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, 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                   (IRS EMPLOYER
     OF INCORPORATION OR             NUMBER)                      IDENTIFICATION
        ORGANIZATION)                                                 NUMBER)

                           1325 AVENUE OF THE AMERICAS
                                   18TH FLOOR
                            NEW YORK, NEW YORK 10019
                                 (212) 974-0100
(NAME, ADDRESS,  INCLUDING ZIP CODE, AND TELEPHONE NUMBER,  INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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

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

<PAGE>


<TABLE>
<CAPTION>
                     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, 1999 (UNAUDITED) AND
           DECEMBER 31, 1998                                                      3

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

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

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

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

         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)                   8-14

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS                                                  15-31

PART II  OTHER INFORMATION

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K                                         32-33


SIGNATURES                                                                        34

EXHIBIT 11                                                                        35
</TABLE>

<PAGE>


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

<TABLE>
<CAPTION>
                                                                                     September 30,
                                                                                              1999   December 31,
                                                                                       (Unaudited)           1998
                                                                                     -------------    -----------
<S>                                                                                    <C>            <C>
Assets
Fixed maturity securities available for sale, at market
   (amortized cost: $936,795 in 1999 and $1,036,862 in 1998)                           $   921,751    $ 1,086,891
Short-term investments, at cost, which approximates market                                 208,743         88,147
                                                                                       -----------    -----------
Total Investments                                                                        1,130,494      1,175,038

Cash                                                                                         6,780          9,893
Accrued investment income                                                                   14,572         15,371
Deferred acquisition costs                                                                 148,431        135,029
Prepaid reinsurance premiums                                                                43,165         49,603
Reinsurance recoverable on ceded losses                                                      8,516          3,292
Funds held under reinsurance agreements                                                      4,914          5,033
Premiums receivable, net                                                                    17,465         16,997
Amounts receivable on ceded annuity reserves                                                     0         53,869
Investment in affiliates                                                                    19,580         15,080
Net assets of discontinued operations                                                            0         11,695
Other assets                                                                                24,477         17,873
                                                                                       -----------    -----------
   Total Assets                                                                        $ 1,418,394    $ 1,508,773
                                                                                       ===========    ===========

Liabilities
Deferred premium revenue                                                               $   416,188    $   405,866
Reserve for losses and loss adjustment expenses                                            107,383         87,960
Annuity benefit reserves                                                                         0         53,869
Accident and health reserves                                                                18,872         17,843
Profit commission liability                                                                 66,786         57,389
Deferred federal income taxes payable                                                       39,197         79,237
Bank note payable                                                                           25,000         25,000
Long-term debt                                                                              74,884         74,856
Net liabilities of discontinued operations                                                  63,183              0
Other liabilities                                                                           30,188         20,927
                                                                                       -----------    -----------
   Total Liabilities                                                                   $   841,681    $   822,947
                                                                                       -----------    -----------

Company Obligated Mandatorily Redeemable
  Preferred Securities of Capital Re LLC                                                    75,000         75,000

Stockholders' Equity
Preferred stock - $.01 par value per share; 25,000,000 shares authorized; no
  shares issued and outstanding
   in 1999 and 1998                                                                             --             --
Common stock - $.01 par value per share; 75,000,000 shares
   authorized, 36,523,398 and 31,929,119 shares issued and
   outstanding in 1999 and 1998, respectively                                                  370            324
Additional paid-in capital                                                                 302,539        227,280
Retained earnings                                                                          218,449        355,693
Treasury stock; 428,000 and 428,000 shares in 1999 and 1998,  respectively                  (4,891)        (4,891)
Other Comprehensive Income
       Net unrealized (loss)/gain on fixed maturities securities available for sale,
            net of reclassification adjustment                                             (14,654)        32,520
       Net unrealized loss on foreign exchange translation                                    (100)          (100)
                                                                                       -----------    -----------
Accumulated Other Comprehensive Income                                                     (14,754)        32,420
                                                                                       -----------    -----------
Total Stockholders' Equity                                                                 501,713        610,826
                                                                                       -----------    -----------
Total Liabilities, Preferred Securities of Capital Re LLC and
   Stockholders' Equity                                                                $ 1,418,394    $ 1,508,773
                                                                                       ===========    ===========
</TABLE>

See Accompanying Notes to Unaudited Consolidated Financial Statements


                                       3
<PAGE>


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

<TABLE>
<CAPTION>
                                                                    Three Months Ended         Nine Months Ended
                                                                      September 30,              September 30,
                                                                       (Unaudited)                (Unaudited)
                                                                  ----------------------    ----------------------
                                                                       1999         1998         1999         1998
                                                                  ----------------------    ----------------------
<S>                                                                <C>          <C>          <C>          <C>
Revenues:
Orgination premiums written                                         $37,465      $41,435     $156,504     $159,367
Canceled Reinsurance                                                      0            0        9,567            0
                                                                   ---------------------     ---------------------
Gross premiums written                                              $37,465      $41,435     $146,937     $159,367
Ceded premiums                                                        1,446          810        4,644        2,330
                                                                   ---------------------     ---------------------
       Net premiums written                                          36,019       40,625      142,293      157,037
       Increase in deferred premium revenue                           6,887        5,590      (16,760)     (27,866)
                                                                   ---------------------     ---------------------
    Net premiums earned                                              42,906       46,215      125,533      129,171
Net investment income                                                17,590       16,413       52,440       48,465
Net realized gain                                                    (8,954)       1,848       (3,926)       4,309
Fee income                                                              258          100        1,017          717
Other income                                                             20           23           41          210
Equity income in affiliate                                            1,650          199        4,043          332
                                                                   ---------------------     ---------------------
     Total Revenues                                                  53,470       64,798      179,148      183,204
                                                                   ---------------------     ---------------------

Expenses:
Loss and loss adjustment expenses                                    12,234       21,085      200,161       33,677
Acquisition costs                                                    10,982       12,893       52,579       47,511
Decrease/(increase) in deferred acquisition costs                     1,130          774      (13,402)      (8,474)
Profit commission expense                                             4,218        3,844       11,446       14,432
Other operating expenses                                              2,522        4,496       10,511       12,352
Interest expense                                                      1,897        1,852        5,644        5,582
Foreign exchange loss                                                  (366)        (163)         358         (127)
Minority interest in Capital Re LLC                                   1,434        1,434        4,303        4,303
                                                                   ---------------------     ---------------------
       Total Expenses                                                34,051       46,215      271,600      109,256
                                                                   ---------------------     ---------------------

        (Loss)/income before provision for federal income taxes      19,419       18,583      (92,452)      73,948

(Benefit from)/provision for federal income taxes
     Current                                                          5,281         (721)     (12,778)      10,600
     Deferred                                                         1,068        4,969      (22,529)       9,056
                                                                   ---------------------     ---------------------
Total (benefit from)/provision for federal income taxes               6,349        4,248      (35,307)      19,656
                                                                   ---------------------     ---------------------

Net (loss)/income from continuing operations                        $13,070      $14,335     ($57,145)     $54,292

Discontinued operations:
Income from operations                                                    0          135            0          158
Loss on disposal                                                    (52,231)           0      (75,896)           0
                                                                   ---------------------     ---------------------
(Loss)/income from discontinued operations, net of tax              (52,231)         135      (75,896)         158

Net (Loss)/Income                                                  ($39,161)     $14,470    ($133,041)     $54,450
                                                                   =====================     =====================

Net (Loss)/Income from Continuing Operations
   Per Common Share:
                           Basic                                      $0.36        $0.45       ($1.69)       $1.70
                         Diluted                                      $0.36        $0.44       ($1.68)       $1.66

Net (Loss)/Income Per Common Share:
                           Basic                                     ($1.07)       $0.45       ($3.94)       $1.71
                         Diluted                                     ($1.07)       $0.44       ($3.91)       $1.66

