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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
NOVEMBER 13, 1998
(Date of Report)
CNA SURETY CORPORATION
(Exact name of Registrant as specified in its charter)
1-13277
(Commission File No.)
DELAWARE 34-4144905
(State or other jurisdiction) (IRS Employer Identification No.)
CNA PLAZA, CHICAGO, ILLINOIS 60685
(Address of principal executive offices) (Zip code)
(312) 822-5000
(Registrant's telephone number, include area code)
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ITEM 5. OTHER EVENTS
See Exhibit 99 to this Form 8-K
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits
Exhibit 99 - CNA Surety Corporation Press Release
issued on November 2, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CNA SURETY CORPORATION
(Registrant)
By:
-----------------------------------------
John S. Heneghan
Vice President and Chief Financial Officer
Dated: November 13, 1998
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EXHIBIT INDEX
Exhibit No.
99. CNA Surety Corporation Press Release issued on November 2, 1998.
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CNA SURETY CORPORATION ANALYST CONTACT:
CNA Plaza John Heneghan
Chicago IL 60685 312-822-1908
[email protected]
MEDIA CONTACT:
Doreen Lubeck
773-583-4331
CNA SURETY ANNOUNCES 17% INCREASE
IN QUARTERLY UNDERWRITING INCOME
CHICAGO, November 2, 1998 -- CNA Surety Corporation (NYSE:SUR) today reported
solid underwriting results for the third quarter ended September 30, 1998 with a
17% increase in underwriting income and a 9% increase in net written premiums as
compared to pro forma amounts for the comparable period in 1997. On a diluted
basis, net income and operating earnings per share were 26 cents for the third
quarter of 1998.
For the third quarter of 1997, the Company reported a pro forma net
loss per share of 31 cents and pro forma operating earnings per share of
20 cents (excluding estimated pro forma investment income of 6 cents).
"We are pleased with our solid underwriting results for the third
quarter, particularly in the face of continued competitive conditions and
growing concerns about an economic downturn. Excluding assumed international
surety and credit business, net written premiums of our core business grew 5%
for the quarter and 8% for the first nine months, in line with our targeted
annual growth rate of 7-9%," said Mark C. Vonnahme, president and Chief
Executive Officer of CNA Surety. "The benefit of our diversified product
portfolio was evident in the quarter as strength in our larger contractor and
commercial segments offset slower growth in other areas. Our highway and road
contractor segment has shown particular strength since Congressional passage of
The Transportation Equity Act for the 21st Century ("TEA-21"). Universally
welcomed by construction and related industries, TEA-21 authorizes a 40%
increase in total Federal funding for highway and transit systems to over $200
billion in the six year period from 1998 to 2004."
For the first nine months of 1998, net income and operating earnings
per share were 74 cents. Pro forma net income and operating earnings per share
for the first nine months of 1997 were 54 cents and $1.04, respectively
(excluding estimated pro forma net investment income of 17 cents). Operating
earnings for the pro forma periods of 1997 exclude 51 cents per share in
non-recurring merger costs and 1 cent in net investment gains for the first nine
months of 1997. The 1997 nine-month results include $40.2 million of favorable
loss reserve development compared to $1.9 million in the first nine months of
1998.
Net written premiums for the third quarter of 1998 increased 9% to
$69.9 million compared to the pro forma combined net written premiums of $64.0
million for the third quarter of 1997. Net written premiums for commercial
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surety increased $4.4 million, or 18%, for the quarter to $29.3 million. A
majority of this increase was due to the addition of approximately $2.5 million
of international surety and credit business assumed under our reinsurance
arrangement with CNA Reinsurance Company, Limited (London). Excluding this
reinsurance business, domestic net written premiums for commercial surety
increased 8% for the quarter. Net written premiums for contract surety increased
4% for the quarter to $35.2 million. Net written premiums for fidelity and other
lines increased 2% for the quarter to $5.4 million. For the first nine months of
1998, net written premiums increased 12% to $204.8 million with domestic
commercial surety and contract surety up 11% and 6%, respectively.
