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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-13277
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CNA SURETY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
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)
</TABLE>
(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)
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates was $174.3
million based upon the closing price of $11.00 per share on March 10, 2000,
using beneficial ownership of stock rules adopted pursuant to Section 13 of the
Securities Exchange Act of 1934 to exclude voting stock owned by Directors,
Officers and Major Stockholders, some of whom may not be held to be affiliates
upon judicial determination.
At March 10, 2000, 42,942,660 shares of the Registrant's Common Stock were
outstanding.
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CNA SURETY CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business.................................................... 3
General..................................................... 3
Formation of CNA Surety and Merger.......................... 3
Description of Business..................................... 3
Financial Strength Ratings.................................. 4
Product Information......................................... 4
Marketing................................................... 7
Underwriting................................................ 8
Competition................................................. 8
Reinsurance................................................. 9
Reserves for Unpaid Losses and Loss Adjustment Expenses..... 9
Claims...................................................... 11
Asbestos and Environmental Claims........................... 12
Regulation.................................................. 12
Investments................................................. 13
Employees................................................... 13
Item 2. Properties.................................................. 13
Item 3. Legal Proceedings........................................... 14
Item 4. Submission of Matters to a Vote of Security Holders......... 14
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters......................................... 14
Item 6. Selected Financial Data..................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 17
Item 7a Quantitative and Qualitative Discussions About Market
Risk........................................................ 17
Item 8. Financial Statements and Supplementary Data................. 17
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 17
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 18
Item 11. Executive Compensation...................................... 18
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 18
Item 13. Certain Relationships and Related Transactions.............. 18
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 18
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CNA SURETY CORPORATION AND SUBSIDIARIES
PART I
ITEM 1. BUSINESS
GENERAL
CNA Surety Corporation ("CNA Surety" or "Company") is an insurance holding
company in the United States formed through the September 30, 1997 combination
of the surety business of CNA Financial Corporation with Capsure Holdings
Corp.'s ("Capsure") insurance subsidiaries. CNA Surety is currently one of the
largest surety providers in the United States with approximately an 8.6% market
share (based upon A.M. Best data). Its wide selection of products range from
very small commercial bonds to large contract bonds.
FORMATION OF CNA SURETY AND MERGER
In December 1996, CNA Financial Corporation ("CNAF") and Capsure agreed to
merge (the "Merger") the surety business of CNAF with Capsure's insurance
subsidiaries, Western Surety Company ("Western Surety") and Universal Surety of
America ("USA"), into a newly-formed holding company, CNA Surety Corporation.
CNAF, through its operating subsidiaries, writes multiple lines of property and
casualty insurance, including surety business that is reinsured by Western
Surety. CNAF owns approximately 63% of the outstanding common stock of CNA
Surety. Loews Corporation owns approximately 86% of the outstanding common stock
of CNAF. The principal operating subsidiaries of CNAF that wrote the surety line
of business for their own account prior to the Merger were Continental Casualty
Company and its property and casualty affiliates (collectively, "CCC") and The
Continental Insurance Company and its property and casualty affiliates
(collectively, "CIC"). CIC was acquired by CNAF on May 10, 1995. The combined
surety operations of CCC and CIC are referred to herein as CCC Surety Operations
("Predecessor").
Pursuant to a reorganization agreement, CCC Surety Operations and Capsure
merged their respective operations at the close of business on September 30,
1997 ("Merger Date"). CNAF, through its property and casualty subsidiaries, CCC
and CIC, contributed $52.25 million of capital to CNA Surety. Through
reinsurance agreements, CCC and CIC ceded to Western Surety all of their net
unearned premiums and loss and loss adjustment expense reserves, as of the
Merger Date, and will cede to Western Surety all surety business written or
renewed by CCC and CIC for a period of five years thereafter. Further, CCC and
CIC have agreed to assume the obligation for any adverse development on recorded
reserves for CCC Surety Operations as of the Merger Date, to limit the loss
ratio on certain defined business written by CNA Surety through December 31,
2000, and to provide certain additional excess of loss reinsurance. CCC also
agreed to provide certain administrative services at specified rates, subject to
inflationary increases, for three years after the Merger, if CNA Surety chooses
to purchase such services.
DESCRIPTION OF BUSINESS
CNA Surety's insurance subsidiaries write surety and fidelity bonds in all
50 states through a combined network of approximately 37,000 independent
agencies. CNA Surety's principal insurance subsidiaries are Western Surety and
USA. The insurance subsidiaries write, on a direct basis or as business assumed
from CCC and CIC, small fidelity and non-contract surety bonds, referred to as
commercial bonds; small, medium and large contract bonds; international surety
and credit insurance; and errors and omissions ("E&O") liability insurance.
Western Surety is a licensed insurer in all 50 states and the District of
Columbia. USA is licensed in 44 states and the District of Columbia. Western
Surety's affiliated company, Surety Bonding Company of America ("SBCA"), is
licensed in 24 states.
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FINANCIAL STRENGTH RATINGS
A.M. BEST COMPANY, INC. ("A.M. BEST")
Western Surety and USA are currently rated A+ (Superior) and A (Excellent),
respectively, by A.M. Best. Through intercompany reinsurance and related
agreements, CNA Surety's customers will continue to have access to CCC's broader
underwriting capacity. CCC is currently rated A by A.M. Best. A.M. Best's letter
ratings range from A++ (Superior) to D (Poor) with A++ being highest. An A+
(Superior) rating is assigned to those companies which A.M. Best believes have
achieved superior overall performance when compared to the norms of the property
and casualty insurance industry. A+ (Superior) rated insurers have been shown to
be among the strongest in ability to meet policyholder and other contractual
obligations. A rating of A (Excellent) is assigned to those companies which A.M.
Best believes have achieved excellent overall performance when compared to the
norms of the property and casualty insurance industry and generally have
demonstrated a strong ability to meet their respective policyholder and other
contractual obligations.
STANDARD AND POOR'S ("S&P")
Western Surety and USA are both currently rated A (Strong), by S&P. CCC is
currently rated A by S&P. S&P's letter ratings range from AAA+ (Extremely
Strong) to CC (Extremely Weak) with AAA+ being highest. An insurer rated 'A' has
strong financial security characteristics, but is somewhat more likely to be
affected by adverse business conditions than are insurers with higher ratings.
PRODUCT INFORMATION
According to the Surety Association of America ("SAA") industry estimates,
approximately 80% of the $3.0 billion United States surety market is represented
by bonds required by federal statutes, state laws, and local ordinances. These
bonding requirements range from federal construction projects, where the
contractor is required to post performance and payment bonds which guarantee
performance of contracts to the government as well as payment of bills to
subcontractors and suppliers, to license and permit bonds which guarantee
compliance with legal requirements for business operations.
PRODUCTS AND POLICIES
Unlike a standard, two-party insurance policy, surety bonds are three-party
agreements in which the issuer of the bond (the surety) joins with a second
party (the principal) in guaranteeing to a third party (the owner/obligee) the
fulfillment of some obligation on the part of the principal. The surety is the
party who guarantees fulfillment of the principal's obligation to the obligee.
In addition, sureties are generally entitled to recover from the principal any
losses and expenses paid to third parties. The surety's responsibility is to
evaluate the risk and determine if the principal meets the underwriting
requirements for the bond. Accordingly, surety bond premiums primarily reflect
the type and class of risk and related costs associated with both processing the
bond transaction and investigating the applicant including, if necessary, an
analysis of the applicant's creditworthiness and ability to perform.
There are two broad types of surety products -- contract surety and
commercial surety bonds. Contract surety bonds secure a contractor's performance
and/or payment obligation generally with respect to a construction project.
Contract surety bonds are generally required by federal, state and local
governments for public works projects. Commercial surety bonds include all
surety bonds other than contract and cover obligations typically required by law
or regulation.
Contract bond guarantee obligations include the following:
Bid bonds: used by contractors submitting proposals on potential
contracts.
Performance bonds: guarantee to the owner the performance of the
contractor's obligations according to the terms and conditions of the
contract.
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Payment bonds: guarantee payment of the contractor's obligations under
the contract for labor, subcontractors, and materials supplied to the
project. Payment bonds are utilized in public projects where liens are not
permitted.
Other examples of contract bonds are completion, maintenance and supply
bonds.
Commercial surety business is comprised of bonds covering obligations
typically required by law or regulation, such as the following:
License and Permit bonds: required by statutes or ordinances for a
number of purposes including guaranteeing the payment of certain taxes and
fees and providing consumer protection as a condition to granting licenses
related to selling real estate or motor vehicles and contracting services.
Judicial and Fiduciary bonds: required by statutes, courts or legal
documents for the protection of those on whose behalf a fiduciary acts.
Examples of such fiduciaries include executors and administrators of
estates, and guardians of minors and incompetents.
Public Official bonds: required by statutes and ordinances to
guarantee the lawful and faithful performance of the duties of office by
public officials.
