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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, 1998
[ ] 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 $221.1
million based upon the closing price of $13.00 per share on March 15, 1999,
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 15, 1999, 44,101,463 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
A.M. Best Ratings........................................... 4
Product Information......................................... 4
Marketing................................................... 6
Underwriting................................................ 8
Competition................................................. 8
Reinsurance................................................. 8
Reserves for Unpaid Losses and Loss Adjustment Expenses..... 9
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........................................ 14
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 8.9% market
share. 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 61% of the outstanding common stock of CNA
Surety. Loews Corporation owns approximately 85% 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. Western Surety writes, on a direct basis or as business assumed from CCC
and CIC, small fidelity and noncontract 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, as a licensed
insurer in all 50 states and the District of Columbia. Western Surety's
affiliated company, Surety Bonding Company of America ("SBCA"), writes
principally small commercial surety business and is licensed in 23 states. USA
specializes in the underwriting of small contract and commercial surety bonds.
USA is licensed in 43 states and the District of Columbia with most of its
business generated in Texas.
The Company's strategy is to continue the underwriting focus of each of its
operating units and to achieve growth from cross-marketing opportunities and
building upon the established traditions of high-quality service and long-term
relationships.
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A.M. BEST RATINGS
Western Surety and USA are currently rated A+ (Superior) and A (Excellent),
respectively, by A.M. Best Company, Inc. ("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.
PRODUCT INFORMATION
According to the Surety Association of America ("SAA") industry estimates,
approximately 80% of the $2.7 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.
The surety business is comprised of contract surety business and commercial
surety business, although the products comprising each are sold through the same
distribution system.
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.
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.
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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.
Fidelity bonds: cover losses arising from employee dishonesty.
Examples of purchasers of fidelity bonds are law firms, insurance agencies
and janitorial service companies.
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). Western Surety
assumed $10.0 million and $10.1 million of premium through this relationship in
1998 and 1997, respectively. The assumed business is predominately European
based risks, approximately 86% of which is credit insurance and 14% is surety
and fidelity. Credit insurance provides protection against abnormal losses from
unpaid accounts receivable.
CNA Surety also writes E&O policies through its subsidiary Western Surety
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. Western Surety introduced an insurance
agents' and brokers' E&O insurance product in 1994 and expanded this product to
41 states as of December 31, 1998.
The following tables set forth, for each principal class of bonds, gross
written premiums, net written premiums and number of 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 pro forma combined operations
of CNA Surety, including Western Surety and USA results prior to the Merger
Date. As such, the financial information is not necessarily indicative of the
financial results that would have 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
1998 TOTAL 1997 TOTAL 1996 TOTAL
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Contract.......................... $132,242 47.5% $123,014 46.2% $124,477 49.6%
Commercial:
License and permit.............. 66,394 23.9 64,614 24.3 61,163 24.3
Judicial and fiduciary.......... 26,557 9.5 26,555 10.0 25,512 10.1
Public official................. 16,430 5.9 16,705 6.3 15,830 6.3
International and other......... 11,665 4.2 11,788 4.4 1,907 0.8
-------- ----- -------- ----- -------- -----
Total commercial................ 121,046 43.5 119,662 45.0 104,412 41.5
-------- ----- -------- ----- -------- -----
Fidelity.......................... 17,113 6.2 16,760 6.2 16,123 6.4
E&O policies and other............ 7,823 2.8 6,982 2.6 6,402 2.5
-------- ----- -------- ----- -------- -----
$278,224 100.0% $266,418 100.0% $251,414 100.0%
======== ===== ======== ===== ======== =====
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NET WRITTEN PREMIUMS
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PRO FORMA
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% OF % OF % OF
1998 TOTAL 1997 TOTAL 1996 TOTAL
---- ----- ---- ----- ---- -----
Contract.......................... $127,114 47.0% $118,138 45.9% $118,268 50.3%
Commercial........................ 120,638 44.6 117,162 45.6 96,421 41.0
Fidelity.......................... 17,096 6.3 16,748 6.5 16,076 6.8
E&O policies and other............ 5,754 2.1 5,019 2.0 4,421 1.9
-------- ----- -------- ----- -------- -----
$270,602 100.0% $257,067 100.0% $235,186 100.0%
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DOMESTIC BOND/POLICIES IN FORCE
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PRO FORMA
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% OF % OF % OF
1998 TOTAL 1997 TOTAL 1996 TOTAL
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Contract.......................... 200 11.1% 30 1.7% 26 1.5%
Commercial........................ 1,276 70.7 1,471 82.0 1,466 83.9
Fidelity.......................... 98 5.4 99 5.5 98 5.6
E&O policies and other............ 232 12.8 193 10.8 157 9.0
-------- ----- -------- ----- -------- -----
1,806 100.0% 1,793 100.0% 1,747 100.0%
======== ===== ======== ===== ======== =====
Average domestic bond
penalty/policy limit(1)......... $ 29,377 $ 25,802 $ 24,883
======== ======== ========
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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.