Weighted Average Number of Shares Outstanding
                           Basic                                     36,523       31,912       33,792       31,871
                         Diluted                                     36,670       32,732       34,058       32,730

Cash dividends per common share                                       $0.04        $0.04        $0.12        $0.12
</TABLE>

See Accompanying Notes to Unaudited Consolidated Financial Statements


                                       4

<PAGE>


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

<TABLE>
<CAPTION>
                                                                             Three Months Ended       Nine Months Ended
                                                                               September 30,            September 30,
                                                                                (Unaudited)              (Unaudited)
                                                                            ---------------------   ---------------------
                                                                                1999        1998         1999        1998
                                                                            ---------------------   ---------------------
<S>                                                                         <C>          <C>        <C>           <C>
Net (Loss)/Income                                                           ($39,161)    $14,470    ($133,041)    $54,450
Other Comprehensive Income, net of tax:
    Unrealized holding losses arising during period                          (21,388)     12,810      (51,100)     14,851
    Reclassification adjustment for (losses)/gains included in net income      8,954      (1,848)       3,926      (4,309)
                                                                            ---------------------   ---------------------
  Change in net unrealized gain on fixed maturities securities
    available for sale                                                       (12,434)     10,962      (47,174)     10,542
  Change in foreign exchange translation                                           0         241            0         264
                                                                            ---------------------   ---------------------
Other Comprehensive (Loss)/Income                                            (12,434)     11,203      (47,174)     10,806
                                                                            ---------------------   ---------------------
Comprehensive (Loss)/Income                                                 ($51,595)    $25,673    ($180,215)    $65,256
                                                                            =====================   =====================
</TABLE>


See Accompanying Notes to Unaudited Consolidated Financial Statements




                                       5
<PAGE>


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


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

 Net Loss                                                           --         --   (133,041)      --          --         (133,041)

Exercise of stock options, including tax benefit (169,500 shares)    2      2,178         --       --          --            2,180

Fixed maturities securities available for sale adjustments          --         --         --       --     (47,174)         (47,174)

Issuance of common stock (4,424,779 shares) (additional paid
   in capital is net of capital issuance costs of $1,875)           44     73,081         --       --          --           73,125

 Dividend ($.12 per common share)                                   --         --     (4,204)      --          --           (4,204)
                                                                  ----------------------------------------------------------------

Balance, September 30, 1999                                       $370   $302,539   $218,449  ($4,891)   ($14,754)        $501,713
                                                                  ================================================================
</TABLE>

See Accompanying Notes to Unaudited Consolidated Financial Statements.


                                        6
<PAGE>
                     CAPITAL RE CORPORATION AND SUBSIDIARIES
                      Consolidated Statements of Cash Flows
                             (dollars in thousands)


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

 Net (loss)/income                                             ($133,041)     $54,450
                                                               ---------    ---------
  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                           (1,233)        (706)
  (Benefit from)/provision for deferred federal income taxes     (22,529)       9,127
  Acquisition costs deferred                                      52,579      (47,511)
  Amortization of deferred acquisition costs                     (65,981)      39,037
  Equity Income in affiliates                                     (4,043)        (332)
  Change in accrued investment income                                799         (737)
  Change in premiums receivable, net                              (1,129)     (11,513)
  Change in deferred premium revenue, net                         16,760       27,866
  Change in outstanding loss reserves, net                        15,229       16,916
  Net realized gain/(loss) on investments                          3,926       (4,309)
  Change in ceded balances payable                                   661        9,401
  Discontinued Operations, net                                    74,879        5,759
  Other                                                           13,746        7,690
                                                               ---------    ---------
 Net Cash (Used in)/Provided by Operating Activities             (49,349)     105,166


Investing Activities:

 Securities available for sale:
  Purchases - fixed maturities                                  (852,800)    (591,931)
  Sales-fixed maturites                                          950,554      482,031
 (Purchases)/maturities of short-term
  investments, net                                              (120,588)       2,537
 Other investing activities                                       (2,032)        (448)
                                                               ---------    ---------
  Net Cash Used in Investing Activities                          (24,866)    (107,811)

Financing Activities:

  Net proceeds from exercise of stock options                      2,180        1,692
  Net proceeds from issuance of stock                             73,125            0
  Dividends paid                                                  (4,204)      (3,826)
                                                               ---------    ---------
  Net Cash Provided/(Used) by Financing Activities                71,101       (2,134)
 Decrease in Cash                                                 (3,114)      (4,779)
 Cash at Beginning of Period                                       9,893       14,103
                                                               ---------    ---------
  Cash at End of Period                                           $6,780       $9,324
                                                               =========    =========
</TABLE>


See Accompanying Notes to Unaudited Consolidated Financial Statements.


                                       7
<PAGE>


                     CAPITAL RE CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

                               September 30, 1999


1. BASIS OF PRESENTATION

The accompanying  unaudited consolidated financial statements and footnotes have
been  prepared  in  accordance  with  the  instructions  to  Form  10-Q  and the
preparation  of  unaudited  interim  financial  statements  under  the Rules and
Regulations of the Securities and Exchange Commission and do not include all the
information  and   disclosures   required  by  generally   accepted   accounting
principles.  These  statements  should be read in  conjunction  with the audited
consolidated  financial  statements of Capital Re Corporation  and  Subsidiaries
(the  "Corporation")  included in the  Corporation's  1998 Annual Report on Form
10-K. The accompanying  unaudited  consolidated financial statements include all
adjustments,  consisting  only of normal  recurring  adjustments,  necessary  to
present fairly the Corporation's  financial  position and results of operations.
The results of operations  for the nine months ended  September 30, 1999 may not
be indicative  of the results that may be expected for the year ending  December
31, 1999.

As of January 1, 1998, the Corporation adopted Statement of Financial Accounting
Standard 130, "Reporting  Comprehensive Income" ("FAS 130"). FAS 130 establishes
new  rules  for the  reporting  and  display  of  comprehensive  income  and its
components;  however,  the adoption of FAS 130 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 FAS 130. For
the three  months and nine  months  ended  September  30,  1999 and 1998,  total
comprehensive  (loss)/income  amounted to ($51.6) million and ($180.2)  million,
and $25.7 million and $65.3 million, respectively.



                                       8
<PAGE>



2. REINSURANCE

Ceded earned  premium for both the three months and nine months ended  September
30, 1999 and 1998 were $3.6  million  and $11.1  million,  and $3.0  million and
$10.4 million, respectively. Ceded losses for the same periods were $5.1 million
and ($45.3)  million,  and ($1.5)  million and $1.3 million,  respectively.  The
($45.3)  million  relates  to non  recoverable  reinsurance  from  International
Financial Service Life Insurance Company ("IFS") on reinsurance ceded of certain
blocks of single premium and flexible premium in deferred annuities.

3. INCOME TAXES

The effective tax rate for the nine months ended  September 30, 1999 and 1998 is
lower  than  the  federal  corporate  tax  rate on  ordinary  income  of 35% due
principally to the effect of tax-exempt  interest  income.  No income taxes were
paid as of September  30, 1999 and $16.1 million of income taxes were paid as of
September 30, 1998.

4. SEGMENT REPORTING

The Corporation  provides  reinsurance to primary insurers in various  specialty
insurance markets. For segment reporting purposes, the Corporation's reinsurance
lines of  business  are  organized  into  four  discrete  segments  -  municipal
financial  guaranty,  nonmunicipal  financial  guaranty  (which  includes 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 reinsurance of municipal
bond  insurance  are  generally  paid in full at the  time of  policy  issuance,
credited to a deferred  premium account and then recognized as revenues over the
life of the reinsured  obligation.  As a result,  only a small portion of annual
premium revenue is derived from premiums written in any one year. Given the zero
expected loss underwriting standard,  this multi-year revenue translates into an
annuity  of earned  premiums,  which is itself  supplemented  by the  investment
income  derived  from the deferred  premiums  account.  Non-municipal  financial
guaranty  premiums  are  generally  paid in  installments  over  the life of the
underlying obligation, also providing an annuity of earned premiums.