International and Other: in 1997, CNA Surety expanded into the
international surety and credit insurance market through a 50% U.S. dollar
denominated quota share treaty with an affiliate of CCC, CNA Reinsurance
Company Limited (London). CNA Surety assumed $11.3 million and $10.0
million of premium through this relationship in 1999 and 1998,
respectively. The assumed business is predominately European based risks,
approximately 74% of which is credit insurance and 26% is surety and
fidelity. Credit insurance provides protection against abnormal losses from
unpaid accounts receivable.
CNA Surety also writes direct contract and commercial surety bonds for
international risks. Such bonds are written to satisfy the international
bond requirements of our domestic customers and for foreign clients.
In addition, the Company markets surety related products such as fidelity
bonds and errors and omissions ("E&O") insurance. Fidelity bonds cover losses
arising from employee dishonesty. Examples of purchasers of fidelity bonds are
law firms, insurance agencies and janitorial service companies. CNA Surety
writes E&O policies for three classes of insureds: notaries public, tax
preparers and insurance agents and brokers. The notary public E&O policy is
marketed as a companion product to the notary public bond and the tax preparer
E&O policy is marketed to small tax return preparation firms. The insurance
agents' and brokers' E&O insurance product is marketed directly to the Company's
independent agency force.
Although all of its products are sold through the same independent
insurance agent and broker distribution network, the Company's underwriting and
management reporting are organized by the two broad types of surety products --
contract surety and commercial surety, which also includes fidelity bonds and
other insurance products for these purposes. These two operating segments have
been aggregated into one reportable business segment for financial reporting
purposes because of their similar economic and operating characteristics.
The following tables set forth, for each principal class of bonds, gross
written premiums, net written premiums and number of domestic bonds and policies
in force and the respective percentages of the total for the past three years.
All tables in this section contain information reflecting the 1997 pro forma
combined operations of CNA Surety, including Western Surety and USA results
prior to the Merger Date. As such, the 1997 pro forma financial information is
not necessarily indicative of the financial results that would have
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occurred under the ownership and management of CNA Surety (amounts in thousands,
except average bond amounts):
<TABLE>
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GROSS WRITTEN PREMIUMS
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PRO FORMA
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% OF % OF % OF
1999 TOTAL 1998 TOTAL 1997 TOTAL
---- ----- ---- ----- ---- -----
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Contract.......................... $150,022 48.9% $132,242 47.5% $123,014 46.2%
Commercial:
License and permit.............. 80,413 26.2 66,394 23.9 64,614 24.3
Judicial and fiduciary.......... 29,485 9.6 26,557 9.5 26,555 10.0
Public official................. 17,658 5.7 16,430 5.9 16,705 6.3
International and other......... 2,946 1.0 11,665 4.2 11,788 4.3
-------- ----- -------- ----- -------- -----
Total commercial................ 130,502 42.5 121,046 43.5 119,662 44.9
-------- ----- -------- ----- -------- -----
Fidelity and other................ 26,335 8.6 24,936 9.0 23,742 8.9
-------- ----- -------- ----- -------- -----
$306,859 100.0% $278,224 100.0% $266,418 100.0%
======== ===== ======== ===== ======== =====
Domestic.......................... $286,253 93.3% $266,998 96.0% $255,635 96.0%
International..................... 20,606 6.7 11,226 4.0 10,783 4.0
-------- ----- -------- ----- -------- -----
$306,859 100.0% $278,224 100.0% $266,418 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
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NET WRITTEN PREMIUMS
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PRO FORMA
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% OF % OF % OF
1999 TOTAL 1998 TOTAL 1997 TOTAL
---- ----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Contract.......................... $145,616 48.7% $127,114 47.0% $118,138 46.0%
Commercial........................ 128,834 43.1 120,638 44.6 117,162 45.6
Fidelity and other................ 24,537 8.2 22,850 8.4 21,767 8.4
-------- ----- -------- ----- -------- -----
$298,987 100.0% $270,602 100.0% $257,067 100.0%
======== ===== ======== ===== ======== =====
Domestic.......................... $280,463 93.8% $260,506 96.3% $246,923 96.1%
International..................... 18,524 6.2 10,096 3.7 10,144 3.9
-------- ----- -------- ----- -------- -----
$298,987 100.0% $270,602 100.0% $257,067 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
<TABLE>
<CAPTION>
DOMESTIC BOND/POLICIES IN FORCE
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PRO FORMA
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% OF % OF % OF
1999 TOTAL 1998 TOTAL 1997 TOTAL
---- ----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Contract.......................... 153 8.1% 200 11.1% 30 1.7%
Commercial........................ 1,368 72.2 1,276 70.7 1,471 82.0
Fidelity and other................ 374 19.7 330 18.2 292 16.3
-------- ----- -------- ----- -------- -----
1,895 100.0% 1,806 100.0% 1,793 100.0%
======== ===== ======== ===== ======== =====
Average domestic bond
penalty/policy limit(1)......... $ 32,224 $ 29,377 $ 25,802
======== ======== ========
</TABLE>
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(1) The average bond penalty is a measure of the average limit of liability
associated with in force contract and commercial surety bonds at each
reporting period. The increase in the average domestic policy limit reflects
the change in business to a higher proportion of contract surety bonds.
In 1999, the agency with which CNA Surety did the most business generated
approximately $4.5 million of gross written premiums, or 1.5% of aggregate gross
written premiums. The ten agencies which did the most business with CNA Surety
produced a total of $25.9 million or 8.5% of aggregate gross written premiums.
In
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addition, $57.9 million, or 18.9%, of gross written premiums were generated from
national brokers during 1999 with the largest national broker generating $21.7
million, or 7.1%, of gross written premiums.
MARKETING
The Company principally markets its products in all 50 states, as well as
the District of Columbia and Puerto Rico. Its products are marketed primarily
through independent producers, including multi-line agents and brokers such as
surety specialists, many of whom are members of the National Association of
Surety Bond Producers. CNA Surety enjoys broad national distribution of its
products, which are marketed through approximately 37,000 of the approximately
44,000 independent property and casualty insurance agencies in the United
States. In addition, the Company employs 57 full-time salaried marketing
representatives to continually service its vast producer network. Relationships
with these independent producers are maintained through the Company's 48 local
branch offices.
The following table sets forth the distribution of the domestic business of
CNA Surety, by state based upon gross written premiums in each of the last three
years:
<TABLE>
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YEARS ENDED
DECEMBER 31,
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PRO FORMA
1999 1998 1997
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<S> <C> <C> <C>
Gross Written Premiums by State:
Texas............................................. 12.6% 13.1% 12.7%
California........................................ 8.4 7.4 7.0
Florida........................................... 5.6 5.5 5.6
New York.......................................... 4.8 4.5 4.5
Illinois.......................................... 4.5 4.9 4.0
Pennsylvania...................................... 3.5 3.8 3.8
Michigan.......................................... 3.0 3.2 3.3
All Other......................................... 57.6 57.6 59.1
----- ----- -----
Total.......................................... 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
Contract Surety
With respect to standard contract surety, the core focus for the Company is
contractors with less than $50 million in contracted work in progress. This
segment is comprised of small contractors (less than $5 million in work in
progress), medium contractors ($5-$25 million) and the lower end of the large
contractors (greater than $25 million). These small and medium contractors, as a
group, represent a significant portion of the United States construction market.
The Company has a small number of accounts with contracted work in progress in
excess of $150 million, the majority of which have been clients of the Company
for more than ten years. Some of these accounts are maintained on a "co-surety"
or joint insurer basis with other sureties in order to manage aggregate
exposure.
In addition to standard contract surety, the Company has underwriters that
focus on serving the bond requirements of small and emerging and specialty
contractors. These contractors typically have limited operating history,
financial resources or other special characteristics that require different
underwriting techniques than standard contract surety. For example, CNA Surety
participates in the non-standard contract surety market, through the federal
government's Small Business Administration ("SBA") surety bond guarantee
programs. These programs provide that the SBA assumes 70% -- 90% of the coverage
in exchange for 10% -- 30% of the premium.
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Commercial Surety
A large portion of the commercial surety market is comprised of small
obligations represented by licenses and permits that are routine in nature and
require minimal underwriting. Customers are focused principally on prompt and
efficient service.
The Company continues to focus its marketing efforts on this small
commercial bond market through its Sioux Falls service center. In this market
segment, CNA Surety emphasizes one-day response service, easy-to-use forms and
an extensive array of commercial bond products. In addition, independent agents
are provided pre-executed bond forms, powers of attorney, and facsimile
authorizations that allow them to issue many standard bonds in their offices.
While a large portion of the commercial surety market is represented by
small entities, CNA Surety also seeks to service the bonding needs of larger,
"Fortune 1000" firms, where a high level of technical and underwriting skill is
required. These larger customers are sophisticated, professional buyers of
commercial surety bonds who demand exceptional service and business expertise at
a reasonable cost. CNA Surety maintains a specific underwriting staff in its
Chicago home office and other underwriting centers across the country dedicated
to the "Fortune 1000" market.
CNA Surety's insurance subsidiaries direct their marketing to particular
industries or classes of bonds on a broad basis. For instance, the Company
maintains programs directed at notary bonds, mortgage broker compliance bonds,
games of chance bonds (guaranteeing payment of prizes from promotional games)
and grain warehouse dealer bonds (protecting funds associated with grain
storage).