In 1998, the agency with which CNA Surety did the most business generated
approximately $3.0 million of gross written premiums, or 1.1% of aggregate gross
written premiums. The ten agencies which did the most business with CNA Surety
produced a total of $17.5 million or 6.3% of aggregate gross written premiums.
In addition, $46.5 million of gross written premiums were generated from
national brokers during 1998 with the largest national broker generating $14.6
million 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 58 full-time salaried marketing
representatives to continually service its vast producer network. Relationships
with these independent producers are maintained through the Company's 47 local
branch offices.
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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
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1998 1997 1996
---- ---- ----
Gross Written Premiums by State:
Texas............................................... 13.1% 12.7% 13.3%
California.......................................... 7.4 7.0 7.8
Florida............................................. 5.5 5.6 5.8
Illinois............................................ 4.9 4.0 4.1
New York............................................ 4.5 4.5 4.8
Pennsylvania........................................ 3.8 3.8 3.6
Michigan............................................ 3.2 3.3 3.1
All Other........................................... 57.6 59.1 57.5
----- ----- -----
Total............................................ 100.0% 100.0% 100.0%
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Contract Surety
With respect to the contract surety business, 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's predecessor 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.
The Company's USA unit continues to focus its marketing efforts on serving
the needs of small and specialty contractors. Contract bonds underwritten by USA
are primarily contractor performance and payment bonds in amounts under $3.0
million. The Company utilizes Western Surety's diverse agency relationships and
its nationwide branch structure to expand the geographic and agency distribution
of USA's small and specialty contract surety business.
CNA Surety also participates in the non-standard contract surety market,
utilizing 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.
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
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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 1997
data from A.M. Best, the U.S. market aggregates approximately $3.6 billion in
direct written premiums, comprised of approximately $2.7 billion in surety
premiums and approximately $0.9 billion in fidelity premiums. The large
diversified insurance companies hold the largest market shares. For example, the
20 largest surety companies account for nearly 73% of the surety market. On a
pro forma basis for 1997, CNA Surety was the largest surety provider with an
8.9% 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.
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 only places its insurance subsidiaries'
reinsurance with qualified carriers after conducting a detailed review of the
nature of the obligation and a thorough assessment of the reinsurers' credit
qualifications and claims settlement performance and capabilities. The
reinsurance coverages and terms are tailored to the specific risk
characteristics of the underlying products of the Company.
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
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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 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, renewed or
assumed 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 Contract 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 through September 30, 1998 during the period from September 30,
1997 (date of inception) through December 31, 1997. CNA Surety insurance
subsidiaries paid the remaining $20,000 in premium for 1998 for Excess of Loss
Contract and the $20,000 in minimum quarterly premiums for the Second Excess of
Loss Contract during the year ended December 31, 1998. There were no amounts due
to CCC under the Excess of Loss Contract and Second Excess of Loss Contract as
of December 31, 1998. 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. For the USA business only, the Company has per principal
reinsurance coverage of 85% of losses up to $4.9 million in excess of $100,000.
