Capital Re Corporation, Capital Reinsurance, Capital Mortgage, Capital Title and Capital Re Solutions Incorporated maintain offices at 1325 Avenue of the Americas, New York, New York 10019. The office comprises the entire 18th floor of the building, approximately 23,000 square feet of space. The companies began occupying these offices in April 1993. Prior to that, Capital Re and Capital Reinsurance maintained offices at 787 Seventh Avenue, New York, New York. The offices at 787 Seventh Avenue were sublet to a third party upon the move to 1325 Avenue of the Americas. The Company has exercised an option to lease an additional 9,000 square feet of space on the 17th floor at 1325 Avenue of the Americas commencing on March 5, 1999. The Company also rents approximately 2,000 square feet of office space at Hasilwood House, 60 Bishopgate, London, England.
since in 1998 the Corporation commenced a plan of divestiture of its Lloyd's operations. All prior period results have been restated for comparative purposes.
For the year ended December 31, 1998, the total federal tax provision decreased to $10.7 million from $26.6 million for the same period in 1997. In addition, the effective tax rate decreased to 19.4% for the year ended December 31, 1998 from 27.3% for the same period of 1997.
Gross premiums written increased 30.9% to $169.9 million for the year ended December 31, 1997 from $129.8 million for the same period in 1996. Gross premiums written increased across all product lines. In addition, in 1997 the Corporation added a financial solutions line of business. The financial solutions business is focused on providing highly structured solutions to problems of financial and risk management through reinsurance, including credit enhancement, excess of loss and surplus management covers. The following table shows gross premiums written by line of business for the years ended December 31, 1997 and December 31, 1996.
Loss and loss adjustment expenses increased to $15.6 million from $9.5 million for the years ended December 31, 1997 and 1996, respectively. Losses recorded for the year ended December 31, 1997 were primarily attributable to the normal loss development in the mortgage guaranty and credit reinsurance lines of business. Ceded losses for the years ended December 31, 1997 and 1996 were $6.6 million and $6.5 million, respectively.
Capital Credit's major sources of liquidity are funds generated from reinsurance premiums, net investment income and maturing investments. Capital Credit is a Bermuda domiciled insurer whose distributions are governed by Bermuda law. Under Bermuda law and the by-laws of Capital Credit, dividends may be paid out of the profits of the company (defined as accumulated realized profits less accumulated realized losses). Distributions to shareholders may also be paid out of Capital Credit's surplus limited by requirements that such company must at all times (i) maintain the minimum share capital required under Bermuda law and (ii) have relevant assets in an amount equal to or greater than 75% of relevant liabilities, all as defined under Bermuda law. Capital Credit paid its first dividend to the Corporation in October 1998 in the amount of $4.0 million.
Capital Title is subject to the New York insurance laws and regulations governing title insurers. Accordingly, dividends may only be declared and distributed out of earned surplus as defined under New York insurance law and only if such dividends do not reduce the company's surplus to less than 50% of its outstanding capital shares, i.e., the value of its outstanding common equity. Additionally, no dividend may be declared or distributed in an amount which, together with all dividends declared or distributed by the company during the preceding twelve months, exceeds 10% of the company's outstanding capital shares, unless, after deducting such dividends, it has a surplus at least equal to 50% of its statutory reinsurance reserve or a surplus at least equal to $250,000, whichever is greater. Capital Title did not pay a dividend in 1998. As of December 31, 1998, Capital Title's maximum amount payable as a dividend during 1999 is approximately $3.6 million.
The following is a summary of the Corporation's internal readiness status:
Stock Based Compensation: The Corporation grants stock options to certain employees for a fixed number of shares with an exercise price equal to the fair value of the shares at the date of grant. The Corporation accounts for stock option grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes no compensation expense for the stock option grants.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which is effective for fiscal years beginning after December 15, 1997. SFAS No. 130 establishes standards for the reporting item, termed comprehensive income, which will combine net income and certain items that directly affect stockholders' equity, such as net unrealized gain/loss on fixed maturity securities available for sale and foreign currency translation adjustments. The Corporation has elected to report comprehensive income in a separate statement. SFAS No. 130 will have no impact on the financial condition or results of operations of the Corporation.
In June 1998, The FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is required to be adopted in years beginning after June 15, 1999. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in the fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehenstive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. Management has determined that it is likely that its credit default swap business will be subject to the requirements of SFAS 133. The Corporation is in the process of determining what the effect of Statement 133 will be on its earnings and financial position.
California $ 6.1 New York 5.6 Florida 2.9 Texas 2.9 Pennsylvania 2.2 New Jersey 2.0 Illinois 1.9 Massachusetts 1.8 Puerto Rico 1.6 Ohio 1.4 Washington 1.4 Others (each less than 2%) 27.2 ----- $57.0 =====
December 31, 1998 1997 -------------------- (Dollars in Thousands) 7.75% debentures due 2002, net of unamortized discount of $0.2 million in 1998 and 1997 ("Debentures") $74,856 $74,819 Bank note payable 25,000 25,000 -------------------- Total $99,856 $99,819 ====================
The following methods and assumptions were used by the Corporation in estimating its fair value disclosure for financial instruments. These determinations were made based on available market information and appropriate valuation methodologies. Considerable judgment is required to interpret market data to develop the estimates and therefore, they may not necessarily be indicative of the amount the Corporation could realize in a current market exchange.
The Corporation also maintains a profit sharing plan which is available to all full-time employees with a minimum of six months of service. Annual contributions to the plan are at the discretion of the Board of Directors. The plan contains a qualified portion and a nonqualified portion. Total expense incurred under the plan amounted to approximately $0.3 million in 1998, 1997 and 1996.