Underwriting income for the third quarter increased $2.4 million, or
17%, to $16.3 million, reflecting an 11% increase in net earned premiums and a
6% increase in operating expenses. The Company's loss and combined ratios were
18.0% and 76.7%, respectively, for the third quarter of 1998 compared to the pro
forma loss and combined ratios for the comparable 1997 quarter of 16.1% and
77.8%, respectively. The loss and combined ratios for the third quarter of 1998
include favorable loss reserve development of $0.3 million compared to favorable
loss reserve development of $1.5 million for the pro forma third quarter of
1997. The expense ratio decreased 3.0 percentage points to 58.7% in the third
quarter of 1998 compared to the pro forma expense ratio of 61.7% in 1997.
For the first nine months of 1998, underwriting income was $43.8
million compared to pro forma underwriting income of $72.1 in 1997. The loss and
combined ratios were 17.9% and 77.2%, respectively, for the first nine months of
1998, compared to (3.6%) and 59.6%, respectively, on a pro forma basis for the
same period in 1997. The loss and combined ratios for the first nine months of
1998 and the comparable pro forma period of 1997 include favorable loss reserve
development of $1.9 million and $40.2 million, respectively. The expense ratio
decreased 3.9 percentage points to 59.3% for the first nine months of 1998
compared to the pro forma expense ratio of 63.2% in 1997. This decline in the
expense ratio reflects an 8% increase in net earned premiums and a modest 1%
increase in operating expenses.
CNA Surety Corporation, through its principal subsidiaries, Western
Surety Company and Universal Surety of America, provides surety and fidelity
bonds in all 50 states through a combined network of approximately 36,000
independent agencies.
CNA is a registered service mark and trade name of CNA Financial
Corporation.
# # #
- -- Chart Follows--
"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995: The statements which are not historical facts contained in this
release are forward-looking statements that involve risks and
uncertainties, including, but not limited to, product and policy demand and
market response risks, the effect of economic conditions, the impact of
competitive products, policies and pricing, product and policy development,
regulatory changes and conditions, rating agency policies and practices,
development of claims and the effect on loss reserves, the performance of
reinsurance companies under reinsurance contracts with the Company,
investment portfolio developments and reaction to market conditions, the
results of financing efforts, the actual closing of contemplated
transactions and agreements, the effect of the Company's accounting
policies, and other risks detailed in CNA Surety Corporation's Securities
and Exchange Commission filings. No assurance can be given that the actual
results of operations and financial condition will conform to the
forward-looking statements contained herein.
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CNA SURETY CORPORATION
Press Release Investor Data
{Amounts in thousands, except per share data}
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ---------------------------
1998 1997 1998 1997
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
OPERATING RESULTS: (1) (PRO FORMA) (PRO FORMA)
Gross written premiums $ 71,883 $ 67,593 $ 210,876 $ 193,663
========== =========== =========== ===========
Net written premiums $ 69,871 $ 63,947 $ 204,816 $ 183,078
========== =========== =========== ===========
Revenues:
Net earned premiums $ 69,781 $ 62,750 $ 191,804 $ 177,992
Net investment income (2) 5,366 2,844 18,232 8,768
Net investment gains 178 2 222 638
---------- ----------- ----------- -----------
Total revenues 75,325 65,596 210,258 187,398
---------- ----------- ----------- -----------
Expenses:
Net losses and loss adjustment expenses 12,552 10,093 34,328 (6,486)
Net commissions, brokerage and
other underwriting 40,944 38,722 113,712 112,418
Interest expense 1,847 1,836 5,505 5,401
Non-recurring merger costs (4) -- 12,087 -- 12,087
Amortization of intangible assets 1,475 1,447 4,425 4,341
---------- ----------- ----------- -----------
Total expenses 56,818 64,185 157,970 127,761
---------- ----------- ----------- -----------
Income before income taxes 18,507 1,411 52,288 59,637
Income taxes(4) 7,025 14,843 19,834 36,258
---------- ----------- ----------- -----------
NET INCOME (LOSS) $ 11,482 $ (13,432) $ 32,454 $ 23,379
========== =========== =========== ===========
Basic earnings per common share $0.26 $ (0.31) $ 0.74 $0.54
========== =========== =========== ===========
Diluted earnings per common share $0.26 $ (0.31) $ 0.74 $0.54
========== =========== =========== ===========
Basic weighted average shares outstanding 44,033 43,302 43,598 43,302
========== =========== =========== ===========
Diluted weighted average shares outstanding 44,155 43,552 43,764 43,552
========== =========== ============ ===========
DILUTED PER SHARE DATA:
Net income (loss) $ 0.26 $ (0.31) $ 0.74 $ 0.54
Net investment gains -- -- -- (.01)
Non-recurring merger costs -- 0.51 -- 0.51
---------- ----------- ----------- -----------
OPERATING EARNINGS $ 0.26 $ 0.20 $ 0.74 $ 1.04
========== =========== ============ ===========
</TABLE>
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See notes to Press Release Investor Data on page 4.
