01—Abstract
Summary
Summary of the 10-K filed March 30, 2000. Cited figures are marked; the original filing is the authoritative source.
This 10-K, filed March 30, 2000, is from Risk Capital Holdings, Inc. (RCHI), the Nasdaq-listed (RCHI) holding company for Risk Capital Reinsurance Company (RCRe).
The filing does not match the name in the request. RCHI later became Arch Capital Group Ltd. (ACGL), so the filing is the predecessor company's annual report. The company reported a 1999 net loss of $32.4 milliona ($1.90 per share) and a comprehensive loss of $52.3 million.
Driving the loss were a 129.2% statutory combined ratio, about $30 millionb of adverse prior-year reserve development, and losses in aviation, space, and a managing underwriting agency. Book value fell to $20.28 per share from $23.29 a year earlier, and stockholders' equity was $346.5 million at year-end 1999. The company is in the middle of a strategic reset.
It repurchased 4,755,000 shares (27.8% of outstanding stock) from XL Capital for $59.2 millionc on March 2, 2000. It also agreed on January 10, 2000 to sell substantially all of RCRe's reinsurance business to Folksamerica Reinsurance Company for book value parity plus $20.3 million in cash, with $20 million held in five-year escrow. After the sale, the company intends to become a vehicle for business combinations, possibly outside insurance, and it has not yet identified any target.
A.M. Best placed RCRe's A- rating under review, and the sale depends on stockholder approval, regulatory approvals, and other closing conditions. For investors, the central questions are the value of the post-sale shell, the escrow and reserve risks that could reduce the Folksamerica proceeds, and the premium growth that came with larger underwriting losses.
Net premiums written rose 31% to $306.7 milliond, but the premium-to-surplus ratio rose to 1.3x, above the company's prior 1.0x limit. The company pays no dividends, and its equity portfolio, which is 41% of cash and invested assets, is concentrated in insurance-sector names.
02—Key points
Key Highlights
- 1999 net loss of $32.4 million ($1.90 per share) versus net income of $3.1 million in 1998; comprehensive loss of $52.3 million including unrealized investment losses.
- Statutory combined ratio of 129.2% in 1999 (116.4% in 1998), driven by aviation, space, and a managing underwriting agency, with about $30 million of adverse prior-year reserve development.
- Book value per share fell to $20.28 (from $23.29), and stockholders' equity fell to $346.5 million; the XL repurchase cut equity by $59.4 million.
- Proposed sale of reinsurance operations to Folksamerica for GAAP book value parity plus $20.335 million cash, with $20 million in five-year escrow tied to reserve adequacy; stockholder approval and regulatory approvals are pending.
- Net premiums written grew 31% to $306.7 million, with about 29% from specialty lines and 26.5% from two clients, and premium-to-surplus rose to 1.3x.
- A.M. Best downgraded RCRe to A- in May 1999 and placed it under review in January 2000; ratings pressure reduced its competitiveness in reinsurance markets.
- Post-sale strategy is an acquisition vehicle with no identified targets, and the company pays no dividends and may repurchase shares after the sale.
03—Questions
Frequently Asked Questions
Why did the company report a large loss in 1999 after a profitable 1998?
Underwriting losses drove the swing. The statutory combined ratio rose to 129.2% from 116.4%. Roughly 16 points came from aviation and space business and a managing underwriting agency, and prior-year reserves were increased by about $30 million. Investment gains of $17.2 million partly offset the underwriting losses.
What will shareholders receive from the Folksamerica sale?
Folksamerica will assume RCRe's reinsurance liabilities and receive assets of equal GAAP book value, plus pay $20.335 million in cash at closing. A $20 million escrow is held for five years to cover any deficiency in the reserves of a managing underwriting agency, and up to $5 million more may be escrowed. Transaction costs, including about $19 million estimated in the pro forma, reduce the net benefit.
What happened with XL Capital, and how did it affect the company?
On March 2, 2000, the company bought back XL's 4,755,000 shares at $12.45 per share, or $59.2 million. XL received its interests in LARC Holdings and Annuity and Life Re, valued at $62.8 million, and paid $3.6 million in cash. Stockholders' equity fell by $59.4 million, voting shares fell to about 12.3 million, and RCRe's statutory surplus fell by $60 million to about $230 million.
What is the company's plan after the sale, and what are the risks?
After the sale, the company plans to act as a vehicle for business combinations, possibly including companies outside insurance. It has not identified any targets and may need additional financing. Its remaining assets are cash, fixed-income and public equity holdings, and private equity investments, plus RCRe and Cross River stock. The main risks are that the acquisition strategy may not succeed, that the company may incur losses if the Folksamerica escrow is drawn, and that a future ownership change could limit its tax loss carryforward.
How concentrated and volatile is the investment portfolio?
At year-end 1999, cash and invested assets were $585.9 million, with 41% in equity securities, nearly all in insurance and insurance-service companies. A hypothetical 10% decline in equity prices would reduce the publicly traded and private equity portfolios by about $15.9 million and $8.4 million. Equity-heavy holdings make investment income smaller and less predictable than competitors', and realized and unrealized gains can dominate results.
04—Continue