Capital Re Corporation (the "Corporation") was incorporated in the State of Delaware in December 1991, and is the successor by merger to a Maryland corporation incorporated in 1986. The Corporation is an insurance holding company and has six wholly owned operating subsidiaries. Capital Reinsurance Company ("Capital Reinsurance"), domiciled in the State of Maryland, commenced operations in January 1988. Capital Reinsurance is engaged in the business of financial guaranty reinsurance, primarily the reinsurance of municipal and non- municipal bond insurance obligations. Capital Mortgage Reinsurance Company ("Capital Mortgage"), a New York domiciled company, commenced operations in February 1994. Capital Mortgage reinsures only residential mortgage guaranty insurance obligations. KRE Reinsurance Ltd. (formerly Capital Mortgage Reinsurance Company (Bermuda) Ltd.) ("KRE"), a Bermuda domiciled company, commenced operations in March 1994. KRE is engaged in the business of reinsuring financial guaranty, mortgage guaranty, financial insurance, trade credit and other specialty lines of insurance, both as a direct reinsurer of third party primary insurers and as a retrocessionaire of Capital Reinsurance, Capital Mortgage, Capital Credit Reinsurance Company Ltd. ("Capital Credit") and Capital Title Reinsurance Company ("Capital Title"). Capital Credit, also a Bermuda domiciled insurance company, commenced operations in February 1990. Capital Credit reinsures trade credit, political risk, and other specialty insurance lines concentrated in Western Europe and the United States and is a retrocessionaire of Capital Reinsurance and Capital Mortgage. Capital Title, a New York domiciled insurance company, commenced operations in March 1996. Capital Title is engaged in the business of reinsuring title insurance policies.
In November 1996, the Corporation acquired, through its newly formed United Kingdom holding company, Capital Re (UK) Holdings, 100% of the issued shares of Tower Street Holdings Limited (now known as RGB Holdings, Ltd.), the holding company for RGB Underwriting Agencies Ltd. ("RGB"). RGB is a managing agency and presently manages five syndicates operating in the Lloyd's of London ("Lloyd's") insurance market. In connection with this acquisition, the Corporation established a corporate name at Lloyd's, CRC Capital, Ltd. ("CRC"), to support underwriting on certain of the managed syndicates. CRC participates in a non-marine and a life syndicate. In November 1997, RGB Holdings, Ltd. acquired 100% of C.I. de Rougemont Group Limited, the ultimate holding company for C.I. de Rougemont & Co. Ltd. ("CIDR"), another Lloyd's managing agency. CIDR manages two syndicates, one marine and the other non-marine. Effective January 1, 1998, the CIDR non-marine syndicate was merged with the non-marine syndicate of RGB. CRC will participate in the business of the newly acquired managed syndicates beginning in 1998. At December 31, 1997 and 1996, the results of RGB, CIDR and CRC are consolidated in the Corporation's financial statements.
In December 1996, the Corporation entered into a joint venture with Global Capital Reinsurance Limited ("GCR"), to form a Bermuda based insurer, Capital Global Underwriters Limited
("CGUL"), which specializes in financial lines reinsurance. In April 1997, GCR was acquired by EXEL Limited ("EXCEL"). In March 1998, EXEL sold its share of CGUL to Bermuda based ACE Limited and CGUL was renamed ACE Capital Re Ltd. The Corporation, through its subsidiary, KRE, owns a fifty-percent interest in ACE Capital Re Ltd. and controls 9.9% of its voting stock. The Corporation accounts for its investment in ACE Capital Re Ltd. under the equity method.
