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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-13277
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CNA SURETY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-4144905
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
CNA PLAZA, CHICAGO, ILLINOIS 60685
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(312) 822-5000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
(Title of Class)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates was $174.3
million based upon the closing price of $11.00 per share on March 10, 2000,
using beneficial ownership of stock rules adopted pursuant to Section 13 of the
Securities Exchange Act of 1934 to exclude voting stock owned by Directors,
Officers and Major Stockholders, some of whom may not be held to be affiliates
upon judicial determination.
At March 10, 2000, 42,942,660 shares of the Registrant's Common Stock were
outstanding.
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CNA SURETY CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 3
General..................................................... 3
Formation of CNA Surety and Merger.......................... 3
Description of Business..................................... 3
Financial Strength Ratings.................................. 4
Product Information......................................... 4
Marketing................................................... 7
Underwriting................................................ 8
Competition................................................. 8
Reinsurance................................................. 9
Reserves for Unpaid Losses and Loss Adjustment Expenses..... 9
Claims...................................................... 11
Asbestos and Environmental Claims........................... 12
Regulation.................................................. 12
Investments................................................. 13
Employees................................................... 13
Item 2. Properties.................................................. 13
Item 3. Legal Proceedings........................................... 14
Item 4. Submission of Matters to a Vote of Security Holders......... 14
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters......................................... 14
Item 6. Selected Financial Data..................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 17
Item 7a Quantitative and Qualitative Discussions About Market
Risk........................................................ 17
Item 8. Financial Statements and Supplementary Data................. 17
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 17
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 18
Item 11. Executive Compensation...................................... 18
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 18
Item 13. Certain Relationships and Related Transactions.............. 18
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 18
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CNA SURETY CORPORATION AND SUBSIDIARIES
PART I
ITEM 1. BUSINESS
GENERAL
CNA Surety Corporation ("CNA Surety" or "Company") is an insurance holding
company in the United States formed through the September 30, 1997 combination
of the surety business of CNA Financial Corporation with Capsure Holdings
Corp.'s ("Capsure") insurance subsidiaries. CNA Surety is currently one of the
largest surety providers in the United States with approximately an 8.6% market
share (based upon A.M. Best data). Its wide selection of products range from
very small commercial bonds to large contract bonds.
FORMATION OF CNA SURETY AND MERGER
In December 1996, CNA Financial Corporation ("CNAF") and Capsure agreed to
merge (the "Merger") the surety business of CNAF with Capsure's insurance
subsidiaries, Western Surety Company ("Western Surety") and Universal Surety of
America ("USA"), into a newly-formed holding company, CNA Surety Corporation.
CNAF, through its operating subsidiaries, writes multiple lines of property and
casualty insurance, including surety business that is reinsured by Western
Surety. CNAF owns approximately 63% of the outstanding common stock of CNA
Surety. Loews Corporation owns approximately 86% of the outstanding common stock
of CNAF. The principal operating subsidiaries of CNAF that wrote the surety line
of business for their own account prior to the Merger were Continental Casualty
Company and its property and casualty affiliates (collectively, "CCC") and The
Continental Insurance Company and its property and casualty affiliates
(collectively, "CIC"). CIC was acquired by CNAF on May 10, 1995. The combined
surety operations of CCC and CIC are referred to herein as CCC Surety Operations
("Predecessor").
Pursuant to a reorganization agreement, CCC Surety Operations and Capsure
merged their respective operations at the close of business on September 30,
1997 ("Merger Date"). CNAF, through its property and casualty subsidiaries, CCC
and CIC, contributed $52.25 million of capital to CNA Surety. Through
reinsurance agreements, CCC and CIC ceded to Western Surety all of their net
unearned premiums and loss and loss adjustment expense reserves, as of the
Merger Date, and will cede to Western Surety all surety business written or
renewed by CCC and CIC for a period of five years thereafter. Further, CCC and
CIC have agreed to assume the obligation for any adverse development on recorded
reserves for CCC Surety Operations as of the Merger Date, to limit the loss
ratio on certain defined business written by CNA Surety through December 31,
2000, and to provide certain additional excess of loss reinsurance. CCC also
agreed to provide certain administrative services at specified rates, subject to
inflationary increases, for three years after the Merger, if CNA Surety chooses
to purchase such services.
DESCRIPTION OF BUSINESS
CNA Surety's insurance subsidiaries write surety and fidelity bonds in all
50 states through a combined network of approximately 37,000 independent
agencies. CNA Surety's principal insurance subsidiaries are Western Surety and
USA. The insurance subsidiaries write, on a direct basis or as business assumed
from CCC and CIC, small fidelity and non-contract surety bonds, referred to as
commercial bonds; small, medium and large contract bonds; international surety
and credit insurance; and errors and omissions ("E&O") liability insurance.
Western Surety is a licensed insurer in all 50 states and the District of
Columbia. USA is licensed in 44 states and the District of Columbia. Western
Surety's affiliated company, Surety Bonding Company of America ("SBCA"), is
licensed in 24 states.
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FINANCIAL STRENGTH RATINGS
A.M. BEST COMPANY, INC. ("A.M. BEST")
Western Surety and USA are currently rated A+ (Superior) and A (Excellent),
respectively, by A.M. Best. Through intercompany reinsurance and related
agreements, CNA Surety's customers will continue to have access to CCC's broader
underwriting capacity. CCC is currently rated A by A.M. Best. A.M. Best's letter
ratings range from A++ (Superior) to D (Poor) with A++ being highest. An A+
(Superior) rating is assigned to those companies which A.M. Best believes have
achieved superior overall performance when compared to the norms of the property
and casualty insurance industry. A+ (Superior) rated insurers have been shown to
be among the strongest in ability to meet policyholder and other contractual
obligations. A rating of A (Excellent) is assigned to those companies which A.M.
Best believes have achieved excellent overall performance when compared to the
norms of the property and casualty insurance industry and generally have
demonstrated a strong ability to meet their respective policyholder and other
contractual obligations.
STANDARD AND POOR'S ("S&P")
Western Surety and USA are both currently rated A (Strong), by S&P. CCC is
currently rated A by S&P. S&P's letter ratings range from AAA+ (Extremely
Strong) to CC (Extremely Weak) with AAA+ being highest. An insurer rated 'A' has
strong financial security characteristics, but is somewhat more likely to be
affected by adverse business conditions than are insurers with higher ratings.
PRODUCT INFORMATION
According to the Surety Association of America ("SAA") industry estimates,
approximately 80% of the $3.0 billion United States surety market is represented
by bonds required by federal statutes, state laws, and local ordinances. These
bonding requirements range from federal construction projects, where the
contractor is required to post performance and payment bonds which guarantee
performance of contracts to the government as well as payment of bills to
subcontractors and suppliers, to license and permit bonds which guarantee
compliance with legal requirements for business operations.
PRODUCTS AND POLICIES
Unlike a standard, two-party insurance policy, surety bonds are three-party
agreements in which the issuer of the bond (the surety) joins with a second
party (the principal) in guaranteeing to a third party (the owner/obligee) the
fulfillment of some obligation on the part of the principal. The surety is the
party who guarantees fulfillment of the principal's obligation to the obligee.
In addition, sureties are generally entitled to recover from the principal any
losses and expenses paid to third parties. The surety's responsibility is to
evaluate the risk and determine if the principal meets the underwriting
requirements for the bond. Accordingly, surety bond premiums primarily reflect
the type and class of risk and related costs associated with both processing the
bond transaction and investigating the applicant including, if necessary, an
analysis of the applicant's creditworthiness and ability to perform.
There are two broad types of surety products -- contract surety and
commercial surety bonds. Contract surety bonds secure a contractor's performance
and/or payment obligation generally with respect to a construction project.
Contract surety bonds are generally required by federal, state and local
governments for public works projects. Commercial surety bonds include all
surety bonds other than contract and cover obligations typically required by law
or regulation.
Contract bond guarantee obligations include the following:
Bid bonds: used by contractors submitting proposals on potential
contracts.
Performance bonds: guarantee to the owner the performance of the
contractor's obligations according to the terms and conditions of the
contract.
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Payment bonds: guarantee payment of the contractor's obligations under
the contract for labor, subcontractors, and materials supplied to the
project. Payment bonds are utilized in public projects where liens are not
permitted.
Other examples of contract bonds are completion, maintenance and supply
bonds.
Commercial surety business is comprised of bonds covering obligations
typically required by law or regulation, such as the following:
License and Permit bonds: required by statutes or ordinances for a
number of purposes including guaranteeing the payment of certain taxes and
fees and providing consumer protection as a condition to granting licenses
related to selling real estate or motor vehicles and contracting services.
Judicial and Fiduciary bonds: required by statutes, courts or legal
documents for the protection of those on whose behalf a fiduciary acts.
Examples of such fiduciaries include executors and administrators of
estates, and guardians of minors and incompetents.
Public Official bonds: required by statutes and ordinances to
guarantee the lawful and faithful performance of the duties of office by
public officials.