UNDERWRITING
The underwriting philosophy of CNA Surety is disciplined, and focused on
consistent underwriting profitability. The extent and sophistication of
underwriting activity varies by type of risk. Contractor accounts and large
commercial surety customers undergo extensive credit, financial and managerial
review and analysis on a regular basis. Certain classifications of bonds, such
as fiduciary and court appeal bonds, also require more extensive underwriting.
CNA Surety also targets various products in the surety and fidelity bond
market which are characterized by relatively low-risk exposure and small bond
amounts. The underwriting criteria, including the extent of bonding authority
granted to independent agents, varies depending on the class of business and the
type of bond. For example, relatively little underwriting information is
typically required of certain low-exposure risks such as notary bonds.
COMPETITION
The surety and fidelity market is highly competitive. According to 1998
data from A.M. Best, the U.S. market aggregates approximately $3.8 billion in
direct written premiums, comprised of approximately $3.0 billion in surety
premiums and approximately $0.8 billion in fidelity premiums. The large
diversified insurance companies hold the largest market shares. For example, the
20 largest surety companies account for nearly 74% of the domestic surety market
and 88% of the domestic fidelity market. In 1998, CNA Surety was the second
largest surety provider with an 8.6% market share.
Primary competitors of CNA Surety are approximately 20 national, multi-line
companies participating in the surety market throughout the country. Management
believes that its principal strengths are capacity, diverse product offering,
service and accessibility and long-term relationships with agents and accounts.
While the surety industry has experienced slow premium growth, competition has
increased as a result of ten years of profitable underwriting experience. This
competition has typically manifested itself through reduced premium rates and
greater tolerance for relaxation of underwriting standards. Management believes
such competition will continue.
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REINSURANCE
The Company's insurance subsidiaries, in the ordinary course of business,
cede reinsurance to other insurance companies to limit their exposure to loss.
Reinsurance arrangements are used to limit maximum loss, provide greater
diversification of risk and minimize exposure on larger risks. Reinsurance
contracts do not ordinarily relieve the Company of its primary obligations to
claimants. Therefore, a contingent liability exists with respect to reinsurance
ceded to the extent that any reinsurer is unable to meet the obligations assumed
under reinsurance contracts. The Company evaluates the financial condition of
its reinsurers, establishes allowances for uncollectible amounts and monitors
concentrations of credit risk.
For contract and commercial surety business an excess of loss reinsurance
program is in effect. The Excess of Loss Contract provides the insurance
subsidiaries of CNA Surety with the capacity to underwrite large surety bond
exposures by providing reinsurance support from CCC. The Excess of Loss Contract
provides $75 million of coverage in excess of the $55 million of coverage
provided to the insurance subsidiaries by third party reinsurers, which is in
turn in excess of the $5 million of coverage per principal to be retained by the
CNA Surety insurance subsidiaries. Subsequent to the Merger Date, the Company
entered into a second excess of loss contract with CCC ("Second Excess of Loss
Contract"). The Second Excess of Loss Contract provides additional coverage for
principal losses that exceed the foregoing coverage of $75 million per principal
provided by the Excess of Loss Contract, or aggregate losses per principal in
excess of $135 million. The two Excess of Loss Contracts collectively provide
coverage for losses discovered on surety bonds in force as of the Merger Date
and for losses discovered on new and renewal business written during the term of
the Excess of Loss Contracts. CCC is also obligated to act as a joint insurer,
or "co-surety," for business covered by the Excess of Loss Contracts when
requested by the CNA Surety insurance subsidiaries. In consideration for the
reinsurance coverage provided by the Excess of Loss Contracts, the insurance
subsidiaries pay to CCC, on a quarterly basis, a premium equal to 1% of the net
written premiums applicable to the Excess of Loss Contract, subject to a minimum
premium of $20,000 and $5,000 per quarter under the Excess of Loss Contract and
Second Excess of Loss Contract, respectively. The CNA Surety insurance
subsidiaries paid $80,000 for all minimum quarterly premiums due in 1999 for the
Excess of Loss Contract and $20,000 in minimum quarterly premiums for the Second
Excess of Loss Contract during the year ended December 31, 1999. There were no
amounts due to CCC under the Excess of Loss Contract and Second Excess of Loss
Contract as of December 31, 1999. Both Excess of Loss Contracts have been made
effective immediately following the Merger Date and continue for a period of
five years from the Merger Date.
At December 31, 1999, CNA Surety's largest reinsurance receivable,
including prepaid reinsurance premiums of $0.8 million, was approximately $8.5
million with a company rated A++ (Superior) by A.M. Best.
RESERVES FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
CNA Surety's insurance subsidiaries employ generally accepted reserving
approaches in establishing the estimated liability for unpaid loss and loss
adjustment expenses that give consideration to the inherent difficulty and
variability in the estimation process. In addition, CNA Surety utilizes an
independent actuarial firm of national standing to conduct periodic reviews of
loss reserving practices, and annually obtains actuarial certification as to the
reasonableness of actuarial assumptions used and the sufficiency of year-end
reserves for each of its principal insurance subsidiaries.
The estimated liability for unpaid losses and loss adjustment expenses
includes, on an undiscounted basis, estimates of (a) the ultimate settlement
value of reported claims, (b) incurred but not reported ("IBNR") claims, (c)
future expenses to be incurred in the settlement of claims and (d) claim
recoveries, exclusive of reinsurance recoveries which are reported as an asset.
These estimates are determined based on the Company's and surety industry loss
experience as well as consideration of current trends and conditions. The
estimated liability for unpaid losses and loss adjustment expenses is an
estimate and there is the potential that actual future loss payments will differ
significantly from initial estimates. The methods of determining such estimates
and the resulting estimated liability are regularly reviewed and updated.
Changes in the estimated liability are reflected in operating income in the year
in which such changes are determined to be needed.
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A table is included in Note 8 to the Consolidated Financial Statements of
the 1999 Annual Report to Shareholders which presents a table of the activity in
the reserves for unpaid losses and loss adjustment expenses for the Company and
the Predecessor. This table highlights the impact of revisions to the estimated
liability established in prior years.
The following table sets forth a reconciliation of the consolidated loss
reserves reported in accordance with generally accepted accounting principles
("GAAP"), and the reserves reported to state insurance regulatory authorities in
accordance with statutory accounting principles ("SAP") for the year ended
December 31, 1999 (dollars in thousands):
<TABLE>
<S> <C>
Net reserves at end of year, GAAP basis..................... $137,469
Ceded reinsurance, net of salvage and subrogation........... 20,464
--------
Gross reserves at end of year, GAAP basis................... 157,933
Estimated salvage and subrogation recoverable (gross of
reinsurance), not anticipated under SAP................... 12,856
Estimated reinsurance recoverable netted against gross
reserves for SAP.......................................... (26,856)
--------
Gross reserves at end of year, SAP basis.................... $143,933
========
</TABLE>
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.
10
<PAGE> 11
The loss reserve development table is cumulative as of each December 31,
and, therefore, ending balances should not be added since the amount at the end
of each calendar year includes activity for both the current and prior years.
