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 MARCH 31, 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 NUMBER)
      ORGANIZATION)

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

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

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY  SECTIONS  13 OR 15(d)  OF THE  SECURITIES  EXCHANGE  ACT OF 1934
DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER  PERIOD THAT THE  REGISTRANT
WAS  REQUIRED  TO FILE SUCH  REPORTS),  AND (2) HAS BEEN  SUBJECT TO SUCH FILING
REQUIREMENTS  FOR THE PAST 90 DAYS. YES X NO  (REGISTRANT  BECAME SUBJECT TO THE
FILING REQUIREMENTS ON APRIL 8, 1992.)

AS OF MAY 14, 1999 THERE WERE 32,045,119 OUTSTANDING SHARES OF COMMON STOCK, PAR
VALUE $.01 PER SHARE, OF THE REGISTRANT.


<PAGE>

<TABLE>


                     CAPITAL RE CORPORATION AND SUBSIDIARIES

                                      INDEX

<S>            <C>    
PART I         FINANCIAL INFORMATION                                                     PAGE

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

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

               CONSOLIDATED STATEMENTS OF INCOME - THREE MONTHS                            
                 ENDED MARCH 31, 1999 (UNAUDITED) AND MARCH 31, 1998
                 (UNAUDITED)                                                                4

               CONSOLIDATED  STATEMENTS OF  COMPREHENSIVE  INCOME - THREE MONTHS
                 ENDED  MARCH 31, 1999 (UNAUDITED) AND MARCH 31, 1998
                 (UNAUDITED)                                                                5

               CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - THREE MONTHS
                 ENDED MARCH 31, 1999 (UNAUDITED)                                           6

               CONSOLIDATED STATEMENTS OF CASH FLOWS - THREE MONTHS ENDED
               MARCH 31, 1999 (UNAUDITED) AND MARCH 31, 1998 (UNAUDITED)                    7

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)                       8-12

ITEM 2.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                 RESULTS OF OPERATIONS                                                      13-29

PART II        OTHER INFORMATION

ITEM 3         EXHIBITS AND REPORTS ON FORM 8-K                                             30-32


SIGNATURES                                                                                  33

</TABLE>

<PAGE>

<TABLE>
<CAPTION>

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

                                                                                 March 31,      December 31,
                                                                                      1999              1998
                                                                                (Unaudited)
                                                                              -------------     -------------
<S>                                                                             <C>               <C>
Assets                                                                                          
Fixed maturity securities available for sale, at market
   (amortized cost: $1,062,432 in 1999 and $1,026,684 in 1998)                  $1,099,143        $1,086,891
Short-term investments, at cost, which approximates market                          91,813            88,147
                                                                              -------------     -------------
Total Investments                                                                1,190,956         1,175,038

Cash                                                                                18,619             9,893
Accrued investment income                                                           14,920            15,371
Deferred acquisition costs                                                         149,967           135,029
Prepaid reinsurance premiums                                                        47,901            49,603
Reinsurance recoverable on ceded losses                                              3,334             3,292
Funds held under reinsurance agreements                                              6,011             5,033
Premiums receivable, net                                                             5,499            16,997
Amounts receivable on ceded annuity reserves                                        53,869            53,869
Investment in affiliates                                                            16,870            15,080
Net assets of discontinued operations                                                5,260            11,695
Other assets                                                                        16,260            17,873
                                                                              -------------     -------------
   Total Assets                                                                 $1,529,466        $1,508,773
                                                                              =============     =============

Liabilities                                                                                     
Deferred premium revenue                                                          $408,401          $405,866
Reserve for losses and loss adjustment expenses                                     93,583            87,960
Annuity benefit reserves                                                            53,869            53,869
Accident and health reserves                                                        18,165            17,843
Profit commission liability                                                         61,009            57,389
Deferred federal income taxes payable                                               79,484            79,237
Bank note payable                                                                   25,000            25,000
Long-term debt                                                                      74,866            74,856
Other liabilities                                                                   24,769            20,927
                                                                              -------------     -------------
   Total Liabilities                                                              $839,146          $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, 32,045,119 and 31,929,119 shares issued and
   outstanding in 1999 and 1998, respectively                                          325               324
Additional paid-in capital                                                         228,831           227,280
Retained earnings                                                                  367,348           355,693
Treasury stock; 428,000 and 428,000 shares in 1999 and 1998,  respectively          (4,891)           (4,891)
Other Comprehensive Income
       Net unrealized gain on fixed maturities securities available for sale,
            net of reclassification adjustment                                      23,863            32,520
       Net unrealized loss on foreign exchange translation                            (156)             (100)
                                                                              -------------     -------------
Accumulated Other Comprehensive Income                                              23,707            32,420
                                                                              -------------     -------------
Total Stockholders' Equity                                                         615,320           610,826
                                                                              -------------     -------------
Total Liabilities, Preferred Securities of Capital Re LLC and                                   
   Stockholders' Equity                                                         $1,529,466        $1,508,773
                                                                              =============     =============

See Accompanying Notes to Unaudited Consolidated Financial Statements                                                          

</TABLE>
<PAGE>


<TABLE>
<CAPTION>

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

                                                                   Three Months Ended
                                                                        March 31,
                                                                      (Unaudited)
                                                                -------------------------
                                                                     1999           1998
                                                                -------------------------
<S>                                                               <C>            <C>
Revenues:

Orgination premiums written                                       $58,455        $62,127
Canceled Reinsurance                                                9,567              0
                                                                -------------------------
Gross premiums written                                            $48,888        $62,127
Ceded premiums                                                      2,064          1,081
                                                                -------------------------
       Net premiums written                                        46,824         61,046
       Increase in deferred premium revenue                        (4,236)       (17,315)
                                                                -------------------------
    Net premiums earned                                            42,588         43,731
Net investment income                                              17,164         15,865
Net realized gain                                                     408          1,180
Fee income                                                             95            180
Other income                                                           10            164
Equity income in affiliate                                          1,490             32
                                                                -------------------------
     Total Revenues                                                61,755         61,152
                                                                -------------------------

Expenses:                                                                  
Loss and loss adjustment expenses                                  12,793          9,986
Acquisition costs                                                  27,268         18,871
Increase in deferred acquisition costs                            (14,938)        (5,352)
Profit commission expense                                           3,757          2,873
Other operating expenses                                            3,298          3,973
Interest expense                                                    1,845          1,879
Foreign exchange loss/(gain)                                          489           (341)
Minority interest in Capital Re LLC                                 1,434          1,434
                                                                -------------------------
       Total Expenses                                              35,946         33,323
                                                                -------------------------

        Income before provision for federal income taxes           25,809         27,829

Provision for federal income taxes
     Current                                                        1,577          4,092
     Deferred                                                       4,853          3,461
                                                                -------------------------
Total provision for federal income taxes                            6,430          7,553
                                                                -------------------------
Net Income from continuing operations                             $19,379        $20,276

Discontinued operations:
Income from operations                                                  0           (480)
Loss on disposal                                                   (6,443)             0
                                                                -------------------------
Loss from discontinued operations, net of tax                      (6,443)          (480)

Net Income                                                        $12,936        $19,796
                                                                =========================
Net Income from Continuing Operations
   Per Common Share:
                           Basic                                    $0.61          $0.64
                         Diluted                                    $0.60          $0.62

Net Income Per Common Share:
                           Basic                                    $0.40          $0.62
                         Diluted                                    $0.40          $0.60

Weighted Average Number of Shares Outstanding
                           Basic                                   32,009         31,834
                         Diluted                                   32,343         32,745

Cash dividends per common share                                     $0.04          $0.04

See Accompanying Notes to Unaudited Consolidated Financial Statements

</TABLE>
<PAGE>


<TABLE>
<CAPTION>

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

                                                                                          Three Months Ended
                                                                                                March 31,
                                                                                              (Unaudited)
                                                                                 -------------------------------
                                                                                            1999           1998
                                                                                 -------------------------------

<S>                                                                                      <C>            <C>    
Net Income                                                                               $12,936        $19,796

Other Comprehensive Income, net of tax:

    Unrealized holding losses arising during period                                       (8,249)        (1,411)
    Reclassification adjustment for gains included in net income                            (408)        (1,180)
                                                                                 -------------------------------
  Change in net unrealized gain on fixed maturities securities
    available for sale                                                                    (8,657)        (2,591)
  Change in foreign exchange translation                                                     (56)           184
                                                                                 -------------------------------
Other Comprehensive Income                                                                (8,713)        (2,407)
                                                                                 -------------------------------
Comprehensive Income                                                                      $4,223         $17,389
                                                                                 ===============================


See Accompanying Notes to Unaudited Consolidated Financial Statements

</TABLE>
<PAGE>


<TABLE>
<CAPTION>

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

                                                                                                 Additional                      
                                                                                  Common          Paid-In        Retained       
                                                                                   Stock          Capital        Earnings       
                                                                           --------------------------------------------------
<S>                                                                                   <C>         <C>             <C>        
Balance, January 1, 1999                                                              $324        $227,280        $355,693   

 Net Income                                                                              -               -          12,936   

Exercise of stock options, including tax benefit (116,000 shares)                        1           1,551               -   

Fixed maturities securities available for sale adjustments                               -               -               -   

Foreign exhange translation                                                              -               -               -   

 Dividend ($.04 per common share)                                                        -               -          (1,281)  
                                                                           --------------------------------------------------
Balance, March 31, 1999                                                               $325        $228,831        $367,348   
                                                                           ==================================================




                                                                                               Accumulated
                                                                                                  Other          Total
                                                                              Treasury        Comprehensive   Stockholders'
                                                                                Stock             Income         Equity
                                                                            ----------------------------------------------
<S>                                                                                <C>            <C>            <C>     
Balance, January 1, 1999                                                           ($4,891)       $32,420        $610,826

 Net Income                                                                              -              -          12,936

Exercise of stock options, including tax benefit (116,000 shares)                        -              -           1,552

Fixed maturities securities available for sale adjustments                               -         (8,657)         (8,657)

Foreign exhange translation                                                              -            (56)            (56)

 Dividend ($.04 per common share)                                                        -              -          (1,281)
                                                                            ----------------------------------------------
Balance, March 31, 1999                                                            ($4,891)       $23,707        $615,320
                                                                            ==============================================


See Accompanying Notes to Unaudited Consolidated Financial Statements.    

