on the assets
underlying the CFS  Securities  following a recently  completed  transfer of all
servicing to the back-up servicer under the transaction documents. On an ever to
date basis, total incurred losses for the CFS Securities total $90 million; (ii)
$74 million for  incurred  losses in the  financial  solutions  line of business
related to three reinsurance  transactions of International  Financial  Services
Life Insurance  Company ("IFS") that the Company  secured.  This loss represents
non-recoverable  reinsurance  from IFS relating to reinsurance  ceded on certain
blocks of single premium and flexible premium deferred annuities.  In the second
quarter of 1999, IFS was placed under an order of rehabilitation by the Missouri
insurance authorities.  The order of rehabilitation indicated that a substantial
portion of the invested asset portfolio of IFS, and its affiliates, could not be
located and IFS's  ability to pay claims was severely  compromised;  (iii) $28.5
million  of  losses  in  the  financial  guaranty  line  of  business  of  which
approximately $14.6


                                       19
<PAGE>

million was for certain reinsured municipal  obligations and approximately $13.9
million  for  certain  reinsured  non-municipal  obligations.   These  financial
guaranty loss reserves were recorded  following  various events occurring during
the second  quarter and  evaluated as part of the  Company's  ongoing  portfolio
surveillance efforts, (iv) $8.5 million of incurred losses related to the credit
line of business.  The addition to the incurred losses was based on an actuarial
review of the trade  credit line of business  conducted  in the second  quarter,
which   revealed  a  deficiency  in  such  reserves   associated   with  certain
underwriting years and (v) $6.5 million of incurred losses for the mortgage line
of  business.  Of that amount,  $3.6 million was recorded  after a review of the
emerging loss frequency for several  underwriting years covered under a specific
excess of loss reinsurance  contract.  The balance of the mortgage  reserves are
associated  with paid and incurred losses  consistent with the Company's  second
quarter actuarial review and analysis of the reinsured mortgage portfolio. Ceded
losses for the three  months ended March 31, 1999 and 1998 were ($50.4) and $0.6
million, respectively.

Total expenses,  excluding loss and loss adjustment expenses,  decreased 2.4% to
$26.5  million for the three months  ended June 30, 1999 from $27.1  million for
the same period of 1998.  This decrease was primarily  attributable to incentive
compensation  related  expenses  accrued  in the  second  quarter of 1998 in the
amount of $1.3 million that are no longer expected to be incurred.  Net expenses
related to this  incentive  compensation  were reversed in the fourth quarter of
1998. As such, no additional  expense has been accrued in 1999.  The decrease in
total expenses  excluding losses was partially offset by investment banking fees
in the amount of $1.0 million incurred in connection with the Company's  pending
merger with ACE Limited.  (See "Liquidity and Capital Resources").  The decrease
was also due to a one time adjustment  recorded in the second quarter of 1998 in
the amount of $5.8 million to reclassify  expenses to profit commission  expense
from losses incurred based on the terms of an in-force reinsurance contract. The
expense  ratios for the three months ended June 30, 1999 and 1998 were 57.2% and
59.7%, respectively.

For the three months ended June 30, 1999,  the Company  recorded  federal  taxes
recoverable of $48.1  million.  This was as a result of the  significant  losses
incurred  described above. For the three months ended June 30, 1998, the Company
recorded federal income taxes payable of $7.9 million.

Six Months Ended June 30, 1999 versus Six Months Ended June 30, 1998

The Company  recorded a ($70.2) million net loss from continuing  operations for
the six months  ended June 30,  1999.  For the same period of 1998,  the Company
recorded net income from  continuing  operations of $40.0. On a per share basis,
the basic and  diluted  net loss from  continuing  operations  were  ($2.17) and
($2.14),  respectively,  for the six months  ended June 30,  1999.  For the same
period of 1998,  on a per  share  basis,  basic  and  diluted  net  income  from
continuing  operations  were $1.25 and $1.21,  respectively.  The losses for the
1999 period are primarily attributable to additions to loss reserves on specific
reinsured transactions as well as portfolio exposures.

The Company recorded a ($93.9) million net loss including loss from discontinued
operations  for the six months ended June 30, 1999. For the same period of 1998,
the Company recorded net income including income from discontinued operations of
$40.0 million. On a per share basis, both basic and diluted net income including
loss from discontinued operations were ($2.90) and ($2.87), respectively.  These
losses were primarily  attributable to the additions to loss reserves  described
above as well as  negative  results  from  the  Company's  discontinued  Lloyd's
operations.  For the same period of 1998,  on a per share basis, both


                                       20
<PAGE>

basic and diluted net income including income from discontinued  operations were
$1.26 and $1.21, respectively.