The loss reserve development table reflects, on a pro forma basis, the reserves
of the CCC Surety Operations and Capsure since 1989 and CIC since its
acquisition in May of 1995. Such historical development is not necessarily
indicative of the financial results that would have occurred under the ownership
and management of CNA Surety nor of future operating results.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net reserves for
losses and loss
adjustment
expenses............ $58,685 $69,733 $60,425 $61,998 $64,627 $70,398 $147,911 $137,064
Net Paid (Cumulative)
as of:
One year later...... 7,618 13,456 16,287 17,636 12,923 12,018 42,552 9,866
Two years later..... 13,540 22,330 24,295 25,854 19,671 18,149 43,179 20,171
Three years later... 18,033 26,835 29,857 29,495 21,990 21,229 46,782 25,206
Four years later.... 20,758 31,591 31,273 30,582 23,070 22,313 48,960 --
Five years later.... 22,089 32,133 31,909 30,817 23,864 24,776 -- --
Six years later..... 25,441 32,352 32,354 32,150 24,706 -- -- --
Seven years later... 23,457 32,993 32,419 32,811 -- -- -- --
Eight years later... 23,849 33,033 34,344 -- -- -- -- --
Nine years later.... 23,839 34,805 -- -- -- -- -- --
Ten years later..... 25,684 -- -- -- -- -- -- --
Net Reserves
Re-estimated as of:
End of initial
year.............. 58,685 69,733 60,425 61,998 64,627 70,398 147,911 137,064
One year later...... 53,486 50,822 58,644 58,603 54,568 51,471 132,267 96,178
Two years later..... 39,131 51,330 51,511 54,585 44,749 44,135 103,466 90,796
Three years later... 39,978 46,439 46,826 47,911 38,972 38,829 101,745 77,086
Four years later.... 34,357 42,946 42,212 42,542 28,094 38,628 89,348 --
Five years later.... 31,405 40,747 39,945 33,699 30,335 31,362 -- --
Six years later..... 31,777 38,131 36,164 37,188 27,842 -- -- --
Seven years later... 26,646 36,179 37,695 34,966 -- -- -- --
Eight years later... 25,464 37,853 37,014 -- -- -- -- --
Nine years later.... 28,027 37,252 -- -- -- -- -- --
Ten years later..... 27,812 -- -- -- -- -- -- --
======= ======= ======= ======= ======= ======= ======== ========
Total net (deficiency)
redundancy.......... $30,873 $32,481 $23,411 $27,032 $36,785 $39,036 $ 58,563 $ 59,978
======= ======= ======= ======= ======= ======= ======== ========
Cumulative redundancy
(deficiency) as a
percentage of
original estimate... 52.6% 46.6% 38.7% 43.6% 56.9% 55.5% 39.6% 43.8%
======= ======= ======= ======= ======= ======= ======== ========
<CAPTION>
AS OF DECEMBER 31,
------------------------------
1997 1998 1999
---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net reserves for
losses and loss
adjustment
expenses............ $122,725 $142,034 $137,469
Net Paid (Cumulative)
as of:
One year later...... 19,595 32,428 --
Two years later..... 30,775 -- --
Three years later... -- -- --
Four years later.... -- -- --
Five years later.... -- -- --
Six years later..... -- -- --
Seven years later... -- -- --
Eight years later... -- -- --
Nine years later.... -- -- --
Ten years later..... -- -- --
Net Reserves
Re-estimated as of:
End of initial
year.............. 122,725 142,034 137,469
One year later...... 118,373 128,949 --
Two years later..... 102,304 -- --
Three years later... -- -- --
Four years later.... -- -- --
Five years later.... -- -- --
Six years later..... -- -- --
Seven years later... -- -- --
Eight years later... -- -- --
Nine years later.... -- -- --
Ten years later..... -- -- --
======== ======== ========
Total net (deficiency)
redundancy.......... $ 20,421 $ 13,085 $ --
======== ======== ========
Cumulative redundancy
(deficiency) as a
percentage of
original estimate... 16.6% 9.2% --
======== ======== ========
</TABLE>
CLAIMS
Proactive claims management is an important factor for the profitable
underwriting of surety and fidelity products. The Company maintains an
experienced and dedicated staff of in-house claim specialists. All claim
handling is centralized in the three principal underwriting
locations -- Chicago, Sioux Falls and Houston. The disposition of claims and
other claim-related activity is done in accordance with established policies,
procedures and expense controls designed to minimize loss costs and maximize
salvage and subrogation recoveries. Indemnity and subrogation rights exist on a
significant portion of the business written, enabling the Company to pursue loss
recovery from the principal.
11
<PAGE> 12
ASBESTOS AND ENVIRONMENTAL CLAIMS
The Company does not typically bond contractors that specialize in
hazardous environmental remediation work. The Company does however bond several
accounts that have incidental environmental exposure with respect to which the
Company provides limited bonding programs. In the commercial surety market, the
Company provides bonds to large corporations that are in the business of mining
various minerals and are obligated to post reclamation bonds that guarantee that
property which was disturbed during mining is returned to an acceptable
condition when the mining is completed. While no environmental responsibility is
overtly provided by commercial or contract bonds, some risk of environmental
exposure may exist if the surety were to assume certain rights in the completion
of a defaulted project or through salvage recovery.
To date, the Company has not received any environmental claim notices nor
is management aware of any potential environmental claims.
REGULATION
The Company's insurance subsidiaries are subject to varying degrees of
regulation and supervision in the jurisdictions in which they transact business
under statutes which delegate regulatory, supervisory and administrative powers
to state insurance regulators. In general, an insurer's state of domicile has
principal responsibility for such regulation which is designed generally to
protect policyholders rather than investors and relates to matters such as the
standards of solvency which must be maintained; the licensing of insurers and
their agents; the examination of the affairs of insurance companies, including
periodic financial and market conduct examinations; the filing of annual and
other reports, prepared on a statutory basis, on the financial condition of
insurers or for other purposes; establishment and maintenance of reserves for
unearned premiums and losses; and requirements regarding numerous other matters.
Licensed or admitted insurers generally must file with the insurance regulators
of such states, or have filed on its behalf, the premium rates and bond and
policy forms used within each state. In some states, approval of such rates and
forms must be received from the insurance regulators in advance of their use.
Western Surety is domiciled in South Dakota and licensed in all 50 states
and the District of Columbia. SBCA is domiciled in South Dakota and licensed in
24 states. USA is domiciled in Texas and licensed in 44 states and the District
of Columbia.
Insurance regulations generally also require registration and periodic
disclosure of certain information concerning ownership, financial condition,
capital structure, general business operations and any material transactions or
agreements by or among affiliates. Such regulation also typically restricts the
ability of any one person to acquire 10% or more, either directly or indirectly,
of a company's stock without prior approval of the applicable insurance
regulatory authority. In addition, dividends and other distributions to
stockholders generally may be paid only out of unreserved and unrestricted
statutory earned surplus. Such distributions may be subject to prior regulatory
approval, including a review of the implications on Risk-Based Capital
requirements. A discussion of Risk-Based Capital requirements for property and
casualty insurance companies is included in both Management's Discussion and
Analysis of Financial Condition and Results of Operations and Note 14 to the
Consolidated Financial Statements of the 1999 Annual Report to Shareholders.
Without prior regulatory approval in 2000, CNA Surety's insurance subsidiaries
may pay stockholder dividends of $60.5 million in the aggregate. For the year
ended December 31, 1999, CNA Surety received $33.3 million in dividends from its
insurance subsidiaries.
In 1998, the National Association of Insurance Commissioners adopted the
Codification of Statutory Accounting Principles ("Codification"). The states of
South Dakota and Texas have not yet adopted the Codification. The Company has
not yet quantified the effects of Codification on its statutory financial
statements. The Codification, which is intended to standardize regulatory
accounting and reporting for the insurance industry, is proposed to be effective
January 1, 2001 if adopted by the domiciliary state.
CNA Surety's insurance subsidiaries are subject to periodic financial and
market conduct examinations. These examinations are generally performed by the
domiciliary state insurance regulatory authorities. The South Dakota Department
of Commerce and Regulation -- Division of Insurance (the "South Dakota
12
<PAGE> 13
Department") conducted its financial and market conduct examination of Western
Surety for the five year period ended December 31, 1996. The South Dakota
Department made a finding of non-compliance with respect to the Company's
practices regarding return of premiums and recommended that Western Surety
change its current procedures regarding the return of premiums. The regulation
in question was subsequently amended to exclude surety products which eliminated
any non-compliance by the Company. The Texas Department of Insurance conducted
its last examination of USA's financial matters as of December 31, 1996. There
were no significant issues noted which required corrective action by any of the
insurance subsidiaries.
Certain states in which CNA Surety's insurance subsidiaries conduct their
business require insurers to join a guaranty association. Guaranty associations
provide protection to policyholders of insurers licensed in such states against
the insolvency of those insurers. In order to provide the associations with
funds to pay certain claims under policies issued by insolvent insurers, the
guaranty associations charge members assessments based on the amount of direct
premiums written in that state. Such assessments were not material to CNA
Surety's results of operations in 1999.
Western Surety and USA each qualifies as an acceptable surety for federal
and other public works project bonds pursuant to U.S. Department of Treasury
regulations. The underwriting limitations of Western Surety and USA, based on
each insurer's statutory surplus, are currently $15.0 million and $1.7 million,
respectively. Through intercompany reinsurance and related agreements with CCC,
CNA Surety has access to CCC's $454.3 million U.S. Treasury underwriting
limitation.
INVESTMENTS
Insurance company investment practices must comply with insurance laws and
regulations and must also comply with certain covenants under CNA Surety's $130
million revolving credit facility. Generally, insurance laws and regulations
prescribe the nature and quality of, and set limits on, the various types of
investments which may be made by CNA Surety's insurance subsidiaries.
The Company's investment portfolio generally is managed to maximize
after-tax investment return, while minimizing credit risk with investments
concentrated in high quality income securities. CNA Surety's portfolio is
managed to provide diversification by limiting exposures to any one industry,
issue or issuer, and to provide liquidity by investing in the public securities
markets. The portfolio is structured to support CNA Surety's insurance
underwriting operations and to consider the expected duration of liabilities and
short-term cash needs.
An investment committee of CNA Surety's Board of Directors establishes
investment policy and oversees the management of each portfolio. A professional
independent investment adviser has been engaged to assist in the management of
each of the Company's insurance subsidiaries investment portfolio pursuant to
established investment committee guidelines. The insurance subsidiaries pay an
advisory fee based on the market value of the assets under management.
EMPLOYEES
As of December 31, 1999, the Company employed 828 persons. CNA Surety has
not experienced any work stoppages. Management of CNA Surety believes its
relations with its employees are good.
ITEM 2. PROPERTIES
CNA Surety leases its executive offices and its shared branch locations
with CCC under an Administrative Services Agreement. CNA Surety currently uses
approximately 110,000 square feet and related personal property at 43 branch
locations and its home and executive offices (24,261 square feet), in Chicago,
Illinois. CNA Surety's annual rent for this space is approximately $2.0 million.
CNA Surety may terminate its use of these locations as set forth in the
Administrative Services Agreement, without penalty, by providing CCC with 60
days written notice.
