GENERAL The following is a discussion and analysis of Capsure Holdings Corp. and its subsidiaries' ("Capsure" or the "Company") operating results, financial condition, liquidity and capital resources. This discussion should be read in conjunction with the consolidated financial statements and related notes thereto, which contain additional information regarding the Company's operating results and financial condition.
Western Surety specializes in writing small fidelity and noncontract surety bonds, referred to as "miscellaneous" bonds, and errors and omissions ("E&O") liability insurance and is licensed to write fidelity, surety and casualty insurance in all 50 states and the District of Columbia. Western Surety is rated A+ (Superior) by A.M. Best Company, Inc. ("A.M. Best"). Bonds underwritten by Western Surety are relatively low-risk, low-premium products where prompt service, easy-to-use forms and availability of an extensive array of bond products are emphasized. One of the largest writers of miscellaneous bonds in the United States, Western Surety has experienced overall growth in gross written premiums since 1990 in spite of the soft market. This growth is attributable to its product specialization, underwriting expertise and broad distribution network as well as to legislatively mandated bond limit increases, and to bonding requirements legislated by various states and municipalities. Substantially all of Western Surety's bonds are mandated by various state statutes and local ordinances. Such factors have largely insulated Western Surety from the effects of prevailing market conditions in the broader commercial property and casualty insurance industry. Management believes, with respect to Western Surety's products, that the Company's results of operations will not be significantly affected by new miscellaneous bond requirements or by the repeal of any existing legislated bonding requirements.
RESULTS OF OPERATIONS The components of income for each of the past three years are summarized as follows (dollars in thousands):
INSURANCE UNDERWRITING Underwriting results for the past three years are summarized in the following table (dollars in thousands):
Net earned premiums increased $6.5 million for the year ended December 31, 1994. Western Surety's net earned premiums increased 1.9% in 1994 compared to 1993. Universal Surety contributed net earned premiums of $4.0 million in 1994. United Capitol's net earned premiums increased 6.3%, or $1.1 million in 1994, primarily as a result of the recognition of $2.5 million of contingent reinsurance premiums related to an excess of loss reinsurance treaty. Excluding the recognition of the contingent premiums, net earned premiums decreased 7.5% at United Capitol.
INVESTMENT INCOME Net investment income for the years ended December 31, 1994, 1993 and 1992 was $19.1 million, $19.8 million and $15.5 million, respectively. Investment results for each year were negatively impacted by declining interest rates through the end of 1993. The $4.3 million increase in net investment income in 1993 over 1992 reflects the inclusion of a full year of Western Surety's investing activity which more than offset the impact of declining investment yields. The average pretax yields of the portfolio for the years ended December 31, 1994, 1993 and 1992 were 6.5%, 6.8% and 7.6%, respectively.
Cash flow at the parent company level is derived principally from dividend and tax sharing payments from its insurance subsidiaries. The principal obligations at the parent company level are to service debt and pay operating expenses. At December 31, 1994, the carrying value of the Company's invested assets of the non-insurance operations, principally at the parent company level, was comprised of $7.6 million of equity securities, $4.6 million of short-term investments, $0.8 million of other investments and $0.3 million of cash. At December 31, 1993, the carrying value of the Company's non-insurance operations invested assets, principally at the parent company level, was comprised of $20.8 million of short-term investments, $8.7 million of equity securities and $1.1 million of cash.
The Company's consolidated net cash flow provided by operating activities was $29.3 million, $32.1 million and $18.7 million for the years ended December 31, 1994, 1993 and 1992, respectively. Consolidated operating cash flow (pretax income excluding the write-off of deferred loan fees, net investment gains and amortization of goodwill and intangibles) for the year ended December 31, 1994, was $27.8 million as compared to $26.9 million in 1993 and $18.7 million in 1992.
The Company continues to pursue acquisitions of financial services businesses with a particular focus on the insurance industry. Although the emphasis is on financial services and insurance, the Company may consider other investments that would further enhance the Company's value.
The following table sets forth the composition by ratings assigned by The Standard & Poors Corporation ("S&P") or Moody's Investor Services, Inc. ("Moody's") of the fixed income portfolio of the Company as of December 31, 1994 (dollars in thousands):
The National Association of Insurance Commissioners ("NAIC") has promulgated Risk-Based Capital ("RBC") requirements for property/casualty insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks such as asset quality, asset and liability matching, loss reserve adequacy, and other business factors. The RBC information will be used by state insurance regulators as an early warning tool to identify, for the purpose of initiating regulatory action, insurance companies that potentially are inadequately capitalized. In addition, the formula defines new minimum capital standards that will supplement the current system of fixed minimum capital and surplus requirements on a state-by-state basis. Regulatory compliance is determined by a ratio (the "Ratio") of the enterprise's regulatory total adjusted capital, as defined by the NAIC, to its authorized control level RBC, as defined by the NAIC. Generally, a Ratio in excess of 200% of authorized control level RBC requires no corrective actions on the behalf of the company or regulators. As of December 31, 1994, each of Capsure's insurance subsidiaries had a Ratio that was substantially in excess of the minimum RBC requirements.
Capsure's insurance subsidiaries require capital to support premium writings. In accordance with industry and regulatory guidelines, the net written premiums to surplus ratio of a property and casualty insurer should not exceed 3 to 1 (the terms of the Credit Facility limit this ratio further to 2.75 to 1 for Western Surety and Universal Surety and 2 to 1 for United Capitol). On December 31, 1994, Western Surety's statutory surplus was $37.1 million and its net written premiums to surplus ratio was 2 to 1. On December 31, 1994, Universal Surety's statutory surplus was $7.6 million and its net written premiums to surplus ratio was 1.9 to 1. On December 31, 1994, United Capitol's statutory surplus was $61.8 million and its net written premiums to surplus ratio was 0.3 to 1. The Company believes that each insurance company's statutory surplus is sufficient to support its current and anticipated premium levels.
All other schedules and historical information are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto.