The Company's corporate offices are located at Two Stamford Plaza, 281 Tresser Boulevard, Stamford, Connecticut 06904-2148. The Company's corporate office is occupied pursuant to a lease covering approximately 26,295 square feet of office space. This lease expires in 2001. The lease has minimum annual rentals, not including costs of certain escalation clauses, of $1,067,000 through 1996 and 85% of the fair market value from 1997 to 2001. In addition, Re Cap maintains a corporate office in Fort Lee, New Jersey.
Set forth below is certain selected consolidated financial information for the last five fiscal years. This information should be read in conjunction with the consolidated financial statements of Re Capital Corporation and Management's Discussion and Analysis of Financial Condition and Results of Operations.
- - - - --------------- (1) Includes a nonrecurring addition of $868,000 or $.13 per share, as the result of the Company's adoption, effective January 1, 1992, of SFAS No. 109, "Accounting for Income Taxes."
(2) 1992 and all prior balances have been reclassified for comparative purposes to reflect the provisions of SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts."
The Company is engaged primarily in property and casualty reinsurance underwriting through its wholly-owned subsidiary, Re Cap.
The Merger Agreement provides that, at the Effective Time of the Merger, each share of the Company's Common Stock, outstanding immediately prior to the Effective Time (which may include a certain number of restricted shares to be determined) will, without any action on the part of the holder thereof, be converted into the right to receive $18.50 in cash, without interest. ZRC will assume all obligations under the Company's Convertible Debentures due August 1, 2000 ($69 million outstanding aggregate principal amount as of January 11, 1995) that are not converted into Common Stock prior to the closing of the Merger.
As more fully described in the Merger Agreement, upon the occurrence of certain specified events, including the occurrence of certain Third Party Business Combinations, the Company will pay ZRC a fee of $4,500,000 plus an amount equal to the costs and expenses incurred by ZRC in connection with the Merger Agreement, not exceeding $1,000,000.
The closing of the Merger is subject to approval by the Company's stockholders, certain state insurance regulatory approvals and certain other customary conditions and approvals. The description contained herein of the Merger and related agreements is qualified in its entirety by reference to the Merger Agreement, the Option and Voting Agreement and the Company's Form 8-K, dated as of January 11, 1995 and filed on January 19, 1995.
The following table sets forth, for the periods indicated, Re Cap's SAP combined ratios and the components thereof, and the combined ratios for the reinsurance industry (based on the Company's analysis of Reinsurance Association of America data).
- - - - --------------- * As of September 30, 1994.
The Company's 1994 net income of $7,907,000 decreased by 1.6% from net income of $8,037,000 for the year ended December 31, 1993. Operating income, excluding after-tax realized investment gains and the expenses associated with a possible merger or other corporate transactions in 1994, increased by 18.9% from $7,579,000 in 1993 to $9,015,000 for the year ended December 31, 1994. Primary and fully diluted earnings per share for the year ended December 31, 1994 were $1.14 and $.95, respectively, versus $1.18 and $1.06, respectively for the year ended December 31, 1993. The improvement in the Company's 1994 operating results principally reflects a significant decrease in property losses during the year. Results for 1993 were adversely impacted by the unfavorable runoff of quota share commercial property treaties cancelled prior to 1993. Both net income of $2,309,000 and operating income of $1,215,000, for the year ended December 31, 1992, were substantially reduced by property catastrophe losses and a commutation charge.
Re Cap's statutory combined ratio improved by 2.5 points to 104.4% in 1994, reflecting a reduction in property losses between 1993 and 1994. The impact of property catastrophe losses was comparable in both years. In 1994, the Northridge earthquake increased the combined ratio by 1.0 point and reduced fully diluted earnings by $.08 per share. The World Trade Center bombing and Midwest floods increased the 1993 combined ratio by 0.9 points and also decreased fully diluted earnings by $.08 per share. In 1992, Hurricanes Andrew and Iniki and the Los Angeles riots added 5.9 points to the combined ratio and reduced earnings per share by $.65.
The 3.3 point difference in the combined ratio for 1993 was the result of property claim activity related to the runoff of quota share treaties cancelled prior to 1993. Results from these treaties, excluding catastrophe losses, increased the 1993 combined ratio by 4.3 points and reduced primary and fully diluted earnings per share by $.42 and $.33, respectively.
The Company's amortization of its deferred acquisition costs increased by 16.9% in 1994 from $28,455,000 to $33,272,000. In 1993, this expense decreased by 17.8% from $34,624,000 in 1992. This expense represents that portion of the costs of obtaining reinsurance business, principally ceding and brokerage commissions, related to the net premiums earned for the year. The 16.9% increase in 1994 is a direct function of the corresponding 14.8% increase in earned premiums. Likewise, the 17.8% decrease in 1993 is a result of a reduction in the Company's net premiums earned as well as a modest shift in the composition of its business to a greater percentage of excess of loss treaties. Excess of loss treaties typically do not provide for ceding commission, which are the largest component of deferred acquisition costs.
