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 SEPTEMBER 30, 1998

                                       OR

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

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

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

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

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

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

AS OF NOVEMBER 11, 1998 THERE WERE 31,866,622 OUTSTANDING SHARES OF COMMON
STOCK, PAR VALUE $.01 PER SHARE, OF THE REGISTRANT


<PAGE>

<TABLE>


                     CAPITAL RE CORPORATION AND SUBSIDIARIES

                                      INDEX

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

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

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

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

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

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

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

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)                     8-9

ITEM 2.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                 RESULTS OF OPERATIONS                                                  10-26

PART II        OTHER INFORMATION

ITEM 3         EXHIBITS AND REPORTS ON FORM 8-K                                         27-29


SIGNATURES                                                                                 30

</TABLE>

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<TABLE>
<CAPTION>

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

                                                                               September 30,             December 31,
                                                                                        1998                     1997

                                                                              ---------------         ----------------
<S>                                                                               <C>                      <C>
Assets                                                                                                 

Fixed maturity securities available for sale, at market
   (amortized cost: $1,002,120 in 1998 and $887,605 in 1997)                      $1,064,114                 $932,423
Short-term investments, at cost, which approximates market                            68,222                   75,500
                                                                             ---------------         ----------------
Total Investments                                                                  1,132,336                1,007,923

Cash                                                                                   9,324                   14,103
Accrued investment income                                                             14,498                   13,761
Deferred acquisition costs                                                           136,111                  127,637
Prepaid reinsurance premiums                                                          51,823                   59,942
Reinsurance recoverable on ceded losses                                                7,305                    5,527
Funds held under reinsurance agreements                                                4,532                    3,926
Premiums receivable, net                                                              16,851                    8,024
Amounts receivable on ceded annuity reserves                                          55,857                   58,635
Investment in affiliates                                                              22,202                   21,858
Net assets of discontinued operations                                                 15,369                   16,769
Other assets                                                                           7,413                    7,368
                                                                              ---------------         ----------------
   Total Assets                                                                   $1,473,621               $1,345,473
                                                                              ===============         ================

Liabilities                                                                                            
Deferred premium revenue                                                            $393,742                 $373,996
Reserve for losses and loss adjustment expenses                                       43,679                   27,986
Annuity benefit reserves                                                              55,857                   58,635
Accident and health reserves                                                          16,809                   16,367
Profit commission liability                                                           49,422                   35,670
Deferred federal income taxes payable                                                 87,682                   72,879
Bank note payable                                                                     25,000                   25,000
Long-term debt                                                                        74,847                   74,819
Other liabilities                                                                     19,518                   16,178
                                                                              ---------------         ----------------
   Total Liabilities                                                                $766,556                 $701,530
                                                                              ---------------         ----------------

Company Obligated Mandatorily Redeemable                                       

  Preferred Securities of Capital Re LLC                                              75,000                   75,000

Stockholders' Equity

Preferred stock - $.01 par value per share;  25,000,000  shares  authorized;  no
  shares issued and outstanding

   in 1998 and 1997                                                                      ---                      ---
Common stock - $.01 par value per share; 75,000,000 shares
   authorized, 31,929,119 and 31,826,874 shares issued and

   outstanding in 1998 and 1997, respectively                                            324                      322
Additional paid-in capital                                                           226,689                  224,999
Retained earnings                                                                    369,877                  319,253
Treasury stock; 428,000 and 428,000 shares in 1998 and 1997,  respectively            (4,891)                  (4,891)
Other Comprehensive Income

       Net unrealized gain on fixed maturities securities

            available for sale, net of tax                                            39,934                   29,392
       Foreign exchange translation                                                      132                     (132)
                                                                              ---------------         ----------------
Accumulated Other Comprehensive Income                                                40,066                   29,260
                                                                              ---------------         ----------------
Total Stockholders' Equity                                                           632,065                  568,943
                                                                              ---------------         ----------------
Total Liabilities, Preferred Securities of Capital Re LLC and                                          
   Stockholders' Equity                                                           $1,473,621               $1,345,473
                                                                              ---------------         ----------------


See Accompanying Notes to Unaudited Consolidated Financial Statements                           

</TABLE>
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<TABLE>
<CAPTION>

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

                                                                   Three Months Ended                   Nine Months Ended
                                                                     September 30,                        September 30,

                                                                      (Unaudited)                          (Unaudited)

                                                              ---------------------------         ---------------------------
                                                                     1998           1997                1998            1997
                                                              ---------------------------         ---------------------------

<S>                                                               <C>            <C>                <C>             <C>    
Revenues:
Gross premiums written                                            $41,435        $42,843            $159,367        $132,539
Ceded premiums                                                        810          2,808               2,330           5,549
                                                              ---------------------------         ---------------------------
       Net premiums written                                        40,625         40,035             157,037         126,990
       Decrease/(increase) in deferred premium revenue              5,590         (8,522)            (27,866)        (38,749)
                                                              ---------------------------         ---------------------------
    Net premiums earned                                            46,215         31,513             129,171          88,241
Net investment income                                              16,413         13,931              48,465          41,696
Net realized gain/(loss)                                            1,848          2,949               4,309           5,543
Fee income                                                            100             73                 717             478
Other income                                                           23             25                 210             158
Equity income in affiliate                                            199            302                 332             772
                                                              ---------------------------         ---------------------------
     Total Revenues                                                64,798         48,793             183,204         136,888
                                                             ---------------------------         ---------------------------
Expenses:                                                                                         
Loss and loss adjustment expenses                                  21,085          4,770              33,677          10,964
Acquisition costs                                                  12,893         13,194              47,511          38,584
(Increase)/decrease in deferred acquisition costs                     774         (2,403)             (8,474)         (8,487)
Profit commission expense                                           3,844          1,295              14,432           5,262
Other operating expenses                                            4,496          3,246              12,352           8,219
Interest expense                                                    1,852          1,819               5,582           5,541
Foreign exchange (gain)/loss                                         (163)           285                (127)            556
Minority interest in Capital Re LLC                                 1,434          1,434               4,303           4,303
                                                              ---------------------------         ---------------------------
       Total Expenses                                              46,215         23,640             109,256          64,942
                                                              ---------------------------         ---------------------------