Net income for the year ended December 31, 1997 increased 24.1% to $70.1 million from $56.5 million for the same period of 1996. The Company adopted Statement of Financial Standards No. 128, "Earnings per Share" ("FAS 128"), as of December 31, 1997. FAS 128 requires the calculation and presentation on the face of the income statement of basic earnings per share and, if applicable, diluted earnings per share. Basic earnings per share is calculated based on the weighted average common shares outstanding. All potentially dilutive securities such as stock options and convertible securities are excluded from the basic earnings per share calculation. In calculating diluted earnings per share, the number of shares is increased to include all potentially dilutive securities, including stock options and convertible securities. On a per share basis, basic and diluted net income increased to $4.41 and $4.31, respectively, for the year ended December 31, 1997 from $3.61 and $3.54, respectively, for the same period of 1996, or 22.2% and 21.8%, respectively. In addition, net operating income (net income excluding realized gains and losses) increased 17.6% to $65.1 million for the year ended December 31, 1997 from $55.3 million for the same period in 1996. On a per share basis, basic and diluted net operating income increased to $4.10 and $4.00, respectively, for the year ended December 31, 1997 from $3.53 and $3.47, respectively, for the same period of 1996, or 16.1% and 15.3%, respectively. Growth in net premiums earned to $133.7 million from $92.4 million, or 44.7%, was the principal cause of the increase in net income. Growth in net premiums earned is a result of the Corporation's Lloyd's participation through CRC as well as growth in the financial guaranty, mortgage, trade credit and other specialty reinsurance lines of business.
For the year ended December 31, 1997, net premiums earned increased 44.7% to $133.7 million from $92.4 million for the comparable 1996 period. This increase was primarily due to growth in net premiums earned across all product lines of business as well as the addition of the Lloyd's line
of business. For the year ended December 31, 1997, net refunded earned premium decreased to $4.8 from $5.8 million for the comparable period in 1996. Excluding the effects of net refunded earned premium, net premiums earned increased 48.8% to $128.9 million for the year ended December 31, 1997 from $86.6 million for the year ended December 31, 1996. A refunding extinguishes the Corporation's reinsurance liability for the refunded obligation and the Corporation then recognizes revenue equal to the remaining related deferred premium revenue. For the years ended December 31, 1997 and 1996, ceded earned premium was $21.2 million and $14.7 million, respectively. The following table shows net premiums earned by line of business for the years ended December 31, 1997 and December 31, 1996.
For the year ended December 31, 1997, net investment income increased 9.7% to $56.6 million from $51.6 million for the comparable period in 1996. Growth in investment income was primarily attributable to a larger investment portfolio caused by an increase in invested assets from positive operating cash flows during the twelve months ended December 31, 1997. In addition, the Corporation recognized net realized gains of $8.0 million for the year ended December 31, 1997 compared to $1.5 million for same period in 1996.
Loss and loss adjustment expenses increased to $27.4 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 expected loss recognition associated with the addition of the Lloyd's line of business as well as 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 $8.8 million and $6.5 million, respectively.
Gross premiums written increased 20.6% to $129.8 million for the year ended December 31, 1996 from $107.6 million for the same period of 1995. This increase was primarily due to growth in the mortgage guaranty, trade credit and other specialty lines of business. In addition, Capital Title established its first reinsurance relationships in 1996, which contributed $1.8 million in premiums written for the year ended December 31, 1996. Non-municipal premiums written decreased to $10.9 for the year ended December 31, 1996 million from $17.2 million for the same period in 1995 because of the positive impact on gross premiums written in the fourth quarter of 1995 of several large reinsurance transactions, which had upfront premium payments. The following table shows gross written premiums by line of business for the year ended December 31, 1996 and December 31, 1995.
For the year ended December 31, 1996, net premiums earned increased 53.7% to $92.4 million from $60.1 million for the comparable 1995 period. This increase was primarily due to growth in net premiums earned in the mortgage, credit and specialty reinsurance lines of business. For the year ended December 31, 1996, net refunded earned premium increased to $5.8 from $0.8 million for the comparable period in 1995. Excluding the effects of net refunded earned premium, net premiums earned increased 46.2% to $86.7 million for the year ended December 31, 1996 from $59.3 million for the year ended December 31, 1995. A refunding extinguishes the Corporation's reinsurance liability for the refunded obligation and the Corporation then recognizes revenue equal to the remaining related deferred premium revenue. For the years ended December 31, 1996 and 1995, ceded earned premium was $14.7 million and $8.0 million, respectively.
The following table shows net premiums earned by line of business for the years ended December 31, 1996 and December 31, 1995.