CNA Surety leases office space for its primary processing and service
center at 101 South Phillips Avenue, Sioux Falls, South Dakota, under a lease
expiring in 2002. CNA Surety's office space, consisting of
13
<PAGE> 14
approximately 81,600 square feet, is leased from a partnership in which the
Company owns a 50% interest. The annual rent, which is subject to annual
adjustments, was $1.3 million as of December 31, 1999. CNA Surety also leases
space for large contract and commercial branch offices in Dallas, Texas and New
York, New York. Annual rent for these offices was $0.3 million with leases
terminating in 2004 and 2007, respectively. CNA Surety leases office space for
its small and specialty contract home office at 950 Echo Lane, Suite 250,
Houston, Texas, under a lease terminating in 2001 with an annual rent of $0.2
million. The Company also leases space for 3 small and specialty contract branch
offices for an additional annual rent of approximately $0.1 million.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to various lawsuits arising in
the normal course of business, some seeking material damages. The Company
believes the resolution of these lawsuits will not have a material adverse
effect on its financial condition or its results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock ("Common Stock") trades on the New York Stock
Exchange under the symbol SUR. On March 10, 2000, the last reported sale price
for the Common Stock was $13.00 per share. The following table shows the range
of high and low sales prices for shares of the Common Stock as reported on the
New York Stock Exchange during 1999 and 1998.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1999
1st Quarter................................................. $16.00 $10.19
2nd Quarter................................................. $15.56 $12.31
3rd Quarter................................................. $15.50 $12.13
4th Quarter................................................. $13.00 $ 9.75
1998
1st Quarter................................................. $16.38 $14.38
2nd Quarter................................................. $16.75 $13.00
3rd Quarter................................................. $15.19 $12.56
4th Quarter................................................. $15.88 $13.06
</TABLE>
The number of stockholders of record of Common Stock on March 10, 2000, was
approximately 988.
DIVIDENDS
On May 19, 1998, the CNA Surety Board of Directors adopted a dividend
policy under which the Company intends to pay a quarterly dividend beginning in
the fourth quarter of 1998. The current quarterly dividend rate is 8 cents per
share or 32 cents on an annual basis. The declaration and payment of dividends
to holders of Common Stock, including the amount and frequency of such
dividends, is at the discretion of the Board and depends upon many factors,
including CNA Surety's financial condition, operating characteristics, projected
earnings and growth, capital requirements of its insurance subsidiaries, debt
service obligations and such other factors as the Board deems relevant.
14
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
The following financial information has been derived from the Consolidated
Financial Statements and Notes thereto which appear in the 1999 Annual Report to
Shareholders and are incorporated herein by reference.
CNA Surety Corporation is a holding company for the combined surety
business of CNAF and Capsure. Pursuant to a reorganization agreement, CNAF and
Capsure merged their respective operations at the close of business on September
30, 1997. The surety operations of CNAF are referred to as CCC Surety Operations
("Predecessor"). For a more detailed description of the merger transactions and
their effects on the Company's financial data, see the Consolidated Financial
Statements and related Notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations appearing in the 1999 Annual
Report to Shareholders which are incorporated herein by reference.
The following information presented for CNA Surety is for the years ended
December 31, 1999 and 1998 and the period from September 30, 1997 (date of
inception) through December 31, 1997 and as of December 31, 1999, 1998 and 1997.
Selected financial data of the Predecessor is presented on the following page.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Total revenues(1)........................................... $309,405 $283,840 $ 71,284
======== ======== ========
Gross written premiums...................................... $306,859 $278,224 $ 72,755
======== ======== ========
Net written premiums........................................ $298,987 $270,602 $ 73,989
======== ======== ========
Net earned premiums......................................... $283,540 $258,737 $ 65,433
======== ======== ========
Underwriting income(2)...................................... $ 71,894 $ 61,773 $ 15,086
Net investment income....................................... 25,850 24,259 5,766
Net realized investment gains............................... 15 844 85
Interest expense............................................ 5,846 7,218 1,831
Amortization of intangible assets........................... 5,982 5,900 1,447
-------- -------- --------
Income before income taxes.................................. 85,931 73,758 17,659
Income taxes................................................ 29,433 28,243 6,663
-------- -------- --------
Net income.................................................. $ 56,498 $ 45,515 $ 10,996
======== ======== ========
Basic and diluted earnings per common share................. $ 1.28 $ 1.04 $ 0.25
======== ======== ========
Loss ratio(2)............................................... 15.7% 17.4% 18.5%
Expense ratio............................................... 58.9 58.7 58.4
-------- -------- --------
Combined ratio(2)........................................... 74.6% 76.1% 76.9%
======== ======== ========
Invested assets and cash.................................... $499,400 $505,355 $419,667
Intangible assets, net of amortization...................... 155,980 156,062 161,962
Total assets................................................ 851,575 819,370 725,131
Insurance reserves.......................................... 357,233 333,728 302,168
Debt........................................................ 101,900 113,000 118,000
Total liabilities........................................... 525,271 509,473 468,399
Stockholders' equity........................................ 326,304 309,897 256,732
Book value per share........................................ $ 7.59 $ 7.03 $ 5.93
Dividends paid per share.................................... $ 0.32 $ 0.08 $ --
</TABLE>
- -------------------------
(1) Includes investment income and investment gains for CNA Surety for the year
ended December 31, 1999, 1998 and for the period from September 30, 1997
(date of inception) through December 31, 1997.
(2) Includes the effect of recording revisions of prior year reserves. The
dollar amount and the percentage point effect on the loss ratio of these
reserve revisions, all of which were favorable, were $13,085, or 4.6%, for
the year ended December 31, 1999, $4,352, or 1.7%, for the year ended
December 31, 1998 and $647, or 1.0%, for the period from September 30, 1997
(date of inception) through December 31, 1997.
15
<PAGE> 16
The following information of the Predecessor is presented for the three
months ended December 31, 1996, for the nine months ended September 30, 1997 and
1996 and for the years ended December 31, 1996 and 1995. The selected financial
information of the Predecessor does not include data with respect to assets,
liabilities (other than insurance reserves) and equity because CNAF did not
customarily allocate the investment portfolio or equity of its operating
subsidiaries to its business units like CCC Surety Operations.
<TABLE>
<CAPTION>
THREE NINE MONTHS ENDED YEARS ENDED
MONTHS SEPTEMBER 30, DECEMBER 31,
ENDED ---------------------- --------------------
12/31/96 1997 1996 1996 1995(1)
-------- ---- ---- ---- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Gross written premiums................... $ 40,654 $116,075 $114,554 $155,208 $136,605
======== ======== ======== ======== ========
Net written premiums..................... $ 37,641 $108,630 $106,263 $143,904 $122,012
======== ======== ======== ======== ========
Net earned premiums...................... $ 36,767 $108,564 $112,302 $149,069 $130,603
Net loss and LAE(2)...................... 9,394 (11,516) 23,612 33,006 32,440
Amortization of deferred policy
acquisition costs(3)................... 16,665 48,075 49,717 66,382 58,243
Other direct expenses.................... 4,631 10,173 8,637 13,268 11,840
Policyholders' dividends................. 324 1,426 1,641 1,965 1,508
-------- -------- -------- -------- --------
Excess of net earned premiums over direct
operating expenses before income
taxes(2)(3)............................ $ 5,753 $ 60,406 $ 28,695 $ 34,448 $ 26,572
======== ======== ======== ======== ========
Loss ratio(2)............................ 25.6% (10.6)% 21.0% 22.1% 24.8%
Expense ratio(3)......................... 58.8 55.0 53.4 54.8 54.8
-------- -------- -------- -------- --------
Combined ratio(2)(3)..................... 84.4% 44.4% 74.4% 76.9% 79.6%
======== ======== ======== ======== ========
Insurance reserves(4).................... $214,828 $183,491 $210,340 $214,828 $239,716
</TABLE>
- -------------------------
(1) CNAF acquired The Continental Insurance Company ("Continental") in May 1995.
Results include the surety operations of Continental since its acquisition
in May 1995 which affects the comparability of financial information.
(2) Includes the effect of recording releases of prior year loss reserves. The
dollar amount and the percentage point effect on the loss ratio of these
reserve revisions, all of which were net reductions, were $1,232, or 3.4%,
for the three months ended December 31, 1996, $35,000, or 32.2%, and $8,510,
or 7.6%, for the nine months ended September 30, 1997 and 1996,
respectively, and $9,742, or 6.5%, and $10,846, or 8.3%, for the years ended
December 31, 1996 and 1995, respectively.
(3) Does not include the effects of certain general and administrative expenses,
which are indirect or overhead in nature, since such costs were not
historically allocated to the CCC Surety Operations by CNAF or its
subsidiaries. Accordingly, the comparability of this data to other data that
include such costs is affected.
(4) The insurance reserves include both loss and loss adjustment expense and
unearned premium reserves. These reserves are shown before the effects of
ceded reinsurance. In accordance with the reorganization and related
reinsurance agreements, these reserves, as of the Merger Date, were
transferred to Western Surety, net of reinsurance which totaled $9,979 and
$23,876 for the nine months ended September 30, 1997 and 1996 and $21,779
and $31,060 at December 31, 1996 and 1995, respectively.