The Company limits its net retention on its insurance agents and brokers E&O
liability insurance product to 20% through a third party quota share reinsurance
agreement.
At December 31, 1998, CNA Surety's largest reinsurance receivable,
including prepaid reinsurance premiums of $1.0 million, was approximately $3.4
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
claim procedures and 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 1998 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, 1998 (dollars in thousands):
Net reserves at end of year, GAAP basis..................... $142,034
Ceded reinsurance, net of salvage and subrogation........... 7,986
--------
Gross reserves at end of year, GAAP basis................... 150,020
Estimated salvage and subrogation recoverable (gross of
reinsurance), not anticipated under SAP................... 11,931
Estimated reinsurance recoverable netted against gross
reserves for SAP.......................................... (13,710)
--------
Gross reserves at end of year, SAP basis.................... $148,241
========
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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.
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 Predecessor and Capsure since 1988 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,
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1988 1989 1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Net reserves for losses
and loss adjustment
expenses............. $60,959 $58,685 $69,733 $60,425 $61,998 $64,627 $70,398 $147,911
Net Paid (Cumulative)
as of:
One year later....... 11,700 7,618 13,456 16,287 17,636 12,923 12,018 42,552
Two years later...... 15,221 13,540 22,330 24,295 25,854 19,671 18,149 43,179
Three years later.... 17,823 18,033 26,835 29,857 29,495 21,990 21,229 46,782
Four years later..... 20,723 20,758 31,591 31,273 30,582 23,070 22,313 --
Five years later..... 22,575 22,089 32,133 31,909 30,817 23,864 -- --
Six years later...... 23,271 25,441 32,352 32,354 32,150 -- -- --
Seven years later.... 24,515 23,457 32,993 32,419 -- -- -- --
Eight years later.... 24,529 23,849 33,033 -- -- -- -- --
Nine years later..... 24,877 23,839 -- -- -- -- -- --
Ten years later...... 24,858 -- -- -- -- -- -- --
Net Reserves
Re-estimated as of:
End of initial
year............... 60,959 58,685 69,733 60,425 61,998 64,627 70,398 147,911
One year later....... 49,285 53,486 50,822 58,644 58,603 54,568 51,471 132,267
Two years later...... 44,495 39,131 51,330 51,511 54,585 44,749 44,135 103,466
Three years later.... 36,635 39,978 46,439 46,826 47,911 38,972 38,829 101,745
Four years later..... 37,200 34,357 42,946 42,212 42,542 28,094 38,628 --
Five years later..... 32,134 31,405 40,747 39,945 33,699 30,335 -- --
Six years later...... 29,816 31,777 38,131 36,164 37,188 -- -- --
Seven years later.... 29,392 26,646 36,179 37,695 -- -- -- --
Eight years later.... 26,831 25,464 37,853 -- -- -- -- --
Nine years later..... 25,514 28,027 -- -- -- -- -- --
Ten years later...... 27,842 -- -- -- -- -- -- --
======= ======= ======= ======= ======= ======= ======= ========
Total net (deficiency)
redundancy........... $33,117 $30,658 $31,880 $22,730 $24,810 $34,292 $31,770 $ 46,166
======= ======= ======= ======= ======= ======= ======= ========
Cumulative redundancy
(deficiency) as a
percentage of
original estimate.... 54.3% 52.2% 45.7% 37.6% 40.0% 53.1% 45.1% 31.2%
======= ======= ======= ======= ======= ======= ======= ========
AS OF DECEMBER 31,
------------------------------
1996 1997 1998
---- ---- ----
(DOLLARS IN THOUSANDS)
Net reserves for losses
and loss adjustment
expenses............. $137,064 $122,725 $142,034
Net Paid (Cumulative)
as of:
One year later....... 9,866 19,595 --
Two years later...... 20,171 -- --
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............... 137,064 122,725 142,034
One year later....... 96,178 118,373 --
Two years later...... 90,796 -- --
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........... $ 46,268 $ 4,352 $ --
======== ======== ========
Cumulative redundancy
(deficiency) as a
percentage of
original estimate.... 33.8% 3.7% --
======== ======== ========
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
23 states. USA is domiciled in Texas and licensed in 43 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 1998 Annual Report to Shareholders.