        Income before provision for federal income taxes           18,583         25,153              73,948          71,946

Provision for federal income taxes
     Current                                                         (721)         3,846              10,600          12,644
     Deferred                                                       4,969          2,844               9,056           7,669
                                                              ---------------------------         ---------------------------
Total provision for federal income taxes                            4,248          6,690              19,656          20,313
                                                              ---------------------------         ---------------------------

Net Income from continuing operations                             $14,335        $18,463             $54,292         $51,633 

Income/(loss) from discontinued operations                            135           (207)                158            (132)

Net Income                                                        $14,470        $18,256             $54,450         $51,501
                                                              ===========================         ===========================

Net Income from Continuing Operations                                                             
   Per Common Share:
                           Basic                                    $0.45          $0.58               $1.70           $1.63
                         Diluted                                    $0.44          $0.57               $1.66           $1.59

Net Income Per Common Share:
                           Basic                                    $0.45          $0.57               $1.71           $1.62
                         Diluted                                    $0.44          $0.56               $1.66           $1.59

Weighted Average Number of Shares Outstanding
                           Basic                                   31,912         31,755              31,871          31,734
                         Diluted                                   32,732         32,587              32,730          32,460

Cash dividends per common share                                     $0.04          $0.04               $0.12           $0.11



See Accompanying Notes to Unaudited Consolidated Financial Statements

</TABLE>
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<TABLE>
<CAPTION>

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

                                                                             Three Months Ended           Nine Months Ended
                                                                                September 30,               September 30,
                                                                                (unaudited)                  (unaudited)

                                                                        --------------------------    --------------------------
                                                                              1998           1997          1998            1997
                                                                        --------------------------    --------------------------

<S>                                                                        <C>            <C>           <C>             <C>    
Net Income                                                                 $14,470        $18,256       $54,450         $51,501

Other Comprehensive Income, net of tax:
    Change in net unrealized gain on fixed maturities securities
    available for sale                                                      10,962          7,224        10,542           5,861
    Change in foreign exchange translation                                     241           (408)          264            (735)
Other Comprehensive Income                                                  11,203          6,816        10,806           5,126
                                                                            ------          -----        ------           -----
Comprehensive Income                                                       $25,673        $25,072       $65,256         $56,627
                                                                           =======        =======       =======         =======


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)

                                                                                          Additional                     
                                                                      Common               Paid-In               Retained        
                                                                       Stock               Capital               Earnings        
                                                                     ------------------------------------------------------
<S>                                                                     <C>                <C>                   <C>     
Balance, January 1, 1998 ........................................       $322               $224,999              $319,253

 Net Income .....................................................        --                      --                54,450 

Exercise of stock options, including tax benefit (102,245 shares)          2                  1,690                  --   

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

Foreign exchange translation ....................................        --                      --                  --   

 Dividend ($.12 per common share) ...............................        --                      --                (3,826)
                                                                     -------------------------------------------------------

Balance, September 30, 1998 .....................................       $324                $226,689             $369,877
                                                                     =======================================================



                                                                                                  Net Unrealized 
                                                                                                     Gain on
                                                                                                 Fixed Maturities
                                                                                                    Securities      Total
                                                                      Treasury     Foreign Exch.   Available for   Stockholders'
                                                                       Stock       Translation         Sale         Equity
                                                                    ------------------------------------------------------------  
<S>                                                                   <C>               <C>          <C>           <C>      
Balance, January 1, 1998 ........................................     ($4,891)          ($132)       $29,392       $ 568,943

 Net Income .....................................................        --              --             --            54,450

Exercise of stock options, including tax benefit (102,245 shares)        --              --             --             1,692

Fixed maturities securities available for sale adjustments ......        --              --           10,542          10,542

Foreign exchange translation ....................................        --               264           --               264

 Dividend ($.12 per common share) ...............................        --              --             --            (3,826)
                                                                    ------------------------------------------------------------

Balance, September 30, 1998 .....................................      ($4,891)          $ 132        $39,934       $ 632,065
                                                                    ============================================================

See Accompanying Notes to Unaudited Consolidated Financial Statements 
</TABLE>
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<TABLE>
<CAPTION>

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

                                                                       Nine Months Ended
                                                                         September 30,
                                                             --------------------------------------
                                                                       1998                   1997
                                                             --------------------------------------
Operating Activities:

<S>                                                                 <C>                    <C>    
  Net income                                                        $54,450                $51,501
  Adjustments to reconcile net income to                                            
    net cash provided by operating activities:                                      
     Amortization of bond discount on long-term debt                     28                     28
     Net amortization of security premiums                             (706)                   327
     Provision for deferred federal income taxes                      9,127                  7,669
     Acquisition costs deferred                                     (47,511)               (38,584)
     Amortization of deferred acquisition costs                      39,037                 30,097
     Equity Income in affiliates                                       (344)                  (772)
     Change in accrued investment income                               (737)                   (56)
     Change in premiums receivable, net                             (11,513)                (7,543)
     Change in deferred premium revenue, net                         27,866                 38,749
     Change in outstanding loss reserves, net                        16,916                    283
     Net realized (gain) on investments                              (4,309)                (5,543)
     Change in ceded balances payable                                 9,401                  3,016
     Other                                                            7,690                  5,372
     Discontinued Operations, Net                                     4,389                  3,015
                                                             ---------------       ----------------
   Net Cash Provided by Operating Activities                        103,783                 87,559