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CNA SURETY CORPORATION
Press Release Investor Data
{Amounts in thousands, except per share data}
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(PRO FORMA) (PRO FORMA)
<S> <C> <C> <C> <C>
UNDERWRITING RESULTS: (1)
Net written premiums:
Contract $ 35,218 $ 33,794 $ 95,550 $ 90,288
Commercial 29,262 24,885 91,723 76,084
Fidelity and other 5,391 5,268 17,543 16,706
----------- ----------- ----------- -----------
$ 69,871 $ 63,947 $ 204,816 $ 183,078
=========== =========== =========== ===========
Net earned premiums $ 69,781 $ 62,750 $ 191,804 $ 177,992
Net losses and loss adjustment expenses (3) 12,552 10,093 34,328 (6,486)
Net commissions, brokerage and other
underwriting expenses 40,944 38,722 113,712 112,418
----------- ----------- ----------- -----------
Underwriting income $ 16,285 $ 13,935 $ 43,764 $ 72,060
=========== =========== =========== ===========
Loss ratio (3) 18.0% 16.1% 17.9% (3.6)%
Expense ratio 58.7 61.7 59.3 63.2
----------- ----------- ----------- -----------
Combined ratio (3) 76.7% 77.8% 77.2% 59.6%
=========== =========== =========== ===========
SEPTEMBER 30, December 31,
CONSOLIDATED BALANCE SHEET DATA: 1998 1997
------------- ------------
Invested assets and cash $ 486,964 $ 419,667
Intangible assets, net 157,537 161,962
Total assets 817,478 727,180
Insurance reserves 331,642 304,217
Long-term debt 118,000 118,000
Total stockholders' equity 303,521 256,732
Book value per share $ 6.88 $ 5.93
=========== ===========
Outstanding shares 44,086 43,320
=========== ===========
</TABLE>
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NOTES TO PRESS RELEASE INVESTOR DATA
(1) Pro Forma operating and underwriting results include the surety
business of CNA Financial Corporation subsidiaries, Western Surety
Company and Universal Surety of America as if these businesses, which
were merged on September 30, 1997 had been combined for all of 1997.
(2) As more fully described in the Company's Securities and Exchange
Commission filings, investment income for the three months ended
September 30, 1997 excludes estimated pro forma investment income on
merger related cash flows of $3,898 ($2,534 net of tax or $0.06 in pro
forma earnings per share). For the nine months ended September 30,
1997, investment income excludes pro forma investment income of $11,254
($7,315 net of tax or $0.17 in pro forma earnings per share). The
additional pro forma investment income is based on the assumption that
merger related cash flows were invested in high-quality, taxable fixed
income securities with an average duration of approximately 3 years,
yielding 6.4%.
(3) 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 $261 or 0.4
% and $1,516 or 2.4% for three months ended September 30, 1998 and
1997, respectively, and $1,942 or 1.0 % and $40,206 or 22.6% for nine
months
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ended September 30, 1998 and 1997, respectively.
(4) As more fully described in the Company's Securities and Exchange
Commission filings, the Company incurred $22.0 million, after
applicable income taxes, or $0.51 per share in non-recurring merger
costs. Such costs include adjustments to the provision for income taxes
to reflect the effects of limitations placed on the Company's ability
to utilize Capsure Holdings Corp.'s available net operating tax loss
carry forwards.
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