Origination  premiums  written  (i.e.,  gross premiums  written before  canceled
reinsurance)  increased 1.0% to $119.0 million for the six months ended June 30,
1999 from $117.9 million for the same period of 1998. Non-municipal  origination
premiums  written  increased to $22.4  million for the six months ended June 30,
1999  from  $12.2  million  for the six  months  ended  June  30,  1998 due to a
significant  increase in premiums  written in the credit default swaps sector of
that business.  A credit default swap is a transaction  whereby one counterparty
pays a periodic fee in fixed basis  points on a notional  amount in return for a
contingent  payment by the other  counterparty  in the event one or more defined
credit  events  occurs  with  respect  to  one or  more  third  party  reference
securities  or loans.  A credit event is generally  defined as a failure to pay,
bankruptcy,  cross  acceleration  (generally  accompanied  by a failure to pay),
repudiation,  restructuring,  or similar  nonpayment event.  Credit default swap
premium  grew to $9.0  million for the six months  ended June 30, 1999 from $2.1
million in the prior year.  Mortgage guaranty  reinsurance  premium decreased to
$36.6  million for the six months ended June 30, 1999  compared to $41.2 million
in the second quarter of 1998.  This decrease was due to an increase in mortgage
prepayments  caused by lower interest rates as well as the Company's  shift from
assuming quota share mortgage  guaranty  reinsurance  business  toward  assuming
structured excess of loss mortgage guaranty reinsurance business.  The following
table shows origination  premiums written by line of business for the six months
ended June 30, 1999 and June 30, 1998.

                              Origination Premiums Written
                                    Six Months Ended
                                        June 30,
                                        1999 1998
                                  (dollars in millions)
Financial Guaranty Division:
   Municipal                      $ 33.6      $ 38.7
   Non-Municipal                    22.4        12.2

Financial Risks Division:
Mortgage                            36.6        41.2
Credit                              17.2        18.3
Financial Solutions                  6.0         5.5
Title                                3.2         2.0
                                  ------      ------

Total Origination
Premiums Written                  $119.0      $117.9

Net  premiums  written  decreased  by 8.7% to $106.3  million for the six months
ended  June 30,  1999 from  $116.4  million  for the same  period of 1998.  This
decrease is  primarily  attributable  to $9.6  million in  canceled  reinsurance
resulting from the  cancellation  of a large  non-municipal  financial


                                       21
<PAGE>

guaranty transaction.  The following table shows net premiums written by line of
business for the six months ended June 30, 1999 and June 30, 1998.

                               Net Premiums Written
                                 Six Months Ended
                                      June 30,
                                 1999        1998
                                 ----        ----
                              (dollars in millions)
Financial Guaranty Division:
   Municipal                   $ 31.7      $ 37.4
   Non-Municipal                 11.8        12.2

Financial Risks Division:
Mortgage                         36.6        41.2
Credit                           17.0        18.2
Financial Solutions               6.0         5.5
Title                             3.2         2.0
                               ------      ------
Total Net
Premiums Written               $106.3      $116.4

For the six months ended June 30, 1999, net premiums earned  decreased  slightly
to $82.6 million from $83.0 million for the comparable 1998 period.  For the six
months  ended June 30,  1999 and June 30 1998,  ceded  earned  premium  was $7.5
million and $7.4 million,  respectively.  The following table shows net premiums
earned by line of business  for the six months  ended June 30, 1999 and June 30,
1998.

                               Net Premiums Earned
                                Six Months Ended
                                    June 30,
                                 1999        1998
                                 ----        ----
                              (dollars in millions)
Financial Guaranty Division:
 Municipal                     $ 15.4      $ 19.2
 Non-Municipal                   14.7         8.9

Financial Risks Division:
 Mortgage                        25.6        32.6
 Credit                          17.5        14.6
 Financial Solutions              6.0         5.5
 Title                            3.4         2.2
                               ------      ------
Total Net
Premiums Earned                $ 82.6      $ 83.0

For the six months ended June 30, 1999, net investment  income increased 8.4% to
$34.8 million from $32.1 million for the  comparable  period of 1998.  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,  1999.  The  Company  recognized  net


                                       22
<PAGE>

realized  gains of $5.0 million for the six months ended June 30, 1999  compared
to $2.5 million for the same period of 1998.