Without prior regulatory approval in 1999, CNA Surety's insurance subsidiaries
may pay stockholder dividends of $32.7 million in the aggregate. For the year
ended December 31, 1998, CNA Surety received $6.6 million in dividends from its
insurance subsidiaries.
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
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
12
13
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 1998.
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 $12.5 million and $1.4 million,
respectively. Through intercompany reinsurance and related agreements with CCC,
CNA Surety has access to CCC's $452.2 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 portfolios generally are managed to maximize
after-tax investment returns, while minimizing credit risks with investments
concentrated in high quality, fixed income securities. CNA Surety's portfolios
are managed to provide diversification by limiting exposures to any one issue or
issuer, and to provide liquidity by investing in the public securities markets.
The portfolios are structured to support CNA Surety's operations and 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, 1998, the Company employed 848 persons. Since its
emergence from bankruptcy in 1986, Capsure has not experienced any work
stoppages nor has CCC Surety Operations ever experienced a work stoppage.
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 109,000 square feet and related personal property at 42 branch
locations and its home and executive offices (17,748 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.
Western Surety leases office space for its executive offices at 101 South
Phillips Avenue, Sioux Falls, South Dakota, under a lease expiring in 2002.
Western Surety's office space, consisting of approximately 81,600 square feet,
is leased from a partnership in which Western Surety owns a 50% interest. The
annual rent, which is subject to annual adjustments, was $1.5 million as of
December 31, 1998. Western Surety also leases a 7,900 square foot branch office
in Dallas, Texas. Annual rent for the branch office was $0.2 million and the
lease expires in 1999. USA leases office space for its executive offices at 950
Echo Lane, Suite 250, Houston,
13
14
Texas, under a lease terminating in 2001 with an annual rent of $0.2 million.
USA also leases space for 4 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 15, 1999, 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 1998 and the fourth quarter of 1997. Prior to
September 30, 1997 the Company was not publicly traded.
HIGH LOW
---- ---
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
1997
4th Quarter............................................... $16.50 $12.88
The number of stockholders of record of Common Stock on March 15, 1999, was
approximately 2,000.
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 initial quarterly dividend was 8 cents per share
and was paid on December 28, 1998. 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.
ITEM 6. SELECTED FINANCIAL DATA
The following financial information has been derived from the Consolidated
Financial Statements and notes thereto which appear in the 1998 Annual Report to
Shareholders and are incorporated herein by reference.
CNA Surety Corporation is a newly formed 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 1998 Annual Report to Shareholders which are incorporated
herein by reference.
14
15
The following information presented for CNA Surety is for the year ended
December 31, 1998 and the period from September 30, 1997 (date of inception)
through December 31, 1997 and as of December 31, 1998 and 1997. Selected
financial data of the Predecessor is presented on the following page.