Investing Activities:

   Securities available-for-sale:
     Purchases - fixed maturities                                  (591,931)            (1,478,783)
     Sales-fixed maturities                                         482,031              1,444,280
  Maturities (purchases) of short-term
   investments, net                                                   2,537                (79,447)
   Investments in Affiliates                                              0                (11,000)
  Other investing activities                                           (436)                33,228
  Discontinued Operations, Net                                          959                    383
                                                             ---------------       ----------------
   Net Cash Used in Investing Activities                           (106,840)               (91,339)

Financing Activities:

  Net proceeds from exercise of stock options                         1,692                  1,045
  Purchase of treasury stock at cost                                      0                 (1,021)
  Dividends paid                                                     (3,826)                (3,333)
  Discontinued Operations, Net                                          411                    (78)
                                                             ---------------       ----------------
   Net Cash Used by Financing Activities                             (1,723)                (3,387)
Decrease in Cash                                                     (4,779)                (7,167)
Cash at Beginning of Period                                          14,103                 13,306
                                                             ---------------       ----------------
     Cash at End of Period                                           $9,324                 $6,139
                                                             ===============       ================


See Accompanying Notes to Unaudited Consolidated Financial Statements.

</TABLE>
<PAGE>

                     CAPITAL RE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

                               September 30, 1998

1.   BASIS OF PRESENTATION

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

As of January 1, 1998,  the Company  adopted  Statement of Financial  Accounting
Standard  130,  "Reporting  Comprehensive  Income"  ("FAS 130").  Statement  130
establishes new rules for the reporting and display of comprehensive  income and
its  components;  however,  the adoption of this  Statement had no impact on the
Corporation income or shareholders' equity. FAS 130 requires unrealized gains or
losses on the Corporation's  available-for-sale  securities and foreign currency
translation  adjustments,  which prior to adoption were  reported  separately in
shareholders'  equity to be included in other comprehensive  income.  Prior year
financial  statements have been  reclassified to conform to the  requirements of
Statement 130. For the three months and nine months ended September 30, 1998 and
1997,  total  comprehensive  income amounted to $25.7 million and $65.3 million,
and $25.1 million and $56.6 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.  All prior period  results have been restated for  comparative
purposes.


<PAGE>


2.   REINSURANCE

Ceded earned premium for the three and nine months ended  September 30, 1998 and
1997 were $3.0 million and $10.4  million,  and $6.5 million and $14.1  million,
respectively.  Ceded losses for the same  periods  were ($1.5)  million and $1.3
million, and $1.0 million and $2.8 million, respectively.

3.   INCOME TAXES

The effective tax rate for the nine months ended  September 30, 1998 and 1997 is
lower  than  the  federal  corporate  tax  rate on  ordinary  income  of 35% due
principally to the effect of tax-exempt  interest income.  Income taxes paid for
the nine months ended  September  30, 1998 and 1997 were $16.1 million and $13.2
million, respectively.

4.   OTHER

Interest  paid for the nine months  ended  September  30, 1998 and 1997 was $4.1
million and $4.0 million, respectively.


<PAGE>




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

GENERAL

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

In November 1996, the  Corporation  acquired,  through a United Kingdom  holding
company,  Capital Re (UK)  Holdings,  100% of the issued  shares of Tower Street
Holdings Limited (now known as RGB Holdings,  Ltd.), the holding company for RGB
Underwriting  Agencies  Ltd.  ("RGB").  RGB is a managing  agency and  presently
manages five syndicates operating in the Lloyd's of London ("Lloyd's") insurance
market. In November 1997, RGB Holdings,  Ltd. acquired 100% of C.I. de Rougemont
Group  Limited,  the ultimate  holding  company for C.I. de Rougemont & Co. Ltd.
("CIDR"),  another Lloyd's  managing  agency.  CIDR manages two syndicates,  one
marine and the other non-marine.  Effective January 1, 1998, the CIDR non-marine
syndicate was merged with the  non-marine  syndicate of RGB. In connection  with
its acquisition of RGB, the Corporation established a corporate name at Lloyd's,
CRC  Capital  Ltd.  ("CRC"),  to provide  underwriting  capacity  to the managed
syndicates commencing with the 1997 year of account. CRC currently  participates
in a marine,  a non-marine and two life syndicates.  However,  for the three and
nine months  ended  September  30,  1998,  the  Corporation  is  reflecting  its
participation  in Lloyd's as a  discontinued  operation  since the  Company  has
commenced a plan of divestiture of its Lloyd's  operations,  including RGB, CIDR
and CRC.  Pending  divestiture,  the  Corporation  will  continue to support its
commitments to Lloyd's. For comparative  purposes,  the Corporation has restated
prior  period  financial   statements  to  reflect  Lloyd's  as  a  discontinued
operation.