</TABLE>
<PAGE>


<TABLE>
<CAPTION>

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

                                                               Three Months Ended
                                                                    March 31,
                                                                  (Unaudited)
                                                         ----------------------------
                                                              1999              1998
                                                         ----------------------------
<S>                                                        <C>               <C>
Operating Activities:

  Net income                                               $12,936           $19,794
  Adjustments to reconcile net income to                                  
    net cash provided by operating activities:                            
     Amortization of bond discount on long-term debt             9                 9
     Net amortization of security premiums                    (351)             (631)
     Provision for deferred federal income taxes             4,909             3,461
     Acquisition costs deferred                            (27,268)          (18,871)
     Amortization of deferred acquisition costs             12,329            13,519
     Equity Income in affiliates                            (1,490)              (32)
     Change in accrued investment income                       451                60
     Change in premiums receivable, net                     10,285            (1,819)
     Change in deferred premium revenue, net                 4,237            17,315
     Change in outstanding loss reserves, net                5,582             4,622
     Net realized gain on investments                         (408)           (1,180)
     Change in ceded balances payable                        1,213               267
     Other                                                   8,694             7,644
                                                         ----------       -----------
   Net Cash Provided by Operating Activities                31,129            44,159


Investing Activities:

   Securities available-for-sale:
     Purchases - fixed maturities                         (242,674)         (175,964)
     Sales-fixed maturites                                 217,854           130,293
  Maturities (purchases) of short-term
   investments, net                                         (3,658)            1,760
  Investment in Affiliate                                     (300)                -
  Discontinued Operations, net                               6,443               244
  Other investing activities                                  (339)             (175)
                                                         ----------       -----------
   Net Cash Used in Investing Activities                   (22,673)          (43,842)

Financing Activities:

  Net proceeds from exercise of stock options                1,551               284
  Dividends paid                                            (1,281)           (1,273)
                                                         ----------       -----------
   Net Cash Used by Financing Activities                       270              (989)
(Decrease) Increase in Cash                                  8,726              (673)
Cash at Beginning of Period                                  9,893            14,103
                                                         ----------       -----------
     Cash at End of Period                                 $18,619           $13,430
                                                         ==========       ===========

See Accompanying Notes to Unaudited Consolidated Financial Statements.

</TABLE>
<PAGE>



                     CAPITAL RE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

                                 MARCH 31, 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 three months ended March 31, 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 Company  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 March 31, 1999 and 1998, total comprehensive
income amounted to $4.2 million and $17.4 million, respectively.

On June 30,  1998,  the  Corporation  completed a two for one stock split of its
outstanding common shares.  Prior period financial results have been restated to
reflect the stock split.  Additionally,  beginning in the third quarter of 1998,
the  Company's  investment  in Lloyd's  which was  previously  consolidated,  is
reflected as a discontinued operation based on the Company's intention to pursue
its  divestiture.  The Company has  recorded a loss on disposal of $6.4  million
based on current  estimates.  All prior period  results  have been  restated for
comparative purposes.

2.   REINSURANCE

Ceded  earned  premium for both the three  months  ended March 31, 1999 and 1998
were $3.8  million.  Ceded losses for the same periods were $42,000 and $0.4
million, respectively.


3.   INCOME TAXES

The  effective  tax rate for the three  months  ended March 31, 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 March 31, 1999 and $1.0 million of income taxes were paid as of March
31, 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.

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 March 31, 1999
                                                                  Reportable Segments
                                          ---------------------------------------------------------------------
                                           Municipal         Non       Mortgage  Credit    Other  Consolidated
                                                          Municipal
                                          ---------------------------------------------------------------------
     <S>                                     <C>         <C>            <C>      <C>      <C>          <C>    
     Origination Written Premiums            $20,432     $12,269        $12,128  $9,060   $4,566       $58,455
     Canceled Reinsurance                          0       9,567              0       0        0         9,567
                                          ---------------------------------------------------------------------
     Gross Written Premiums                   20,432       2,702         12,128   9,060    4,566        48,888
     Net Premiums Written                     19,411       1,769         12,128   8,950    4,566        46,824
     Net Premiums Earned                       9,607       6,616         12,786   9,048    4,531        42,588
     Net Underwriting Profit and Other
            Segment Related Income            $4,479      $4,224         $4,880  $1,297   $1,391       $16,271


</TABLE>

<PAGE>


<TABLE>
<CAPTION>



                                                     Three Months Ended March 31, 1998
                                                            Reportable Segments

                                          ---------------------------------------------------------------------
                                           Municipal         Non       Mortgage  Credit    Other  Consolidated
                                                          Municipal
                                          ---------------------------------------------------------------------
     <S>                                     <C>          <C>           <C>      <C>      <C>          <C>    
     Origination Written Premiums            $22,219      $5,994        $20,197  $8,455   $5,262       $62,127
     Canceled Reinsurance                          0           0              0       0        0             0
                                          ---------------------------------------------------------------------
     Gross Written Premiums                   22,219       5,994         20,197   8,455    5,262        62,127
     Net Premiums Written                     21,267       5,994         20,120   8,403    5,262        61,046
     Net Premiums Earned                       9,371       3,921         17,953   7,166    5,320        43,731
     Net Underwriting Profit and Other
            Segment Related Income            $6,957      $2,268         $6,959  $1,932   $1,372       $19,488

</TABLE>



                                                      THREE MONTHS ENDED
                                                          MARCH 31,

RECONCILIATION TO CONSOLIDATED RESULTS               1999            1998
                                           -------------------------------
 Net Segment Income                               $16,271         $19,488
Investment Income and Net Realized
    Gains                                          17,572          17,045
Other Income                                        1,595             376
Operating Expense, net                            (6,350)         (5,767)
Interest Expense & Minority Int in Subs           (3,279)         (3,313)
                                           -------------------------------

Consolidated Income Before Taxes                  $25,809         $27,829
                                           -------------------------------

5.   OTHER

Interest  paid for the  three  months  ended  March  31,  1999 and 1998 was $.04
million.