1998 1997
---- ----
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Total revenues(1)........................................... $283,840 $ 71,284
======== ========
Gross written premiums...................................... $278,224 $ 72,755
======== ========
Net written premiums........................................ $270,602 $ 73,989
======== ========
Net earned premiums......................................... $258,737 $ 65,433
======== ========
Underwriting income(2)...................................... $ 61,773 $ 15,086
Net investment income....................................... 24,259 5,766
Net realized investment gains............................... 844 85
Interest expense............................................ 7,218 1,831
Amortization of intangible assets........................... 5,900 1,447
-------- --------
Income before income taxes.................................. 73,758 17,659
Income taxes................................................ 28,243 6,663
-------- --------
Net income.................................................. $ 45,515 $ 10,996
======== ========
Basic and diluted earnings per common share................. $ 1.04 $ 0.25
======== ========
Loss ratio(2)............................................... 17.4% 18.5%
Expense ratio............................................... 58.7 58.4
-------- --------
Combined ratio(2)........................................... 76.1% 76.9%
======== ========
Invested assets and cash.................................... $505,355 $419,667
Intangible assets, net of amortization...................... 156,062 161,962
Total assets................................................ 819,370 725,131
Insurance reserves.......................................... 333,728 302,168
Long-term debt.............................................. 113,000 118,000
Total liabilities........................................... 509,473 468,399
Stockholders' equity........................................ 309,897 256,732
Book value per share........................................ $ 7.03 $ 5.93
Dividends paid per share.................................... $ 0.08 $ --
- -------------------------
(1) Includes investment income and investment gains for CNA Surety for the year
ended December 31, 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 $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, 1995 and 1994. 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
MONTHS SEPTEMBER 30, YEARS ENDED DECEMBER 31,
ENDED ---------------------- --------------------------------
12/31/96 1997 1996 1996 1995(1) 1994
-------- ---- ---- ---- ------- ----
(DOLLARS IN THOUSANDS)
Gross written premiums......... $ 40,654 $116,075 $114,554 $155,208 $136,605 $ 94,182
======== ======== ======== ======== ======== ========
Net written premiums........... $ 37,641 $108,630 $106,263 $143,904 $122,012 $ 82,064
======== ======== ======== ======== ======== ========
Net earned premiums............ $ 36,767 $108,564 $112,302 $149,069 $130,603 $ 77,981
Net loss and LAE(2)............ 9,394 (11,516) 23,612 33,006 32,440 8,580
Amortization of deferred policy
acquisition costs(3)......... 16,665 48,075 49,717 66,382 58,243 34,202
Other direct expenses.......... 4,631 10,173 8,637 13,268 11,840 6,716
Policyholders' dividends....... 324 1,426 1,641 1,965 1,508 1,009
-------- -------- -------- -------- -------- --------
Excess of net earned premiums
over direct operating
expenses before income
taxes(2) (3)................. $ 5,753 $ 60,406 $ 28,695 $ 34,448 $ 26,572 $ 27,474
======== ======== ======== ======== ======== ========
Loss ratio(2).................. 25.6% (10.6)% 21.0% 22.1% 24.8% 11.0%
Expense ratio(3)............... 58.8 55.0 53.4 54.8 54.8 53.8
-------- -------- -------- -------- -------- --------
Combined ratio(2)(3)........... 84.4% 44.4% 74.4% 76.9% 79.6% 64.8%
======== ======== ======== ======== ======== ========
Insurance reserves(4).......... $214,828 $183,491 $210,340 $214,828 $239,716 $111,695
- -------------------------
(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%, $10,846, or 8.3%, and $8,454, or 10.8%,
for the years ended December 31, 1996, 1995, and 1994, 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,
$31,060, and $21,098 at December 31, 1996, 1995, and 1994, 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 28 of the 1998
Annual Report to Shareholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCUSSIONS ABOUT MARKET RISK
Incorporated herein by reference from page 23 of the 1998 Annual Report to
Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL:
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Income for the Year Ended December 31, 1998 and the
Period from September 30, 1997 (date of inception) through December 31,
1997 and Statements of Certain Revenues and Direct Operating Expenses of
the Predecessor for the Nine Months Ended September 30, 1997 and Year Ended
December 31, 1996
Consolidated Statements of Changes in Stockholders' Equity for the Year Ended
December 31, 1998 and the Period from September 30, 1997 (date of
inception) through December 31, 1997
Consolidated Statements of Cash Flows for the Year Ended December 31, 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 29 through 49 of the 1998 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 11, 1999, 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 13, 1998: CNA Surety announces 17% increase in quarterly
underwriting income.