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

RESULTS OF OPERATIONS

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

The  Company  adopted  Statement  of  Financial  Accounting  Standards  No. 128,
"Earnings per Share" ("FAS 128"),  as of December 31, 1997. FAS 128 requires the
calculation  and  presentation  on the  face of the  income  statement  of basic
earnings  per share and,  if  applicable,  diluted  earnings  per  share.  Basic
earnings per share is  calculated  based on the weighted  average  common shares
outstanding.  All  potentially  dilutive  securities  such as stock  options and
convertible   securities   are  excluded  from  the  basic  earnings  per  share
calculation.  In calculating diluted earnings per share, the number of shares is
increased  to include  all  potentially  dilutive  securities,  including  stock
options and convertible securities.  On June 30, 1998, the Corporation completed
a two for one  stock  split  of its  outstanding  common  shares.  Prior  period
financial  results have been restated to reflect the stock split.  Additionally,
as  mentioned  above,  beginning  in the third  quarter of 1998,  the  Company's
investment  in Lloyd's,  which was  previously  consolidated,  is reflected as a
discontinued  operation since the Company has commenced a plan of divestiture of
its Lloyd's  operations,  including  RGB, CIDR and CRC. All prior period results
have been restated for comparative purposes.

Net income from  continuing  operations for the three months ended September 30,
1998 decreased  22.7% to $14.3 million from $18.5 million for the same period of
1997.  On a per share  basis,  basic and  diluted  net  income  from  continuing
operations  decreased  to $0.45 and $0.44,  respectively,  for the three  months
ended September 30, 1998 from $0.58 and $0.57, respectively, for the same period
of 1997, or 22.4% and 22.8%, respectively.

Net income including income or (loss) from discontinued operations for the three
months ended  September 30, 1998,  decreased to $14.5 million from $18.3 million
for the same period of the prior year.  On a per share basis,  basic and diluted
net income including income or loss from  discontinued  operations  decreased to
$0.45 and $0.44,  respectively,  for the three months ended  September  30, 1998
from $0.57 and $0.56,  respectively,  for the same period of 1997,  or 21.1% and
21.4%, respectively. Net operating income from continuing operations (net income
from  continuing  operations  excluding  realized  gains and losses and  foreign
exchange gains and losses) decreased 22.1% to $13.0 million for the three months
ended  September  30, 1998 from $16.7  million for the same period in 1997. On a
per  share  basis,  basic and  diluted  net  operating  income  from  continuing
operations  decreased  to $0.41 and $0.40,  respectively,  for the three  months
ended September 30, 1998 from $0.53 and $0.51, respectively, for the same period
of 1997, or 22.6% and 21.6%, respectively.

The decrease in third quarter  financial  results is due to $9.3 million pre-tax
increase in Capital  Re's case basis loss  reserve for losses  arising  from the
bankruptcy of the Delaware Valley  Obligated  Group, a unit of Pittsburgh  based
Allegheny Health, Education and Research Foundation  ("Allegheny").  The Company
assumed  its  exposure  to  Allegheny  in the  ordinary  course  under  its 1996
reinsurance  treaty with MBIA Inc. Under its treaty, the Company has $15 million
in principal  outstanding to the hospital system bonds, or  approximately  5% of
MBIA's aggregate  exposure.  The Company expects that the reserve will cover all
anticipated  present value losses arising from its exposure to Allegheny.  As of
September 30, 1998,  the aggregate  case basis loss reserve for Allegheny was in
the amount of $10 million.  Notwithstanding  the Allegheny  loss,  the Company's
total revenues  increased to $64.8 million for the three months ended  September
30, 1998 from $48.8  million,  or 32.8%,  principally  on growth in net premiums
earned and net investment income.

Gross  premiums  written  decreased  3.3% to $41.4  million for the three months
ended  September  30, 1998 from $42.8  million for the same period of 1997.  The
slight decline in total gross premiums written in the third quarter 1998 was, in
part, the result of several large municipal  transactions reinsured in the third
quarter of 1997. In addition, mortgage guaranty reinsurance premium declined due
to an increased level in mortgage  prepayments caused by lower interest rates as
well as the Company's shift away from assuming quota share reinsurance  business
to assuming  structured  excess of loss  reinsurance  business.  The decrease in
total gross  premiums  written was partially  offset by growth in  non-municipal
bond  reinsurance  business.  This growth was due to a  significant  increase in
premiums  written in the  credit  default  swaps  sector of that  business.  The
Company has  expanded  its  traditional  municipal  and  nonmunicipal  financial
guaranty bond  reinsurance  lines of business to include credit default swaps. A
credit default swap is a transaction  whereby a counterparty pays a periodic fee
in fixed basis points on a notional amount in return for a contingent payment by
the  company  in the case of one or more  defined  credit  events on one or more
third party reference  securities or loans. A credit event is defined as failure
to pay,  bankruptcy,  cross  acceleration  (accompanied  by a  failure  to pay),
repudiation,  restructuring,  or similar  nonpayment event.  Credit default swap
premium grew to $2.2 million for the three months ended  September 30, 1998 from
$0.2 million in the prior year.

In 1997, the Company added a financial  reinsurance line of business.  This line
consists of  structured,  finite  risk,  financial  transactions  involving  the
reinsurance of annuity and accident and health reserves.  Gross premiums written
from  financial  lines  increased  to $2.8  million for the three  months  ended
September 30, 1998 from $2.6 million for the same period of 1997.  The following
table shows gross  premiums  written by line of  business  for the three  months
ended September 30, 1998 and September 30, 1997.

