Risk Capital Holdings, Inc. to Sell Its Reinsurance Operations to Folksamerica Reinsurance Company and to Repurchase XL Capital Ltd's Interest in the Company

Business Wire, Jan 18, 2000

Business & Insurance Editors

GREENWICH, CONNECTICUT--(BUSINESS WIRE)--January 18, 2000

Risk Capital Holdings, Inc. [NASDAQ: RCHI], announced today that it has signed a definitive agreement with Folksamerica Reinsurance Company ("Folksamerica") pursuant to which Folksamerica will acquire substantially all of the reinsurance operations of RCHI's wholly owned subsidiary, Risk Capital Reinsurance Company ("RCRe"), for a cash purchase price equal to the GAAP book value of the assets and liabilities to be transferred to Folksamerica plus $20.335 million, payable at closing.

As part of the transaction, RCHI will place $20 million in escrow for a period of five years. These funds will be primarily used to reimburse Folksamerica to the extent that the loss reserves relating to business produced on behalf of RCRe by a certain managing agency are deficient as measured at the end of such five year period. To the extent that such loss reserves are redundant, all of the escrowed funds will be returned to RCHI and Folksamerica will pay RCHI an amount equal to such redundancy. RCHI will be responsible for certain tax costs incurred by Folksamerica in the transaction, as well as its own transaction and severance costs, and certain reinsurance costs incurred for the benefit of Folksamerica. An additional amount may be placed in escrow for a period of five years to the extent that RCRe's reserves at closing are less by at least a specified amount than those estimated by RCRe's independent actuaries.

The sale of RCHI's reinsurance business to Folksamerica is contingent on obtaining applicable regulatory approvals, approval of RCHI's stockholders, expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act, the retention of certain personnel, obtaining certain third party consents, the absence of a material adverse change in RCRe's business, and other customary closing conditions. XL Capital Ltd ("XL") (to the extent its shares of RCHI are not repurchased as described below), Marsh & McLennan Risk Capital Holdings, Ltd. and The Trident Partnership, L.P., which collectively represent approximately 37.5% of the 17,094,034 outstanding voting shares of RCHI, have agreed to vote in favor of the transaction.

In a separate transaction, which is not contingent on the closing of the Folksamerica transaction, RCHI and XL have agreed that RCHI will repurchase from XL all of the 4,755,000 shares of RCHI's common stock held by XL (constituting in the aggregate 27.8% and 20.8% of RCHI's common stock on a basic and diluted* basis, respectively) for a purchase price per share equal to the lesser of (i) 85% of the average closing market price of RCHI's common stock for the twenty-day trading period beginning January 21, 2000, and (ii) $15.00. Assuming that the purchase price for XL's shares of RCHI is $15 per share, the aggregate consideration payable to XL would equal $71.325 million. The consideration payable to XL will consist of (i) RCHI's interest in privately held LARC Holdings, Ltd. (parent of Latin American Reinsurance Company Ltd.), which interest is valued at $25 million, (ii) RCHI's interest, or a portion thereof, in Annuity and Life Re (Holdings), Ltd., valued at the average closing market price of Annuity and Life Re common stock during the twenty-day trading period beginning January 21, 2000 (which was carried at $36.3 million by RCHI at September 30, 1999), plus or minus (iii) cash. The repurchase of XL's shares of RCHI is contingent on obtaining regulatory approval and other customary closing conditions.

At September 30, 1999, RCHI's GAAP book value was $361.4 million and its basic and diluted* book value was $21.15 and $20.91 per share, respectively. On a pro forma basis, after giving effect to the separate transactions with Folksamerica and XL and related tax, severance and transaction costs (including the estimated cost of obtaining additional reinsurance protection for the benefit of Folksamerica), and making the same assumptions as above regarding RCHI's and Annuity and Life Re's share prices, and assuming further that RCHI fully recovers the escrowed funds, RCHI's GAAP book value at September 30, 1999 would have been $300.8 million and its basic and diluted* book value per share would have been $24.38 and $23.05 per share, respectively. Upon payment of a contemplated dividend from RCRe to RCHI that would occur after the transfer of RCRe's reinsurance-related liabilities to Folksamerica (which dividend is subject to regulatory approval), on a pro forma basis at September 30, 1999, the assets of RCHI would consist of fixed maturity and short term investments, publicly traded equity securities, and privately held securities, and RCHI's $25 million investment commitment to Trident II, L.P. would remain in place. RCHI would also continue to own all of the outstanding capital stock of RCRe and Cross River Insurance Company, a recently formed excess and surplus carrier, each with statutory surplus of $20 million.