International and Other: in 1997, CNA Surety expanded into the
international surety and credit insurance market through a 50% U.S. dollar
denominated quota share treaty with an affiliate of CCC, CNA Reinsurance
Company Limited (London). CNA Surety assumed $11.3 million and $10.0
million of premium through this relationship in 1999 and 1998,
respectively. The assumed business is predominately European based risks,
approximately 74% of which is credit insurance and 26% is surety and
fidelity. Credit insurance provides protection against abnormal losses from
unpaid accounts receivable.
CNA Surety also writes direct contract and commercial surety bonds for
international risks. Such bonds are written to satisfy the international
bond requirements of our domestic customers and for foreign clients.
In addition, the Company markets surety related products such as fidelity
bonds and errors and omissions ("E&O") insurance. Fidelity bonds cover losses
arising from employee dishonesty. Examples of purchasers of fidelity bonds are
law firms, insurance agencies and janitorial service companies. CNA Surety
writes E&O policies for three classes of insureds: notaries public, tax
preparers and insurance agents and brokers. The notary public E&O policy is
marketed as a companion product to the notary public bond and the tax preparer
E&O policy is marketed to small tax return preparation firms. The insurance
agents' and brokers' E&O insurance product is marketed directly to the Company's
independent agency force.
Although all of its products are sold through the same independent
insurance agent and broker distribution network, the Company's underwriting and
management reporting are organized by the two broad types of surety products --
contract surety and commercial surety, which also includes fidelity bonds and
other insurance products for these purposes. These two operating segments have
been aggregated into one reportable business segment for financial reporting
purposes because of their similar economic and operating characteristics.
The following tables set forth, for each principal class of bonds, gross
written premiums, net written premiums and number of domestic bonds and policies
in force and the respective percentages of the total for the past three years.
All tables in this section contain information reflecting the 1997 pro forma
combined operations of CNA Surety, including Western Surety and USA results
prior to the Merger Date. As such, the 1997 pro forma financial information is
not necessarily indicative of the financial results that would have
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occurred under the ownership and management of CNA Surety (amounts in thousands,
except average bond amounts):
GROSS WRITTEN PREMIUMS
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PRO FORMA
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% OF % OF % OF
1999 TOTAL 1998 TOTAL 1997 TOTAL
---- ----- ---- ----- ---- -----
Contract.......................... $150,022 48.9% $132,242 47.5% $123,014 46.2%
Commercial:
License and permit.............. 80,413 26.2 66,394 23.9 64,614 24.3
Judicial and fiduciary.......... 29,485 9.6 26,557 9.5 26,555 10.0
Public official................. 17,658 5.7 16,430 5.9 16,705 6.3
International and other......... 2,946 1.0 11,665 4.2 11,788 4.3
-------- ----- -------- ----- -------- -----
Total commercial................ 130,502 42.5 121,046 43.5 119,662 44.9
-------- ----- -------- ----- -------- -----
Fidelity and other................ 26,335 8.6 24,936 9.0 23,742 8.9
-------- ----- -------- ----- -------- -----
$306,859 100.0% $278,224 100.0% $266,418 100.0%
======== ===== ======== ===== ======== =====
Domestic.......................... $286,253 93.3% $266,998 96.0% $255,635 96.0%
International..................... 20,606 6.7 11,226 4.0 10,783 4.0
-------- ----- -------- ----- -------- -----
$306,859 100.0% $278,224 100.0% $266,418 100.0%
======== ===== ======== ===== ======== =====
NET WRITTEN PREMIUMS
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PRO FORMA
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% OF % OF % OF
1999 TOTAL 1998 TOTAL 1997 TOTAL
---- ----- ---- ----- ---- -----
Contract.......................... $145,616 48.7% $127,114 47.0% $118,138 46.0%
Commercial........................ 128,834 43.1 120,638 44.6 117,162 45.6
Fidelity and other................ 24,537 8.2 22,850 8.4 21,767 8.4
-------- ----- -------- ----- -------- -----
$298,987 100.0% $270,602 100.0% $257,067 100.0%
======== ===== ======== ===== ======== =====
Domestic.......................... $280,463 93.8% $260,506 96.3% $246,923 96.1%
International..................... 18,524 6.2 10,096 3.7 10,144 3.9
-------- ----- -------- ----- -------- -----
$298,987 100.0% $270,602 100.0% $257,067 100.0%
======== ===== ======== ===== ======== =====
DOMESTIC BOND/POLICIES IN FORCE
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PRO FORMA
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% OF % OF % OF
1999 TOTAL 1998 TOTAL 1997 TOTAL
---- ----- ---- ----- ---- -----
Contract.......................... 153 8.1% 200 11.1% 30 1.7%
Commercial........................ 1,368 72.2 1,276 70.7 1,471 82.0
Fidelity and other................ 374 19.7 330 18.2 292 16.3
-------- ----- -------- ----- -------- -----
1,895 100.0% 1,806 100.0% 1,793 100.0%
======== ===== ======== ===== ======== =====
Average domestic bond
penalty/policy limit(1)......... $ 32,224 $ 29,377 $ 25,802
======== ======== ========
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(1) The average bond penalty is a measure of the average limit of liability
associated with in force contract and commercial surety bonds at each
reporting period. The increase in the average domestic policy limit reflects
the change in business to a higher proportion of contract surety bonds.
In 1999, the agency with which CNA Surety did the most business generated
approximately $4.5 million of gross written premiums, or 1.5% of aggregate gross
written premiums. The ten agencies which did the most business with CNA Surety
produced a total of $25.9 million or 8.5% of aggregate gross written premiums.
In
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addition, $57.9 million, or 18.9%, of gross written premiums were generated from
national brokers during 1999 with the largest national broker generating $21.7
million, or 7.1%, of gross written premiums.
MARKETING
The Company principally markets its products in all 50 states, as well as
the District of Columbia and Puerto Rico. Its products are marketed primarily
through independent producers, including multi-line agents and brokers such as
surety specialists, many of whom are members of the National Association of
Surety Bond Producers. CNA Surety enjoys broad national distribution of its
products, which are marketed through approximately 37,000 of the approximately
44,000 independent property and casualty insurance agencies in the United
States. In addition, the Company employs 57 full-time salaried marketing
representatives to continually service its vast producer network. Relationships
with these independent producers are maintained through the Company's 48 local
branch offices.
The following table sets forth the distribution of the domestic business of
CNA Surety, by state based upon gross written premiums in each of the last three
years:
YEARS ENDED
DECEMBER 31,
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PRO FORMA
1999 1998 1997
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Gross Written Premiums by State:
Texas............................................. 12.6% 13.1% 12.7%
California........................................ 8.4 7.4 7.0
Florida........................................... 5.6 5.5 5.6
New York.......................................... 4.8 4.5 4.5
Illinois.......................................... 4.5 4.9 4.0
Pennsylvania...................................... 3.5 3.8 3.8
Michigan.......................................... 3.0 3.2 3.3
All Other......................................... 57.6 57.6 59.1
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Total.......................................... 100.0% 100.0% 100.0%
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Contract Surety
With respect to standard contract surety, the core focus for the Company is
contractors with less than $50 million in contracted work in progress. This
segment is comprised of small contractors (less than $5 million in work in
progress), medium contractors ($5-$25 million) and the lower end of the large
contractors (greater than $25 million). These small and medium contractors, as a
group, represent a significant portion of the United States construction market.
The Company has a small number of accounts with contracted work in progress in
excess of $150 million, the majority of which have been clients of the Company
for more than ten years. Some of these accounts are maintained on a "co-surety"
or joint insurer basis with other sureties in order to manage aggregate
exposure.
In addition to standard contract surety, the Company has underwriters that
focus on serving the bond requirements of small and emerging and specialty
contractors. These contractors typically have limited operating history,
financial resources or other special characteristics that require different
underwriting techniques than standard contract surety. For example, CNA Surety
participates in the non-standard contract surety market, through the federal
government's Small Business Administration ("SBA") surety bond guarantee
programs. These programs provide that the SBA assumes 70% -- 90% of the coverage
in exchange for 10% -- 30% of the premium.
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Commercial Surety
A large portion of the commercial surety market is comprised of small
obligations represented by licenses and permits that are routine in nature and
require minimal underwriting. Customers are focused principally on prompt and
efficient service.
The Company continues to focus its marketing efforts on this small
commercial bond market through its Sioux Falls service center. In this market
segment, CNA Surety emphasizes one-day response service, easy-to-use forms and
an extensive array of commercial bond products. In addition, independent agents
are provided pre-executed bond forms, powers of attorney, and facsimile
authorizations that allow them to issue many standard bonds in their offices.
While a large portion of the commercial surety market is represented by
small entities, CNA Surety also seeks to service the bonding needs of larger,
"Fortune 1000" firms, where a high level of technical and underwriting skill is
required. These larger customers are sophisticated, professional buyers of
commercial surety bonds who demand exceptional service and business expertise at
a reasonable cost. CNA Surety maintains a specific underwriting staff in its
Chicago home office and other underwriting centers across the country dedicated
to the "Fortune 1000" market.