                                       9
<PAGE>


Mortgage  guaranty  insurance  is  a  specialized  class  of  credit  insurance,
providing  protection to mortgage  lenders  against  default by borrowers on low
down-payment  residential  mortgage loans.  For the  Corporation's  proportional
mortgage guaranty business, reinsurance premiums are paid on a monthly basis and
fully recognized when written. Losses are expected in the proportional 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 the  non-proportional  mortgage  guaranty
business.

Credit  insurance  protects  suppliers  of goods and  services  from the risk of
non-payment by their customers.  Losses are also expected in this business.  The
business  strategy  is  based  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 them. 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 each  segment.  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) comprise the
Financial Guaranty Division while the Financial Risks Division includes mortgage
guaranty, trade credit, title and financial solutions.

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


<TABLE>
<CAPTION>
                                                                      Three Months Ended September 30, 1999
                                                                                Reportable Segments
                                                 -----------------------------------------------------------------------------------
                                                 Municipal    Non-Municipal      Mortgage       Credit        Other     Consolidated
                                                 -----------------------------------------------------------------------------------
<S>                                                  <C>              <C>           <C>          <C>          <C>            <C>
     Origination Written Premiums                    $7,022           $9,448        $8,836       $7,530       $4,629         $37,465
     Canceled Reinsurance                                 0                0             0            0            0               0
                                                  ----------------------------------------------------------------------------------
     Gross Written Premiums                           7,022            9,448         8,836        7,530        4,629          37,465
     Net Premiums Written                             6,164            9,315         8,729        7,363        4,448          36,019
     Net Premiums Earned                              9,638           10,007        13,409        5,294        4,558          42,906
     Net Underwriting (Loss)/Profit and Other
            Segment Related (Loss)/Income            $5,030           $5,581        $6,298       $1,132           $0         $18,042

</TABLE>


                                       10
<PAGE>


<TABLE>
<CAPTION>
                                                                      Nine Months Ended September 30, 1999
                                                                                Reportable Segments
                                                  ----------------------------------------------------------------------------------
                                                  Municipal    Non-Municipal      Mortgage       Credit        Other    Consolidated
                                                  ----------------------------------------------------------------------------------
<S>                                                 <C>              <C>           <C>          <C>          <C>            <C>
     Origination Written Premiums                   $40,306          $32,154       $45,477      $24,725      $13,842        $156,504
     Canceled Reinsurance                                 0            9,567             0            0            0           9,567
                                                  ----------------------------------------------------------------------------------
     Gross Written Premiums                          40,306           22,587        45,477       24,725       13,842         146,937
     Net Premiums Written                            37,471           21,461        45,370       24,347       13,644         142,293
     Net Premiums Earned                             24,663           25,066        39,046       22,831       13,927         125,533
     Net Underwriting (Loss)/Profit and Other
            Segment Related (Loss)/Income           $2,034)        ($45,598)       $11,813       ($198)    ($81,158)      ($117,175)


<CAPTION>
                                                                      Three Months Ended September 30, 1998
                                                                                Reportable Segments
                                                  ----------------------------------------------------------------------------------
                                                  Municipal    Non-Municipal      Mortgage       Credit        Other    Consolidated
                                                  ----------------------------------------------------------------------------------
<S>                                                 <C>               <C>          <C>          <C>           <C>            <C>
     Origination Written Premiums                   $7,828            $6,234       $13,091      $10,011       $4,271         $41,435
     Canceled Reinsurance                                0                 0             0            0            0               0
                                                  ----------------------------------------------------------------------------------
     Gross Written Premiums                          7,828             6,234        13,091       10,011        4,271          41,435
     Net Premiums Written                            7,139             6,164        13,092        9,959        4,271          40,625
     Net Premiums Earned                            12,756             6,834        13,712        8,544        4,369          46,215
     Net Underwriting Profit and Other
            Segment Related Income                  ($390)            $5,399        $4,986        ($377)      $1,063         $10,681



<CAPTION>
                                                                      Nine Months Ended September 30, 1998
                                                                                Reportable Segments
                                                  ----------------------------------------------------------------------------------
                                                  Municipal    Non-Municipal      Mortgage       Credit        Other    Consolidated
                                                  ----------------------------------------------------------------------------------
<S>                                                 <C>              <C>          <C>           <C>          <C>            <C>
     Origination Written Premiums                   $46,522          $18,420      $54,329       $28,295      $11,801        $159,367
     Canceled Reinsurance                                 0                0            0             0            0               0
                                                  ----------------------------------------------------------------------------------
     Gross Written Premiums                          46,522           18,420       54,329        28,295       11,801         159,367
     Net Premiums Written                            44,493           18,350       54,253        28,139       11,801         157,036
     Net Premiums Earned                             31,954           15,597       46,345        23,139       12,136         129,171
     Net Underwriting Profit and Other
            Segment Related Income                  $12,148          $12,122      $20,143        $2,352       $3,015         $49,780
</TABLE>



                                       11
<PAGE>



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

Net Segment Income                                       $18,042        $10,681
Investment Income and Net Realized
    Gains                                                  8,636         18,261
Other Income                                               1,928            322
Operating Expense, net                                    (5,856)        (7,395)
Interest Expense & Minority Int in Subs                   (3,331)        (3,286)
                                                       ------------------------

Consolidated Income Before Taxes                         $19,419        $18,583
                                                       ------------------------



                                                       Nine Months Ended
                                                         September 30,
Reconciliation to Consolidated Results                      1999           1998
                                                       ------------------------

Net Segment Income                                     ($117,175)       $49,780
Investment Income and Net Realized
    Gains                                                 48,514         52,774
Other Income                                               5,101          1,259
Operating Expense, net                                   (18,945)       (19,980)
Interest Expense & Minority Int in Subs                   (9,947)        (9,885)
                                                       ------------------------

Consolidated Income Before Taxes                        ($92,452)       $73,948
                                                       ------------------------



                                       12
<PAGE>


5. CAPITAL INVESTMENT

On June 15, 1999,  ACE Bermuda  Insurance  Ltd.,  a  subsidiary  of ACE Limited,
invested $75 million in the Corporation  through a purchase of common stock. The
proceeds  were  used to  augment  the  surplus  of the  Corporation's  operating
subsidiaries. Under the stock purchase agreement, as amended, the purchase price
was $16.95 common per share.

6. MERGER

On  October  6,  1999,  the  Corporation   announced  the  postponement  of  its
shareholder  meeting  scheduled  for  October 7, 1999 for  consideration  of the
proposed  merger with ACE Ltd.  ("ACE") in accordance with an Agreement and Plan
of Meger  dated as of June 10,  1999.  The  postponement  was the  result  of an
unsolicited bid received by the  Corporation  from XL Capital Ltd. on October 6,
1999. The Corporation's Board of Directors considered and responded to competing
bids from ACE and XL during the first three weeks of October.  As  announced  by
the  Corporation  on October 26, 1999, the  Corporation  signed a revised merger
agreement  with ACE,  which  increased the merger  consideration  payable to the
Corporation's  shareholders  from the 0.6 ACE ordinary  shares for each share of
the  Corporation's  Common  Stock  provided  for in the  June  10,  1999  Merger
Agreement,  to 0.65 ACE  ordinary  shares  for each  share of the  Corporation's
Common  Stock plus cash in an amount  equal to the greater of $1.30 per share or
an  amount   necessary  to  deliver   $14.00  in  value  to  the   Corporation's
shareholders,  up to a maximum  cash amount of $4.68 per share,  but in no event
less than $1.30 per share. The Corporation's shareholders would receive value of
$14.00  per share at closing  if the price of ACE's  ordinary  shares is between
$14.34 and $19.54 per ordinary  share.  If the price of ACE's ordinary shares is
below $14.34 per share or above $19.54 per share, the Corporation's shareholders
would receive less value or more value, respectively.  Closing is conditioned on
the  Corporation's  shareholders'  approval.  The Corporation  intends to call a
special meeting of its  shareholders to vote on the revised merger  agreement as
soon  as  practicable  following  filling  and  processing  of a  revised  proxy
statement/ prospectus materials.