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, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity, and cash flows for the year ended
December 31, 1998 and for the period from September 30, 1997 (date of inception)
through December 31, 1997, and have also audited the special-purpose statements
of certain revenues and direct operating expenses of CCC Surety Operations, a
business unit of CNA Financial Corporation, for the year ended December 31, 1996
and for the nine month period ended September 30, 1997, and have issued our
report thereon dated February 8, 1999. Such consolidated financial statements
and report are included in the Company's 1998 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 8, 1999
19
20
SCHEDULE I
CNA SURETY CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
AS OF DECEMBER 31, 1998 AND 1997
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
-------- ======== --------
Short-term investments...................................... 57,865 57,865
Other investments........................................... 5,867 5,830
-------- --------
Total investments.................................... $482,598 $487,609
======== ========
AS OF DECEMBER 31, 1997
--------------------------------
FAIR CARRYING
COST VALUE VALUE
---- ----- --------
(AMOUNTS IN THOUSANDS)
Fixed Income Securities:
U.S. Government and government agencies and authorities... $182,238 $182,721 $182,721
States, municipalities and political subdivisions......... 3,556 3,570 3,570
All other corporate bonds................................. 79,751 80,010 80,010
-------- -------- --------
Total fixed income securities........................ 265,545 $266,301 266,301
-------- ======== --------
Short-term investments...................................... 147,235 147,235
Other investments........................................... 6,027 6,001
-------- --------
Total investments.................................... $418,807 $419,537
======== ========
20
21
SCHEDULE II
CNA SURETY CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
BALANCE SHEETS
DECEMBER 31,
----------------------
1998 1997
---- ----
(AMOUNTS IN THOUSANDS)
ASSETS
Investments in and advances to subsidiaries............................ $405,141 $368,843
Short-term investments................................................. 14,492 7,021
Cash................................................................... 15,919 26
Other assets........................................................... 1,303 1,421
-------- --------
Total assets...................................................... $436,855 $377,311
======== ========
LIABILITIES
Long-term debt......................................................... $113,000 $118,000
Other liabilities...................................................... 13,958 2,579
-------- --------
Total liabilities................................................. 126,958 120,579
======== ========
STOCKHOLDERS' EQUITY
Common stock........................................................... 441 433
Additional paid-in capital............................................. 253,215 244,829
Retained earnings...................................................... 52,984 10,996
Accumulated other comprehensive income................................. 3,257 474
-------- --------
Total stockholders' equity........................................ 309,897 256,732
-------- --------
Total liabilities and stockholders' equity................... $436,855 $377,311
======== ========
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 THROUGH
DECEMBER 31, DECEMBER 31,
1998 1997
------------ -------------
(AMOUNTS IN THOUSANDS)
Revenues:
Net investment income..................................... $ 695 $ 33
------- -------
Total revenues......................................... 695 33
------- -------
Expenses:
Interest expense.......................................... 7,218 1,831
Corporate expense......................................... 3,062 1,364
------- -------
Total expenses......................................... 10,280 3,195
------- -------
Loss from operations before income taxes and equity in net
income of subsidiaries.................................... (9,585) (3,162)
Income taxes................................................ (3,399) (1,107)
------- -------
Net loss before equity in net income of
subsidiaries -- Parent Company only....................... (6,186) (2,055)
Equity in net income of subsidiaries........................ 51,701 13,051
------- -------
Net income.................................................. $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 THROUGH
DECEMBER 31, DECEMBER 31,
1998 1997
------------ -------------
(AMOUNTS IN THOUSANDS)
OPERATING ACTIVITIES:
Net loss before equity in net income of subsidiaries --
Parent Company only.................................... $ (6,186) $ (2,055)
Cash dividends from subsidiaries....................... 6,610 4,970