16
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Incorporated herein by reference from pages 13 through 25 of the 1999
Annual Report to Shareholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCUSSIONS ABOUT MARKET RISK
Incorporated herein by reference from pages 21 through 22 of the 1999
Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL:
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Income for the Years Ended December 31, 1999 and 1998
and the Period from September 30, 1997 (date of inception) through December
31, 1997 and Statement of Certain Revenues and Direct Operating Expenses of
the Predecessor for the Nine Months Ended September 30, 1997
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1999 and 1998 and the Period from September 30, 1997 (date of inception)
through December 31, 1997
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999 and
1998 and the Period from September 30, 1997 (date of inception) through
December 31, 1997
Notes to Consolidated Financial Statements
Independent Auditors' Report
The above Consolidated Financial Statements, the related Notes to the
Consolidated Financial Statements and the Independent Auditors' Report are
incorporated herein by reference from pages 26 through 47 of the 1999 Annual
Report to Shareholders.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
17
<PAGE> 18
PART III
ITEMS 10, 11, 12, AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT,
EXECUTIVE COMPENSATION, SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT, AND CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
The Company will file a definitive proxy statement with the Securities and
Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act
of 1934 (the "Proxy Statement") relating to the Company's Annual Meeting of
Stockholders to be held on May 16, 2000, not later than 120 days after the end
of the fiscal year covered by this Form 10-K. Information required by Items 10
through 13 will appear in the Proxy Statement and is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
(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:
</TABLE>
November 12, 1999: CNA Surety announces 32% increase in third quarter net
income.
November 18, 1999: CNA Surety announces quarterly dividend.
18
<PAGE> 19
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
CNA Surety Corporation
We have audited the consolidated balance sheets of CNA Surety Corporation
and subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of income, stockholders' equity, and cash flows for the years ended
December 31, 1999 and 1998 and for the period from September 30, 1997 (date of
inception) through December 31, 1997. We have also audited the special-purpose
statement of certain revenues and direct operating expenses of CCC Surety
Operations, a business unit of CNA Financial Corporation, for the nine month
period ended September 30, 1997, and have issued our report thereon dated
February 22, 2000. Such consolidated financial statements and report are
included in the Company's 1999 Annual Report to Shareholders and are
incorporated herein by reference. Our audit also included the financial
statement schedules listed in the Index at Item 14. These financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.
Deloitte & Touche LLP
Chicago, Illinois
February 22, 2000
19
<PAGE> 20
SCHEDULE I
CNA SURETY CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
AS OF DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
--------------------------------
FAIR CARRYING
COST VALUE VALUE
---- ----- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Fixed Income Securities:
U.S. Government and government agencies and authorities... $116,185 $112,739 $112,739
States, municipalities and political subdivisions......... 229,499 218,153 218,153
All other corporate bonds................................. 91,006 87,064 87,064
-------- -------- --------
Total fixed income securities........................ 436,690 $417,956 417,956
-------- ======== --------
Equity securities........................................... 23,968 25,897 25,897
Short-term investments...................................... 43,033 43,033
Other investments........................................... 5,626 5,277
-------- --------
Total investments.................................... $509,317 $492,163
======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
--------------------------------
FAIR CARRYING
COST VALUE VALUE
---- ----- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Fixed Income Securities:
U.S. Government and government agencies and authorities... $130,506 $133,280 $133,280
States, municipalities and political subdivisions......... 206,264 208,238 208,238
All other corporate bonds................................. 82,096 82,396 82,396
-------- -------- --------
Total fixed income securities........................ 418,866 $423,914 423,914
-------- ======== --------
Equity securities........................................... -- -- --
Short-term investments...................................... 57,865 57,865
Other investments........................................... 5,867 5,830
-------- --------
Total investments.................................... $482,598 $487,609
======== ========
</TABLE>
20
<PAGE> 21
SCHEDULE II
CNA SURETY CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
---- ----
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
ASSETS
Investments in and advances to subsidiaries................. $428,232 $405,141
Short-term investments...................................... 11,618 14,492
Cash........................................................ 1,437 15,919
Other assets................................................ 1,543 1,303
-------- --------
Total assets........................................... $442,830 $436,855
======== ========
LIABILITIES
Debt........................................................ $100,000 $113,000
Other liabilities........................................... 16,526 13,958
-------- --------
Total liabilities...................................... 116,526 126,958
-------- --------
STOCKHOLDERS' EQUITY
Common stock................................................ 441 441
Additional paid-in capital.................................. 253,366 253,215
Retained earnings........................................... 95,419 52,984
Accumulated other comprehensive income (loss)............... (11,150) 3,257
Treasury stock, at cost..................................... (11,772) --
-------- --------
Total stockholders' equity............................. 326,304 309,897
-------- --------
Total liabilities and stockholders' equity........ $442,830 $436,855
======== ========
</TABLE>
21
<PAGE> 22
SCHEDULE II
CNA SURETY CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY) -- (CONTINUED)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SEPTEMBER 30,
(DATE OF
INCEPTION),
YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------ ------------ -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Net investment income................................. $ 787 $ 695 $ 33
------- ------- -------
Total revenues..................................... 787 695 33
------- ------- -------
Expenses:
Interest expense...................................... 5,806 7,218 1,831
Corporate expense..................................... 4,100 3,062 1,364
------- ------- -------
Total expenses..................................... 9,906 10,280 3,195
------- ------- -------
Loss from operations before income taxes and equity in
net income of subsidiaries............................ (9,119) (9,585) (3,162)
Income taxes............................................ (2,892) (3,399) (1,107)
------- ------- -------
Loss before equity in net income of
subsidiaries -- Parent Company only................... (6,227) (6,186) (2,055)
Equity in net income of subsidiaries.................... 62,725 51,701 13,051
------- ------- -------
Net income.............................................. $56,498 $45,515 $10,996
======= ======= =======
</TABLE>
22
<PAGE> 23
SCHEDULE II
CNA SURETY CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY) -- (CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SEPTEMBER 30,
(DATE OF
INCEPTION),
YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------ ------------ -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................. $ (6,227) $ (6,186) $ (2,055)
Cash dividends from subsidiaries.................. 33,300 6,610 4,970
Tax payments received from subsidiaries........... 28,674 28,499 2,449
Federal and state income tax payments............. (20,600) (17,750) --
Adjustments to reconcile net loss to net cash
provided by operating activities:
Other assets and liabilities.................... (5,746) 749 (1,368)
-------- -------- ---------
Net cash provided by operating activities.............. 29,401 11,922 3,996
-------- -------- ---------
INVESTING ACTIVITIES:
Net advances from (to) subsidiaries.................. (3,519) 11,935 (65,075)
Capital contributions to subsidiaries................ (4,500) -- (50,000)
Changes in short-term investments.................... 2,874 (7,471) (7,021)
-------- -------- ---------
Net cash provided by (used in) investing activities.... (5,145) 4,464 (122,096)
-------- -------- ---------
FINANCING ACTIVITIES:
Proceeds from debt................................... -- -- 118,000
Principal payments on debt........................... (13,000) (5,000) --
Proceeds from issuance of common stock............... -- 7,531 --
Dividends to stockholders............................ (14,063) (3,527) --
Purchase of treasury stock........................... (11,772) -- --
Other................................................ 97 503 126
-------- -------- ---------
Net cash (used in) provided by financing activities.... (38,738) (493) 118,126
-------- -------- ---------
Increase (decrease) in cash............................ (14,482) 15,893 26
Cash at beginning of period............................ 15,919 26 --
-------- -------- ---------