7. LOSSES

Loss and loss adjustment expenses increased to $200.2 million from $33.7 million
for the nine months ended September 30, 1999 and 1998, respectively.  The $200.2
million is principally comprised of (i) an addition of $48.3 million to incurred
losses for reinsurance exposure to certain asset-backed  securities issued by or
on behalf of Commercial Financial Services (the "CFS Securities").  In 1998, the
Corporation  established  a loss  reserve  in the  amount of $44.1  million  for
expected losses and loss  adjustment  expenses on this  non-municipal  financial
guaranty  transaction.  The  increase  in  losses  incurred  in 1999 is based on
revised  collection  estimates  on the  assets  underlying  the  CFS  Securities
following a recently completed transfer of all servicing to the back-up servicer
under the transaction documents. On an ever to date basis, total incurred losses
for the CFS  Securities  total $92.4  million;  (ii) $75.2  million for incurred
losses in the financial  solutions line of business related to three reinsurance
transactions  with  International  Financial  Services  Life  Insurance  Company
("IFS").  This loss represents  probable  non-recoverable  reinsurance  from IFS
relating to  reinsurance  ceded on certain blocks of single premium and flexible
premium deferred



                                       13
<PAGE>


annuities.  In the  second  quarter of 1999,  IFS was  placed  under an order of
rehabilitation   by  the   Missouri   insurance   authorities.   The   order  of
rehabilitation  indicated  that a  substantial  portion  of the  invested  asset
portfolio of IFS, and its affiliates,  could not be located and IFS's ability to
pay  claims  was  severely  compromised;  (iii)  $28.5  million of losses in the
financial guaranty line of business of which approximately $14.6 million was for
certain  reinsured  municipal  obligations and  approximately  $13.9 million for
certain  reinsured  non-municipal  obligations.  These  financial  guaranty loss
reserves were recorded  following  various  events  occurring  during the second
quarter  and  evaluated  as  part  of  the   Corporation's   ongoing   portfolio
surveillance  efforts,  (iv) $16.1  million of  incurred  losses  related to the
credit line of business.  The  addition to the  incurred  losses was based on an
actuarial  review of the trade  credit line of business  conducted in the second
quarter,  which revealed a deficiency in such reserves  associated  with certain
underwriting  years and (v) $10.2  million of incurred  losses for the  mortgage
line of business.  Of that amount,  $3.6 million was recorded  after a review of
the emerging  loss  frequency  for several  underwriting  years  covered under a
specific  excess of loss  reinsurance  contract.  The  balance  of the  mortgage
reserves  are  associated  with paid and  incurred  losses  consistent  with the
Corporation's  second  quarter  actuarial  review and analysis of the  reinsured
mortgage portfolio.

8. DISCONTINUED OPERATIONS

The Corporation owns RGB Underwriting Agencies Ltd. ("RGB"), a Lloyd's of London
("Lloyd's")  managing  agency  which  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.  In the  third  quarter  of  1998,  the  Corporation  commenced  a plan  of
divestiture  of its  Lloyd's  operation.  Accordingly,  commencing  in the third
quarter of 1998, the Corporation  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.  Unable  to  dispose  of RGB on
acceptable  terms the Corporation  directed RGB to cease operations in the third
quarter of 1999 and initiated a run-off of the managed syndicates.  For the nine
months ended  September 30, 1999, the  Corporation  recorded a net loss from the
discontinued  Lloyd's  operations of ($75.9)  million.  Of the ($75.9)  million,
($11.7)  million  relates to the write-offs  ($6.4 million at March 31, 1999 and
$5.3 at June 30,  1999) of the  estimated  net  realizable  value of the Lloyd's
operations  as reflected on the  Corporation's  balance sheet as of December 31,
1998,  and an  additional  charge of ($12.0)  million  related to  Corporation's
revised  estimate  of the net  cost of  disposal  as of June 30,  1999,  ($15.0)
million  is  associated  with  costs to run-off  the  operations,  approximately
($35.0) million related to the  Corporation's  reevaluation of the Corporation's
best estimate  loss costs arising from the increased  emergence of claims in the
third quarter of 1999 and a ($2.2) million revision to estimate tax benefits. In
connection with CRC Capital's  capital  obligations to Lloyd's a payment will be
required on November 25, 1999 in the amount of approximately $21.0 million. This
payment will fund excepted losses and run-off expenses discussed above.

9. OTHER

Interest  paid for the nine months  ended  September  30, 1999 and 1998 was $3.8
million and $4.1 million, respectively.


                                       14
<PAGE>


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

General

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

The  Company  participates  in its  business  lines  through  five  wholly-owned
insurance   subsidiaries  and  two  joint  venture  vehicles.  Its  wholly-owned
subsidiaries are: Capital Reinsurance Company ("Capital  Reinsurance"),  Capital
Credit Reinsurance Company Ltd. ("Capital Credit"), Capital Mortgage Reinsurance
Company ("Capital  Mortgage"),  KRE Reinsurance Ltd. ("KRE"),  and Capital Title
Reinsurance  Company  ("Capital  Title").  The Company  owns a thirteen  percent
economic interest in ACE Capital Re Ltd. ("ACRE"),  a non-consolidated,  Bermuda
domiciled,  joint venture insurance company. The Company's joint venture partner
in ACRE is ACE Bermuda  Insurance,  Ltd.  ("ACE  Bermuda"),  a subsidiary of ACE
Limited.  In August 1999,  ACE Bermuda  contributed an additional $85 million in
equity to ACRE and the Company's  economic  interest in ACRE was thereby reduced
to 13.4 percent from 50 percent.  The Company also owns a fifty percent interest
in Lenders  Residential  Asset Company LLC (formerly,  Lenders Mortgage Alliance
Company LLC) ("LRAC"),  a  non-consolidated  Delaware limited liability company.
During the Second Quarter of 1999, the Company completed a reorganization of its
operating subsidiaries.  As part of the reorganization Capital Credit was merged
into KRE. KRE, the surviving company, is now a direct wholly-owned subsidiary of
the  Company.  Capital  Mortgage  and  Capital  Title  are  direct  wholly-owned
subsidiaries of KRE and KRE also holds the Company's equity interest in ACRE.

The  Company's  financial  guaranty  division  conducts its  business  primarily
through Capital Reinsurance.  Capital Reinsurance is a professional  reinsurance
company  dedicated  to serving the U.S.  domestic  and  international  financial
guaranty  insurance  markets and has established  itself as a leading  specialty
reinsurer  (by market share) of financial  guaranties  of investment  grade debt
obligations, principally municipal debt obligations. Capital Reinsurance applies
a "zero expected loss" standard to its underwriting  process,  which is premised
on a general  policy of reinsuring  only those  obligations  that are investment
grade on the date  reinsured  and where there is no  expectation  of loss on the
risk  reinsured.  Nevertheless,  losses  can be  expected  to occur  in  Capital
Reinsurance's   existing  and  future   reinsurance   and  credit  default  swap
portfolios.  At  the  same  time,  consistent  with  its  "zero  expected  loss"
underwriting  policies,  Capital  Reinsurance  has  pursued the  reinsurance  of
investment grade non-municipal debt obligations and directed its capacity to the
reinsurance of financial  guaranties of  asset-backed  securities.  In addition,
Capital Reinsurance reinsures municipal and non-municipal credit risk protection
on a  facultative  basis to a wide  variety  of  counterparties


                                       15
<PAGE>


through credit default swap  transactions  executed by KRE. Credit default swaps
are  underwritten in accordance with the same "zero expected loss" standard that
applies to Capital Reinsurance's  municipal and non-municipal financial guaranty
business.