CNA Surety's insurance subsidiaries direct their marketing to particular
industries or classes of bonds on a broad basis. For instance, the Company
maintains programs directed at notary bonds, mortgage broker compliance bonds,
games of chance bonds (guaranteeing payment of prizes from promotional games)
and grain warehouse dealer bonds (protecting funds associated with grain
storage).
UNDERWRITING
The underwriting philosophy of CNA Surety is disciplined, and focused on
consistent underwriting profitability. The extent and sophistication of
underwriting activity varies by type of risk. Contractor accounts and large
commercial surety customers undergo extensive credit, financial and managerial
review and analysis on a regular basis. Certain classifications of bonds, such
as fiduciary and court appeal bonds, also require more extensive underwriting.
CNA Surety also targets various products in the surety and fidelity bond
market which are characterized by relatively low-risk exposure and small bond
amounts. The underwriting criteria, including the extent of bonding authority
granted to independent agents, varies depending on the class of business and the
type of bond. For example, relatively little underwriting information is
typically required of certain low-exposure risks such as notary bonds.
COMPETITION
The surety and fidelity market is highly competitive. According to 1998
data from A.M. Best, the U.S. market aggregates approximately $3.8 billion in
direct written premiums, comprised of approximately $3.0 billion in surety
premiums and approximately $0.8 billion in fidelity premiums. The large
diversified insurance companies hold the largest market shares. For example, the
20 largest surety companies account for nearly 74% of the domestic surety market
and 88% of the domestic fidelity market. In 1998, CNA Surety was the second
largest surety provider with an 8.6% market share.
Primary competitors of CNA Surety are approximately 20 national, multi-line
companies participating in the surety market throughout the country. Management
believes that its principal strengths are capacity, diverse product offering,
service and accessibility and long-term relationships with agents and accounts.
While the surety industry has experienced slow premium growth, competition has
increased as a result of ten years of profitable underwriting experience. This
competition has typically manifested itself through reduced premium rates and
greater tolerance for relaxation of underwriting standards. Management believes
such competition will continue.
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REINSURANCE
The Company's insurance subsidiaries, in the ordinary course of business,
cede reinsurance to other insurance companies to limit their exposure to loss.
Reinsurance arrangements are used to limit maximum loss, provide greater
diversification of risk and minimize exposure on larger risks. Reinsurance
contracts do not ordinarily relieve the Company of its primary obligations to
claimants. Therefore, a contingent liability exists with respect to reinsurance
ceded to the extent that any reinsurer is unable to meet the obligations assumed
under reinsurance contracts. The Company evaluates the financial condition of
its reinsurers, establishes allowances for uncollectible amounts and monitors
concentrations of credit risk.
For contract and commercial surety business an excess of loss reinsurance
program is in effect. The Excess of Loss Contract provides the insurance
subsidiaries of CNA Surety with the capacity to underwrite large surety bond
exposures by providing reinsurance support from CCC. The Excess of Loss Contract
provides $75 million of coverage in excess of the $55 million of coverage
provided to the insurance subsidiaries by third party reinsurers, which is in
turn in excess of the $5 million of coverage per principal to be retained by the
CNA Surety insurance subsidiaries. Subsequent to the Merger Date, the Company
entered into a second excess of loss contract with CCC ("Second Excess of Loss
Contract"). The Second Excess of Loss Contract provides additional coverage for
principal losses that exceed the foregoing coverage of $75 million per principal
provided by the Excess of Loss Contract, or aggregate losses per principal in
excess of $135 million. The two Excess of Loss Contracts collectively provide
coverage for losses discovered on surety bonds in force as of the Merger Date
and for losses discovered on new and renewal business written during the term of
the Excess of Loss Contracts. CCC is also obligated to act as a joint insurer,
or "co-surety," for business covered by the Excess of Loss Contracts when
requested by the CNA Surety insurance subsidiaries. In consideration for the
reinsurance coverage provided by the Excess of Loss Contracts, the insurance
subsidiaries pay to CCC, on a quarterly basis, a premium equal to 1% of the net
written premiums applicable to the Excess of Loss Contract, subject to a minimum
premium of $20,000 and $5,000 per quarter under the Excess of Loss Contract and
Second Excess of Loss Contract, respectively. The CNA Surety insurance
subsidiaries paid $80,000 for all minimum quarterly premiums due in 1999 for the
Excess of Loss Contract and $20,000 in minimum quarterly premiums for the Second
Excess of Loss Contract during the year ended December 31, 1999. There were no
amounts due to CCC under the Excess of Loss Contract and Second Excess of Loss
Contract as of December 31, 1999. Both Excess of Loss Contracts have been made
effective immediately following the Merger Date and continue for a period of
five years from the Merger Date.
At December 31, 1999, CNA Surety's largest reinsurance receivable,
including prepaid reinsurance premiums of $0.8 million, was approximately $8.5
million with a company rated A++ (Superior) by A.M. Best.
RESERVES FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
CNA Surety's insurance subsidiaries employ generally accepted reserving
approaches in establishing the estimated liability for unpaid loss and loss
adjustment expenses that give consideration to the inherent difficulty and
variability in the estimation process. In addition, CNA Surety utilizes an
independent actuarial firm of national standing to conduct periodic reviews of
loss reserving practices, and annually obtains actuarial certification as to the
reasonableness of actuarial assumptions used and the sufficiency of year-end
reserves for each of its principal insurance subsidiaries.
The estimated liability for unpaid losses and loss adjustment expenses
includes, on an undiscounted basis, estimates of (a) the ultimate settlement
value of reported claims, (b) incurred but not reported ("IBNR") claims, (c)
future expenses to be incurred in the settlement of claims and (d) claim
recoveries, exclusive of reinsurance recoveries which are reported as an asset.
These estimates are determined based on the Company's and surety industry loss
experience as well as consideration of current trends and conditions. The
estimated liability for unpaid losses and loss adjustment expenses is an
estimate and there is the potential that actual future loss payments will differ
significantly from initial estimates. The methods of determining such estimates
and the resulting estimated liability are regularly reviewed and updated.
Changes in the estimated liability are reflected in operating income in the year
in which such changes are determined to be needed.
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A table is included in Note 8 to the Consolidated Financial Statements of
the 1999 Annual Report to Shareholders which presents a table of the activity in
the reserves for unpaid losses and loss adjustment expenses for the Company and
the Predecessor. This table highlights the impact of revisions to the estimated
liability established in prior years.
The following table sets forth a reconciliation of the consolidated loss
reserves reported in accordance with generally accepted accounting principles
("GAAP"), and the reserves reported to state insurance regulatory authorities in
accordance with statutory accounting principles ("SAP") for the year ended
December 31, 1999 (dollars in thousands):
Net reserves at end of year, GAAP basis..................... $137,469
Ceded reinsurance, net of salvage and subrogation........... 20,464
--------
Gross reserves at end of year, GAAP basis................... 157,933
Estimated salvage and subrogation recoverable (gross of
reinsurance), not anticipated under SAP................... 12,856
Estimated reinsurance recoverable netted against gross
reserves for SAP.......................................... (26,856)
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Gross reserves at end of year, SAP basis.................... $143,933
========
The loss reserve development table below illustrates the change over time
of reserves established for the Company's estimated losses and loss adjustment
expenses at the end of various calendar years. The first section shows the
reserves as originally reported at the end of the stated year. The second
section shows the cumulative amounts paid as of the end of successive years with
respect to that reserve liability. The third section shows re-estimates of the
original recorded reserve as of the end of each successive year which is the
result of management's expanded awareness of additional facts and circumstances
that pertain to the unsettled claims. The last section compares the latest
re-estimated reserve to the reserve originally established, and indicates
whether or not the original reserve was adequate or inadequate to cover the
estimated costs of unsettled claims.
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The loss reserve development table is cumulative as of each December 31,
and, therefore, ending balances should not be added since the amount at the end
of each calendar year includes activity for both the current and prior years.
The loss reserve development table reflects, on a pro forma basis, the reserves
of the CCC Surety Operations and Capsure since 1989 and CIC since its
acquisition in May of 1995. Such historical development is not necessarily
indicative of the financial results that would have occurred under the ownership
and management of CNA Surety nor of future operating results.