                                 GROSS PREMIUMS WRITTEN
                                  THREE MONTHS ENDED
                                      SEPTEMBER 30,
                                 1998             1997
                                 ----             ----
                                 (dollars in millions)

   MUNICIPAL                     $7.8           $13.5
   NON-MUNICIPAL                  6.2             3.4
   FINANCIAL LINES                2.8             2.6
   MORTGAGE                      13.1            16.4
   TITLE                          1.5             1.1
   CREDIT AND SPECIALTY          10.0             5.8
                               ------         -------
                                $41.4           $42.8


Net premiums  written  increased  by 1.5% to $40.6  million for the three months
ended  September  30, 1998 from $40.0  million for the same period in 1997.  The
following  table shows net  premiums  written by line of business  for the three
months ended September 30, 1998 and September 30, 1997.

                                 NET PREMIUMS WRITTEN
                                  THREE MONTHS ENDED
                                     SEPTEMBER 30,
                                 1998             1997
                                 ----             ----
                                 (dollars in millions)

   MUNICIPAL                     $7.1            $13.5
   NON-MUNICIPAL                  6.2              3.3
   FINANCIAL LINES                2.8              0.0
   MORTGAGE                      13.1             16.3
   TITLE                          1.4              1.1
   CREDIT AND SPECIALTY          10.0              5.8
                               ------          -------
                                $40.6            $40.0


For the three months ended  September 30, 1998,  net premiums  earned  increased
46.7% to $46.2 million from $31.5 million for the comparable  1997 period.  This
increase was  primarily due to growth in net premiums  earned in the  municipal,
non-municipal  (including  credit  default  swaps),  credit and  specialty,  and
financial lines of business.  For the three months ended September 30, 1998, net
refunded  earned premium  increased to $6.6 from $1.9 million for the comparable
period in 1997.  Excluding the effects of net refunded municipal earned premium,
net premiums earned  increased 33.8% to $39.6 million for the three months ended
September 30, 1998 from $29.6  million for the three months ended  September 30,
1997. A refunding  extinguishes the Corporation's  reinsurance liability for the
refunded  obligation and the Corporation  then  recognizes  revenue equal to the
remaining  related  deferred  premium  revenue.  Net premiums earned from credit
default  swaps,  which are earned as written,  increased to $2.2 million for the
three months ended  September 30, 1998 from $0.2 million in the prior year.  For
the three months ended  September  30, 1998 and 1997,  ceded earned  premium was
$3.0  million and $6.5  million,  respectively.  The  following  table shows net
premiums  earned by line of business for the three months  ended  September  30,
1998 and September 30, 1997.

                               NET PREMIUMS EARNED
                               THREE MONTHS ENDED
                                  SEPTEMBER 30,
                              1998             1997
                              ----             ----
                              (dollars in millions)

 MUNICIPAL                   $12.8           $  8.0
 NON-MUNICIPAL                 6.8              3.4
 FINANCIAL LINES               2.8              0.0
 MORTGAGE                     13.7             14.0
 TITLE                         1.5              1.0
 CREDIT AND SPECIALTY          8.6              5.1
                           -------          -------
                             $46.2            $31.5

For the three months ended September 30, 1998, net investment  income  increased
18.0% to $16.4  million from $13.9  million for the  comparable  period in 1997.
Growth in investment  income was primarily  attributable to a larger  investment
portfolio caused by an increase in invested assets from positive  operating cash
flows  during the twelve  months ended  September  30,  1998.  In addition,  the
Corporation  recognized  net realized gains of $1.8 million for the three months
ended September 30, 1998 compared to $2.9 million for same period in 1997.

Loss and loss adjustment  expenses  increased to $21.1 million from $4.8 million
for the three  months  ended  September  30,  1998 and 1997,  respectively.  The
increase in losses  recorded for the three months ended  September  30, 1998 was
primarily  attributable to the $9.3 million  Allegheny loss, as well as expected
loss  development  commensurate  with the growth in net premiums  earned.  Ceded
losses  for the three  months  ended  September  30,  1998 and 1997 were  ($1.5)
million and $1.0 million,  respectively.  The loss ratio was 45.6% for the three
months ended September 30, 1998 compared to 15.1 % for the prior year. Excluding
the Allegheny loss, the loss ratio for the three months ended September 30, 1998
was 25.5%.

Total expenses,  including loss and loss adjustment expenses, increased 95.8% to
$46.2  million for the three months ended  September 30, 1998 from $23.6 million
for the same period of 1997.  This  increase was primarily  attributable  to the
Allegheny loss as well as the  amortization of acquisition  expenses  associated
with the increased level of premiums earned and normal expected loss development
from the credit,  mortgage  and  financial  lines  business.  In  addition,  the
increase  in  expenses  was  attributable  to an increase in overhead to support
growth in the  Company's  lines of  businesses.  The expense ratio for the three
months ended September 30, 1998 and 1997 was 47.6% and 48.7%, respectively.  The
combined ratio,  excluding expenses  associated with  non-insurance  operations,
increased to 93.2% for the three months ended  September 30, 1998 from 63.8% for
the comparable  1997 period.  This increase is a result of the Allegheny loss as
well as the  Corporation's  diversification  strategy,  which is producing  more
business  from lines with  relatively  higher  combined  ratios than that of the
financial guaranty  reinsurance  business.  For the three months ended September
30, 1998, the combined ratios excluding the Allegheny loss was 73.1%.

For the three months ended  September 30, 1998,  the total federal tax provision
decreased  to $4.2  million  from $6.7  million for the same period in 1997.  In
addition,  the effective tax rate  decreased to 22.9% for the three months ended
September 30, 1998 from 26.6% for the same period of 1997.