<PAGE>


6.   SUBSEQUENT EVENTS

In February  1999,  ACE Bermuda  Insurance  Ltd., a  subsidiary  of ACE Limited,
agreed to invest $75 million in the Company  through a purchase of common stock.
The  proceeds  will be used to augment  the surplus of the  Company's  operating
subsidiaries. Under the stock purchase agreement, as amended, the purchase price
is $16.95.  The closing under the purchase  agreement is expected to occur prior
to the end of the second  quarter of 1999.  Closing is  contingent  on customary
conditions as well as certain regulatory approvals.

On April 28, 1999  Standard & Poor's  affirmed the double-A  financial  strength
ratings of Capital  Mortgage  Reinsurance  Co., and KRE Reinsurance Ltd. and the
single-A plus financial  strength  rating of Capital Credit  Reinsurance  Co. In
addition,  S&P raised Capital Title Reinsurance Co.'s financial  strength rating
to double-A from double-A minus.


<PAGE>




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

GENERAL

Capital Re Company  (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 principal areas of business, the Company
seeks to provide  innovative  reinsurance  solutions to satisfy the diverse risk
and financial management demands of its primary clients.  Theses solutions often
take the form of complex reinsurance  arrangements that provide value other than
pure risk management (i.e.,  financial statement benefit,  regulatory relief and
rating agency  qualified  capital).  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  based
joint venture  vehicle.  The Company's  joint venture partner in ACRE is Bermuda
based ACE Bermuda Insurance, Ltd. ("ACE Bermuda"). 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.

The  Company's  financial  guaranty  division  conducts its  business  primarily
through  Capital  Reinsurance  and KRE.  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's  focus on the municipal bond reinsurance  business  recognizes the
fact that historically municipal bond insurance has been a proven revenue source
in the financial  guaranty  insurance market which, when managed  properly,  can
provide  predictable  revenues from (i) an associated  deferred  premium revenue
account,  (ii) installment  premiums from business already  originated and (iii)
interest  income on the  Company's  investment  portfolio.  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   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 the case of
both municipal  bond  reinsurance  and the  reinsurance  of  non-municipal  debt
obligations,  Capital Reinsurance has emphasized facultative reinsurance,  which
Capital   Reinsurance   believes   better  permits  it  to  maintain   portfolio
diversification, pricing discipline and conformity to its underwriting policies,
because through facultative  reinsurance the reinsurer may exercise control over
risks assumed as they are accepted only on a  risk-by-risk  basis.  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.  KRE, a Bermuda based
insurer,  also assumes financial  guaranty risk, both as a  retrocessionaire  of
Capital  Reinsurance  and  directly  from  certain  primary  financial  guaranty
insurers.

The Company's  financial risks division conducts its business  primarily through
Capital Mortgage,  Capital Credit,  Capital Title,  KRE, ACRE and LRAC.  Capital
Mortgage  is  a  leading  reinsurer  of  mortgage  guaranty  insurance.  Capital
Mortgage's strategy 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.  In order to
optimize capital utilization, the business plan of Capital Mortgage includes the
reinsurance  of  mortgage  guaranty   insurance  business  by  KRE,  both  as  a
retrocessionaire of Capital Mortgage and directly from primary mortgage guaranty
insurers.

The Company  writes trade  credit  reinsurance  in the U.S.  and Europe  through
Capital  Credit.  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 a logical  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.  Capital Credit's strategy is to build a limited portfolio of trade
credit  reinsurance  business from the leading  European and U.S.  primary trade
credit insurers,  which  outperforms the overall market by combining quota share
and  structured  excess of loss  participations.  Portfolio  losses will also be
expected to occur regularly in the Company's trade credit reinsurance business.

Capital Title is a New York domiciled, monoline insurance company formed in 1996
to provide title  reinsurance.  Prior to the formation of Capital  Title,  there
were  no  dedicated  title  reinsurers,   and  only  intra-industry  facultative
reinsurance was available to support large commercial title insurance  policies.
Capital  Title  provides  coverages  designed  to aid title  insurers in meeting
capital adequacy concerns and to achieve desired  claims-paying  ability ratings
from nationally recognized rating agencies.  Capital Title derives business from
relationships  with primary title  insurers,  financial  institutions  active in
commercial  real estate  lending and  professionals  involved in the real estate
industry.  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 Capital  Title's  existing  and  future  reinsured
portfolio. KRE provides retrocessional support to Capital Title.

The Company's  financial solutions business is written through KRE and ACRE. The
financial solutions business 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.

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 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 newly formed Maryland  surety insurer,  intend to
commence business in 1999.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 1999 VERSUS THREE MONTHS ENDED MARCH 31, 1998

Net income from continuing  operations for the three months ended March 31, 1999
decreased  4.4% to $19.4 million from $20.3 million for the same period of 1998.
On a per share basis,  basic and diluted net income from  continuing  operations
decreased to $0.61 and $0.60, respectively, for the three months ended March 31,
1999 from $0.64 and $0.62, respectively, for the same period of 1998.