Loss and loss adjustment expenses increased to $187.9 million from $12.6 million
for the six  months  ended  June 30,  1999 and 1998,  respectively.  The  $187.9
million is principally  comprised of:

o    An addition of $45.1 million to incurred losses for reinsurance exposure to
     certain  asset-backed  securities  issued  by or on  behalf  of  Commercial
     Financial Services (the "CFS Securities"). In 1998, the Company established
     a loss reserve in the amount of $44.1  million for expected  losses on this
     non-municpal  financial  guaranty  transaction.   The  increase  in  losses
     incurred  in 1999 is based on revised  collection  estimates  on the assets
     underlying the CFS Securities  following a recently  completed  transfer of
     all servicing to the back-up servicer under the transaction  documents.  On
     an ever to date basis,  total incurred losses for the CFS Securities  total
     $90 million;

o    $74 million for incurred losses in the financial solutions line of business
     related  to  three  reinsurance  transactions  of  International  Financial
     Services Life Insurance Company ("IFS") that the Company secured. This loss
     represents the counterparties  estimated  non-recoverable  reinsurance from
     IFS relating to  reinsurance  ceded on certain blocks of single premium and
     flexible premium deferred annuities. In the second quarter of 1999, IFS was
     placed  under  an  order  of  rehabilitation  by  the  Missouri   insurance
     authorities.  The  order of  rehabilitation  indicated  that a  substantial
     portion of the invested asset portfolio of IFS, and its  affiliates,  could
     not be located and IFS's ability to pay claims was severely compromised;

o    $28.5 million of losses in the financial guaranty line of business of which
     approximately $14.6 million was for certain reinsured municipal obligations
     and  approximately  $13.9  million  for  certain  reinsured   non-municipal
     obligations. These financial guaranty loss reserves were recorded following
     various events occurring during the second quarter and evaluated as part of
     the Company's ongoing portfolio surveillance efforts;

o    $8.5 million of incurred losses related to the credit line of business. The
     addition to the  incurred  losses was based on an  actuarial  review of the
     trade  credit  line of  business  conducted  in the second  quarter,  which
     revealed a deficiency in such reserves associated with certain underwriting
     years; and

o    $6.5 million of incurred losses for the mortgage line of business.  Of that
     amount,  $3.6  million was  recorded  after a review of the  emerging  loss
     frequency for several underwriting years covered under a specific excess of
     loss  reinsurance  contract.  The  balance  of the  mortgage  reserves  are
     associated  with paid and incurred  losses  consistent  with the  Company's
     second  quarter  actuarial  review and analysis of the  reinsured  mortgage
     portfolio.  Ceded  losses for the six months  ended June 30,  1999 and 1998
     were $(50.4) million and $1.1 million, respectively.

Total expenses,  excluding loss and loss adjustment expenses,  decreased 1.6% to
$49.6  million for the six months ended June 30, 1999 from $50.4 million for the
same period of 1998.  This  decrease  was


                                       23
<PAGE>

primarily attributable to incentive compensation related expenses accrued in the
second quarter of 1998 in the amount of $1.8 million that are no longer expected
to be  incurred.  Net  expenses  related  to this  incentive  compensation  were
reversed in the fourth quarter of 1998. As such, no additional  expense has been
accrued in 1999. The decrease in total expenses  excluding  losses was partially
offset by  investment  banking  fees in the amount of $1.0  million  incurred in
connection  with the Company's  pending merger with ACE Limited.  (See Liquidity
and Capital  Resources.).  The  decrease  was also due to a one time  adjustment
recorded  in the  second  quarter  of 1998 in the  amount  of  $5.8  million  to
reclassify  expenses to profit commission  expense from losses incurred based on
the terms of an inforce  reinsurance  contract.  The expense  ratios for the six
months ended June 30, 1999 and 1998 were 51.2% and 52.8%, respectively.

For the six months  ended June 30,  1999,  the Company  recorded  federal  taxes
recoverable of $41.7  million.  This was as a result of the  significant  losses
incurred  described  above.  For the six months ended June 30, 1998, the Company
recorded federal income taxes payable of $15.4 million.

Liquidity and Capital Resources

The Company  relies on dividends  from Capital  Reinsurance  and KRE 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  1999 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,  1998,  or
approximately  $32.3  million.  For the six months ended June 30, 1999,  Capital
Reinsurance paid dividends in the amount of $5.0 million to the Company.