NINE MONTHS ENDED SEPTEMBER 30, 1998 VERSUS NINE MONTHS ENDED
SEPTEMBER 30, 1997

Net income from  continuing  operations for the nine months ended  September 30,
1998  increased  5.2% to $54.3 million from $51.6 million for the same period of
1997.  On a per share  basis,  basic and  diluted  net  income  from  continuing
operations increased to $1.70 and $1.66, respectively, for the nine months ended
September  30, 1998 from $1.63 and $1.59,  respectively,  for the same period of
1997, or 4.3% and 4.4%, respectively.

Net income  including income or loss from  discontinued  operations for the nine
months ended  September 30, 1998,  increased to $54.5 million from $51.5 million
for the same period of the prior year.  On a per share basis,  basic and diluted
net income including income or loss from  discontinued  operations  decreased to
$1.71 and $1.66,  respectively,  for the three months ended  September  30, 1998
from  $1.62 and  $1.59,  respectively,  for the same  period of 1997 or 5.6% and
4.4%, respectively.

Net operating  income from  continuing  operations  (net income from  continuing
operations  excluding  realized gains and losses and foreign  exchange gains and
losses)  increased 6.2% to $51.4 million for the nine months ended September 30,
1998 from $48.4 million for the same period in 1997. On a per share basis, basic
and diluted net operating income from continuing  operations  increased to $1.61
and $1.57, respectively, for the nine months ended September 30, 1998 from $1.52
and  $1.49,  respectively,  for the  same  period  of 1997,  or 5.9%  and  5.4%,
respectively.

Growth in net premiums  earned to $129.2 million from $88.2  million,  or 46.5%,
and growth in net  investment  income to $48.5  million from $41.7  million,  or
16.3%,  partially  offset by the $10  million  pre-tax  Allegheny  loss were the
principal causes of the increase in the Company's financial results for the nine
months ended September 30, 1998.

Gross  premiums  written  increased  20.3% to $159.4 million for the nine months
ended September 30, 1998 from $132.5 million for the same period of 1997.  Gross
premiums written increased primarily because of growth in the non-municipal line
of business which includes  credit default swaps,  the credit and specialty line
of business as well as from the financial lines line of business. Credit default
swap premiums  amounted to $4.3 million for the nine months ended  September 30,
1998  compared  to $0.3  million  in the same  period  of the  prior  year.  The
following  table shows gross  premiums  written by line of business for the nine
months ended September 30, 1998 and 1997.

                                GROSS PREMIUMS WRITTEN
                                  NINE MONTHS ENDED
                                     SEPTEMBER 30,
                                1998             1997
                                ----             ----
                                 (dollars in millions)

   MUNICIPAL                   $46.5            $43.2
   NON-MUNICIPAL                18.4             10.6
   FINANCIAL LINES               8.4              2.6
   MORTGAGE                     54.4             56.8
   TITLE                         3.4              2.5
   CREDIT AND SPECIALTY         28.3             16.8
                              ------           ------
                              $159.4           $132.5

Net premiums  written  increased by 23.6% to $157.0  million for the nine months
ended  September 30, 1998 from $127.0 million for the same period in 1997.  This
increase is commensurate  with the increase in gross premiums written  explained
above.  The following  table shows net premiums  written by line of business for
the nine months ended September 30, 1998 and September 30, 1997.


<PAGE>


                                 NET PREMIUMS WRITTEN
                                   NINE MONTHS ENDED
                                     SEPTEMBER 30,
                                 1998             1997
                                 ----             ----
                                 (dollars in millions)

   MUNICIPAL                    $44.5            $40.6
   NON-MUNICIPAL                 18.4             10.6
   FINANCIAL LINES                8.4              0.0
   MORTGAGE                      54.2             56.5
   TITLE                          3.4              2.5
   CREDIT AND SPECIALTY          28.1             16.8
                               ------           ------
                               $157.0           $127.0

For the nine months ended  September  30, 1998,  net premiums  earned  increased
46.5% to $129.2 million from $88.2 million for the comparable 1997 period.  This
increase was primarily  due to growth in net premiums  earned across all product
lines of business.  For the nine months ended  September 30, 1998,  net refunded
earned premium increased to $14.5 from $4.3 million for the comparable period in
1997.  Excluding  the effects of net  municipal  refunded  earned  premium,  net
premiums  earned  increased  36.7% to $114.7  million for the nine months  ended
September  30, 1998 from $83.9  million for the nine months ended  September 30,
1997. A refunding  extinguishes the Corporation's  reinsurance liability for the
refunded  obligation and the Corporation  then  recognizes  revenue equal to the
remaining  related  deferred  premium  revenue.  Net premiums earned from credit
default  swaps,  which are earned as written,  increased to $4.3 million for the
three months ended  September 30, 1998 from $0.3 million in the prior year.  For
the nine months ended  September  30, 1998 and 1997,  ceded  earned  premium was
$10.4 million and $14.1  million,  respectively.  The following  table shows net
premiums earned by line of business for the nine months ended September 30, 1998
and September 30, 1997.

                                 NET PREMIUMS EARNED
                                 NINE MONTHS ENDED
                                    SEPTEMBER 30,
                                1998             1997
                                ----             ----
                                (dollars in millions)

 MUNICIPAL                     $32.0            $22.2
 NON-MUNICIPAL                  15.6              8.8
 FINANCIAL LINES                 8.4              0.0
 MORTGAGE                       46.3             41.4
 TITLE                           3.8              2.4
 CREDIT AND SPECIALTY           23.1             13.4
                              ------           ------
                              $129.2            $88.2


For the nine months ended  September 30, 1998, net investment  income  increased
16.3% to $48.5  million from $41.7  million for the  comparable  period in 1997.
Growth in investment  income was primarily  attributable to a larger  investment
portfolio caused by an increase in invested assets from positive  operating cash
flows  during the twelve  months ended  September  30,  1998.  In addition,  the
Corporation  recognized  net realized  gains of $4.3 million for the nine months
ended September 30, 1998 compared to $5.5 million for same period in 1997.