Tax payments received from subsidiaries................ 28,499 2,449
Federal and state income tax payments.................. (17,750) --
Adjustments to reconcile net loss to net cash provided
by operating activities:
Other assets and liabilities......................... 749 (1,368)
-------- ---------
Net cash provided by operating activities................... 11,922 3,996
-------- ---------
INVESTING ACTIVITIES:
Net advances from (to) subsidiaries....................... 11,935 (65,075)
Capital contribution to Western Surety Company............ -- (50,000)
Changes in short-term investments......................... (7,471) (7,021)
-------- ---------
Net cash provided by (used in) investing activities......... 4,464 (122,096)
-------- ---------
FINANCING ACTIVITIES:
Proceeds from long-term debt.............................. -- 118,000
Principal payments on long-term debt...................... (5,000) --
Proceeds from issuance of common stock.................... 7,531 --
Dividend to stockholders.................................. (3,527) --
Other..................................................... 503 126
-------- ---------
Net cash (used in) provided by financing activities......... (493) 118,126
-------- ---------
Increase in cash............................................ 15,893 26
Cash at beginning of period................................. 26 --
-------- ---------
Cash at end of period....................................... $ 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 YEAR ENDED
DECEMBER 31, 1998 AND FOR THE YEAR ENDED
DECEMBER 31, 1997 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
AND YEAR ENDED DECEMBER 31, 1996
PREDECESSOR
SEPTEMBER 30, -----------------------------
(DATE OF NINE
INCEPTION) MONTHS
YEAR ENDED THROUGH ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1998 1997 1997 1996
------------ ------------- ------------- ------------
(AMOUNTS IN THOUSANDS)
Deferred policy acquisition costs........... $ 74,488 $ 64,144 $ 37,740 $ 37,689
======== ======== ======== ========
Future policy benefits, losses, claims and
loss expenses............................. $150,020 $130,381 $ 88,914 $119,151
======== ======== ======== ========
Unearned premiums........................... $183,708 $171,787 $ 94,577 $ 95,677
======== ======== ======== ========
Other policy claims and benefits payable.... $ -- $ -- $ -- $ --
======== ======== ======== ========
Net premium revenue......................... $258,737 $ 65,433 $108,564 $149,069
======== ======== ======== ========
Net investment income....................... $ 24,259 $ 5,766 $ -- $ --
======== ======== ======== ========
Benefits, claims, losses and settlement
expenses.................................. $ 44,998 $ 12,134 $(11,516) $ 33,006
======== ======== ======== ========
Amortization of deferred policy acquisition
costs..................................... $105,420 $ 25,881 $ 48,075 $ 66,382
======== ======== ======== ========
Other operating expenses.................... $ 46,546 $ 12,332 $ 11,599 $ 15,233
======== ======== ======== ========
Net premiums written........................ $270,602 $ 73,989 $108,630 $143,904
======== ======== ======== ========
24
25
SCHEDULE IV
CNA SURETY CORPORATION AND SUBSIDIARIES AND PREDECESSOR
REINSURANCE
CNA SURETY CORPORATION FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE
PERIOD SEPTEMBER 30, 1997 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1997
AND PREDECESSOR FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND THE
YEAR ENDED DECEMBER 31, 1996
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, 1998
Premiums:
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:
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:
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%
======== ======= ======== ======== =====
YEAR ENDED DECEMBER 31, 1996
Premiums:
Property and casualty insurance......... $158,160 $11,520 $ 2,429 $149,069 1.6%
-------- ------- -------- -------- -----
Total premiums....................... $158,160 $11,520 $ 2,429 $149,069 1.6%
======== ======= ======== ======== =====
25
26
SCHEDULE V
CNA SURETY CORPORATION AND SUBSIDIARIES AND PREDECESSOR
VALUATION AND QUALIFYING ACCOUNTS
CNA SURETY CORPORATION FOR THE YEAR ENDED DECEMBER 31, 1998 AND
THE PERIOD SEPTEMBER 30, 1997 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1997 AND
PREDECESSOR FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND THE
YEAR ENDED DECEMBER 31, 1996
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, 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.......... $ -- $ -- $-- $ -- $ --
==== ====== == ===== ======
YEAR ENDED DECEMBER 31, 1996
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 YEAR ENDED DECEMBER 31, 1998
AND FOR THE YEAR ENDED DECEMBER 31, 1997 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 AND THE YEAR ENDED DECEMBER 31, 1996