AS OF DECEMBER 31,
-------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Net reserves for
losses and loss
adjustment
expenses............ $58,685 $69,733 $60,425 $61,998 $64,627 $70,398 $147,911 $137,064
Net Paid (Cumulative)
as of:
One year later...... 7,618 13,456 16,287 17,636 12,923 12,018 42,552 9,866
Two years later..... 13,540 22,330 24,295 25,854 19,671 18,149 43,179 20,171
Three years later... 18,033 26,835 29,857 29,495 21,990 21,229 46,782 25,206
Four years later.... 20,758 31,591 31,273 30,582 23,070 22,313 48,960 --
Five years later.... 22,089 32,133 31,909 30,817 23,864 24,776 -- --
Six years later..... 25,441 32,352 32,354 32,150 24,706 -- -- --
Seven years later... 23,457 32,993 32,419 32,811 -- -- -- --
Eight years later... 23,849 33,033 34,344 -- -- -- -- --
Nine years later.... 23,839 34,805 -- -- -- -- -- --
Ten years later..... 25,684 -- -- -- -- -- -- --
Net Reserves
Re-estimated as of:
End of initial
year.............. 58,685 69,733 60,425 61,998 64,627 70,398 147,911 137,064
One year later...... 53,486 50,822 58,644 58,603 54,568 51,471 132,267 96,178
Two years later..... 39,131 51,330 51,511 54,585 44,749 44,135 103,466 90,796
Three years later... 39,978 46,439 46,826 47,911 38,972 38,829 101,745 77,086
Four years later.... 34,357 42,946 42,212 42,542 28,094 38,628 89,348 --
Five years later.... 31,405 40,747 39,945 33,699 30,335 31,362 -- --
Six years later..... 31,777 38,131 36,164 37,188 27,842 -- -- --
Seven years later... 26,646 36,179 37,695 34,966 -- -- -- --
Eight years later... 25,464 37,853 37,014 -- -- -- -- --
Nine years later.... 28,027 37,252 -- -- -- -- -- --
Ten years later..... 27,812 -- -- -- -- -- -- --
======= ======= ======= ======= ======= ======= ======== ========
Total net (deficiency)
redundancy.......... $30,873 $32,481 $23,411 $27,032 $36,785 $39,036 $ 58,563 $ 59,978
======= ======= ======= ======= ======= ======= ======== ========
Cumulative redundancy
(deficiency) as a
percentage of
original estimate... 52.6% 46.6% 38.7% 43.6% 56.9% 55.5% 39.6% 43.8%
======= ======= ======= ======= ======= ======= ======== ========
AS OF DECEMBER 31,
------------------------------
1997 1998 1999
---- ---- ----
(DOLLARS IN THOUSANDS)
Net reserves for
losses and loss
adjustment
expenses............ $122,725 $142,034 $137,469
Net Paid (Cumulative)
as of:
One year later...... 19,595 32,428 --
Two years later..... 30,775 -- --
Three years later... -- -- --
Four years later.... -- -- --
Five years later.... -- -- --
Six years later..... -- -- --
Seven years later... -- -- --
Eight years later... -- -- --
Nine years later.... -- -- --
Ten years later..... -- -- --
Net Reserves
Re-estimated as of:
End of initial
year.............. 122,725 142,034 137,469
One year later...... 118,373 128,949 --
Two years later..... 102,304 -- --
Three years later... -- -- --
Four years later.... -- -- --
Five years later.... -- -- --
Six years later..... -- -- --
Seven years later... -- -- --
Eight years later... -- -- --
Nine years later.... -- -- --
Ten years later..... -- -- --
======== ======== ========
Total net (deficiency)
redundancy.......... $ 20,421 $ 13,085 $ --
======== ======== ========
Cumulative redundancy
(deficiency) as a
percentage of
original estimate... 16.6% 9.2% --
======== ======== ========
CLAIMS
Proactive claims management is an important factor for the profitable
underwriting of surety and fidelity products. The Company maintains an
experienced and dedicated staff of in-house claim specialists. All claim
handling is centralized in the three principal underwriting
locations -- Chicago, Sioux Falls and Houston. The disposition of claims and
other claim-related activity is done in accordance with established policies,
procedures and expense controls designed to minimize loss costs and maximize
salvage and subrogation recoveries. Indemnity and subrogation rights exist on a
significant portion of the business written, enabling the Company to pursue loss
recovery from the principal.
11
12
ASBESTOS AND ENVIRONMENTAL CLAIMS
The Company does not typically bond contractors that specialize in
hazardous environmental remediation work. The Company does however bond several
accounts that have incidental environmental exposure with respect to which the
Company provides limited bonding programs. In the commercial surety market, the
Company provides bonds to large corporations that are in the business of mining
various minerals and are obligated to post reclamation bonds that guarantee that
property which was disturbed during mining is returned to an acceptable
condition when the mining is completed. While no environmental responsibility is
overtly provided by commercial or contract bonds, some risk of environmental
exposure may exist if the surety were to assume certain rights in the completion
of a defaulted project or through salvage recovery.
To date, the Company has not received any environmental claim notices nor
is management aware of any potential environmental claims.
REGULATION
The Company's insurance subsidiaries are subject to varying degrees of
regulation and supervision in the jurisdictions in which they transact business
under statutes which delegate regulatory, supervisory and administrative powers
to state insurance regulators. In general, an insurer's state of domicile has
principal responsibility for such regulation which is designed generally to
protect policyholders rather than investors and relates to matters such as the
standards of solvency which must be maintained; the licensing of insurers and
their agents; the examination of the affairs of insurance companies, including
periodic financial and market conduct examinations; the filing of annual and
other reports, prepared on a statutory basis, on the financial condition of
insurers or for other purposes; establishment and maintenance of reserves for
unearned premiums and losses; and requirements regarding numerous other matters.
Licensed or admitted insurers generally must file with the insurance regulators
of such states, or have filed on its behalf, the premium rates and bond and
policy forms used within each state. In some states, approval of such rates and
forms must be received from the insurance regulators in advance of their use.
Western Surety is domiciled in South Dakota and licensed in all 50 states
and the District of Columbia. SBCA is domiciled in South Dakota and licensed in
24 states. USA is domiciled in Texas and licensed in 44 states and the District
of Columbia.
Insurance regulations generally also require registration and periodic
disclosure of certain information concerning ownership, financial condition,
capital structure, general business operations and any material transactions or
agreements by or among affiliates. Such regulation also typically restricts the
ability of any one person to acquire 10% or more, either directly or indirectly,
of a company's stock without prior approval of the applicable insurance
regulatory authority. In addition, dividends and other distributions to
stockholders generally may be paid only out of unreserved and unrestricted
statutory earned surplus. Such distributions may be subject to prior regulatory
approval, including a review of the implications on Risk-Based Capital
requirements. A discussion of Risk-Based Capital requirements for property and
casualty insurance companies is included in both Management's Discussion and
Analysis of Financial Condition and Results of Operations and Note 14 to the
Consolidated Financial Statements of the 1999 Annual Report to Shareholders.
Without prior regulatory approval in 2000, CNA Surety's insurance subsidiaries
may pay stockholder dividends of $60.5 million in the aggregate. For the year
ended December 31, 1999, CNA Surety received $33.3 million in dividends from its
insurance subsidiaries.
In 1998, the National Association of Insurance Commissioners adopted the
Codification of Statutory Accounting Principles ("Codification"). The states of
South Dakota and Texas have not yet adopted the Codification. The Company has
not yet quantified the effects of Codification on its statutory financial
statements. The Codification, which is intended to standardize regulatory
accounting and reporting for the insurance industry, is proposed to be effective
January 1, 2001 if adopted by the domiciliary state.
CNA Surety's insurance subsidiaries are subject to periodic financial and
market conduct examinations. These examinations are generally performed by the
domiciliary state insurance regulatory authorities. The South Dakota Department
of Commerce and Regulation -- Division of Insurance (the "South Dakota
12
13
Department") conducted its financial and market conduct examination of Western
Surety for the five year period ended December 31, 1996. The South Dakota
Department made a finding of non-compliance with respect to the Company's
practices regarding return of premiums and recommended that Western Surety
change its current procedures regarding the return of premiums. The regulation
in question was subsequently amended to exclude surety products which eliminated
any non-compliance by the Company. The Texas Department of Insurance conducted
its last examination of USA's financial matters as of December 31, 1996. There
were no significant issues noted which required corrective action by any of the
insurance subsidiaries.
Certain states in which CNA Surety's insurance subsidiaries conduct their
business require insurers to join a guaranty association. Guaranty associations
provide protection to policyholders of insurers licensed in such states against
the insolvency of those insurers. In order to provide the associations with
funds to pay certain claims under policies issued by insolvent insurers, the
guaranty associations charge members assessments based on the amount of direct
premiums written in that state. Such assessments were not material to CNA
Surety's results of operations in 1999.
Western Surety and USA each qualifies as an acceptable surety for federal
and other public works project bonds pursuant to U.S. Department of Treasury
regulations. The underwriting limitations of Western Surety and USA, based on
each insurer's statutory surplus, are currently $15.0 million and $1.7 million,
respectively. Through intercompany reinsurance and related agreements with CCC,
CNA Surety has access to CCC's $454.3 million U.S. Treasury underwriting
limitation.
INVESTMENTS
Insurance company investment practices must comply with insurance laws and
regulations and must also comply with certain covenants under CNA Surety's $130
million revolving credit facility. Generally, insurance laws and regulations
prescribe the nature and quality of, and set limits on, the various types of
investments which may be made by CNA Surety's insurance subsidiaries.