Cash at end of period.................................. $ 1,437 $ 15,919 $ 26
======== ======== =========
</TABLE>
23
<PAGE> 24
SCHEDULE III
CNA SURETY CORPORATION AND SUBSIDIARIES AND PREDECESSOR
SUPPLEMENTARY INSURANCE INFORMATION
CNA SURETY CORPORATION AS OF AND FOR THE YEARS ENDED
DECEMBER 31, 1999 AND 1998 AND
FOR THE PERIOD SEPTEMBER 30, 1997 (DATE OF INCEPTION)
THROUGH DECEMBER 31, 1997 AND PREDECESSOR AS OF AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
SEPTEMBER 30,
(DATE OF PREDECESSOR
INCEPTION), ------------------
YEAR ENDED YEAR ENDED THROUGH NINE
DECEMBER 31, DECEMBER 31, DECEMBER 31, MONTHS ENDED
1999 1998 1997 SEPTEMBER 30, 1997
------------ ------------ ------------- ------------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Deferred policy acquisition costs...... $ 84,924 $ 74,488 $ 64,144 $ 37,740
======== ======== ======== ========
Future policy benefits, losses, claims
and loss expenses.................... $157,933 $150,020 $130,381 $ 88,914
======== ======== ======== ========
Unearned premiums...................... $199,300 $183,708 $171,787 $ 94,577
======== ======== ======== ========
Other policy claims and benefits
payable.............................. $ -- $ -- $ -- $ --
======== ======== ======== ========
Net premium revenue.................... $283,540 $258,737 $ 65,433 $108,564
======== ======== ======== ========
Net investment income.................. $ 25,850 $ 24,259 $ 5,766 $ --
======== ======== ======== ========
Benefits, claims, losses and settlement
expenses............................. $ 44,672 $ 44,998 $ 12,134 $(11,516)
======== ======== ======== ========
Amortization of deferred policy
acquisition costs.................... $119,746 $105,420 $ 25,881 $ 48,075
======== ======== ======== ========
Other operating expenses............... $ 47,228 $ 46,546 $ 12,332 $ 11,599
======== ======== ======== ========
Net premiums written................... $298,987 $270,602 $ 73,989 $108,630
======== ======== ======== ========
</TABLE>
24
<PAGE> 25
SCHEDULE IV
CNA SURETY CORPORATION AND SUBSIDIARIES AND PREDECESSOR
REINSURANCE
CNA SURETY CORPORATION FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 AND
FOR THE PERIOD SEPTEMBER 30, 1997 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 1997 AND PREDECESSOR AS OF AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
------ --------- ---------- ------ ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CNA SURETY CORPORATION
YEAR ENDED DECEMBER 31, 1999
Premiums written:
Property and casualty insurance......... $108,968 $7,872 $197,891 $298,987 66.2%
-------- ------ -------- -------- -----
Total premiums....................... $108,968 $7,872 $197,891 $298,987 66.2%
======== ====== ======== ======== =====
YEAR ENDED DECEMBER 31, 1998
Premiums written:
Property and casualty insurance......... $103,298 $7,564 $163,003 $258,737 63.0%
-------- ------ -------- -------- -----
Total premiums....................... $103,298 $7,564 $163,003 $258,737 63.0%
======== ====== ======== ======== =====
SEPTEMBER 30, 1997 (DATE OF INCEPTION)
THROUGH DECEMBER 31, 1997
Premiums written:
Property and casualty insurance......... $ 27,159 $2,379 $ 40,653 $ 65,433 62.1%
-------- ------ -------- -------- -----
Total premiums....................... $ 27,159 $2,379 $ 40,653 $ 65,433 62.1%
======== ====== ======== ======== =====
PREDECESSOR
NINE MONTHS ENDED SEPTEMBER 30, 1997
Premiums written:
Property and casualty insurance......... $112,751 $6,221 $ 2,034 $108,564 1.9%
-------- ------ -------- -------- -----
Total premiums....................... $112,751 $6,221 $ 2,034 $108,564 1.9%
======== ====== ======== ======== =====
</TABLE>
25
<PAGE> 26
SCHEDULE V
CNA SURETY CORPORATION AND SUBSIDIARIES AND PREDECESSOR
VALUATION AND QUALIFYING ACCOUNTS
CNA SURETY CORPORATION AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1999 AND
1998 AND FOR THE PERIOD SEPTEMBER 30, 1997 (DATE OF INCEPTION) THROUGH DECEMBER
31, 1997 AND
PREDECESSOR AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C>
CNA SURETY CORPORATION
YEAR ENDED DECEMBER 31, 1999
Allowance for possible losses on
premiums receivable............. $1,465 $1,786 $-- $(425) $2,826
====== ====== == ===== ======
Allowance for possible losses on
reinsurance receivable.......... $ -- $ -- $-- $ -- $ --
====== ====== == ===== ======
YEAR ENDED DECEMBER 31, 1998
Allowance for possible losses on
premiums receivable............. $ 968 $1,041 $-- $(544) $1,465
====== ====== == ===== ======
Allowance for possible losses on
reinsurance receivable.......... $ -- $ -- $-- $ -- $ --
====== ====== == ===== ======
SEPTEMBER 30, 1997 (DATE OF
INCEPTION)
THROUGH DECEMBER 31, 1997
Allowance for possible losses on
premiums receivable............. $ 893(1) $ 250 $-- $(175) $ 968
====== ====== == ===== ======
Allowance for possible losses on
reinsurance receivable.......... $ -- $ -- $-- $ -- $ --
====== ====== == ===== ======
PREDECESSOR
NINE MONTHS ENDED SEPTEMBER 30, 1997
Allowance for possible losses on
premiums receivable............. $ -- $ -- $-- $ -- $ --
====== ====== == ===== ======
Allowance for possible losses on
reinsurance receivable.......... $ -- $ -- $-- $ -- $ --
====== ====== == ===== ======
</TABLE>
- -------------------------
(1) Acquired balance of Capsure Holdings Corp. on September 30, 1997.
(2) Accounts charged against allowance.
26
<PAGE> 27
SCHEDULE VI
CNA SURETY CORPORATION AND SUBSIDIARIES AND PREDECESSOR
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY
INSURANCE OPERATIONS
CNA SURETY CORPORATION AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1999, 1998
AND FOR THE PERIOD SEPTEMBER 30, 1997 (DATE OF INCEPTION) THROUGH
DECEMBER 31, 1997 AND PREDECESSOR AS OF AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
SEPTEMBER 30, PREDECESSOR
(DATE OF -------------
INCEPTION), NINE MONTHS
YEAR ENDED YEAR ENDED THROUGH ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1999 1998 1997 1997
------------ ------------ ------------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Deferred policy acquisition costs........... $ 84,924 $ 74,488 $ 64,144 $ 37,740
======== ======== ======== ========
Reserves for unpaid claims and claim
adjustment expenses....................... $157,933 $150,020 $130,381 $ 88,914
======== ======== ======== ========
Discount (if any) deducted.................. $ -- $ -- $ -- $ --
======== ======== ======== ========
Unearned premiums........................... $199,300 $183,708 $171,787 $ 94,577
======== ======== ======== ========
Net premium revenue......................... $283,540 $258,737 $ 65,433 $108,564
======== ======== ======== ========
Net investment income....................... $ 25,850 $ 24,259 $ 5,766 $ --
======== ======== ======== ========
Net claims and claim expenses incurred
related to:
Current year.............................. $ 57,757 $ 49,350 $ 12,781 $ 23,484
======== ======== ======== ========
Prior years............................... $(13,085) $ (4,352) $ (647) $(35,000)
======== ======== ======== ========
Amortization of deferred policy acquisition
costs..................................... $119,746 $105,420 $ 25,881 $ 48,075
======== ======== ======== ========
Net paid claims and claim adjustment
expenses.................................. $ 49,237 $ 25,689 $ 4,417 $ 8,087
======== ======== ======== ========
Net premiums written........................ $298,987 $270,602 $ 73,989 $108,630
======== ======== ======== ========
</TABLE>
27
<PAGE> 28
(A)(3) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
2(1) Reorganization Agreement dated as of December 19, 1996 among
Capsure Holdings Corp., Continental Casualty Company, CNA
Surety Corporation, Surety Acquisition Company and certain
affiliates of Continental Casualty Company (filed on
December 27, 1996 as Exhibit 2 to Capsure Holdings Corp.'s
Form 8-K, and incorporated herein by reference).
2(2) First Amendment to the Reorganization Agreement dated as of
July 14, 1997 among Capsure Holdings Corp., Continental
Casualty Company, CNA Surety Corporation, Surety Acquisition
Company and certain affiliates of Continental Casualty
Company (filed on July 16, 1997 as Exhibit 2 to Capsure
Holdings Corp.'s Form 8-K, and incorporated herein by
reference).
3(1) Certificate of Incorporation of CNA Surety Corporation dated
December 10, 1996 (filed on August 15, 1997 as Exhibit 3(1)
to CNA Surety Corporation's Registration Statement on Form
S-4 (Registration No. 333-33753), and incorporated herein by
reference).
3(2) Amendment to Certificate of Incorporation of CNA Surety
Corporation dated May 27, 1997 (filed on August 15, 1997 as
Exhibit 3(2) to CNA Surety Corporation's Registration
Statement on Form S-4 (Registration No. 333-33753), and
incorporated herein by reference).
3(3) Bylaws of CNA Surety Corporation (filed on August 15, 1997
as Exhibit 3(3) to CNA Surety Corporation's Registration
Statement on Form S-4 (Registration No. 333-33753), and
incorporated herein by reference).
3(4) Amendment to Bylaws of CNA Surety Corporation (filed on
September 23, 1998 as Exhibit 4(3) to CNA Surety
Corporation's Registration Statement on Form S-8
(Registration No. 333-64135), and incorporated herein by
reference).
4(1) Specimen certificate of CNA Surety Corporation (filed on
August 15, 1997 as Exhibit 4(1) to CNA Surety Corporation's
Registration Statement on Form S-4 (Registration No.
333-33753), and incorporated herein by reference).
9 Not applicable.
10(1) Contract Surety Bond Reinsurance Agreement dated as of
September 22, 1994 between Western Surety Company, a South
Dakota corporation, and Universal Surety of America, a Texas
corporation (filed on March 30, 1995 as Exhibit 10(23) to
Capsure Holding Corp.'s Annual Report on Form 10-K, and
incorporated herein by reference).
10(2) Co-Employee Agreement dated as of September 22, 1994 between
Western Surety Company and Universal Surety of America
(filed on March 30, 1995 as Exhibit 10(24) to Capsure
Holding Corp.'s Annual Report on Form 10-K, and incorporated
herein by reference).