Loss and loss adjustment expenses increased to $9.5 million from $2.6 million for the year ended December 31, 1996 and 1995, respectively. Losses recorded in the year ended December 31, 1996 were primarily attributable to normal loss development in the mortgage guaranty and credit reinsurance lines of business which constitute an increasing portion of the Corporation's assumed book of business. Ceded losses for the year ended December 31, 1996 and 1995 were $6.5 million and $2.6 million, respectively.
Credit Re Corporation, a wholly owned subsidiary of the Corporation, relies on dividends from its wholly owned subsidiary, Capital Credit, for funds to be provided to the Corporation. Capital Credit's major sources of liquidity are funds generated from reinsurance premiums, net investment income and maturing investments. Capital Credit is a Bermuda domiciled insurer whose distributions are governed by Bermuda law. Under Bermuda law and the by-laws of Capital Credit, dividends may be paid out of the profits of the company (defined as accumulated realized profits less accumulated realized losses). Distributions to shareholders may also be paid out of Capital Credit's surplus limited by requirements that such company must at all times (i) maintain the minimum share capital required under Bermuda law, and (ii) have relevant assets in an amount equal to or greater than 75% of relevant liabilities, all as defined under Bermuda law. Since its organization, Capital Credit has not declared nor paid any dividends.
not declared nor paid any dividends. The maximum dividend payable by Capital Mortgage during 1998 is $0 since its earned surplus was ($0.4) million as of December 31, 1997.
Capital Title is subject to the New York insurance laws and regulations governing title insurers. Accordingly, dividends may only be declared and distributed out of earned surplus as defined under New York insurance law and only if such dividends do not reduce the company's surplus to less than 50% of its outstanding capital shares, i.e., the value of its outstanding common equity. Additionally, no dividend may be declared or distributed in an amount which, together with all dividends declared or distributed by the company during the preceding twelve months, exceeds 10% of the company's outstanding capital shares, unless, after deducting such dividends, it has a surplus at least equal to 50% of its statutory reinsurance reserve or a surplus at least equal to $250,000, whichever is greater. During 1997, Capital Title paid a dividend in the amount of $1.1 million to its immediate parent, KRE. As of December 31, 1997, Capital Title's maximum amount payable as a dividend during 1998 is approximately $1.3 million.
On February 12, 1996, the Corporation completed a public offering of approximately 3.5 million shares of common stock. Of the 3.5 million shares, an institutional shareholder sold 2.6 million shares and the Corporation sold 853,120 shares in the public offering generating net proceeds to the Corporation of approximately $25.9 million of which $21.5 million was used to complete the $25 million capitalization of Capital Title. The remaining $4.4 million was used for Corporation expenses associated with the public offering and general corporate purposes. The Corporation received no proceeds from the institutional shareholder's sale of shares.
Cash flows from operations for the year ended December 31, 1997 and 1996, consisting of reinsurance premiums collected net of expenses, investment income and income taxes, were $143.5 million and $95.9 million, respectively. The Corporation believes that current levels of cash flow from operations provide the Corporation with sufficient liquidity to meet its operating needs. The Corporation's non-operating cash outflows are primarily dedicated to (i) fixed- income investment activity, (ii) the payment of dividends on its common shares, (iii) payments of interest on long-term debt and (iv) the payment of its loan obligations to Capital Re LLC.
At December 31, 1997, cash and investments approximated $1.03 billion, an increase of $113.6 million, or 12.4%, from $916.4 million at December 31, 1996. In managing its investment portfolio, the Corporation places a high priority on quality and liquidity. As of December 31, 1997, the entire investment portfolio was invested in highly rated fixed income securities.
At December 31, 1997, approximately $155.4 million, or 15.4%, of the Corporation's investment portfolio was comprised of mortgage-backed securities ("MBS"). Of the MBS portfolio, approximately $132.7, million or 85.4%, is backed by agencies or entities sponsored by the U.S. government as to the full amount of principal and interest. As of December 31, 1997, the entire MBS portfolio was invested in triple A rated securities.