The Company's investment portfolio generally is managed to maximize
after-tax investment return, while minimizing credit risk with investments
concentrated in high quality income securities. CNA Surety's portfolio is
managed to provide diversification by limiting exposures to any one industry,
issue or issuer, and to provide liquidity by investing in the public securities
markets. The portfolio is structured to support CNA Surety's insurance
underwriting operations and to consider the expected duration of liabilities and
short-term cash needs.
An investment committee of CNA Surety's Board of Directors establishes
investment policy and oversees the management of each portfolio. A professional
independent investment adviser has been engaged to assist in the management of
each of the Company's insurance subsidiaries investment portfolio pursuant to
established investment committee guidelines. The insurance subsidiaries pay an
advisory fee based on the market value of the assets under management.
EMPLOYEES
As of December 31, 1999, the Company employed 828 persons. CNA Surety has
not experienced any work stoppages. Management of CNA Surety believes its
relations with its employees are good.
ITEM 2. PROPERTIES
CNA Surety leases its executive offices and its shared branch locations
with CCC under an Administrative Services Agreement. CNA Surety currently uses
approximately 110,000 square feet and related personal property at 43 branch
locations and its home and executive offices (24,261 square feet), in Chicago,
Illinois. CNA Surety's annual rent for this space is approximately $2.0 million.
CNA Surety may terminate its use of these locations as set forth in the
Administrative Services Agreement, without penalty, by providing CCC with 60
days written notice.
CNA Surety leases office space for its primary processing and service
center at 101 South Phillips Avenue, Sioux Falls, South Dakota, under a lease
expiring in 2002. CNA Surety's office space, consisting of
13
14
approximately 81,600 square feet, is leased from a partnership in which the
Company owns a 50% interest. The annual rent, which is subject to annual
adjustments, was $1.3 million as of December 31, 1999. CNA Surety also leases
space for large contract and commercial branch offices in Dallas, Texas and New
York, New York. Annual rent for these offices was $0.3 million with leases
terminating in 2004 and 2007, respectively. CNA Surety leases office space for
its small and specialty contract home office at 950 Echo Lane, Suite 250,
Houston, Texas, under a lease terminating in 2001 with an annual rent of $0.2
million. The Company also leases space for 3 small and specialty contract branch
offices for an additional annual rent of approximately $0.1 million.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to various lawsuits arising in
the normal course of business, some seeking material damages. The Company
believes the resolution of these lawsuits will not have a material adverse
effect on its financial condition or its results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock ("Common Stock") trades on the New York Stock
Exchange under the symbol SUR. On March 10, 2000, the last reported sale price
for the Common Stock was $13.00 per share. The following table shows the range
of high and low sales prices for shares of the Common Stock as reported on the
New York Stock Exchange during 1999 and 1998.
HIGH LOW
---- ---
1999
1st Quarter................................................. $16.00 $10.19
2nd Quarter................................................. $15.56 $12.31
3rd Quarter................................................. $15.50 $12.13
4th Quarter................................................. $13.00 $ 9.75
1998
1st Quarter................................................. $16.38 $14.38
2nd Quarter................................................. $16.75 $13.00
3rd Quarter................................................. $15.19 $12.56
4th Quarter................................................. $15.88 $13.06
The number of stockholders of record of Common Stock on March 10, 2000, was
approximately 988.
DIVIDENDS
On May 19, 1998, the CNA Surety Board of Directors adopted a dividend
policy under which the Company intends to pay a quarterly dividend beginning in
the fourth quarter of 1998. The current quarterly dividend rate is 8 cents per
share or 32 cents on an annual basis. The declaration and payment of dividends
to holders of Common Stock, including the amount and frequency of such
dividends, is at the discretion of the Board and depends upon many factors,
including CNA Surety's financial condition, operating characteristics, projected
earnings and growth, capital requirements of its insurance subsidiaries, debt
service obligations and such other factors as the Board deems relevant.
14
15
ITEM 6. SELECTED FINANCIAL DATA
The following financial information has been derived from the Consolidated
Financial Statements and Notes thereto which appear in the 1999 Annual Report to
Shareholders and are incorporated herein by reference.
CNA Surety Corporation is a holding company for the combined surety
business of CNAF and Capsure. Pursuant to a reorganization agreement, CNAF and
Capsure merged their respective operations at the close of business on September
30, 1997. The surety operations of CNAF are referred to as CCC Surety Operations
("Predecessor"). For a more detailed description of the merger transactions and
their effects on the Company's financial data, see the Consolidated Financial
Statements and related Notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations appearing in the 1999 Annual
Report to Shareholders which are incorporated herein by reference.
The following information presented for CNA Surety is for the years ended
December 31, 1999 and 1998 and the period from September 30, 1997 (date of
inception) through December 31, 1997 and as of December 31, 1999, 1998 and 1997.
Selected financial data of the Predecessor is presented on the following page.
1999 1998 1997
---- ---- ----
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Total revenues(1)........................................... $309,405 $283,840 $ 71,284
======== ======== ========
Gross written premiums...................................... $306,859 $278,224 $ 72,755
======== ======== ========
Net written premiums........................................ $298,987 $270,602 $ 73,989
======== ======== ========
Net earned premiums......................................... $283,540 $258,737 $ 65,433
======== ======== ========
Underwriting income(2)...................................... $ 71,894 $ 61,773 $ 15,086
Net investment income....................................... 25,850 24,259 5,766
Net realized investment gains............................... 15 844 85
Interest expense............................................ 5,846 7,218 1,831
Amortization of intangible assets........................... 5,982 5,900 1,447
-------- -------- --------
Income before income taxes.................................. 85,931 73,758 17,659
Income taxes................................................ 29,433 28,243 6,663
-------- -------- --------
Net income.................................................. $ 56,498 $ 45,515 $ 10,996
======== ======== ========
Basic and diluted earnings per common share................. $ 1.28 $ 1.04 $ 0.25
======== ======== ========
Loss ratio(2)............................................... 15.7% 17.4% 18.5%
Expense ratio............................................... 58.9 58.7 58.4
-------- -------- --------
Combined ratio(2)........................................... 74.6% 76.1% 76.9%
======== ======== ========
Invested assets and cash.................................... $499,400 $505,355 $419,667
Intangible assets, net of amortization...................... 155,980 156,062 161,962
Total assets................................................ 851,575 819,370 725,131
Insurance reserves.......................................... 357,233 333,728 302,168
Debt........................................................ 101,900 113,000 118,000
Total liabilities........................................... 525,271 509,473 468,399
Stockholders' equity........................................ 326,304 309,897 256,732
Book value per share........................................ $ 7.59 $ 7.03 $ 5.93
Dividends paid per share.................................... $ 0.32 $ 0.08 $ --
- -------------------------
(1) Includes investment income and investment gains for CNA Surety for the year
ended December 31, 1999, 1998 and for the period from September 30, 1997
(date of inception) through December 31, 1997.
(2) Includes the effect of recording revisions of prior year reserves. The
dollar amount and the percentage point effect on the loss ratio of these
reserve revisions, all of which were favorable, were $13,085, or 4.6%, for
the year ended December 31, 1999, $4,352, or 1.7%, for the year ended
December 31, 1998 and $647, or 1.0%, for the period from September 30, 1997
(date of inception) through December 31, 1997.
15
16
The following information of the Predecessor is presented for the three
months ended December 31, 1996, for the nine months ended September 30, 1997 and
1996 and for the years ended December 31, 1996 and 1995. The selected financial
information of the Predecessor does not include data with respect to assets,
liabilities (other than insurance reserves) and equity because CNAF did not
customarily allocate the investment portfolio or equity of its operating
subsidiaries to its business units like CCC Surety Operations.
THREE NINE MONTHS ENDED YEARS ENDED
MONTHS SEPTEMBER 30, DECEMBER 31,
ENDED ---------------------- --------------------
12/31/96 1997 1996 1996 1995(1)
-------- ---- ---- ---- -------
(DOLLARS IN THOUSANDS)
Gross written premiums................... $ 40,654 $116,075 $114,554 $155,208 $136,605
======== ======== ======== ======== ========
Net written premiums..................... $ 37,641 $108,630 $106,263 $143,904 $122,012
======== ======== ======== ======== ========
Net earned premiums...................... $ 36,767 $108,564 $112,302 $149,069 $130,603
Net loss and LAE(2)...................... 9,394 (11,516) 23,612 33,006 32,440
Amortization of deferred policy
acquisition costs(3)................... 16,665 48,075 49,717 66,382 58,243
Other direct expenses.................... 4,631 10,173 8,637 13,268 11,840
Policyholders' dividends................. 324 1,426 1,641 1,965 1,508
-------- -------- -------- -------- --------
Excess of net earned premiums over direct
operating expenses before income
taxes(2)(3)............................ $ 5,753 $ 60,406 $ 28,695 $ 34,448 $ 26,572
======== ======== ======== ======== ========
Loss ratio(2)............................ 25.6% (10.6)% 21.0% 22.1% 24.8%
Expense ratio(3)......................... 58.8 55.0 53.4 54.8 54.8
-------- -------- -------- -------- --------
Combined ratio(2)(3)..................... 84.4% 44.4% 74.4% 76.9% 79.6%
======== ======== ======== ======== ========
Insurance reserves(4).................... $214,828 $183,491 $210,340 $214,828 $239,716
- -------------------------
(1) CNAF acquired The Continental Insurance Company ("Continental") in May 1995.