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

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

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

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

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

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



                                       16
<PAGE>


1998,  the Company  commenced a plan of  divestiture  of its Lloyd's  operation.
Accordingly,  commencing  in the  third  quarter  of  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. Unable to dispose of RGB on acceptable terms the Company directed RGB
to cease operations in the third quarter of 1999 and initiated a run-offs of the
managed  syndicates..  For the nine months ended September 30, 1999, the Company
recorded a net loss from discontinued  Lloyd's operations of ($75.9) million. Of
the ($75.9) million,  ($11.7) million relates to the write-offs  ($6.4million at
March 31, 1999 and $5.3 at June 30, 1999) of the estimated net realizable  value
of the Lloyd's  operations  as reflected on the  Company's  balance  sheet as of
December  31,  1998,  and an  additional  charge  of $12.0  million  related  to
Company's  revised  estimated  of the net cost of  disposal  as of June 30, 1999
($15.0)   million  is   associated   with  costs  to  run-off  the   operations,
approximately  ($35.0)  million  related to the  Company's  reevaluation  of the
Company's  best estimate loss arising from the increased  emergence of claims in
the  third  quarter  of 1999 and a ($2.2)  million  revision  to  estimated  tax
benefits.  In connection  with CRC Capital's  capital  obligations  to Lloyd's a
payment  will be required on  November  25, 1999 in the amount of  approximately
$21.0  million.  This payment  will fund  excepted  losses and run-off  expenses
discussed above.

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


Results of Operations

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

Net income from continuing  operations  decreased to $13.1 million for the three
months ended  September  30, 1999 from $14.3 million for the  comparable  period
last  year.  On a per share  basis,  the  basic  and  diluted  net  income  from
continuing  operations  were both $0.36 for the three months ended September 30,
1999.  For the same period of 1998, on a per share basis,  basic and diluted net
income  from  continuing  operations  were  $0.45 and $0.44,  respectively.  The
decrease in net income from continuing  operations was primarily due to realized
capital  losses  on  sales  of  fixed  maturity  securities  in  the  investment
portfolio.

The Company recorded a ($39.2) million net loss including loss from discontinued
operations for the three months ended September 30, 1999. For the same period of
1998,  the  Company  recorded  net income  including  income  from  discontinued
operations of $14.5  million.  On a per share basis,  both basic and diluted net
income including loss from  discontinued  operations were ($1.07).  These losses
were primarily  attributable to negative results from the Company's discontinued
Lloyd's operations.


                                       17
<PAGE>


For the same period of 1998, on a per share basis,  basic and diluted net income
including   income   from   discontinued   operations   were  $0.45  and  $0.44,
respectively.

Origination  premiums  written  (i.e.,  gross premiums  written before  canceled
reinsurance)  decreased  9.6% to  $37.5  million  for  the  three  months  ended
September  30, 1999 from $41.4  million  for the same  period of 1998.  Mortgage
guaranty  reinsurance  premium  decreased  to $8.8  million for the three months
ended September 30, 1999 compared to $13.1 million in the third quarter of 1998.
This  decrease  was due to an increase in mortgage  prepayments  caused by lower
interest rates as well as the Company's shift from assuming quota share mortgage
guaranty reinsurance business toward assuming structured excess of loss mortgage
guaranty  reinsurance  business.  Credit  reinsurance  premium decreased to $7.5
million for the three months ended  September 30, 1999 compared to $10.0 million
in the third  quarter of 1998.  This  decrease was in response to the  Company's
planned  decrease in premiums  written in this line of  business.  Non-municipal
origination  premiums  written  increased  to $9.5  million for the three months
ended  September 30, 1999 from $6.2 million for the three months ended September
30, 1998 due to a significant increase in premiums written in the credit default
swaps sector of that business.  A credit  default swap is a transaction  whereby
one counterparty  pays a periodic fee in fixed basis points on a notional amount
in return for a contingent payment by the other counterparty in the event one or
more  defined  credit  events  occurs  with  respect to one or more third  party
reference  securities or loans. A credit event is generally defined as a failure
to pay, bankruptcy,  cross acceleration  (generally  accompanied by a failure to
pay),  repudiation,  restructuring,  or similar nonpayment event. Credit default
swap premium grew to $4.6 million for the three months ended  September 30, 1999
from $2.2  million in the prior year.  The  following  table  shows  origination
premiums  written by line of business for the three months ended  September  30,
1999 and September 30, 1998.

                                    Origination Premiums Written
                                         Three Months Ended
                                            September 30,
                                        (dollars in millions)
                                          1999          1998
                                         -----         -----
Financial Guaranty Division:
   Municipal                              $7.0          $7.8
   Non-Municipal                           9.5           6.2

Financial Risks Division:
   Mortgage                                8.8          13.1
   Credit                                  7.6          10.0
   Financial Solutions                     1.7           1.5
   Title                                   2.9           2.8
                                         -----         -----
Total Origination
Premiums Written                         $37.5         $41.4

Net premiums  written  decreased by 11.3% to $36.0  million for the three months
ended  September 30, 1999 from $40.6  million for the same period of 1998.  This
decrease is commensurate  with the explanation  described above for the decrease
in origination  premium.  The following table shows net premiums written by line
of business for the three  months ended  September  30, 1999 and  September  30,
1998.



                                       18
<PAGE>


                                        Net Premiums Written
                                         Three Months Ended
                                            September 30,
                                        (dollars in millions)
                                          1999          1998
                                         -----         -----
Financial Guaranty Division:
   Municipal                              $6.1          $7.1
   Non-Municipal                           9.3           6.2

Financial Risks Division:
   Mortgage                                8.7          13.1
   Credit                                  7.4          10.0
   Financial Solutions                     1.6           1.4
   Title                                   2.9           2.8
                                         -----         -----
Total Net
Premiums Written                         $36.0         $40.6


For the three months ended  September 30, 1999,  net premiums  earned  decreased
7.1% to $42.9  million  from  $46.2  million  for the  comparable  1998  period.
Municipal premiums earned decreased $3.2 million. This decrease was attributable
to a decrease  in refunded  earned  premium to $5.2 for the three  months  ended
September  30, 1999 from $6.6  million for the same period in the prior year.  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.  For the three months ended September 30, 1999
and September 30 1998,  ceded earned  premium was $3.6 million and $3.0 million,
respectively.  The following table shows net premiums earned by line of business
for the three months ended September 30, 1999 and September 30, 1998.

                                          Net Premiums Earned
                                          Three Months Ended
                                             September 30,
                                         (dollars in millions)
                                          1999          1998
                                         -----         -----
Financial Guaranty Division:
 Municipal                                $9.6         $12.8
 Non-Municipal                            10.0           6.8

Financial Risks Division:
  Mortgage                                13.4          13.7
  Credit                                   5.3           8.5
  Financial Solutions                      1.7           1.6
  Title                                    2.9           2.8
                                         -----         -----
Total Net
Premiums Earned                          $42.9         $46.2


                                       19
<PAGE>


For the three months ended September 30, 1999, net investment  income  increased
7.3% to $17.6 million from $16.4 million for the comparable  period of 1998. The
Company  recognized  net realized  losses of ($9.0) million for the three months
ended June 30,  1999  compared to  realized  gains of $1.8  million for the same
period of 1998. The capital losses resulted from of the  Corporation's  decision
to shorten the duration of its investment portfolio.