Net income  including losses from  discontinued  operations for the three months
ended March 31, 1999  decreased to $12.9 million from $19.8 million for the same
period of the prior  year.  On a per share  basis,  both basic and  diluted  net
income including loss from  discontinued  operations  decreased to $0.40 for the
three  months ended March 31, 1999 from $0.62 and $0.60,  respectively,  for the
same  period of 1998,  or 35.5% and 33.3%,  respectively.  The  decrease  in net
income in the first quarter of 1999 was  primarily due to a $6.4 million  charge
to  discontinued  operations,  net of tax,  representing an expected loss on the
ultimate disposition of the Company's Lloyd's operations.

Net operating  income from  continuing  operations  (net income from  continuing
operations  excluding  realized gains and losses and foreign  exchange gains and
losses)  increased  1.0% to $19.4  million for the three  months ended March 31,
1999 from $19.3 million for the same period of 1998. On a per share basis, basic
and diluted net operating income from continuing operations was $0.61 and $0.60,
respectively,  for the three  months  ended  March 31, 1999 and $0.61 and $0.59,
respectively, for the same period of 1998.

Origination  premiums  written  (i.e.,  gross premiums  written before  canceled
reinsurance)  decreased  5.8% to $58.5  million for the three months ended March
31,  1999  from  $62.1  million  for the  same  period  of  1998.  Non-municipal
origination  premiums  written  increased to $12.3  million for the three months
ended March 31, 1999 from $6.0 million for the three months ended March 31, 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 $3.8  million for the year ended March 31, 1999 from $0.6
million in the prior year.  Mortgage guaranty  reinsurance  premium decreased to
$12.1  million in the first  quarter of 1999  compared  to $20.2  million in the
first quarter of 1998 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 three months ended March 31, 1999 and March 31,1998.


                                ORIGINATION PREMIUMS WRITTEN
                                     THREE MONTHS ENDED
                                         MARCH 31,
                                      1999      1998
                                  (dollars in millions)

FINANCIAL GUARANTY DIVISION:
  MUNICIPAL                          $20.5     $22.2
  NON-MUNICIPAL                       12.3       6.0

FINANCIAL RISKS DIVISION:
  MORTGAGE                            12.1      20.2
  CREDIT                               9.1       8.5
  FINANCIAL SOLUTIONS                  2.7       4.1
  TITLE                                1.8       1.1
                                       ---       ---
TOTAL ORIGINATION
PREMIUMS WRITTEN                     $58.5     $62.1

Net premiums  written  decreased by 23.3% to $46.8  million for the three months
ended  March 31,  1999  from  $61.0  million  for the same  period of 1998.  The
decrease is  primarily  attributable  to $9.6  million in  canceled  reinsurance
resulting  from the  cancelation  of a large  non-municipal  financial  guaranty
transaction.  (See  discussion of canceled  reinsurance in Liquidity and Capital
Resources.) The following  table shows net premiums  written by line of business
for the three months ended March 31, 1999 and March 31, 1998.


<PAGE>

                                  NET PREMIUMS WRITTEN
                                   THREE MONTHS ENDED
                                        MARCH 31,
                                    1999        1998
                                  (dollars in millions)

FINANCIAL GUARANTY DIVISION:
  MUNICIPAL                        $19.4       $21.3
  NON-MUNICIPAL                      1.8         6.0

FINANCIAL RISKS DIVISION:
  MORTGAGE                          12.1        20.1
  CREDIT                             9.0         8.4
  FINANCIAL SOLUTIONS                2.7         4.1
  TITLE                              1.8         1.1
                                     ---         ---
TOTAL NET
PREMIUMS WRITTEN                   $46.8       $61.0


For the three months ended March 31, 1999, net premiums earned decreased 2.5% to
$42.6 million from $43.7 million for the comparable  1998 period.  For the three
months  ended March 31,  1999,  net refunded  earned  premium  decreased to $3.3
million  from $3.6  million for the  comparable  period of 1998.  Excluding  the
effects of net refunded municipal earned premium,  net premiums earned decreased
to $39.3  million for the three months  ended March 31, 1999 from $40.1  million
for the three  months  ended  March  31,  1998.  A  refunding  extinguishes  the
Company's reinsurance liability for the refunded obligation and the Company then
recognizes revenue equal to the remaining related deferred premium revenue.  The
decrease  in net  premiums  earned is the  result of the  decrease  in  mortgage
premiums earned to $12.8 million in the first quarter of 1999 from $17.9 million
in the first  quarter of 1998.  This  decrease  was expected due to the shift of
business  written to structured  excess of loss  mortgage  guaranty as explained
above.  However, net premiums earned from credit default swaps increased to $3.8
million for the three months ended March 31, 1999 from $0.6 million in the prior
year.  For both the three  months  ended March 31, 1999 and 1998,  ceded  earned
premium was $3.8 million.  The following table shows net premiums earned by line
of business for the three months ended March 31, 1999 and March 31, 1998.


                                   NET PREMIUMS EARNED
                                   THREE MONTHS ENDED
                                        MARCH 31,
                                    1999        1998
                                  (dollars in millions)

FINANCIAL GUARANTY DIVISION:
  MUNICIPAL                         $9.6        $9.4
  NON-MUNICIPAL                      6.6         3.9

FINANCIAL RISKS DIVISION:
  MORTGAGE                          12.8        17.9
  CREDIT                             9.1         7.2
  FINANCIAL SOLUTIONS                2.7         4.1
  TITLE                              1.8         1.2
                                     ---         ---
TOTAL NET
PREMIUMS EARNED                    $42.6       $43.7

For the three months ended March 31, 1999, net investment  income increased 8.2%
to $17.2 million from $15.9 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  March 31,  1999.  The Company  recognized  net
realized  gains of $0.4  million  for the three  months  ended  March  31,  1999
compared to $1.2 million for the same period of 1998.