Results include the surety operations of Continental since its acquisition
in May 1995 which affects the comparability of financial information.
(2) Includes the effect of recording releases of prior year loss reserves. The
dollar amount and the percentage point effect on the loss ratio of these
reserve revisions, all of which were net reductions, were $1,232, or 3.4%,
for the three months ended December 31, 1996, $35,000, or 32.2%, and $8,510,
or 7.6%, for the nine months ended September 30, 1997 and 1996,
respectively, and $9,742, or 6.5%, and $10,846, or 8.3%, for the years ended
December 31, 1996 and 1995, respectively.
(3) Does not include the effects of certain general and administrative expenses,
which are indirect or overhead in nature, since such costs were not
historically allocated to the CCC Surety Operations by CNAF or its
subsidiaries. Accordingly, the comparability of this data to other data that
include such costs is affected.
(4) The insurance reserves include both loss and loss adjustment expense and
unearned premium reserves. These reserves are shown before the effects of
ceded reinsurance. In accordance with the reorganization and related
reinsurance agreements, these reserves, as of the Merger Date, were
transferred to Western Surety, net of reinsurance which totaled $9,979 and
$23,876 for the nine months ended September 30, 1997 and 1996 and $21,779
and $31,060 at December 31, 1996 and 1995, respectively.
16
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Incorporated herein by reference from pages 13 through 25 of the 1999
Annual Report to Shareholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCUSSIONS ABOUT MARKET RISK
Incorporated herein by reference from pages 21 through 22 of the 1999
Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL:
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Income for the Years Ended December 31, 1999 and 1998
and the Period from September 30, 1997 (date of inception) through December
31, 1997 and Statement of Certain Revenues and Direct Operating Expenses of
the Predecessor for the Nine Months Ended September 30, 1997
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1999 and 1998 and the Period from September 30, 1997 (date of inception)
through December 31, 1997
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999 and
1998 and the Period from September 30, 1997 (date of inception) through
December 31, 1997
Notes to Consolidated Financial Statements
Independent Auditors' Report
The above Consolidated Financial Statements, the related Notes to the
Consolidated Financial Statements and the Independent Auditors' Report are
incorporated herein by reference from pages 26 through 47 of the 1999 Annual
Report to Shareholders.
PAGE
----
FINANCIAL STATEMENT SCHEDULES:
Schedule I -- Summary of Investments........................ 20
Schedule II -- Condensed Financial Information of
Registrant................................................ 21
Schedule III -- Supplementary Insurance Information......... 24
Schedule IV -- Reinsurance.................................. 25
Schedule V -- Valuation and Qualifying Accounts............. 26
Schedule VI -- Supplemental Information Concerning
Property -- Casualty Insurance Operations................. 27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
17
18
PART III
ITEMS 10, 11, 12, AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT,
EXECUTIVE COMPENSATION, SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT, AND CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
The Company will file a definitive proxy statement with the Securities and
Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act
of 1934 (the "Proxy Statement") relating to the Company's Annual Meeting of
Stockholders to be held on May 16, 2000, not later than 120 days after the end
of the fiscal year covered by this Form 10-K. Information required by Items 10
through 13 will appear in the Proxy Statement and is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
PAGE
----
(a)(1) Financial Statements:
A separate index to the Consolidated Financial
Statements is presented in Part II, Item 8 .... 17
(a)(2) Financial Statement Schedules:
Independent Auditors' Report................... 19
Schedule I -- Summary of Investments........... 20
Schedule II -- Condensed Financial Information
of Registrant.................................. 21
Schedule III -- Supplementary Insurance
Information.................................... 24
Schedule IV -- Reinsurance..................... 25
Schedule V -- Valuation and Qualifying
Accounts....................................... 26
Schedule VI -- Supplemental Information
Concerning Property -- Casualty Insurance
Operations..................................... 27
(a)(3) Exhibits........................................ 28
(b) Reports on Form 8-K:
November 12, 1999: CNA Surety announces 32% increase in third quarter net
income.
November 18, 1999: CNA Surety announces quarterly dividend.
18
19
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
CNA Surety Corporation
We have audited the consolidated balance sheets of CNA Surety Corporation
and subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of income, stockholders' equity, and cash flows for the years ended
December 31, 1999 and 1998 and for the period from September 30, 1997 (date of
inception) through December 31, 1997. We have also audited the special-purpose
statement of certain revenues and direct operating expenses of CCC Surety
Operations, a business unit of CNA Financial Corporation, for the nine month
period ended September 30, 1997, and have issued our report thereon dated
February 22, 2000. Such consolidated financial statements and report are
included in the Company's 1999 Annual Report to Shareholders and are
incorporated herein by reference. Our audit also included the financial
statement schedules listed in the Index at Item 14. These financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.
Deloitte & Touche LLP
Chicago, Illinois
February 22, 2000
19
20
SCHEDULE I
CNA SURETY CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
AS OF DECEMBER 31, 1999 AND 1998
AS OF DECEMBER 31, 1999
--------------------------------
FAIR CARRYING
COST VALUE VALUE
---- ----- --------
(AMOUNTS IN THOUSANDS)
Fixed Income Securities:
U.S. Government and government agencies and authorities... $116,185 $112,739 $112,739
States, municipalities and political subdivisions......... 229,499 218,153 218,153
All other corporate bonds................................. 91,006 87,064 87,064
-------- -------- --------
Total fixed income securities........................ 436,690 $417,956 417,956
-------- ======== --------
Equity securities........................................... 23,968 25,897 25,897
Short-term investments...................................... 43,033 43,033
Other investments........................................... 5,626 5,277
-------- --------
Total investments.................................... $509,317 $492,163
======== ========
AS OF DECEMBER 31, 1998
--------------------------------
FAIR CARRYING
COST VALUE VALUE
---- ----- --------
(AMOUNTS IN THOUSANDS)
Fixed Income Securities:
U.S. Government and government agencies and authorities... $130,506 $133,280 $133,280
States, municipalities and political subdivisions......... 206,264 208,238 208,238
All other corporate bonds................................. 82,096 82,396 82,396
-------- -------- --------
Total fixed income securities........................ 418,866 $423,914 423,914
-------- ======== --------
Equity securities........................................... -- -- --
Short-term investments...................................... 57,865 57,865
Other investments........................................... 5,867 5,830
-------- --------
Total investments.................................... $482,598 $487,609
======== ========
20
21
SCHEDULE II
CNA SURETY CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
BALANCE SHEETS
DECEMBER 31,
----------------------
1999 1998
---- ----
(AMOUNTS IN THOUSANDS)
ASSETS
Investments in and advances to subsidiaries................. $428,232 $405,141
Short-term investments...................................... 11,618 14,492
Cash........................................................ 1,437 15,919
Other assets................................................ 1,543 1,303
-------- --------
Total assets........................................... $442,830 $436,855
======== ========
LIABILITIES
Debt........................................................ $100,000 $113,000
Other liabilities........................................... 16,526 13,958
-------- --------
Total liabilities...................................... 116,526 126,958
-------- --------
STOCKHOLDERS' EQUITY
Common stock................................................ 441 441
Additional paid-in capital.................................. 253,366 253,215
Retained earnings........................................... 95,419 52,984