SEPTEMBER 30, PREDECESSOR
(DATE OF -----------------------------
INCEPTION) NINE MONTHS
YEAR ENDED THROUGH ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1998 1997 1997 1996
------------ ------------- ------------- ------------
(AMOUNTS IN THOUSANDS)
Deferred policy acquisition costs........... $ 74,488 $ 64,144 $ 37,740 $ 37,689
======== ======== ======== ========
Reserves for unpaid claims and claim
adjustment expenses....................... $150,020 $130,381 $ 88,914 $119,151
======== ======== ======== ========
Discount (if any) deducted.................. $ -- $ -- $ -- $ --
======== ======== ======== ========
Unearned premiums........................... $183,708 $171,787 $ 94,577 $ 95,677
======== ======== ======== ========
Net premium revenue......................... $258,737 $ 65,433 $108,564 $149,069
======== ======== ======== ========
Net investment income....................... $ 24,259 $ 5,766 $ -- $ --
======== ======== ======== ========
Net claims and claim expenses incurred
related to:
Current year.............................. $ 49,350 $ 12,781 $ 23,484 $ 42,748
======== ======== ======== ========
Prior years............................... $ (4,352) $ (647) $(35,000) $ (9,742)
======== ======== ======== ========
Amortization of deferred policy acquisition
costs..................................... $105,420 $ 25,881 $ 48,075 $ 66,382
======== ======== ======== ========
Net paid claims and claim adjustment
expenses.................................. $ 25,689 $ 4,417 $ 8,087 $ 43,448
======== ======== ======== ========
Net premiums written........................ $270,602 $ 73,989 $108,630 $143,904
======== ======== ======== ========
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).
4(2) Form of Registration Rights Agreement, between CNA Surety
Corporation and Equity Capsure Limited Partnership (filed on
August 15, 1997 as Exhibit 4(2) 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) Non-Competition and Non-Solicitation Agreement between
Capsure Holdings Corp. and Frontier Insurance Company, dated
as of May 22, 1996 (filed on August 15, 1997 as Exhibit
10(9) to CNA Surety Corporation's Registration Statement on
Form S-4 (Registration No. 333-33753), and incorporated
herein by reference).
10(2) 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(3) 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(4) 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(5) 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).
28
29
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10(6) 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(7) 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).
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 October 1, 1997 by and
between CNA Surety Corporation and Dan L. Kirby (filed on
March 20, 1998 as Exhibit 10(13) to CNA Surety Corporation's
Annual Report on Form 10-K, and incorporated herein by
reference).
10(10) Employment Agreement dated as of October 3, 1997 by and
between CNA Surety Corporation and Mark C. Vonnahme (filed
on March 20, 1998 as Exhibit 10(13) to CNA Surety
Corporation's Annual Report on Form 10-K, and incorporated
herein by reference).
10(11) 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(12) 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(13) 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).
11 Earnings per share computation.
12 Not Applicable.
13 1998 Annual Report to Shareholders.
21 Subsidiaries of the Registrant.
22 Not Applicable.
23 Consent of Deloitte & Touche LLP dated March 22, 1999.
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 22, 1999
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 22, 1999 Chairman of the Board /s/ ROBERT T. VAN GIESON
and Director ---------------------------------------------
Robert T. Van Gieson
March 22, 1999 Director /s/ GIORGIO BALZER
---------------------------------------------
Giorgio Balzer
March 22, 1999 Director /s/ PHILIP H. BRITT
---------------------------------------------
Philip Britt
March 22, 1999 Director /s/ ROD F. DAMMEYER
---------------------------------------------
Rod F. Dammeyer
March 22, 1999 Director /s/ EDWARD DUNLOP
---------------------------------------------
Edward Dunlop
March 22, 1999 Director /s/ MELVIN GRAY
---------------------------------------------
Melvin Gray
March 22, 1999 Director /s/ JOE P. KIRBY
---------------------------------------------
Joe P. Kirby
March 22, 1999 Director /s/ WILLIAM C. PATE
---------------------------------------------
William C. Pate
30
31
DATE TITLE SIGNATURE
---- ----- ---------
March 22, 1999 Director /s/ ROY E. POSNER
---------------------------------------------
Roy E. Posner
March 22, 1999 Director /s/ ADRIAN M. TOCKLIN
---------------------------------------------
Adrian M. Tocklin
March 22, 1999 Director /s/ MARK C. VONNAHME
---------------------------------------------
Mark C. Vonnahme
31