Loss and loss adjustment  expenses increased to $12.8 million from $10.0 million
for the three months ended March 31, 1999 and 1998,  respectively.  The increase
in losses  accrued  for the three  months  ended  March 31,  1999 was  primarily
attributable to expected loss  development in the trade credit line of business,
accretion  related to the present value of  outstanding  reserves for Commercial
Financial   Services   ("CFS")  and  Allegheny  Health  Education  and  Research
Foundation  ("Allegheny")  as  well  as  the  establishment  of a  $1.0  million
non-specific  loss reserve for the financial  guaranty  reinsurance  lines.  The
present  value  of  expected   losses  for  CFS  and  Allegheny  was  originally
established in 1998; however, quarterly accretion will be recorded on each loss.
The  non-specific  reserve was established in response to the recent increase in
loss  activity  and will be  evaluated on a quarterly  basis and  correlated  to
management's  overall  assessment of its  outstanding  credit  exposures.  Ceded
losses for the three  months ended March 31, 1999 and 1998 were $42,000 and $0.4
million, respectively. The loss ratio was 30.0% for the three months ended March
31, 1999 compared to 22.8% for the same period of the prior year.

Total expenses,  including loss and loss adjustment expenses,  increased 7.8% to
$35.9  million for the three months ended March 31, 1999 from $33.3  million for
the same  period  of 1998.  This  increase  was  primarily  attributable  to the
increase in losses  noted above.  The expense  ratios for the three months ended
March 31, 1999 and 1998 were 45.5% and 46.6%, respectively.  The combined ratio,
excluding expenses associated with non-insurance operations,  increased to 75.5%
for the three  months  ended March 31, 1999 from 69.4% for the  comparable  1998
period.  This increase is a result of the  Company's  mix of business,  which is
producing more business from lines with  relatively  higher combined ratios than
that of the financial guaranty reinsurance  business.  In addition,  acquisition
costs  increased  to $27.3  million for three  months  ended March 31, 1999 from
$18.9  million for the same period last year.  This  increase was in response to
Capital Reinsurance's downgrade by Moody's Investor's Service, Inc. as explained
below.  The downgrade  increased the  contractual  ceding  commission on certain
reinsurance  contracts by approximately  $10.8 million.  These  commissions were
deferred and will be amortized as the related premium is earned.

For the three  months  ended March 31,  1999,  the total  federal tax  provision
decreased  to $6.4  million  from $7.6  million for the same period of 1998.  In
addition,  the effective tax rate  decreased to 24.9% for the three months ended
March 31,  1999 from  27.1% for the same  period of 1998.  The  decrease  in the
Company's  effective  tax rate was due to the  increased tax deduction in ceding
commission expense as explained above.

LIQUIDITY AND CAPITAL RESOURCES

The Company relies on dividends from Capital  Reinsurance to fund its payment of
dividends on its capital stock and interest on its  outstanding  debt. The major
sources  of  liquidity  for  Capital   Reinsurance   are  funds  generated  from
reinsurance premiums,  net investment income and maturing  investments.  Capital
Reinsurance is domiciled in the State of Maryland, and, under Maryland insurance
law, the amount of the surplus of Capital Reinsurance available for distribution
as dividends is subject to certain statutory restrictions.  The amount available
for  distribution  from  Capital  Reinsurance  during  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 three months ended March 31, 1999, Capital
Reinsurance paid no dividends to the Company.

Capital Credit's major sources of liquidity are funds generated from reinsurance
premiums,  net investment income and maturing  investments.  Capital Credit is a
Bermuda domiciled insurer whose distributions are governed by Bermuda law. Under
Bermuda law and the by-laws of Capital Credit,  dividends may be paid out of the
profits of the company (defined as accumulated realized profits less accumulated
realized losses).  Distributions to shareholders may also be paid out of Capital
Credit's surplus limited by requirements that such company must at all times (i)
maintain the minimum  share  capital  required  under  Bermuda law and (ii) have
relevant  assets  in an  amount  equal  to  or  greater  than  75%  of  relevant
liabilities,  all as defined  under  Bermuda law. As of March 31, 1999,  Capital
Credit had paid no dividends to the Company.

Capital Mortgage is subject to the dividend  restrictions imposed under New York
insurance law.  Accordingly,  dividends may only be declared and distributed out
of earned surplus (as defined under New York insurance  law).  Additionally,  no
dividend may be declared or distributed by Capital  Mortgage in an amount which,
together with all dividends  declared or distributed by Capital  Mortgage during
the preceding twelve months, exceeds the lesser of 10% of such company's surplus
to policyholders  as shown by its last Annual  Statutory  Statement on file with
the New York insurance department, or 100% of adjusted net investment income (as
defined under New York  insurance  law) during such period,  unless,  upon prior
application,  the New  York  Superintendent  of  Insurance  approves  a  greater
dividend  distribution  based upon his finding that Capital Mortgage will retain
sufficient surplus to support its obligations and writings.  KRE's dividends and
distributions to its sole shareholder, Capital Mortgage, are governed by Bermuda
law and are  subject  to the same  restrictions  as  those  for  Capital  Credit
described in the preceding paragraph. To date, Capital Mortgage and KRE have not
declared  nor paid any  dividends.  The  maximum  dividend  payable  by  Capital
Mortgage  during 1999 is $0 since its earned  surplus  was ($9.2)  million as of
December 31, 1998.