Prepayment risk is an inherent risk of holding MBS. However, the degree of prepayment risk is particular to the type of MBS held. The Corporation limits its exposure to prepayments by purchasing less volatile types of MBS. As of December 31, 1997, $3.7 million, or approximately 2.4%, 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, $151.7 million, or 97.6%, was invested in mortgage- backed pass-throughs or sequential CMOs. Pass-throughs are securities in which the monthly cash flows of principal and interest (both scheduled and prepayments) generated by the underlying mortgages are distributed on a pro-rata basis to the holders of securities. A sequential MBS is structured to divide the CMO security into sequentially ordered classes. Receipt of principal payments within classes is contingent on the retirement of all previously paying classes. Generally, interest payments are made currently on all classes. While these securities are more sensitive to prepayment risk than PACs, they are not considered highly volatile securities. While the Corporation may consider investing in any tranche of a sequential MBS, the individual security's characteristics (duration, relative value, underlying collateral, etc.) along with aggregate portfolio risk management determine which tranche of sequential MBS will be purchased. At December 31, 1997, the Corporation had no securities such as interest only
securities, principal only securities, or MBS purchased at a substantial premium to par that have the potential for loss of a significant portion of the original investment due to changes in the prepayment rate of the underlying loans supporting the security.
In addition, on August 20, 1996, the Corporation entered into a credit agreement with Chase Manhattan Bank for the provision of a $25.0 million credit facility (the "Chase Facility") which is available for general corporate purposes. Furthermore, on August 26, 1996, the Corporation utilized $16 million of the Chase Facility for purposes of paying subordinated notes which came due. Interest on the bank note issued under the Chase Facility is payable quarterly based upon the Corporation's chosen interest rate option under the terms of the Chase Facility. In November 1996, the Corporation utilized the remaining $9 million of the Chase Facility for purposes of acquiring RGB.
The Corporation is addressing the Year 2000 issue. The Company has initiated a plan to review its internal computer systems. It also has initiated discussions with its significant clients and other entities to ensure that those parties have appropriate plans to correct Year 2000 issues where their systems interface with the Corporation's systems or otherwise impact its operations. While the Corporation believes its planning efforts are adequate to address its Year 2000 concerns, there can be no guarantee that the systems of other companies on which the Corporation's systems and operations rely will be converted on a timely basis. In conclusion, the Corporation does not expect that there will be any major Year 2000 impact to its computer systems, nor does it expect that the cost of the Year 2000 initiative will be material.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Capital Re Corporation and Subsidiaries at December 31, 1997 and 1996 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
In November 1996, the Corporation, through its newly formed United Kingdom holding company, Capital Re (UK) Holdings, acquired 100% of the issued shares of Tower Street Holdings Limited (now known as RGB Holdings, Ltd.), the holding company for RGB Underwriting Agencies Ltd. ("RGB"). RGB is a Lloyd's managing agency and presently manages five syndicates operating in the Lloyd's of London insurance market. In connection with this acquisition, the Corporation established a corporate name ("CRC Capital, Ltd.") at Lloyd's to support underwriting on certain of the managed syndicates beginning with the 1997 year of account. CRC participates in a nonmarine and life syndicate. In November 1997, RGB Holdings acquired 100% of C.I. de Rougemont Group Limited, the holding company for C.I. de Rougemont and Co. Ltd. ("CIDR"), another Lloyd's managing agency. CIDR manages
In December 1996, the Corporation entered into a joint venture with Global Capital Reinsurance Limited, ("GCR") to form a Bermuda based insurer, Capital Global Underwriters Limited ("CGUL"), which specializes in financial lines reinsurance. In April 1997, GCR was acquired by EXEL Limited ("EXEL"). In March 1998 sold its share of CGUL to Bermuda based ACE Limited, and CGUL was renamed ACE Capital Re Ltd. The Corporation, through its subsidiary, KRE, owns a 50% interest in ACE Capital Re Ltd. and controls 9.9% of its voting stock. The Corporation accounts for its investment in ACE Capital Re Ltd. under the equity method.