Loss and loss adjustment  expenses decreased to $12.2 million from $21.1 million
for the three  months  ended  September  30,  1999 and 1998,  respectively.  The
decrease in loss and loss  adjustment  expenses in the third quarter of 1999 was
due to $9.3 million  pre-tax  increase in the Company's  case basis loss reserve
recorded in the third quarter of 1998 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 a 1996  reinsurance  treaty.
Ceded losses for the three months  ended  September  31, 1999 and 1998 were $5.1
and ($1.5) million, respectively.

Total expenses,  excluding loss and loss adjustment expenses, decreased 13.1% to
$21.8  million for the three months ended  September 30, 1999 from $25.1 million
for the same  period  of 1998.  This  decrease  was  primarily  attributable  to
incentive  compensation related expenses accrued in the third quarter of 1998 in
the amount of $2.1  million  that are no longer  expected  to be  incurred.  Net
expenses  related to this  incentive  compensation  were  reversed in the fourth
quarter of 1998. As such, no  additional  expense has been accrued in 1999.  The
expense ratios for the three months ended September 30, 1999 and 1998 were 43.9%
and 47.6%, respectively.

For the three months ended  September  30, 1999,  the Company  recorded  federal
taxes of of $6.3 million.  For the three months ended  September  30, 1998,  the
Company recorded federal income taxes payable of $4.2 million.


Nine Months Ended September 30, 1999 versus Nine Months Ended September 30, 1998

The Company  recorded a ($57.1) million net loss from continuing  operations for
the nine months  ended  September  30,  1999.  For the same period of 1998,  the
Company recorded net income from continuing  operations of $54.3. On a per share
basis,  the basic and diluted net loss from  continuing  operations were ($1.69)
and ($1.68), respectively, for the nine months ended September 30, 1999. For the
same  period of 1998,  on a per share  basis,  basic and diluted net income from
continuing  operations  were $1.70 and $1.66,  respectively.  The losses for the
1999 period are  primarily  attributable  to additions to loss reserves and paid
losses on specific reinsured transactions as well as portfolio exposures.

The  Company  recorded  a  ($133.0)  million  net  loss,   including  loss  from
discontinued  operations  for the nine months ended  September 30, 1999. For the
same  period of 1998,  the Company  recorded  net income  including  income from
discontinued  operations  of $54.5  million.  On a per  share  basis,  basic and
diluted net income including loss from discontinued  operations were ($3.94) and
($3.91),  respectively for the nine months ends September 30, 1999. These losses
were primarily attributable to the additions to loss reserves described above as
well as negative results from the Company's


                                       20
<PAGE>


discontinued  Lloyd's  operations.  For the same period of 1998,  on a per share
basis,  both basic and diluted  net income  including  income from  discontinued
operations were $1.71 and $1.66, respectively.

Origination  premiums  written  (i.e.,  gross premiums  written before  canceled
reinsurance)  decreased  1.8% to  $156.5  million  for  the  nine  months  ended
September  30,  1999 from $159.4  million for the same period of 1998.  Mortgage
guaranty  reinsurance  premium  decreased  to $45.5  million for the nine months
ended  September 30, 1999 compared to $54.3 million in the comparable  period of
1998.  This  decrease was due to an increase in mortgage  prepayments  caused by
lower  interest  rates as well as the Company's  shift from assuming quota share
mortgage guaranty reinsurance business toward assuming structured excess of loss
mortgage guaranty reinsurance business.  Credit reinsurance premium decreased to
$24.7  million for the nine months ended  September  30, 1999  compared to $28.3
million in the  comparable  period of 1998.  This  decrease was in line with the
Company's  planned  decrease  in  premiums  written  in this  line of  business.
Non-municipal  origination  premiums written  increased to $32.2 million for the
nine months  ended  September  30,  1999 from $18.4  million for the nine months
ended  September 30, 1998 due to a significant  increase in premiums  written in
the credit  default swaps sector of that  business.  A credit  default swap is a
transaction  whereby one counterparty  pays a periodic fee in fixed basis points
on  a  notional  amount  in  return  for  a  contingent  payment  by  the  other
counterparty  in the event one or more defined credit events occurs with respect
to one or more third party  reference  securities  or loans.  A credit  event is
generally defined as a failure to pay, bankruptcy, cross acceleration (generally
accompanied  by a  failure  to  pay),  repudiation,  restructuring,  or  similar
nonpayment  event.  Credit  default swap  premium grew to $13.2  million for the
three months ended  September 30, 1999 from $4.3 million in the prior year.  The
following table shows  origination  premiums written by line of business for the
nine months ended September 30, 1999 and September 30, 1998.

                                    Origination Premiums Written
                                          Nine Months Ended
                                            September 30,
                                        (dollars in millions)
                                          1999          1998
                                        ------        ------
Financial Guaranty Division:
   Municipal                             $40.3         $46.5
   Non-Municipal                          32.2          18.4

Financial Risks Division:
   Mortgage                               45.5          54.3
   Credit                                 24.7          28.3
   Financial Solutions                     4.9           3.5
   Title                                   8.9           8.4
                                        ------        ------
Total Origination
Premiums Written                        $156.5        $159.3

Net premiums  written  decreased  by 9.4% to $142.3  million for the nine months
ended  September 30, 1999 from $157.0 million for the same period of 1998.  This
decrease is attributable to $9.6 million in canceled reinsurance  resulting from
the cancellation of a large non-municipal financial guaranty transaction as well
as the above explanations for the decrease in origination  premiums written. The
following  table shows net  premiums  written by line of  business  for the nine
months ended September 30, 1999 and September 30, 1998.


                                       21
<PAGE>


                                        Net Premiums Written
                                          Nine Months Ended
                                            September 30,
                                        (dollars in millions)
                                         1999          1998
                                        ------        ------
Financial Guaranty Division:
   Municipal                             $37.5         $44.5
   Non-Municipal                          21.5          18.4

Financial Risks Division:
   Mortgage                               45.4          54.3
   Credit                                 24.3          28.1
   Financial Solutions                     4.7           3.3
   Title                                   8.9           8.4
                                        ------        ------
Total Net
Premiums Written                        $142.3        $157.0


For the nine months ended September 30, 1999, net premiums  earned  decreased to
$125.5  million from $129.2 million for the  comparable  1998 period.  Municipal
premium earned decreased $6.3 million. This decrease was primarily  attributable
to a decrease  in  refunded  earned  premium to $8.6 for the nine  months  ended
September  30, 1999 from $14.5  million for the same period in the prior year. 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.  For the nine months ended September 30, 1999
and September 30 1998, ceded earned premium was $11.1 million and $10.4 million,
respectively.  The following table shows net premiums earned by line of business
for the nine months ended September 30, 1999 and September 30, 1998.

                                         Net Premiums Earned
                                          Nine Months Ended
                                            September 30,
                                        (dollars in millions)
                                          1999          1998
                                        ------        ------
Financial Guaranty Division:
 Municipal                               $24.7         $32.0
 Non-Municipal                            25.1          15.6

Financial Risks Division:
  Mortgage                                39.0          46.3
  Credit                                  22.8          23.1
  Financial Solutions                      5.1           3.8
  Title                                    8.8           8.4
                                        ------        ------
Total Net
Premiums Earned                         $125.5        $129.2

For the nine months ended  September 30, 1999, net investment  income  increased
8.0% to $52.4 million from $48.5 million for the comparable  period of 1998. The
Company  recognized  net realized


                                       22
<PAGE>


losses of ($3.9)  million for the nine months ended  September 30, 1999 compared
to $4.3 million for the same period of 1998.