Capital  Title  is  subject  to the New  York  insurance  laws  and  regulations
governing  title  insurers.  Accordingly,  dividends  may only be  declared  and
distributed  out of earned  surplus as defined under New York  insurance law and
only if such  dividends do not reduce the company's  surplus to less than 50% of
its  outstanding  capital  shares,  i.e.,  the value of its  outstanding  common
equity.  Additionally,  no dividend may be declared or  distributed in an amount
which, together with all dividends declared or distributed by the company during
the preceding twelve months,  exceeds 10% of the company's  outstanding  capital
shares, unless, after deducting such dividends,  it has a surplus at least equal
to 50% of its  statutory  reinsurance  reserve  or a surplus  at least  equal to
$250,000, whichever is greater. As of December 31, 1998, Capital Title's maximum
amount payable as a dividend during 1999 is  approximately  $3.6 million.  As of
March 31, 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.

In June 1997, Capital  Reinsurance  invested  approximately  $10.9 million for a
minority ownership interest in CGA. CGA was formed to provide financial guaranty
insurance  ("Policies")  of structured  securities,  including  commercial  real
estate and asset backed transactions.  CGA's initial capitalization consisted of
$150.5  million of paid-in  capital and $60 million of  committed  capital.  The
Company's  investment  consists of an aggregate of $10.0  million in B Preferred
Stock  and  Common  Stock of CGA and  $1.0  million  in A  Preferred  Stock.  In
connection with its investment in the B Preferred Stock, Capital Reinsurance has
a commitment to invest an additional $7.5 million (the "Capital Commitments") in
CGA to the extent that such  investment  would be  necessary  in order for CGA's
operating  subsidiary,  Commercial Guaranty Assurance,  Ltd. ("CG Assurance") to
maintain its triple-A  rating from Duff & Phelps Credit Rating Company  ("D&P").
Additionally,  KRE has a $20  million  outstanding  excess  of loss  reinsurance
agreement with CG Assurance  which  responds when CG  Assurance's  credit losses
under Policies reach certain  catastrophic  levels (including Policies issued in
favor  of the  funding  banks  described  below).  Also  in June  1997,  Capital
Reinsurance invested $0.1 million in St. George Holdings Ltd. ("St. George"). In
response  to market  value  declines in the  insured  portfolios  of CGA and the
resulting  potential  stress on its  triple A rating  from  Duff &  Phelps,  the
Corporation  performed an analysis to determine the appropriate valuation of its
investment  in CGA for the  1998  year-end  reporting  period.  The  Corporation
determined the investment in CGA had suffered a permanent  impairment as defined
under the guidelines of Generally Accepted Accounting Principles ("GAAP"). Based
on its analysis the Corporation recorded a $7.5 million write-down.

As part of its  business  plan,  through its  operating  subsidiaries  (the "St.
George  Investment  Subsidiaries"),   St.  George  purchases  investment  grade,
asset-backed  securities  to  be  held  to  maturity,   selectively  resold,  or
repackaged   with  CG  Assurance   Policies   and  then  resold  (the   "Managed
Portfolios").  The securities purchases are funded by bank loans advanced to the
St.  George  Investment  Subsidiaries.  CG Assurance  issues  Policies to secure
repayment to the funding banks.  Under certain of the bank loan agreements,  the
St. George Investment Subsidiaries are required to provide additional collateral
to the extent the market  values of the Managed  Portfolios  fall below  certain
thresholds.  Failure to satisfy the  collateral  requirements  may result in the
liquidation  of the Managed  Portfolios  and, to the extent that  proceeds  from
liquidation are insufficient to repay the bank loans, the St. George  Investment
Subsidiaries must pay any shortfall.  If the St. George Investment  Subsidiaries
cannot pay the amount then due, CG  Assurance  is  obligated to pay such amounts
under its Policies issued in favor of the funding banks.

Due to  unprecedented  market  conditions  relating to credit spreads during the
third and fourth  quarters of 1998, the market values of the Managed  Portfolios
declined.  As of September 30, 1998, the market values of the Managed Portfolios
with collateral  threshold triggers were not then below the collateral threshold
triggers.  Subsequent to September 30, market values  further  declined  through
mid-October and, as of October 18, 1998, CG Assurance's  management  prepared an
estimate of market values of the Managed  Portfolios,  which  indicated  that if
such market  values were  validated  at the  October  30,  1998  valuation  date
provided  for in the  bank  loan  agreements,  substantial  collateral  would be
required  in the  case  of the  Managed  Portfolios  subject  to the  collateral
threshold triggers. As a result, certain institutional investors in CGA provided
credit  enhancements  on various  securities  in the Managed  Portfolios  in the
aggregate  principal amount of $382 million.  Of that aggregate amount,  Capital
Reinsurance  credit  enhanced  $74.6  million of  investment-grade  asset-backed
securities. Capital Reinsurance also credit enhanced the two other institutional
investors  that provided  credit  enhancement  on the  securities in the Managed
Portfolios. Capital Reinsurance was paid a market rate premium for providing the
reinsurance support. Market values of the Managed Portfolios have improved since
October and,  currently,  the market values of the Managed  Portfolios are above
the relevant collateral threshold triggers. Because market values of the Managed
Portfolios  have  improved  since  October of 1998 and CG  Assurance's  triple-A
rating was  affirmed by D&P,  the above  mentioned  transaction  was canceled in
March  1999.   See  discussion  of  canceled   reinsurance   under  "Results  of
Operations."