KRE's major sources of liquidity are funds generated from reinsurance  premiums,
net  investment  income and maturing  investments.  KRE, is a Bermuda  domiciled
insurer whose  distributions  are governed by Bermuda law. Under Bermuda law and
the  by-laws of KRE,  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 KRE'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. During 1999, KRE has paid no dividends to the Company.

Capital  Mortgage,  a wholly owned subsidiary of KRE, is subject to the dividend
restrictions  imposed under New York insurance law.  Accordingly,  dividends may
only be declared and  distributed  out of


                                       24
<PAGE>

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.  To date,  Capital
Mortgage has not declared nor paid any dividends.  The maximum  dividend payable
by  Capital  Mortgage  during  1999 is $0 since its  earned  surplus  was ($9.2)
million as of December 31, 1998.

Capital Title, also a wholly owned subsidiary of KRE, 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.  As of
December 31, 1998,  Capital  Title's maximum amount payable as a dividend during
1999 is  approximately  $3.6  million.  During 1999,  Capital  Title has paid no
dividends.

In January 1994,  the Company  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 Company 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 Company.  The Company 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.

For the six months  ended June 30,  1999,  the Company  declared and paid common
dividends in the amount of $2.7 million or $0.08 per share.

The Company reorganized its operating  subsidiaries during the second quarter of
1999.  As a  result,  KRE has  become a direct  wholly-owned  subsidiary  of the
Company. Capital Mortgage and Capital Title are now wholly-owned subsidiaries of
KRE and KRE owns all of the  Company's  equity  interest in ACRE. As part of the
reorganization,  approximately  $137.0  million  was  transferred  from  Capital
Mortgage to KRE and KRE assumed  certain  reinsurance  liabilities  from Capital
Mortgage.

Cash flows from  operations  for the six  months  ended June 30,  1999 and 1998,
consisting of reinsurance premiums collected net of expenses,  investment income
and income  taxes,  were $37.6  million  and $44.4  million,  respectively.  The
Company  believes that current levels of cash flow from  operations  provide the
Company with  sufficient  liquidity to meet its operating  needs.  The


                                       25
<PAGE>

Company'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, 1999,  cash and investments  were  approximately  $1.25 billion,  an
increase of $64.2 million,  or 5.4%, from $1.18 billion at December 31, 1998. In
managing its investment portfolio, the Company places a high priority on quality
and liquidity. As of June 30, 1999, the entire investment portfolio was invested
in highly rated fixed income securities.

At June 30, 1999,  approximately  $195.1  million,  or 15.6%,  of the  Company's
investment portfolio was composed of mortgage-backed  securities ("MBS"). Of the
MBS portfolio,  approximately $167.9 million, or 86.1%, 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, 1999, 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 Company
limits its exposure to prepayments by purchasing  less volatile types of MBS. As
of June 30, 1999, $3.6 million,  or approximately 1.8%, 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,  $191.6  million,  or  98.2%,  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 Company 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, 1999, the Company 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.

Capital Reinsurance is party to a credit facility with Deutsche Bank AG (the "DB
Credit  Facility")  pursuant  to which  Deutsche  Bank AG  provides up to $100.0
million  specifically  designed to provide  rating agency  qualified  capital to
further support Capital Reinsurance's  claims-paying  resources.  This agreement
expires  January 27, 2006.  Capital  Reinsurance  has not borrowed  under the DB
Credit Facility. The Company is also party to a liquidity facility with Deutsche
Bank AG,  pursuant to which Deutsche Bank provides up to $30 million for general
corporate purposes.  The Company has not borrowed under this liquidity facility.
The liquidity facility expires January 21, 2000.


                                       26
<PAGE>

In addition,  on August 20, 1996,  the Company  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 Company  utilized $16 million of the Chase
Facility for purposes of paying  subordinated  notes that came due.  Interest on
the bank note issued under the Chase  Facility is payable  quarterly  based upon
the Company's chosen interest rate option under the terms of the Chase Facility.
In November  1996,  the Company  utilized the  remaining $9 million of the Chase
Facility for purposes of acquiring RGB.  Under the terms of the Chase  Facility,
borrowed  principal  in the  amount of $25  million  becomes  payable in full on
October 16, 1999.