Loss and loss adjustment expenses increased to $200.2 million from $33.7 million
for the nine months ended September 30, 1999 and 1998, respectively.  The $200.2
million is principally comprised of (i) an addition of $48.3 million to incurred
losses for reinsurance exposure to certain asset-backed  securities issued by or
on behalf of Commercial Financial Services (the "CFS Securities").  In 1998, the
Company  established  a loss reserve in the amount of $44.1 million for expected
losses and loss  adjustment  expenses on this  non-municpal  financial  guaranty
transaction.  The  increase  in  losses  incurred  in 1999 is based  on  revised
collection  estimates on the assets  underlying the CFS  Securities  following a
recently  completed  transfer of all servicing to the back-up servicer under the
transaction  documents.  On an ever to date basis, total incurred losses for the
CFS Securities  total $92.4 million;  (ii) $75.2 million for incurred  losses in
the  financial   solutions  line  of  business  related  to  three   reinsurance
transactions  with  International  Financial  Services  Life  Insurance  Company
("IFS").  This loss represents  probable  non-recoverable  reinsurance  from IFS
relating to  reinsurance  ceded on certain blocks of single premium and flexible
premium deferred annuities.  In the second quarter of 1999, IFS was placed under
an order of rehabilitation by the Missouri insurance  authorities.  The order of
rehabilitation  indicated  that a  substantial  portion  of the  invested  asset
portfolio of IFS, and its affiliates,  could not be located and IFS's ability to
pay  claims  was  severely  compromised;  (iii)  $28.5  million of losses in the
financial guaranty line of business of which approximately $14.6 million was for
certain  reinsured  municipal  obligations and  approximately  $13.9 million for
certain  reinsured  non-municipal  obligations.  These  financial  guaranty loss
reserves were recorded  following  various  events  occurring  during the second
quarter and evaluated as part of the Company's  ongoing  portfolio  surveillance
efforts,  (iv) $16.1  million of incurred  losses  related to the credit line of
business.  The addition to the incurred losses was based on an actuarial  review
of the trade  credit line of business  conducted  in the second  quarter,  which
revealed a deficiency  in such  reserves  associated  with certain  underwriting
years  and (v)  $10.2  million  of  incurred  losses  for the  mortgage  line of
business.  Of that  amount,  $3.6  million  was  recorded  after a review of the
emerging loss frequency for several  underwriting years covered under a specific
excess of loss reinsurance  contract.  The balance of the mortgage  reserves are
associated  with paid and incurred losses  consistent with the Company's  second
quarter actuarial review and analysis of the reinsured mortgage portfolio. Ceded
losses  for the nine  months  ended  September  30,  1999 and 1998 were  $(45.3)
million and $1.3 million, respectively.

Total expenses,  excluding loss and loss adjustment expenses,  decreased 5.5% to
$71.4  million for the nine months ended  September  30, 1999 from $75.6 million
for the same  period  of 1998.  This  decrease  was  primarily  attributable  to
incentive  compensation  related  expenses  accrued through the third quarter of
1998 in the amount of $5.0 million  that are no longer  expected to be incurred.
Net expenses related to this incentive  compensation were reversed in the fourth
quarter of 1998. As such, no  additional  expense has been accrued in 1999.  The
decrease was also due to a one time adjustment recorded in the second quarter of
1998 in the amount of $5.8 million to reclassify  expenses to profit  commission
expense  from  losses  incurred  based on the  terms of an  inforce  reinsurance
contract.  The expense  ratios for the nine months ended  September 30, 1999 and
1998 were 48.7% and 51.0%, respectively.


                                       23
<PAGE>


For the nine months ended September 30, 1999, the Company recorded federal taxes
recoverable of $35.3  million.  This was as a result of the  significant  losses
incurred  described  above.  For the nine months ended  September 30, 1998,  the
Company recorded federal income taxes payable of $19.7 million.


Liquidity and Capital Resources

The Company  relies on dividends  from Capital  Reinsurance  and KRE to fund its
payment of dividends on its capital stock and interest on its outstanding  debt.
The major sources of liquidity for Capital  Reinsurance are funds generated from
reinsurance premiums,  net investment income and maturing  investments.  Capital
Reinsurance is domiciled in the State of Maryland, and, under Maryland insurance
law, the amount of the surplus of Capital Reinsurance available for distribution
as dividends is subject to certain statutory restrictions.  The amount available
for  distribution  from  Capital  Reinsurance  during  1999 with  notice to, but
without prior approval of, the Maryland Insurance Commissioner is limited to 10%
of Capital  Reinsurance's  policyholders'  surplus as of December 31,  1998,  or
approximately  $32.3  million.  For the nine months  ended  September  30, 1999,
Capital Reinsurance paid dividends in the amount of $5.0 million to the Company.

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

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

Capital Title, also a wholly owned subsidiary of KRE, is subject to the New York
insurance laws and regulations governing title insurers. Accordingly,  dividends
may only be declared and  distributed out of earned surplus as defined under New
York  insurance  law and only if such  dividends  do not  reduce  the  company's
surplus to less than 50% of its outstanding  capital shares,  i.e., the value of
its  outstanding  common  equity.  Additionally,  no dividend may be declared or


                                       24
<PAGE>


distributed  in an  amount  which,  together  with  all  dividends  declared  or
distributed  by the company during the preceding  twelve months,  exceeds 10% of
the  company's   outstanding  capital  shares,   unless,  after  deducting  such
dividends,  it has a surplus at least equal to 50% of its statutory  reinsurance
reserve or a surplus at least equal to  $250,000,  whichever  is greater.  As of
December 31, 1998,  Capital  Title's maximum amount payable as a dividend during
1999 is approximately  $3.6 million.  During 1999, Capital Title has paid a $3.6
million dividend to KRE.

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


For the nine months  ended  September  30, 1999,  the Company  declared and paid
common dividends in the amount of $4.2 million or $0.12 per share.

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

Cash flows from  operations  for the nine months  ended  September  30, 1999 and
1998,  consisting of reinsurance premiums collected net of expenses,  investment
income and income taxes, were ($49.3) million and $105.2 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 September 30, 1999, cash and investments were approximately  $1.14 billion, a
decrease of $47.5 million,  or 4.0%, 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 September 30, 1999, the entire  investment  portfolio was
invested in highly rated fixed income securities.

At September 30, 1999,  approximately $113.2 million, or 10.0%, of the Company's
investment portfolio was composed of mortgage-backed  securities ("MBS"). Of the
MBS portfolio,  approximately  $92.3 million, or 81.5%, 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, 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


                                       25
<PAGE>


exposure  to  prepayments  by  purchasing  less  volatile  types  of MBS.  As of
September 30, 1999, $3.0 million,  or  approximately  2.7%, 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, $110.2 million, or 97.3%, 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 September 30, 1999, the Company had no securities such as interest
only securities,  principal only  securities,  or MBS purchased at a substantial
premium to par that have the potential for loss of a significant  portion of the
original  investment  due to changes in the  prepayment  rate of the  underlying
loans supporting the security.

Capital Reinsurance is party to a credit facility with Deutsche Bank AG (the "DB
Credit  Facility")  pursuant  to which  Deutsche  Bank AG  provides up to $100.0
million  specifically  designed to provide  rating agency  qualified  capital to
further support Capital Reinsurance's  claims-paying  resources.  This agreement
expires  January 27, 2006.  Capital  Reinsurance  has not borrowed  under the DB
Credit  Facility.  In addition,  on August 20, 1996, the Company  entered into a
credit  agreement with Chase Manhattan Bank for the provision of a $25.0 million
credit facility (the "Chase  Facility") which is available for general corporate
purposes.  Furthermore,  on August 26, 1996, the Company utilized $16 million of
the Chase  Facility  for  purposes of paying  subordinated  notes that came due.
Interest on the bank note issued under the Chase  Facility is payable  quarterly
based upon the  Company's  chosen  interest  rate option  under the terms of the
Chase Facility.  In November 1996, the Company utilized the remaining $9 million
of the Chase  Facility  for purposes of  acquiring  RGB.  Under the terms of the
Chase Facility,  borrowed principal in the amount of $25 million becomes payable
in full on November 16, 1999. The company is currently  negotiating an extension
of the payment date of the Chase Facility.