Accumulated other comprehensive income (loss)............... (11,150) 3,257
Treasury stock, at cost..................................... (11,772) --
-------- --------
Total stockholders' equity............................. 326,304 309,897
-------- --------
Total liabilities and stockholders' equity........ $442,830 $436,855
======== ========
21
22
SCHEDULE II
CNA SURETY CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY) -- (CONTINUED)
STATEMENTS OF INCOME
SEPTEMBER 30,
(DATE OF
INCEPTION),
YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------ ------------ -------------
(AMOUNTS IN THOUSANDS)
Revenues:
Net investment income................................. $ 787 $ 695 $ 33
------- ------- -------
Total revenues..................................... 787 695 33
------- ------- -------
Expenses:
Interest expense...................................... 5,806 7,218 1,831
Corporate expense..................................... 4,100 3,062 1,364
------- ------- -------
Total expenses..................................... 9,906 10,280 3,195
------- ------- -------
Loss from operations before income taxes and equity in
net income of subsidiaries............................ (9,119) (9,585) (3,162)
Income taxes............................................ (2,892) (3,399) (1,107)
------- ------- -------
Loss before equity in net income of
subsidiaries -- Parent Company only................... (6,227) (6,186) (2,055)
Equity in net income of subsidiaries.................... 62,725 51,701 13,051
------- ------- -------
Net income.............................................. $56,498 $45,515 $10,996
======= ======= =======
22
23
SCHEDULE II
CNA SURETY CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY) -- (CONTINUED)
STATEMENTS OF CASH FLOWS
SEPTEMBER 30,
(DATE OF
INCEPTION),
YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------ ------------ -------------
(AMOUNTS IN THOUSANDS)
OPERATING ACTIVITIES:
Net loss............................................. $ (6,227) $ (6,186) $ (2,055)
Cash dividends from subsidiaries.................. 33,300 6,610 4,970
Tax payments received from subsidiaries........... 28,674 28,499 2,449
Federal and state income tax payments............. (20,600) (17,750) --
Adjustments to reconcile net loss to net cash
provided by operating activities:
Other assets and liabilities.................... (5,746) 749 (1,368)
-------- -------- ---------
Net cash provided by operating activities.............. 29,401 11,922 3,996
-------- -------- ---------
INVESTING ACTIVITIES:
Net advances from (to) subsidiaries.................. (3,519) 11,935 (65,075)
Capital contributions to subsidiaries................ (4,500) -- (50,000)
Changes in short-term investments.................... 2,874 (7,471) (7,021)
-------- -------- ---------
Net cash provided by (used in) investing activities.... (5,145) 4,464 (122,096)
-------- -------- ---------
FINANCING ACTIVITIES:
Proceeds from debt................................... -- -- 118,000
Principal payments on debt........................... (13,000) (5,000) --
Proceeds from issuance of common stock............... -- 7,531 --
Dividends to stockholders............................ (14,063) (3,527) --
Purchase of treasury stock........................... (11,772) -- --
Other................................................ 97 503 126
-------- -------- ---------
Net cash (used in) provided by financing activities.... (38,738) (493) 118,126
-------- -------- ---------
Increase (decrease) in cash............................ (14,482) 15,893 26
Cash at beginning of period............................ 15,919 26 --
-------- -------- ---------
Cash at end of period.................................. $ 1,437 $ 15,919 $ 26
======== ======== =========
23
24
SCHEDULE III
CNA SURETY CORPORATION AND SUBSIDIARIES AND PREDECESSOR
SUPPLEMENTARY INSURANCE INFORMATION
CNA SURETY CORPORATION AS OF AND FOR THE YEARS ENDED
DECEMBER 31, 1999 AND 1998 AND
FOR THE PERIOD SEPTEMBER 30, 1997 (DATE OF INCEPTION)
THROUGH DECEMBER 31, 1997 AND PREDECESSOR AS OF AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
SEPTEMBER 30,
(DATE OF PREDECESSOR
INCEPTION), ------------------
YEAR ENDED YEAR ENDED THROUGH NINE
DECEMBER 31, DECEMBER 31, DECEMBER 31, MONTHS ENDED
1999 1998 1997 SEPTEMBER 30, 1997
------------ ------------ ------------- ------------------
(AMOUNTS IN THOUSANDS)
Deferred policy acquisition costs...... $ 84,924 $ 74,488 $ 64,144 $ 37,740
======== ======== ======== ========
Future policy benefits, losses, claims
and loss expenses.................... $157,933 $150,020 $130,381 $ 88,914
======== ======== ======== ========
Unearned premiums...................... $199,300 $183,708 $171,787 $ 94,577
======== ======== ======== ========
Other policy claims and benefits
payable.............................. $ -- $ -- $ -- $ --
======== ======== ======== ========
Net premium revenue.................... $283,540 $258,737 $ 65,433 $108,564
======== ======== ======== ========
Net investment income.................. $ 25,850 $ 24,259 $ 5,766 $ --
======== ======== ======== ========
Benefits, claims, losses and settlement
expenses............................. $ 44,672 $ 44,998 $ 12,134 $(11,516)
======== ======== ======== ========
Amortization of deferred policy
acquisition costs.................... $119,746 $105,420 $ 25,881 $ 48,075
======== ======== ======== ========
Other operating expenses............... $ 47,228 $ 46,546 $ 12,332 $ 11,599
======== ======== ======== ========
Net premiums written................... $298,987 $270,602 $ 73,989 $108,630
======== ======== ======== ========
24
25
SCHEDULE IV
CNA SURETY CORPORATION AND SUBSIDIARIES AND PREDECESSOR
REINSURANCE
CNA SURETY CORPORATION FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 AND
FOR THE PERIOD SEPTEMBER 30, 1997 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 1997 AND PREDECESSOR AS OF AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
------ --------- ---------- ------ ----------
(AMOUNTS IN THOUSANDS)
CNA SURETY CORPORATION
YEAR ENDED DECEMBER 31, 1999
Premiums written:
Property and casualty insurance......... $108,968 $7,872 $197,891 $298,987 66.2%
-------- ------ -------- -------- -----
Total premiums....................... $108,968 $7,872 $197,891 $298,987 66.2%
======== ====== ======== ======== =====
YEAR ENDED DECEMBER 31, 1998
Premiums written:
Property and casualty insurance......... $103,298 $7,564 $163,003 $258,737 63.0%
-------- ------ -------- -------- -----
Total premiums....................... $103,298 $7,564 $163,003 $258,737 63.0%
======== ====== ======== ======== =====
SEPTEMBER 30, 1997 (DATE OF INCEPTION)
THROUGH DECEMBER 31, 1997
Premiums written:
Property and casualty insurance......... $ 27,159 $2,379 $ 40,653 $ 65,433 62.1%
-------- ------ -------- -------- -----
Total premiums....................... $ 27,159 $2,379 $ 40,653 $ 65,433 62.1%
======== ====== ======== ======== =====
PREDECESSOR
NINE MONTHS ENDED SEPTEMBER 30, 1997
Premiums written:
Property and casualty insurance......... $112,751 $6,221 $ 2,034 $108,564 1.9%
-------- ------ -------- -------- -----
Total premiums....................... $112,751 $6,221 $ 2,034 $108,564 1.9%
======== ====== ======== ======== =====
25
26
SCHEDULE V
CNA SURETY CORPORATION AND SUBSIDIARIES AND PREDECESSOR
VALUATION AND QUALIFYING ACCOUNTS
CNA SURETY CORPORATION AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1999 AND
1998 AND FOR THE PERIOD SEPTEMBER 30, 1997 (DATE OF INCEPTION) THROUGH DECEMBER
31, 1997 AND
PREDECESSOR AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING OF COSTS AND OTHER AT END OF
PERIOD EXPENSES ACCOUNTS DEDUCTIONS(2) PERIOD
------------ ---------- ---------- ------------- ---------
(AMOUNTS IN THOUSANDS)
CNA SURETY CORPORATION
YEAR ENDED DECEMBER 31, 1999
Allowance for possible losses on
premiums receivable............. $1,465 $1,786 $-- $(425) $2,826
====== ====== == ===== ======
Allowance for possible losses on
reinsurance receivable.......... $ -- $ -- $-- $ -- $ --
====== ====== == ===== ======
YEAR ENDED DECEMBER 31, 1998
Allowance for possible losses on
premiums receivable............. $ 968 $1,041 $-- $(544) $1,465
====== ====== == ===== ======
Allowance for possible losses on
reinsurance receivable.......... $ -- $ -- $-- $ -- $ --
====== ====== == ===== ======
SEPTEMBER 30, 1997 (DATE OF
INCEPTION)
THROUGH DECEMBER 31, 1997
Allowance for possible losses on
premiums receivable............. $ 893(1) $ 250 $-- $(175) $ 968
====== ====== == ===== ======
Allowance for possible losses on
reinsurance receivable.......... $ -- $ -- $-- $ -- $ --
====== ====== == ===== ======
PREDECESSOR
NINE MONTHS ENDED SEPTEMBER 30, 1997
Allowance for possible losses on
premiums receivable............. $ -- $ -- $-- $ -- $ --
====== ====== == ===== ======
Allowance for possible losses on
reinsurance receivable.......... $ -- $ -- $-- $ -- $ --
====== ====== == ===== ======
- -------------------------
(1) Acquired balance of Capsure Holdings Corp. on September 30, 1997.
(2) Accounts charged against allowance.