On March 10, 1999, Moody's Investors Service, Inc. ("Moody's") announced that it
had downgraded the financial strength rating of Capital  Reinsurance to Aa2 from
Aaa. This action ended a review process that began on November 5, 1998.  Moody's
cited  increased  competition  in the monoline  financial  guaranty  reinsurance
industry,  an increased  risk profile in business  assumed and rising  operating
leverage  as  reasons  for  the  downgrade.  Under  certain  of its  reinsurance
agreements  with  two  of  its  financial  guaranty  ceding  companies,  Capital
Reinsurance  has agreed to increase  the ceding  commission  payable  under such
agreements as a result of the rating action by Moody's.  The increase applies to
in-force and future business ceded by those companies. The Company expects total
additional ceding commission expense to total  approximately  $11.8 million.  Of
the $11.8  million,  $5.6  million was paid in the second  quarter of 1999.  The
expected   additional  ceding  commission  will  be  amortized  as  the  related
reinsurance  premium is earned.  The reinsurance  agreements with the two ceding
companies also give those  companies an option to reassume  business  previously
ceded to Capital Reinsurance upon certain adverse rating actions; however, those
options to fully reassume were not triggered by Capital Reinsurance's March 10th
downgrade.  Additionally,  one of the  ceding  companies  may  reassume  a minor
portion of its  previously  ceded  business  based on this rating  action alone;
however, that company has not indicated that it will exercise the option.

On December 16, 1998,  Standard & Poor's ("S&P") affirmed the triple A financial
strength  rating of Capital  Reinsurance.  In  addition,  on April 28,  1999 S&P
affirmed the financial  strength  ratings of Capital  Mortgage (double "A"), KRE
(double  "A") and  Capital  Credit  (single  "A" plus).  S&P also  upgraded  the
financial strength rating of Capital Title from double "A" minus to double "A".

On June 15,  1999,  ACE Bermuda  Insurance  Ltd.,  a  subsidiary  of ACE Limited
("ACE"), invested $75 million in the Company through a purchase of common stock.
The proceeds were used to support the Company's ongoing business activity. ACE's
investment is equal to approximately 12% of the Company.

In addition,  on June 10, 1999, a definitive  agreement was executed whereby ACE
agreed  to  purchase  the  remaining  outstanding  shares  of the  Company.  The
definitive  agreement  followed  a binding  letter of intent to merge  which was
executed on May 27,  1999.  It is expected  that the merger will be completed in
the  second  half of 1999.  Under  the  terms of the  agreement,  the  Company's
shareholders  would  receive  0.6 shares of ACE for each share of the Company at
closing,  subject to a maximum  value of the Company's  shareholders  of $22 per
share.  The  transaction  is subject to customary  regulatory  approvals,  final
approval by Capital  Re's


                                       27
<PAGE>

shareholders,  confirmation  of  specified  financial  strength  ratings  of the
Company's principal operating subsidiaries and other customary conditions.

Market Risk

The main objectives in managing the investment portfolios of the Company and its
operating  subsidiaries are to maximize  after-tax  investment  income and total
investment  returns while  minimizing  credit risks in order to provide  maximum
support to the reinsurance  underwriting  operations.  Investment strategies are
developed based on many factors including underwriting results and the Company's
resulting tax position, regulatory requirements,  fluctuations in interest rates
and  consideration  of other market risks.  Investment  decisions are managed by
outside  investment  professionals  under  discretionary  investment  management
agreements and based on guidelines established by management and approved by the
board of directors.

Market risk represents the potential for loss due to adverse changes in the fair
value  of  financial   instruments.   The  market  risks  related  to  financial
instruments of the Company and its operating  subsidiaries  primarily  relate to
the investment portfolio, which exposes the Company to risks related to interest
rates and, to a lesser extent,  credit quality and prepayment.  Analytical tools
and  monitoring  systems are in place to assess each of these elements of market
risk.

Interest  rate risk is the  price  sensitivity  of a fixed  income  security  to
changes in interest rates.  Management  views these  potential  changes in price
within the overall context of asset and liability management. Wherever possible,
the  duration  of asset and  liability  portfolios  are  matched.  However,  the
duration of most of the asset  portfolio  is managed  according  to the level of
expected return and volatility  deemed tolerable by management.  The duration of
the liability  portfolio does not lend itself to active duration  management due
to the low  frequency,  high  severity  losses in a  majority  of the  Company's
reinsured  businesses.  Other factors are considered in determining the duration
of the asset portfolio,  which the Company believes mitigates the overall effect
of interest risk for the Company.

The following  table  provides  information  about the Company's  fixed maturity
investments  at June 30, 1999 that are  sensitive to changes in interest  rates.
The table presents cash flows of principal  amounts and related weighted average
interest  rates by  expected  maturity  dates.  The cash  flows are based on the
earlier  of  the  call  date  or  the  maturity  date  or,  for  mortgage-backed
securities,  expected payment patterns.  Actual cash flows could differ from the
expected amounts.