Losses and Loss Adjustment Expenses: The liability for loss and loss adjustment expenses is determined according to management's loss expectations which are based on historical loss development patterns as well as reports and individual case estimates received from ceding companies where applicable. An estimate is also provided for losses and loss adjustment expenses for incurred but not reported losses for the mortgage guaranty, trade credit and specialty, and Lloyd's lines of business. Incurred but not reported losses are not estimated for the financial guaranty and title reinsurance lines of business since they are underwritten to a zero loss standard. Financial guaranty loss and loss adjustment expenses were discounted using an average rate of 6.4% in 1997 and 6.0% in 1996.
Income Taxes: In accordance with FASB Statement No. 109, "Accounting for Income Taxes," deferred federal income taxes are provided on the temporary difference between the tax basis of an asset or liability and its reported amount in the financial statements that will result in deductible or taxable amounts in future years when the reported amount of the asset or liability is recovered or settled. Such temporary differences relate principally to premium revenue recognition, deferred acquisition costs, and contingency reserve. The Internal Revenue Code permits companies writing financial guaranty insurance and mortgage guaranty insurance to deduct from taxable income amounts added to the statutory contingency reserve, subject to certain limitations. The amounts deducted must be included in taxable income in the tenth or twentieth year following the year of deduction dependent on the type of business, or in the event that incurred losses exceed certain statutorily established levels and the contingency reserve is released to cover such excess losses. However, the tax benefits obtained from such deductions must be invested in noninterest- bearing U.S. Government tax and loss bonds. The Corporation records purchases of tax and loss bonds as payments of federal income taxes.
Earnings Per Share: In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 128, Earnings Per Share ("SFAS 128"), effective for years ending after December 15, 1997. SFAS 128 requires the calculation and presentation on the income statement of "basic" earnings per share and "diluted" earnings per share. Basic earnings per share is calculated based on the weighted average common shares outstanding. All potentially dilutive securities such as stock options are excluded from the basic earnings per share calculation. In calculating diluted earnings per share, the number of shares outstanding is increased to include all potentially dilutive securities. The Corporation adopted SFAS 128 in 1997 and has restated earnings per share for each of the years ending December 31, 1996 and 1995. Basic and diluted net income per share of common stock are computed by dividing net income by the applicable weighted average number of shares of common stock outstanding during each year.
Federal income taxes are only provided on taxable income for which income taxes are currently payable, while under GAAP, deferred income taxes are provided with respect to temporary differences;
Certain assets designated as "nonadmitted assets" are charged directly to statutory capital and surplus, but are reflected as assets under GAAP.
Holding company guarantees (approved by Bermuda's Minister of Finance) issued for the benefit of Capital Credit and KRE under which the holding company is obligated under certain circumstances to invest additional capital in each company are admitted assets and included as part of statutory capital and surplus at December 31, 1996. During 1997, such guarantees were allowed to lapse and are not intended to be renewed in the near term. Accordingly, they are not included as part of statutory capital and surplus at December 31, 1997.
Net financial guaranty par in force was approximately $44.8 billion at December 31, 1997. The composition at December 31, 1997, by type of issue and the range of final maturities, was as follows:
As part of its financial guaranty business, the Corporation participates in credit default swap transactions whereby a counterparty pays a periodic fee, typically expressed in fixed basis points on a notional amount in return for a contingent payment by the Corporation in the event of default of one or more third party reference securities. A default is typically defined as bankruptcy, insolvency or failure to meet payment obligations when due, accompanied by significant price deterioration in a reference security. The total notional amount of credit default swaps outstanding at December 31, 1997 and included in the Corporation's financial guaranty exposure above was $1.8 billion.