Loss and loss adjustment  expenses increased to $33.7 million from $11.0 million
for the nine  months  ended  September  30,  1998 and  1997,  respectively.  The
increase in losses  recorded for the nine months ended  September  30, 1998 were
primarily  attributable to the $10.0 million Allegheny loss, as well as expected
loss  development  in the  financial  lines,  mortgage and credit and  specialty
reinsurance lines of business.  Ceded losses for the nine months ended September
30, 1998 and 1997 were $1.3 million and $2.8 million, respectively. For the nine
months ended  September 30, 1998, the loss ratio was 26.1% compared to 12.4% for
the same period of 1997.  Excluding the Allegheny  loss,  the loss ratio for the
nine months ended September 30, 1998 was 18.3%.

Total expenses,  including loss and loss adjustment expenses, increased 68.4% to
$109.3  million for the nine months ended  September 30, 1998 from $64.9 million
for the same period of 1997.  This  increase was primarily  attributable  to the
Allegheny loss as well as the  amortization of acquisition  expenses  associated
with the  increased  level of premiums  earned  across all lines of business and
normal loss  development  from the credit and specialty,  mortgage and financial
line lines of business.  In addition,  the increase in expenses was attributable
to an  increase  in  overhead  to  support  growth  in the  Company's  lines  of
businesses.  For the nine months  ended  September  30,  1998 the expense  ratio
increased  slightly to 51.0% from 49.4% from the prior year. The combined ratio,
excluding expenses associated with non-insurance operations,  increased to 77.1%
for the nine months ended  September 30, 1998 from 61.8% for the comparable 1997
period.  This increase is related to the  Allegheny  loss as well as an expected
result of the Corporation's  diversification  strategy,  which is producing more
business  from lines with  relatively  higher  combined  ratios than that of the
financial  guaranty  reinsurance  business.  Excluding the Allegheny  loss,  the
combined ratio for the nine months ended September 30, 1998 was 69.3%.

For the nine months ended  September  30, 1998,  the total federal tax provision
decreased to $19.7  million from $20.3  million for the same period in 1997.  In
addition,  the effective  tax rate  decreased to 26.6% for the nine months ended
September 30, 1998 from 28.2% for the same period of 1997.

LIQUIDITY AND CAPITAL RESOURCES

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

Capital Credit's major sources of liquidity are funds generated from reinsurance
premiums,  net investment income and maturing  investments.  Capital Credit is a
Bermuda domiciled insurer whose distributions are governed by Bermuda law. Under
Bermuda law and the by-laws of Capital Credit,  dividends may be paid out of the
profits of the company (defined as accumulated realized profits less accumulated
realized losses).  Distributions to shareholders may also be paid out of Capital
Credit's surplus limited by requirements that such company must at all times (i)
maintain the minimum  share  capital  required  under  Bermuda law and (ii) have
relevant  assets  in an  amount  equal  to  or  greater  than  75%  of  relevant
liabilities,  all as defined  under Bermuda law.  Capital  Credit paid its first
dividend to the Corporation in October 1998 in the amount of $4.0 million.

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

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

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

In June 1997, Capital  Reinsurance  invested  approximately  $11.0 million for a
minority  ownership  interest  in CGA  Group,  Ltd.  ("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.  Capital Re'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   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").

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,  then the St.  George
Investment  Subsidiaries  must pay any shortfall.  If the St. George  Investment
Subsidiaries  cannot pay the amount then due,  then 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 quarter 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. Throughout this period, CG Assurance
was, and continues to be, rated triple-A by D&P.

In February and July,  1998,  KRE  Reinsurance  assumed from CG Assurance  three
issues of  asset-backed  securities  (the  "Securities")  issued  by  Commercial
Financial Services Inc. ("CFS"), a leader in the acquisition, securitization and
collection  of charged off credit card loans.  At the time they were  reinsured,
the Securities  were rated  investment  grade.  On October 22, 1998, the Company
became aware of possible irregularities relating to the Securities when Standard
& Poor's Corporation  ("S&P") announced the suspension of its single A rating on
the  Securities  due to the  lack  of  sufficient  information  material  to the
continued  maintenance of its rating. S&P suspended its rating in the context of
allegations  that CFS may have been  involved  in  improper  conduct,  including
substantial  sales to an affiliate  of assets which were backing  certain of its
outstanding  obligations.  Based  on  the  allegations,  and  with  insufficient
information  to the  contrary,  D&P,  Fitch ICBA and Moody's  Investors  Service
Company also  downgraded  or withdrew  their ratings on the  Securities.  In the
Company's  third  quarter  earnings  release,  the Company  reported that it had
outstanding   principal   exposure  of  approximately   $155.8  million  to  the
Securities.  CFS has engaged outside legal counsel and an independent accounting
firm to assist in an internal inquiry into the allegations of improper  conduct.
The  information  currently  available to the Company  indicates that the assets
backing the  Securities  reinsured by the Company are  performing  in accordance
with  expectations.  As of September  30, 1998, no provision for losses has been
made and, until adequate  information is provided,  the Company will not be able
to determine whether losses, if any, will be incurred.

In December 1997, the Corporation's Board of Directors authorized an increase of
the quarterly  common stock dividend rate to $0.04 per share, or $0.16 annually.
For the nine months ended September 30, 1998, common dividends were declared and
paid in the amount of $3.8 million or $0.12 per share.