                                       28
<PAGE>

                           Long-term Fixed Maturities
                    Expected Cash Flows of Principal Amounts
                              (Dollars in millions)

<TABLE>
<CAPTION>

                                                                                      Amortized   Market
                                1999     2000     2001     2002     2003  Thereafter     Cost      Value
                                ----     ----     ----     ----     ----  ----------     ----      -----
<S>                          <C>      <C>      <C>      <C>      <C>      <C>         <C>        <C>
Tax-exempt                   $   0.0  $   1.8  $    .8  $   6.3  $  18.0  $  455.6    $  482.5   $  490.9

    Average Interest Rate        0.0%     5.7%     6.3%     7.3%     7.2%      5.7%        --         --

Taxable-other than              10.6     45.1     46.4     57.3     28.4     228.4       416.2      407.3
mortgage-backed securities
    Average Interest Rate        7.0%     6.4%     7.5%     6.4%     6.5%      5.6%        --         --

Mortgage-backed securities      12.7     22.7     19.9     17.7     17.1     108.1       198.2      195.1

    Average Interest Rate        7.0%     6.9%     6.9%     6.8%     6.8%      6.7%        --         --
                             -------  -------  -------  -------  -------  --------    --------   --------

Total                        $  23.3  $  69.6  $  67.1  $  81.3  $  63.5  $  792.1    $1,096.9   $1,093.3
                             -------  -------  -------  -------  -------  --------    --------   --------
</TABLE>

The Company and its operating  subsidiaries have  consistently  invested in high
quality  marketable  securities.  As a result,  the Company believes that it has
minimal credit quality risk.  Taxable bonds in the Company's  domestic portfolio
consist of U.S.  Treasury,  government  agency,  mortgage-backed  and  corporate
securities.  At June 30, 1999,  approximately 22.0% of taxable bonds were issued
by the U.S. Treasury or U.S.  government  agencies and approximately  70.4% were
rated AA or better by Moody's or S&P.  Of the tax  exempt  bonds,  approximately
97.9% were rated AA or better with more than 81.7% rated AAA.  Less than 1.4% of
the Company's  bond  portfolio was below  investment  grade at June 30, 1999. At
June 30, 1999, both taxable and tax exempt bonds had a weighted average maturity
of approximately 9.71 years.

The Company's taxable bond portfolio includes mortgage-backed securities,  which
comprised 32.4% of the portfolio at June30, 1999.  Prepayment risk refers to the
changes in prepayment  patterns that can either shorten or lengthen the expected
timing of the principal  repayments  and thus the average life and the effective
yield of a security.  Such risk exists primarily within the Company's  portfolio
of mortgage-backed securities. The Company invests primarily in those classes of
mortgage-backed securities that are less subject to prepayment risk.

All of the above risks are  monitored  on an ongoing  basis.  A  combination  of
in-house  systems and proprietary  models and externally  licensed  software are
used to analyze  individual  securities as well as each  portfolio.  These tools
provide  management  with  information  to assist them in the  evaluation of the
market risks of the portfolio.

The Year 2000

The Company is actively  pursuing its Year 2000  analysis and  preparation.  The
Year 2000 issue involves  potential  complications  related to computer systems,
machinery and  electronics  that


                                       29
<PAGE>

contain computer code, whether in software or embedded within  microchips,  that
recognize  years in two digit  code,  e.g.  "98" for the year 1998.  Software or
microchips  that  recognize the Year 2000 as "00" or any year  thereafter in its
two digit  equivalent,  threatens  date  sensitive  calculations  by potentially
misapplying the date (e.g. "00" could be applied as 1900 rather than 2000).  Any
coding that causes a date recognition error of this sort is commonly referred to
as a Year 2000 bug.

STATE OF READINESS

The Company has  assembled a team  consisting  of officers and  employees of the
finance and information  systems  departments to oversee the Company's readiness
for the Year  2000.  The  group has  already  completed  the first  phase of its
analysis in which a  comprehensive  list of all the  Company's  own  information
technology  systems and  general  technology  was  prepared.  Additionally,  the
Company's  clients and vendors were reviewed and a listing was prepared of those
with information systems or other technology upon which the Company may rely and
those which may be affected by the Year 2000 bug. The Company has made inquiries
as to Year 2000  readiness  with these  clients  and  vendors  and has  received
responses from a majority of them. It is currently  evaluating  these responses.
However,  all of the  Company's  ceding  companies  that have thus far responded
report that they expected to be Year 2000  compliant by mid 1999. The Company is
now  performing  testing  and  remediation,  as  necessary,  on its  information
technology  systems,  its general  systems and any other  technology that may be
affected by the Year 2000 bug. This process is not yet complete, but is expected
to be completed by mid-1999.

The following is a summary of the Company's internal readiness status:

In-house  Applications:  All key in-house  applications have been tested and are
Year 2000 compliant.

Accounting Software:  Vendors for the major accounting software packages used by
the Company  have stated that the  software  versions  the Company uses are Year
2000 compliant.

Administration/Human   Resources;   Operating   System   Software;   Network/Lan
Utilities; Desktop Hardware:  Ninety-five percent of these applications are Year
2000 compliant.

General Office Services:. These systems will all be upgraded by mid-1999.

The Company has not had to defer any of its expected  information  technology or
other technology installations,  updates or enhancements in order to accommodate
its Year 2000 review and remediation work.

Costs

Due to the  youthfulness  of the  Company's  information  technology  and  other
systems, testing and remediation have been fairly uncomplicated.  Moreover, none
of  the  Company's   technology   is


                                       30
<PAGE>

mainframe   computer   based.   Mainframes   traditionally   use  older   coding
methodologies  and,  thus,  are more likely to be double digit dated  coded.  No
external  consultants  have  been  retained.   Internal  information  technology
personnel  have  overseen and  implemented  the testing and  remediation  of the
systems and  technology.  The amount of additional  time allocable to employees'
efforts has been  nominal.  All system  upgrade costs  incurred  would have been
incurred by the  Company as part of routine  software  upgrades  and all patches
have been provided  without any material  cost to the Company.  The Company does
not expect any material  additional  costs and expects that,  including the cost
allocation of internal  personnel,  the overall testing and remediation  will be
less than $50,000 as originally anticipated.  The costs are being funded through
operating cash flows and will be expensed as incurred.

The Risk of the Company's Year 2000 Issues

A Year 2000 bug  issue may  manifest  itself as (i) a failure  of the  Company's
software,  systems  and  general  technology,  (ii) a failure of a  client's  or
vendor's software or systems which would impact the Company, and (iii) insurance
claims against the Company due to Year 2000 issues. Management believes that the
likelihood  that a failure of the  Company's  software and systems  would have a
material  effect on the  business  of the Company is  minimal.  The  information
technology  and  other  systems  are  not  critical  to the  carrying-on  of the
Company's business.  Additionally, all critical accounting,  financial reporting
and human  resources  functions can be maintained on a manual basis for a period
of time without materially impeding the operations of the Company.  Similarly, a
failure of clients and vendors to properly  provide  data or services  will also
not materially affect the Company's  ability to continue its operations.  Such a
failure would likely be temporary and could be compensated for in the short-term
by using manual  alternatives to tracking  business with our clients or vendors.
Reinsurance  losses pose the most reasonably  likely worst case scenario for the
Company  arising out of Year 2000 bugs. The issue would originate with a default
on debt  service  obligations  of bond issuers due to the issuer's own Year 2000
bug difficulties.  In the event of such a default,  the Company's  clients,  the
ceding  companies,  will be required to make debt service  payments on behalf of
the  defaulting  issuers.  The Company  will have to make prompt  payment to its
clients  for its agreed  upon  portion of such  losses.  Such  defaults  by bond
issuers  would  generally  be of a technical  nature,  arising out of  temporary
inabilities to process payments or calculate payment amounts.  Additionally, the
defaulted debt service obligations would generally not require our clients,  the
ceding  insurers,  to make debt service  payments on behalf of the issuers for a
prolonged  period.  Once issuers or payment  agents have cured any errors,  they
would resume debt service  payment and  reimburse  the insurers for all payments
made.  Hence,  the  reasonable  worst case  scenario for the Company  under such
circumstances would involve liquidity pressure which should ease quickly.  There
is no way to quantify the  potential  exposure  under this scenario as there has
never been any event similar to the Year 2000. Consequently,  it is difficult to
make  assumptions  based on the Company's  business.  However,  as the Company's
operating  units  affected by such an occurrence  already meet the rating agency
stress test requirements  designed to simulate  depression-era  conditions,  the
Company believes it can withstand  temporary defaults of that magnitude based on
the Year 2000 bug.


