01—Abstract
Summary
Summary of the 10-K filed March 30, 1999. Cited figures are marked; the original filing is the authoritative source.
Risk Capital Holdings, Inc. (RCHI) is the holding company for Risk Capital Reinsurance Company, a Nebraska-domiciled property and casualty reinsurer based in Greenwich, Connecticut.
Its 1998 results were weak: net income was $3.1 milliona, or $0.17 diluted per share, while comprehensive income was a loss of $4.4 million, driven by a $7.5 million decline in unrealized appreciation of investments. Net premiums written rose 62% to $234.7 million, and the statutory composite ratio reached 116.4%, which the company attributed to satellite business, business from a managing underwriting agency, and a finite risk property treaty. Statutory surplus was approximately $359 million, and the company rated A (Excellent) by A.M.
Best. The company's strategy centers on writing a small number of large treaties and integrating reinsurance with equity investments, mainly in insurance and reinsurance companies advised by Marsh & McLennan Capital, Inc. At December 31, 1998, cash and invested assets totaled $587.2 millionb, with equity securities (publicly traded and privately held) representing about half of the invested portfolio. Management disclosed that the company expects additional after-tax underwriting losses of approximately $22 million in the first quarter of 1999 from satellite risks and the managing underwriting agency business, and it has discontinued its relationship with that agency.
Investors should weigh the company's concentration in a few large clients (three clients contributed about 32%c of 1998 net premiums written), its heavy exposure to equity markets and private investments, and the expected first-quarter 1999 losses. The company has not paid dividends since its 1995 formation, and Nebraska law limits dividends from the reinsurance subsidiary without regulatory approval.
02—Key points
Key Highlights
- Net income of $3.1 million ($0.17 diluted EPS) for 1998, compared with $2.0 million in 1997; comprehensive loss of $4.4 million due to a $7.5 million decline in unrealized appreciation
- Net premiums written grew 62% to $234.7 million in 1998, led by Core Business ($193.3 million) and new Specialty Business lines ($41.4 million)
- Statutory composite ratio of 116.4% in 1998, adversely affected by $18.2 million in after-tax underwriting losses from satellite business, a managing underwriting agency, and a finite risk property treaty
- Expects approximately $22 million in after-tax underwriting losses in Q1 1999 related to satellite risks and the managing underwriting agency; the relationship with that agency has been discontinued
- Cash and invested assets of $587.2 million at year-end 1998, with about half in equity securities, mainly of insurance and reinsurance companies
- Statutory surplus of approximately $359 million; A (Excellent) rating from A.M. Best; total stockholders' equity of $398.0 million ($22.75 diluted book value per share)
- Concentrated client base: three clients contributed about 32% of 1998 net premiums written; no dividends declared since 1995 formation
03—Questions
Frequently Asked Questions
Why did the company report a comprehensive loss in 1998 despite positive net income?
Net income was $3.1 million, but other comprehensive loss of $7.5 million, from a change in net unrealized appreciation of investments, produced a comprehensive loss of $4.4 million for 1998. Net realized investment gains of $25.3 million were included in net income, and the reclassification of those gains reduced other comprehensive income.
What caused the high 1998 statutory composite ratio?
The company attributed the 116.4% statutory composite ratio mainly to underwriting losses in the second half of 1998 from satellite business ($8.3 million after tax), casualty reinsurance on business from a managing underwriting agency ($6.6 million), and a property loss on a finite risk treaty ($3.3 million).
What additional losses does the company expect in 1999?
The company expects approximately $22 million in total after-tax underwriting losses in the first quarter of 1999 from satellite risks and business produced by the managing underwriting agency, including about $4 million in additional satellite losses and about $18 million from the agency business.
Can the company pay dividends?
The company has not declared dividends since its 1995 formation. Under Nebraska insurance law, the reinsurance subsidiary cannot pay a dividend without prior approval of the Nebraska Director of Insurance in 1999, because the maximum permitted amount is limited and its unassigned funds were a deficit of $32.8 million at December 31, 1998.
How does the company's investment strategy differ from that of other reinsurers?
The company invests a significant portion of its portfolio in publicly traded and privately held equity securities, mainly of insurance and reinsurance companies, advised by Marsh & McLennan Capital. The filing states this may make investment income smaller and less predictable than that of competitors, which tend to hold more fixed income securities, and makes realized and unrealized gains and losses more significant to results and equity.
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