Interest expense increased in 1994 to $3,795,000 from $2,348,000 in 1993. This increase resulted from the inclusion of a full year's interest expense for the $69,000,000 of Convertible Debentures issued on July 27, 1993. From 1992 to 1993, interest expense increased by $985,000 from $1,363,000 primarily as a result of the issuance of the aforementioned convertible debentures.
Net investment income, excluding net realized gains, increased 14.6% in 1994, from $18,934,000 to $21,696,000. In 1993, net investment income increased 9.6% over the 1992 level of $17,270,000. These increases were the result of growth in invested assets attributable to cash flow from operations and the proceeds of the 1993 offering of $69,000,000 in convertible debentures. Exclusive of investment income allocable to the proceeds of this offering, the Company's net investment income for the year ended December 31, 1994 increased by 5.8% over the comparable 1993 amount. The pre-tax yield on investments declined in 1994 to 6.6% from 6.7% in 1993 and 7.0% in 1992. On an after-tax basis, the investment yield declined to 5.2% in 1994 from 5.4% in 1993 and 5.7% in 1992. This downward trend in yields is a direct result of the decline in interest rates that occurred during 1993 concurrent with the Company's purchase of more than $105,000,000 in fixed income securities, $52,000,000 of which were purchased from the proceeds of the Company's convertible debenture offering. While interest rates increased progressively through 1994, such increases have not yet offset the impact of the 1993 purchases.
Net realized investment gains for 1994 were $39,000 versus $694,000 and $342,000 in 1993 and 1992, respectively. The 1993 gains were the result of the Company selectively selling certain taxable securities and replacing them with tax-exempt securities in order to increase after-tax yield.
For the year ended December 31, 1994, the Company recorded a Federal income tax provision of $195,000 versus tax benefits of $230,000 and $3,490,000 in 1993 and 1992, respectively. As a result of Re Cap's underwriting losses in each of the three years, the Company's pre-tax results include a proportionally higher component of tax-exempt income, thereby reducing the effective tax rate.
At December 31, 1994, the Company had total shareholders' equity of $121,207,000. During 1994, shareholders' equity decreased by $9,566,000 from $130,773,000 at December 31, 1993. This decrease resulted principally from unrealized depreciation on the Company's fixed income portfolio, net of tax, of $15,564,000 offset by net income less cash dividends declared of $5,651,000.
On July 27, 1993, the Company successfully completed an offering of $69,000,000 of the Convertible Debentures. The Convertible Debentures are due on August 1, 2000, and are convertible into common stock of Re Capital at a conversion price of $17.1875 per share. The Company contributed $45,250,000 of the net proceeds of the offering of the Convertible Debentures to the surplus of Re Cap. In addition, $15,000,000 of the net proceeds was used to repay the Company's revolving bank loan, which was then terminated. The balance of the proceeds of approximately $7,000,000 was retained for general corporate purposes. Management believes that the Company has sufficient liquidity to meet its anticipated reinsurance obligations and operating expenses, including debt financing costs and principal repayments.
On June 1, 1993, the Company announced the suspension of its share repurchase program. This program, which had been ongoing since October 20, 1987, resulted in the aggregate repurchase of 2,378,888 shares at an average price of $11.74. At the time the share repurchase program was suspended, there remained approximately $2,500,000 authorized for future repurchases.
Cash flow from operations totaled $26,824,000 in 1994, compared to $22,978,000 in 1993. Cash flow in 1994 was increased by approximately $10,000,000 as the result of the restructuring of a cedant trust agreement in the second quarter. The Company anticipates that its cash flow from operations in 1995 will continue to be sufficient to fulfill its operational and financing needs.
In June 1993, the FASB issued SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This statement, which was effective for fiscal years beginning after December 15, 1993, requires that securities be classified in one of three categories. Debt securities that the Company has the intent and ability to hold to maturity are to be classified as held to maturity and reported at amortized cost. Debt and equity securities that are held for resale are to be classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. Debt and equity securities not so classified would be considered available for sale and reported at fair value with unrealized gains and losses, net of tax, included in shareholders' equity. As previously noted, the Company elected to adopt this new standard effective December 31, 1993. In connection therewith, the Company classified all of its fixed income portfolio as available for sale and recorded such securities at their market value. The Company's classification of its portfolio as available for sale provides the Company with the flexibility to adjust its portfolio as needed in response to operating, tax and regulatory conditions.
See the Consolidated Financial Statements and Notes thereto and the Schedules on pages through and S-1 through S-4 below.