On March 10, 1999, Moody's Investors Service, Inc. ("Moody's") announced that it
had downgraded the financial strength rating of Capital  Reinsurance to Aa2 from
Aaa. This action ended a review process that began on November 5, 1998.  Moody's
cited  increased  competition  in the monoline  financial  guaranty  reinsurance
industry,  an increased  risk profile in business  assumed and rising  operating
leverage  as  reasons  for  the  downgrade.  Under  certain  of its  reinsurance
agreements  with  two  of  its  financial  guaranty  ceding  companies,  Capital
Reinsurance  has agreed to increase  the ceding  commission  payable  under such
agreements as a result of the rating action by Moody's.  The increase applies to
in-force and future business ceded by those companies.  Total additional  ceding
commission  expense  amounted  to  approximately  $11.8  million.  The  expected
additional  ceding


                                       26
<PAGE>


commission will be amortized as the related  reinsurance  premium is earned. The
reinsurance  agreements with the two ceding  companies also give those companies
an option to reassume  business  previously  ceded to Capital  Reinsurance  upon
certain  adverse rating actions;  however,  those options to fully reassume were
not 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;   that  company  is  currently
considering whether or not to exercise the option to reassume.

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

On June 15,  1999,  ACE Bermuda  Insurance  Ltd.,  a  subsidiary  of ACE Limited
("ACE"), invested $75 million in the Company through a purchase of common stock.
The proceeds were used to support the Company's ongoing business activity. ACE's
investment is equal to approximately 13% of the Company.

On October 6, 1999,  Capital Re announced the  postponement  of its  shareholder
meeting  scheduled for October 7, 1999 for  consideration of the proposed merger
with ACE Ltd.  ("ACE") in accordance  with an Agreement and Plan of Merger dated
as of June 10,  1999.  The  postponement  was the result of an  unsolicited  bid
received  by Capital Re from XL Capital  Ltd. on October 6, 1999.  Capital  Re's
Board of Directors  considered  and responded to competing  bids from ACE and XL
during the first three weeks of October.  As announced by the Company on October
26, 1999,  Capital Re signed a revised merger agreement with ACE which increased
the  merger  consideration  payable to  Capital  Re  shareholders  from the (the
"Revised  Meger  Agreement")  0.6  of  ACE  ordinary  shares  for  each  of  the
Corporation's  Common Stocks provided for in the June 10, 1999 Merger Agreement,
to 0.65 ACE  ordinary  shares for each share of the  Corporation's  Common Stock
plus  cash in an  amount  equal to the  greater  of $1.30 per share or an amount
necessary to deliver $14.00 in value to Capital Re shareholders, up to a maximum
cash  amount of $4.68 per  share,  but in no event be less than $1.30 per share.
Capital Re  shareholders  would  receive value of $14.00 per share at closing if
the price of ACE's  ordinary  shares is between  $14.34 and $19.54 per  ordinary
share.  If the price of ACE's ordinary shares is below $14.34 per share or above
$19.54  per share,  Capital Re  shareholders  would  receive  less value or more
value,  respectively.  Closing  is  conditioned  on Capital  Re's  shareholders'
approval.  Capital Re intends to call a special  meeting of its  shareholders to
vote on the revised merger agreement as soon as practicable following processing
of a revised proxy  statement/  prospectus  materials.  In  connection  with the
revised Merger  Agreement,  the Company and ACE entered into a Stand-By  Capital
Commitment  under which the Company  may borrow up to $50 million  upon  demand.
Under certain circumstance,  ACE may convert outstanding  borrowings into common
equity of the company at $14 per share.

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


                                       27
<PAGE>


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  September  30, 1999 that are  sensitive  to changes in interest
rates.  The table presents cash flows of principal  amounts and related weighted
average  interest rates by expected  maturity dates. The cash flows are based on
the  earlier  of the call  date or the  maturity  date or,  for  mortgage-backed
securities,  expected payment patterns.  Actual cash flows could differ from the
expected amounts.
                           Long-term Fixed Maturities
                    Expected Cash Flows of Principal Amounts
                              (dollars in millions)

<TABLE>
<CAPTION>
                                                                                                             Amortized    Market
                                               1999     2000      2001      2002      2003     Thereafter      Cost       Value
                                              ------   ------    ------    ------    ------      ------       ------      ------
<S>                                             <C>     <C>       <C>       <C>       <C>        <C>          <C>         <C>
Tax-exempt                                      $0.0     $1.8       $.8      $1.8     $10.8      $475.0       $490.2      $485.3

    Average Interest Rate                        0.0%     5.7%      6.3%      6.4%      7.0%        5.7%          --          --

Taxable-other than mortgage-backed               3.7     42.2      37.4      39.5      23.3       185.6        331.7       323.3
securities
    Average Interest Rate                        7.6%     6.3%      7.5%      6.5%      6.6%        5.6%          --          --

Mortgage-backed securities                       2.9     10.8      10.1       9.1       9.3        72.7        114.9       113.2

    Average Interest Rate                        7.1%     7.0%      7.0%      6.9%      6.9%        6.9%          --          --
                                              ------   ------    ------    ------    ------      ------

Total                                           $6.6    $54.8     $48.3     $50.4     $43.4      $733.3       $936.8      $921.8
                                              ------   ------    ------    ------    ------      ------       ------      ------
</TABLE>



                                       28
<PAGE>


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 September  30, 1999,  approximately  24.1% of taxable bonds were
issued by the U.S. Treasury or U.S.  government agencies and approximately 67.1%
were  rated  AA  or  better  by  Moody's  or  S&P.  Of  the  tax  exempt  bonds,
approximately  97.9% were rated AA or better  with more than 79.5% rated AAA. At
September  30, 1999,  both  taxable and tax exempt bonds had a weighted  average
maturity of approximately 9.52 years.

The Company's taxable bond portfolio includes mortgage-backed securities,  which
comprised  25.7% of the portfolio at September 30, 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. In all material respects, the Company's systems are year 2000
compliant.

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.



                                       29
<PAGE>


     o    Administration/Human Resources; Operating System Software; Network/Lan
          Utilities;   Desktop  Hardware:   These  applications  are  Year  2000
          compliant.

     o    General Office Services:. These systems are Year 2000 compliant.

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


                                       30
<PAGE>


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.





                                       31
<PAGE>


                           Long-term Fixed Maturities


PART II - OTHER INFORMATION


Item 6 EXHIBITS AND REPORTS ON FORM 8-K


     (A)  THE FOLLOWING IS ANNEXED AS AN EXHIBIT:

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

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

     (B)  REPORTS ON FORM 8-K:

          None.


                                       32
<PAGE>






                                INDEX TO EXHIBITS



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

11.       STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
          (UNAUDITED)                                                       34





                                       33
<PAGE>


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 15, 1999                   BY /S/ DAVID A. BUZEN
                                             ------------------
                                             DAVID A. BUZEN
                                             EXECUTIVE VICE PRESIDENT AND
                                             CHIEF FINANCIAL OFFICER



DATE: NOVEMBER 15, 1999                   BY /S/ ALAN S. ROSEMAN
                                             -------------------
                                             ALAN S. ROSEMAN
                                             EXECUTIVE VICE PRESIDENT,
                                             GENERAL COUNSEL AND SECRETARY



                                       34