As stated in Note 1, the principal business of Capital Reinsurance is the reinsurance of financial guaranties. In connection with this business, the claims-paying ability of Capital Reinsurance is rated triple-A by Standard & Poors ("S&P"), Moody's Investor Service ("Moody's") and Fitch IBCA. The rating agencies have developed and published rating guidelines for rating financial guaranty reinsurers. These criteria follow the standards used to evaluate the claims-paying ability of primary monoline financial guaranty insurers. In January 1998, Moody's placed the claims-paying ability rating of Capital Reinsurance on review for a possible downgrade. Moody's took this action in light of the company's diversification into nonfinancial guaranty businesses. While this action does not impact the Corporation's 1997 financial statements, under several reinsurance treaties to which Capital Reinsurance is a party, the ceding companies may recapture business previously ceded to Capital Reinsurance in the event of a specified rating downgrade. Should Moody's rating review result in a downgrade of Capital Reinsurance's claims paying rating to double-A, the Corporation does not expect that any previously ceded business to Capital Reinsurance will be recaptured.
The following summarizes the Corporation's aggregate investment portfolio at December 31, 1996:
The amortized cost and estimated fair value of fixed maturity securities available-for-sale at December 31, 1997, by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
In 1997, the Corporation realized gross gains and losses of $12.4 million and ($4.4) million, respectively. In 1996, the Corporation realized gross gains and losses of $8.5 million and ($7.0) million, respectively. In 1995, the Corporation realized gross gains and losses of $3.5 million and ($3.4) million, respectively. Included in gross losses in 1995 were ($2.6) million for other than temporary declines in value.
Approximately 15.4% of the Corporation's total investment portfolio of $1.0 billion at December 31, 1997 is comprised of mortgage-backed securities ("MBS"), including collateralized mortgage obligations. Of the securities in the MBS portfolio, approximately 85.4% are backed by agencies or entities sponsored by the U.S. government. As of December 31, 1997, the weighted average credit quality of the Corporation's entire investment portfolio was AA+.
Under agreements with its cedants and in accordance with statutory requirements, certain of the Corporation's subsidiaries maintain fixed maturity securities in trust accounts for the benefit of reinsured companies and for the protection of policyholders in states in which they are not licensed. The carrying amount of such restricted balances amounted to approximately $87.3 million and $31.9 million at December 31, 1997 and 1996, respectively. Additionally, at December 31, 1997 and 1996, $4.1 million and $3.7 million, respectively, was on deposit with state insurance departments to satisfy regulatory requirements.
The following table provides a reconciliation of the beginning and ending reserve balances for unpaid losses and loss adjustment expenses ("LAE").
Incurred losses in 1997 were principally from the Corporation's Lloyd's insurance operations as well as the mortgage guaranty and trade credit and specialty reinsurance lines of business. During 1996, incurred losses were principally from the mortgage guaranty and trade credit and specialty reinsurance lines of business. Incurred losses in 1995 were caused primarily by increases in reserves estimated for mortgage guaranty losses. The increases for 1997, 1996 and 1995 are consistent with the expected loss development patterns for the respective lines of business.
On January 22, 1998, the Corporation renewed an agreement with Deutsche Bank AG for the provision of a $25.0 million liquidity facility which will be available for general corporate purposes expiring January 22, 1999. Capital Reinsurance also renewed an agreement on January 27, 1998 with Deutsche Bank AG for a credit facility of up to $75.0 million specifically designed to provide rating agency qualified capital to further support Capital Reinsurance's claims-paying resources. This agreement expires January 27, 2005.
The liability for deferred federal income taxes reflects the tax effect of the following temporary differences:
The fair value of the Corporation's deferred premium revenue is based on entering into a cession of the entire portfolio with third party reinsurers under market conditions. This figure was determined by using the statutory basis unearned premium reserve, net of deferred acquisition costs, and the present value of the estimated future cash flow stream from installment premiums. At December 31, 1997, the fair value of the Corporation's net deferred premium revenue was estimated to be $311.9 million.
RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES, NET OF REINSURANCE RECOVERABLE ON CEDED LOSSES
For financial guaranty losses, the carrying amount is composed of the present value of the expected cash flows for case basis claims and therefore represents the best estimate of fair value. The short-term nature of losses from the remaining lines of business indicate that the carrying value represents the best estimate of fair value. Accordingly, for all lines, the carrying amount is deemed the best estimate of fair value as of December 31, 1997.
The carrying amount of the Corporation's bank note payable of $25.0 million approximates fair value due to its floating interest rate provision.