For the three months ended March 31, 1999,  common  dividends  were declared and
paid in the amount of $1.3 million or $0.04 per share.

Cash flows from  operations  for the three months ended March 31, 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 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 March 31, 1999, cash and investments  were  approximately  $1.21 billion,  an
increase of $24.6 million,  or 2.1%, 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 March 31,  1999,  the  entire  investment  portfolio  was
invested in highly rated fixed income securities.

At March 31, 1999,  approximately  $218.0  million,  or 18.0%,  of the Company's
investment portfolio was composed of mortgage-backed  securities ("MBS"). Of the
MBS portfolio,  approximately $184.1 million, or 84.4%, is backed by agencies or
entities sponsored by the U.S. government as to the full amount of principal and
interest.  As of March 31, 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 March 31, 1999, $3.6 million, or approximately 1.7%, 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,  $214.4  million,  or  98.3%,  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 March 31, 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.  The Company  has not  borrowed  under the DB Credit
Facility.

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.

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 will apply
to in-force and future  business ceded by those  companies.  The Company accrued
$10.8  million in  additional  ceding  commission  in the first  quarter of 1999
related to the in-force business subject to this agreement.  The 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 will not be 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".

In February  1999,  ACE Bermuda  Insurance  Ltd., a  subsidiary  of ACE Limited,
agreed to invest $75 million in the Company  through a purchase of common stock.
The  proceeds  will be used to augment  the surplus of the  Company's  operating
subsidiaries. Under the stock purchase agreement, as amended, the purchase price
is $16.95.  The closing under the purchase  agreement is expected to occur prior
to the end of the second  quarter of 1999.  Closing is  contingent  on customary
conditions as well as certain regulatory approvals.

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 March 31, 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.

<TABLE>
<CAPTION>

                           LONG-TERM FIXED MATURITIES
                    EXPECTED CASH FLOWS OF PRINCIPAL AMOUNTS
                              (DOLLARS IN MILLIONS)

                                                                                                 Amortized     Market
                                         1999     2000      2001    2002     2003   Thereafter     Cost        Value
                                         ----     ----      ----    ----     ----   ----------     ----        -----
<S>                                      <C>      <C>       <C>     <C>     <C>      <C>          <C>          <C>   
Tax-exempt                               $0.2     $1.8      $4.1    $6.3    $18.3    $464.8       $495.5       $529.1

    Average Interest Rate                7.9%     5.7%      7.5%    7.3%     7.2%      5.7%         --           --

Taxable-other than mortgage-backed       12.2     23.4      47.4    45.0     24.1     198.7        350.8        352.0
securities
    Average Interest Rate                6.7%     6.9%      7.7%    6.6%     6.3%      5.5%         --           --

Mortgage-backed securities               21.9     26.2      23.6    20.5     20.5     103.4        216.1        218.0

    Average Interest Rate                7.0%     7.0%      6.9%    6.9%     6.9%      6.8%         --           --
                                         ----     ----      ----    ----     ----      ----
Total                                   $34.3    $51.4     $75.1   $71.8    $62.9    $766.9     $1,062.4     $1,099.1
                                        -----    -----     -----   -----    -----    ------     --------     --------
</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 March 31, 1999, approximately 18.1% of taxable bonds were issued
by the U.S. Treasury or U.S.  government  agencies and approximately  70.0% were
rated AA or better by Moody's or S&P.  Of the tax  exempt  bonds,  approximately
99.0% were rated AA or better with more than 91.0% rated AAA.  Less than 1.1% of
the Company's  bond portfolio was below  investment  grade at March 31, 1999. At
March 31,  1999,  both  taxable  and tax  exempt  bonds had a  weighted  average
maturity of approximately 8.4 years.

The Company's taxable bond portfolio includes mortgage-backed securities,  which
comprised  38.3% of the portfolio at March 31, 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 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:

o         IN-HOUSE APPLICATIONS: All key in-house applications have been 
            tested and are Year 2000 compliant.

o         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.

o         ADMINISTRATION/HUMAN  RESOURCES;  OPERATING SYSTEM SOFTWARE; 
          NETWORK/LAN UTILITIES; DESKTOP HARDWARE:  Ninety-five percent of
            these applications are Year 2000 compliant.

o         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  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.

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.


<PAGE>



PART II -  OTHER INFORMATION

ITEM 3  -  EXHIBITS AND REPORTS ON FORM 8-K

           (A) THE FOLLOWING IS ANNEXED AS AN EXHIBIT:

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

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

           (B) REPORTS ON FORM 8-K: NONE


<PAGE>



                                INDEX TO EXHIBITS

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

11         STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (UNAUDITED)     32





<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:             MAY 14, 1999          BY      /S/ DAVID A. BUZEN
                                                ------------------
                                                DAVID A. BUZEN
                                                EXECUTIVE VICE PRESIDENT AND
                                                CHIEF FINANCIAL OFFICER

DATE:             MAY 14, 1999          BY      /S/ ALAN S. ROSEMAN
                                                -------------------
                                                ALAN S. ROSEMAN
                                                EXECUTIVE VICE PRESIDENT,
                                                GENERAL COUNSEL AND SECRETARY