                                       31
<PAGE>

Contingency Plans

The Company does not have a prescribed  contingency  plan  relative to Year 2000
bug issues.  The  Company  does not  predict  that a failure of its  information
technology  systems will materially affect daily operations or have an immediate
impact on the  Company's  ability to conduct  business.  All internal  financial
reporting of the Company may be conducted by hand.  As for any failure of a bond
issuer that has been  reinsured  by the Company,  the Company  expects to handle
such matters in the ordinary course of business.  As the Company is a reinsurer,
payments are requested in bulk by the Company's ceding insurers,  and payment of
reinsurance  proceeds would be made in bulk. The Company is not required to make
payment to individual  bond obligees.  Ultimately,  all recovery  efforts in the
event of any Year 2000 bug related  event can either be handled  internally,  or
would  require  the  intervention  of  hardware,  software  or other  technology
vendors.  The  Company  maintains  a list of the  appropriate  contacts  at such
vendors in the event such a need arises


                                       32
<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, 1999,
the ten nominees  listed below were elected as directors of the  Corporation  to
hold office until the 2002 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.

(a)     Election of Directors

------------------------- --------------------------- --------------------------
         Name                     Votes For                 Votes Withheld
------------------------- --------------------------- --------------------------
Harrison W. Conrad, Jr.   28,201,998                  454,485
------------------------- --------------------------- --------------------------
Richard L. Huber          28,202,298                  454,185
------------------------- --------------------------- --------------------------
Jerome F. Jurschak        28,202,198                  454,285
------------------------- --------------------------- --------------------------
Steven D. Kesler          28,201,798                  454,685
------------------------- --------------------------- --------------------------
Philip H. Robinson        28,201,547                  454,936
------------------------- --------------------------- --------------------------
Edwin L. Russell          28,202,298                  454,185
------------------------- --------------------------- --------------------------
J. Randolph Respess       28,201,698                  454,785
------------------------- --------------------------- --------------------------
Barbara D. Stewart        28,201,718                  454,765
------------------------- --------------------------- --------------------------
Jeffrey F. Stuermer       28,201,718                  454,765
------------------------- --------------------------- --------------------------
Joseph W. Swain           28,202,198                  454,285
------------------------- --------------------------- --------------------------


                                       33
<PAGE>

Item 5         OTHER INFORMATION

Information Regarding Shareholder Proposals at the 2000 Annual Meeting

In order to present a proposal at the 2000 Annual Meeting of Stockholders,  must
provide  written  notice of the  proposal  to the Company no later than March 6,
2000. The Company intends to use discretionary  voting authority with respect to
any matter that brought before the 2000 annual meeting of  stockholders of which
the Company has not received written notice by March 6, 2000.

Capital Re Corporation
1325 Avenue of the Americas
New York, NY 10019
Attn.: Alan S. Roseman
           Executive 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

     4    JANUARY 1999 AMMENDMENT TO THE CREDIT  AGREEMENT,  DATED AS OF JANUARY
          22, 1999,  AMONG  CAPITAL RE  CORPORATION,  VARIOUS BANKS AND DEUTSCHE
          BANK AG, NEW YORK BRANCH, AS AGENT

     10   CAPITAL RE CORPORATION RETENTION AGREEMENT EFFECTIVE DECEMBER 21, 1998
          BETWEEN CAPITAL RE CORPORATION AND SUSAN HOOKER

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

(B)  REPORTS ON FORM 8-K: NONE


                                       34
<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 13, 1999              BY   /s/ David A. Buzen
                                                 ------------------------------
                                                 DAVID A. BUZEN
                                                 EXECUTIVE VICE PRESIDENT AND
                                                 CHIEF FINANCIAL OFFICER


DATE:          AUGUST 13, 1999              BY   /s/ Alan S. Roseman
                                                 ------------------------------
                                                 ALAN S. ROSEMAN
                                                 EXECUTIVE VICE PRESIDENT,
                                                 GENERAL COUNSEL AND SECRETARY


                                       35
<PAGE>

                                INDEX TO EXHIBITS

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

4        JANUARY 1999 AMENDMENT TO THE CREDIT AGREEMENT, DATED AS OF      37-39
         JANUARY 22,  1999,  AMONG  CAPITAL RE  CORPORATION,  VARIOUS
         BANKS AND DEUTSCHE BANK AG, NEW YORK BRANCH, AS AGENT

10       CAPITAL  RE  CORPORATION   RETENTION   AGREEMENT   EFFECTIVE     40-44
         DECEMBER 21, 1998 BETWEEN  CAPITAL RE CORPORATION  AND SUSAN
         HOOKER

11       STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS                  45
         (UNAUDITED)


                                  36