Under Maryland's insurance law, the amount of surplus available for distribution as dividends is subject to certain statutory provisions, which generally prohibit the payment of dividends in any twelve-month period without prior approval of the Maryland Commissioner of Insurance in an amount exceeding 10% of policyholder's surplus at the preceding December 31. The amount available for distribution from Capital Reinsurance during 1998 with notice to, but without prior approval of, the Maryland Commissioner of Insurance under the Maryland insurance law is approximately $34.6 million. During 1997, Capital Reinsurance paid dividends in the amount of $8.0 million to the Corporation.
Credit Re Corporation, Capital Credit's holding company has never paid a dividend to the Corporation. Were it to pay dividends to the Corporation, it would rely on dividends from its wholly-owned subsidiary, Capital Credit. Capital Credit's and KRE's dividend distributions are governed by Bermuda law. Under Bermuda law and the By-Laws of Capital Credit and KRE, dividends may be paid out of the profits of Capital Credit and KRE (defined as accumulated realized profits less accumulated realized losses). Distributions to shareholders may also be paid out of Capital Credit's and KRE's surplus limited by requirements that Capital Credit and KRE 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. Since their organization, Capital Credit and KRE have not declared or paid any dividends.
The Corporation participates in the Lloyd's of London insurance market through its corporate name, CRC Capital Ltd. At the Corporation's direction, a letter of credit has been provided to Lloyd's in satisfaction of CRC Capital's capital requirement. All corporate capital providers are required by Lloyd's to post funds at Lloyd's equal to a fixed percentage of the amount of committed insurance capacity. For the year ended December 31, 1997, the total amount of insurance capacity committed by CRC Capital was British Pound Sterling 39.7 million, and CRC Capital's Funds at Lloyd's requirement was 50% of that amount and was supported by a letter of credit for British Pound Sterling 19.9 million. For the 1998 year, the Corporation increased its insurance capacity commitment to British Pound Sterling 88.2 million which is supported by a letter of credit of British Pound Sterling 44.1 million.
To enable recipients of awards under the stock incentive plan to meet tax obligations which may have resulted from such awards, the Corporation agreed to make loans to recipients, payable upon ultimate disposition of their shares or three years after their termination of employment. As of December 31, 1997 and 1996, total loans outstanding under all officer loan programs were approximately $1.64 million and $1.74 million, respectively, at the end of the year, and are included under the caption "Other assets."
On April 15, 1992, the Corporation adopted the 1992 Stock Option Plan (the "1992 Option Plan"). The 1992 Option Plan enables key employees to benefit from appreciation in the price of the common stock of the Corporation. The 1992 Option Plan provides for grants of incentive stock options ("ISO"), which are intended to qualify under Section 422 of the Internal Revenue Code and of options which are intended not to so qualify ("NQSO"). Under the 1992 Option Plan, options may be granted at a price not less than 100% of the fair market value as determined on the date granted. ISO's and NQSO's awarded, vest in four equal yearly installments commencing one year after the date of grant. Once vested, options may be exercised at any time and expire ten years from the date of grant. According to the terms of the 1992 Option Plan, the aggregate number of shares subject to option awards may not exceed 1,450,000. All option awards have been granted under the 1992 Option Plan as of December 31, 1997. During 1997, the Corporation adopted the 1997 Stock Option Plan ("1997 Plan"). The terms of the 1997 Plan are similar to those of the 1992 Option Plan, however, the number of shares subject to option award shall not exceed 1,000,000.
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 1997, 1996 and 1995.
The Corporation does not provide health care or life insurance benefits to retirees.
During 1997, one customer, CMAC, provided 12.3% of the Corporation's total gross written premium. All other clients provided less than 10% during 1997. Customer concentration occurring in 1996 and 1995 resulted from the fact that a larger portion of the Corporation's total gross written premiums came from the financial guaranty and mortgage guaranty reinsurance lines of business. This is due to the small number of primary insurance companies writing primary financial guaranty and mortgage guaranty insurance. As the Corporation continues to diversify its businesses, client concentration should decrease.