26
27
SCHEDULE VI
CNA SURETY CORPORATION AND SUBSIDIARIES AND PREDECESSOR
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY
INSURANCE OPERATIONS
CNA SURETY CORPORATION AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1999, 1998
AND FOR THE PERIOD SEPTEMBER 30, 1997 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 1997 AND PREDECESSOR AS OF AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
SEPTEMBER 30, PREDECESSOR
(DATE OF -------------
INCEPTION), NINE MONTHS
YEAR ENDED YEAR ENDED THROUGH ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1999 1998 1997 1997
------------ ------------ ------------- -------------
(AMOUNTS IN THOUSANDS)
Deferred policy acquisition costs........... $ 84,924 $ 74,488 $ 64,144 $ 37,740
======== ======== ======== ========
Reserves for unpaid claims and claim
adjustment expenses....................... $157,933 $150,020 $130,381 $ 88,914
======== ======== ======== ========
Discount (if any) deducted.................. $ -- $ -- $ -- $ --
======== ======== ======== ========
Unearned premiums........................... $199,300 $183,708 $171,787 $ 94,577
======== ======== ======== ========
Net premium revenue......................... $283,540 $258,737 $ 65,433 $108,564
======== ======== ======== ========
Net investment income....................... $ 25,850 $ 24,259 $ 5,766 $ --
======== ======== ======== ========
Net claims and claim expenses incurred
related to:
Current year.............................. $ 57,757 $ 49,350 $ 12,781 $ 23,484
======== ======== ======== ========
Prior years............................... $(13,085) $ (4,352) $ (647) $(35,000)
======== ======== ======== ========
Amortization of deferred policy acquisition
costs..................................... $119,746 $105,420 $ 25,881 $ 48,075
======== ======== ======== ========
Net paid claims and claim adjustment
expenses.................................. $ 49,237 $ 25,689 $ 4,417 $ 8,087
======== ======== ======== ========
Net premiums written........................ $298,987 $270,602 $ 73,989 $108,630
======== ======== ======== ========
27
28
(A)(3) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2(1) Reorganization Agreement dated as of December 19, 1996 among
Capsure Holdings Corp., Continental Casualty Company, CNA
Surety Corporation, Surety Acquisition Company and certain
affiliates of Continental Casualty Company (filed on
December 27, 1996 as Exhibit 2 to Capsure Holdings Corp.'s
Form 8-K, and incorporated herein by reference).
2(2) First Amendment to the Reorganization Agreement dated as of
July 14, 1997 among Capsure Holdings Corp., Continental
Casualty Company, CNA Surety Corporation, Surety Acquisition
Company and certain affiliates of Continental Casualty
Company (filed on July 16, 1997 as Exhibit 2 to Capsure
Holdings Corp.'s Form 8-K, and incorporated herein by
reference).
3(1) Certificate of Incorporation of CNA Surety Corporation dated
December 10, 1996 (filed on August 15, 1997 as Exhibit 3(1)
to CNA Surety Corporation's Registration Statement on Form
S-4 (Registration No. 333-33753), and incorporated herein by
reference).
3(2) Amendment to Certificate of Incorporation of CNA Surety
Corporation dated May 27, 1997 (filed on August 15, 1997 as
Exhibit 3(2) to CNA Surety Corporation's Registration
Statement on Form S-4 (Registration No. 333-33753), and
incorporated herein by reference).
3(3) Bylaws of CNA Surety Corporation (filed on August 15, 1997
as Exhibit 3(3) to CNA Surety Corporation's Registration
Statement on Form S-4 (Registration No. 333-33753), and
incorporated herein by reference).
3(4) Amendment to Bylaws of CNA Surety Corporation (filed on
September 23, 1998 as Exhibit 4(3) to CNA Surety
Corporation's Registration Statement on Form S-8
(Registration No. 333-64135), and incorporated herein by
reference).
4(1) Specimen certificate of CNA Surety Corporation (filed on
August 15, 1997 as Exhibit 4(1) to CNA Surety Corporation's
Registration Statement on Form S-4 (Registration No.
333-33753), and incorporated herein by reference).
9 Not applicable.
10(1) Contract Surety Bond Reinsurance Agreement dated as of
September 22, 1994 between Western Surety Company, a South
Dakota corporation, and Universal Surety of America, a Texas
corporation (filed on March 30, 1995 as Exhibit 10(23) to
Capsure Holding Corp.'s Annual Report on Form 10-K, and
incorporated herein by reference).
10(2) Co-Employee Agreement dated as of September 22, 1994 between
Western Surety Company and Universal Surety of America
(filed on March 30, 1995 as Exhibit 10(24) to Capsure
Holding Corp.'s Annual Report on Form 10-K, and incorporated
herein by reference).
10(3) Form of The CNA Surety Corporation Replacement Stock Option
Plan (filed on August 15, 1997 as Exhibit 10(12) to CNA
Surety Corporation's Registration Statement on Form S-4
(Registration No. 333-33753), and incorporated herein by
reference).
10(4) Form of CNA Surety Corporation 1997 Long-Term Equity
Compensation Plan (filed on August 15, 1997 as Exhibit
10(13) to CNA Surety Corporation's Registration Statement on
Form S-4 (Registration No. 333-33753), and incorporated
herein by reference).
10(5) Form of Aggregate Stop Loss Reinsurance Contract by and
between Western Surety Company, Universal Surety of America,
Surety Bonding Company of America and Continental Casualty
Company (filed on December 27, 1996 as Exhibit 2 to Capsure
Holdings Corp.'s Form 8-K, and incorporated herein by
reference).
10(6) Form of Surety Excess of Loss Reinsurance Contract by and
between Western Surety Company, Universal Surety of America,
Surety Bonding Company of America and Continental Casualty
Company (filed on December 27, 1996 as Exhibit 2 to Capsure
Holdings Corp.'s Form 8-K, and incorporated herein by
reference).
28
29
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10(8) Form of Surety Quota Share Treaty by and between Western
Surety Company and Continental Casualty Company (filed on
December 27, 1996 as Exhibit 2 to Capsure Holdings Corp.'s
Form 8-K, and incorporated herein by reference).
10(9) Employment Agreement dated as of January 1, 2000 by and
between CNA Surety Corporation and Mark C. Vonnahme.
10(10) Employment Agreement dated as of January 1, 2000 by and
between CNA Surety Corporation and Robert E. Ayo.
10(11) Employment Agreement dated as of January 1, 2000 by and
between CNA Surety Corporation and Michael A. Dougherty.
10(12) Employment Agreement dated as of January 1, 2000 by and
between CNA Surety Corporation and John S. Heneghan.
10(13) Employment Agreement dated as of January 1, 2000 by and
between CNA Surety Corporation and Stephen T. Pate.
10(14) Employment Agreement dated as of January 1, 2000 by and
between CNA Surety Corporation and David F. Paul.
10(15) Credit Agreement dated as of September 30, 1997, among CNA
Surety Corporation, the lenders party thereto, and Chase
Manhattan Bank, as Administrative Agent (filed on July 9,
1998 as Exhibit 10(13) to CNA Surety Corporation's
Registration Statement on Form S-1 (Registration No.
333-56063), and incorporated herein by reference).
10(16) Surety Second Excess of Loss Reinsurance Contract by and
between Western Surety Company, Universal Surety of America,
Surety Bonding Company of America and Continental Casualty
Company (filed on July 9, 1998 as Exhibit 10(14) to CNA
Surety Corporation's Registration Statement on Form S-1
(Registration No. 333-56063), and incorporated herein by
reference).
10(17) Form of CNA Surety Corporation Non-Employee Directors
Deferred Compensation Plan (filed on July 9, 1998 as Exhibit
10(15) to CNA Surety Corporation's Registration Statement on
Form S-1 (Registration No. 333-56063), and incorporated
herein by reference).
10(18) Form of CNA Surety Corporation Deferred Compensation Plan.
11 Earnings per share computation.
12 Not Applicable.
13 1999 Annual Report to Shareholders
21 Subsidiaries of the Registrant.
22 Not Applicable.
23 Consent of Deloitte & Touche LLP dated March 24, 2000.
24 Not Applicable.
27 Financial Data Schedule.
29
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
CNA SURETY CORPORATION
/s/ MARK C. VONNAHME
--------------------------------------
Mark C. Vonnahme
President and Chief Executive Officer
(Principal Executive Officer)
/s/ JOHN S. HENEGHAN
--------------------------------------
John S. Heneghan
Vice President and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
Dated: March 24, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
DATE TITLE SIGNATURE
---- ----- ---------
March 24, 1999 Chairman of the Board /s/ THOMAS F. TAYLOR
and Director ---------------------------------------------
Thomas F. Taylor
March 24, 1999 Director /s/ GIORGIO BALZER
---------------------------------------------
Giorgio Balzer
March 24, 1999 Director /s/ PHILIP H. BRITT
---------------------------------------------
Philip Britt
March 24, 1999 Director /s/ ROD F. DAMMEYER
---------------------------------------------
Rod F. Dammeyer
March 24, 1999 Director /s/ EDWARD DUNLOP
---------------------------------------------
Edward Dunlop
March 24, 1999 Director /s/ MELVIN GRAY
---------------------------------------------
Melvin Gray
March 24, 1999 Director /s/ JOE P. KIRBY
---------------------------------------------
Joe P. Kirby
March 24, 1999 Director /s/ WILLIAM C. PATE
---------------------------------------------
William C. Pate
30
31
DATE TITLE SIGNATURE
---- ----- ---------
March 24, 1999 Director /s/ ROY E. POSNER
---------------------------------------------
Roy E. Posner
March 24, 1999 Director /s/ ADRIAN M. TOCKLIN
---------------------------------------------
Adrian M. Tocklin
March 24, 1999 Director /s/ MARK C. VONNAHME
---------------------------------------------
Mark C. Vonnahme
31