Cash flows from  operations  for the nine months  ended  September  30, 1998 and
1997, consisting of reinsurance  premiums  collected net of expenses, 
investment  income and income taxes,  were $103.8 million and $87.5  million,
respectively.  The  Corporation believes  that  current  levels  of  cash  flow
from  operations   provide  the Corporation  with  sufficient   liquidity  to 
meet  its  operating  needs.  The Corporation's  non-operating  cash  outflows 
are  primarily  dedicated  to  (i)fixed-income  investment  activity,  (ii) the
payment of dividends on its common shares, (iii) payments of interest on 
long-term debt and (iv) the payment of its loan obligations to Capital Re LLC.

At September 30, 1998,  cash and  investments  approximated  $1.14  billion,  an
increase of $110.0 million,  or 10.7%,  from $1.03 billion at December 31, 1997.
In managing its investment portfolio,  the Corporation places a high priority on
quality and liquidity. As of September 30, 1998, the entire investment portfolio
was invested in highly rated fixed income securities.

At  September  30,  1998,   approximately  $179.6  million,  or  15.7%,  of  the
Corporation's  investment portfolio was comprised of mortgage-backed  securities
("MBS"). Of the MBS portfolio, approximately $153.1 million, or 85.2%, is backed
by agencies or entities  sponsored by the U.S.  government as to the full amount
of principal  and interest.  As of September 30, 1998,  the entire MBS portfolio
was invested in triple A rated securities.

Prepayment  risk is an  inherent  risk of holding  MBS.  However,  the degree of
prepayment  risk is particular to the type of MBS held. The  Corporation  limits
its exposure to  prepayments  by purchasing  less  volatile  types of MBS. As of
September 30, 1998, $3.7 million,  or  approximately  2.0%, of the MBS portfolio
was  invested  in  collateralized   mortgage   obligations  ("CMOs")  which  are
characterized as planned  amortization class CMOs ("PACs").  PACs are securities
whose cash flows are  designed  to remain  constant  over a variety of  mortgage
prepayment  environments.  Other  classes in the CMO security are  structured to
accept the volatility of mortgage prepayment changes, thereby insulating the PAC
class. Of the remaining MBS portfolio, $175.9 million, or 98.0%, was invested in
mortgage-backed  pass-throughs or sequential CMOs.  Pass-throughs are securities
in which the monthly cash flows of principal  and interest  (both  scheduled and
prepayments) generated by the underlying mortgages are distributed on a pro-rata
basis to the holders of securities. A sequential MBS is structured to divide the
CMO security into sequentially  ordered classes.  Receipt of principal  payments
within classes is contingent on the retirement of all previously paying classes.
Generally,  interest  payments are made  currently  on all classes.  While these
securities  are more  sensitive  to  prepayment  risk  than  PACs,  they are not
considered  highly  volatile  securities.  While the  Corporation  may  consider
investing  in  any  tranche  of a  sequential  MBS,  the  individual  security's
characteristics  (duration,  relative value, underlying collateral,  etc.) along
with aggregate  portfolio risk management  determine which tranche of sequential
MBS will be purchased.  At September 30, 1998, the Corporation had no securities
such as interest only securities, principal only securities, or MBS purchased at
a  substantial  premium to par that have the potential for loss of a significant
portion of the original  investment due to changes in the prepayment rate of the
underlying loans supporting the security.

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

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

On  November  5,  1998,  Moody's  Investor  Service  ("Moody's")  placed the Aaa
insurance  financial  strength rating of Capital  Reinsurance and the Aa3 senior
long-term debt rating of the Company on review for possible downgrade.  The "a1"
preferred  stock rating of Capital Re LLC was also placed on review for possible
downgrade.  Moody's stated that the review was prompted by recent changes in the
mix of financial  guaranty  reinsurance  business  being assumed by the Company,
through its various  subsidiaries,  in response to  competitive  pressure on the
Company's  core  financial  guaranty  franchise.  This  action by Moody's had no
effect on the Company's financial statements as of September 30, 1998.

The Company is analyzing the need to raise additional  equity capital to support
its business.  This  analysis is ongoing and there can be no assurance  that the
Company's  ultimate decision will be to raise additional capital or whether such
capital can be raised when desired or on terms acceptable to the Company.

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  which contain  computer code,  whether in software or
imbedded  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  comprised  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 their
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 prepared of those with
information  systems or other  technology  upon which the  Company  may rely and
which may be affected by the Year 2000 "bug". The Company has made inquiry 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  expect to be Year 2000  compliant  by  year-end  1998.  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:  Two-thirds of the key in-house applications
     have been tested and are Year 2000 compliant.  The remainder will be
     tested by year-end 1998.

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 WILL BE COMPLIANT BY UPGRADES
     OR ENHANCEMENTS: will be compliant in the fourth quarter of 1998.

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 has been fairly uncomplicated.  Moreover, none
of the Company's technology ismainframe 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 have 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 or vendor's
software or systems which would impact the Company,  and (iii) insurance  claims
against the Company due to Year 2000 issues.  The  likelihood  that a failure of
the Company's  software and systems would have a material affect 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)   29





<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:   November 11, 1998              By /s/ David A. Buzen
                                          ----------------------------
                                          David A. Buzen
                                          Executive Vice President and
                                          Chief Financial Officer



Date:   November 11, 1998              By /s/ Alan S. Roseman
                                          ----------------------------
                                          Alan S. Roseman
                                          Senior Vice President,
                                          General Counsel and Secretary