10(3) Form of The CNA Surety Corporation Replacement Stock Option
Plan (filed on August 15, 1997 as Exhibit 10(12) to CNA
Surety Corporation's Registration Statement on Form S-4
(Registration No. 333-33753), and incorporated herein by
reference).
10(4) Form of CNA Surety Corporation 1997 Long-Term Equity
Compensation Plan (filed on August 15, 1997 as Exhibit
10(13) to CNA Surety Corporation's Registration Statement on
Form S-4 (Registration No. 333-33753), and incorporated
herein by reference).
10(5) Form of Aggregate Stop Loss Reinsurance Contract by and
between Western Surety Company, Universal Surety of America,
Surety Bonding Company of America and Continental Casualty
Company (filed on December 27, 1996 as Exhibit 2 to Capsure
Holdings Corp.'s Form 8-K, and incorporated herein by
reference).
10(6) Form of Surety Excess of Loss Reinsurance Contract by and
between Western Surety Company, Universal Surety of America,
Surety Bonding Company of America and Continental Casualty
Company (filed on December 27, 1996 as Exhibit 2 to Capsure
Holdings Corp.'s Form 8-K, and incorporated herein by
reference).
</TABLE>
28
<PAGE> 29
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10(8) Form of Surety Quota Share Treaty by and between Western
Surety Company and Continental Casualty Company (filed on
December 27, 1996 as Exhibit 2 to Capsure Holdings Corp.'s
Form 8-K, and incorporated herein by reference).
10(9) Employment Agreement dated as of January 1, 2000 by and
between CNA Surety Corporation and Mark C. Vonnahme.
10(10) Employment Agreement dated as of January 1, 2000 by and
between CNA Surety Corporation and Robert E. Ayo.
10(11) Employment Agreement dated as of January 1, 2000 by and
between CNA Surety Corporation and Michael A. Dougherty.
10(12) Employment Agreement dated as of January 1, 2000 by and
between CNA Surety Corporation and John S. Heneghan.
10(13) Employment Agreement dated as of January 1, 2000 by and
between CNA Surety Corporation and Stephen T. Pate.
10(14) Employment Agreement dated as of January 1, 2000 by and
between CNA Surety Corporation and David F. Paul.
10(15) Credit Agreement dated as of September 30, 1997, among CNA
Surety Corporation, the lenders party thereto, and Chase
Manhattan Bank, as Administrative Agent (filed on July 9,
1998 as Exhibit 10(13) to CNA Surety Corporation's
Registration Statement on Form S-1 (Registration No.
333-56063), and incorporated herein by reference).
10(16) Surety Second Excess of Loss Reinsurance Contract by and
between Western Surety Company, Universal Surety of America,
Surety Bonding Company of America and Continental Casualty
Company (filed on July 9, 1998 as Exhibit 10(14) to CNA
Surety Corporation's Registration Statement on Form S-1
(Registration No. 333-56063), and incorporated herein by
reference).
10(17) Form of CNA Surety Corporation Non-Employee Directors
Deferred Compensation Plan (filed on July 9, 1998 as Exhibit
10(15) to CNA Surety Corporation's Registration Statement on
Form S-1 (Registration No. 333-56063), and incorporated
herein by reference).
10(18) Form of CNA Surety Corporation Deferred Compensation Plan.
11 Earnings per share computation.
12 Not Applicable.
13 1999 Annual Report to Shareholders
21 Subsidiaries of the Registrant.
22 Not Applicable.
23 Consent of Deloitte & Touche LLP dated March 24, 2000.
24 Not Applicable.
27 Financial Data Schedule.
</TABLE>
29
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
CNA SURETY CORPORATION
/s/ MARK C. VONNAHME
--------------------------------------
Mark C. Vonnahme
President and Chief Executive Officer
(Principal Executive Officer)
/s/ JOHN S. HENEGHAN
--------------------------------------
John S. Heneghan
Vice President and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
Dated: March 24, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
DATE TITLE SIGNATURE
---- ----- ---------
<S> <C> <C>
March 24, 1999 Chairman of the Board /s/ THOMAS F. TAYLOR
and Director ---------------------------------------------
Thomas F. Taylor
March 24, 1999 Director /s/ GIORGIO BALZER
---------------------------------------------
Giorgio Balzer
March 24, 1999 Director /s/ PHILIP H. BRITT
---------------------------------------------
Philip Britt
March 24, 1999 Director /s/ ROD F. DAMMEYER
---------------------------------------------
Rod F. Dammeyer
March 24, 1999 Director /s/ EDWARD DUNLOP
---------------------------------------------
Edward Dunlop
March 24, 1999 Director /s/ MELVIN GRAY
---------------------------------------------
Melvin Gray
March 24, 1999 Director /s/ JOE P. KIRBY
---------------------------------------------
Joe P. Kirby
March 24, 1999 Director /s/ WILLIAM C. PATE
---------------------------------------------
William C. Pate
</TABLE>
30
<PAGE> 31
<TABLE>
<CAPTION>
DATE TITLE SIGNATURE
---- ----- ---------
<S> <C> <C>
March 24, 1999 Director /s/ ROY E. POSNER
---------------------------------------------
Roy E. Posner
March 24, 1999 Director /s/ ADRIAN M. TOCKLIN
---------------------------------------------
Adrian M. Tocklin
March 24, 1999 Director /s/ MARK C. VONNAHME
---------------------------------------------
Mark C. Vonnahme
</TABLE>
31
<PAGE> 1
EXHIBIT 10(9)
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of ______________, 1999, by and between CNA
SURETY CORPORATION a Delaware corporation ("the Company"), and MARK C. VONNAHME
("the Executive").
WITNESSETH:
WHEREAS, the Company wishes to continue to employ the Executive and the Company
and the Executive desires to enter into an agreement embodying the terms of such
employment (the "Agreement'); and
NOW, THEREFORE, in consideration of the mutual covenants herein contained, the
Company and the Executive hereby agree as follows:
1. EMPLOYMENT.
a. AGREEMENT TO EMPLOY. Upon the terms and subject to the conditions of this
Agreement, the Company hereby agrees to continue to employ Executive and
Executive hereby agrees to employment by the Company.
b. TERM OF EMPLOYMENT. Except as provided in Paragraph 5(a), the Company shall
employ Executive for the period commencing on January 1, 2000 (the "Commencement
Date") and ending on December 31, 2001. The period during which Executive is
employed pursuant to this Agreement and any extensions set forth in Paragraph
1(c) of this Agreement shall be referred to as the "Employment Period."
c. RENEWAL. Upon expiration of the original term of this Agreement set forth in
Paragraph 1(b) of this Agreement, this Agreement shall renew automatically for
one (1) additional one (1) year term unless the Company or the Executive
provides the other thirty days written notice that the Agreement will not be
renewed.
2. POSITION AND DUTIES.
a. POSITION. During the Employment Period, Executive shall serve as President
and Chief Executive Officer of the Company or in such other position or
positions in the Company and/or in any of its subsidiaries as he and the Company
shall mutually agree. In addition, Executive shall serve in such other position
or positions with the Company and its subsidiaries commensurate with his
position and experience as the Board of Directors of the Company (the "Board")
shall from time to time specify.
<PAGE> 2
CNA Surety Corporation
Employment Agreement -
Page -2-
b. DUTIES. During the Employment Period, Executive shall have the duties,
responsibilities, and obligations as the Board shall from time to time specify.
Executive shall devote his full time to the services required of him hereunder,
except for vacation time and reasonable periods of absence due to sickness,
personal injury or other disability, and shall use his best efforts, judgment,
skill and energy to perform such services in a manner consonant with the duties
of his position and to improve and advance the business and interests of the
Company and its subsidiaries. Nothing contained herein shall preclude Executive
from (i) serving on the board of directors of any business corporation with the
consent of the Board or (ii) serving on the Board of, or working for, any
charitable or community organization.
c. COMPANY BOARD SERVICE. While the Executive and the Company recognize that the
right to elect directors is by law vested in the stockholders of the Company, it
is nevertheless mutually contemplated, subject to such right, that during the
term of Executive's employment under this Agreement the Executive shall be
elected and shall serve as, a member of the Boards of the Company and its
subsidiaries.
d. LOCATION. Subject to normal business travel, Executive shall perform his
service hereunder in, and shall not be required to change his place of residence
from, the Chicago metropolitan area.
3. COMPENSATION.
a. BASE SALARY. During the Employment Period, the Company shall pay Executive a
base salary of $375,000 for the year ending December 31, 2000 and $400,000 for
the year ending December 31, 2001. The Compensation Committee of the Board shall
annually review Executive's base salary in light of competitive practices and
the performance of Executive and the Company, and may, in its discretion,
increase such base salary by an amount it determines to be appropriate. Any such
increase shall not reduce or limit any other obligation of the Company
hereunder. Executive's base salary as set forth above or as may be increased
from time to time and shall not be reduced without the mutual written consent of
the Company and the Executive. Executive's base salary as defined in this
paragraph may be referred to hereinafter as "Base Salary."
b. ANNUAL BONUS. For each calendar year ending during the Employment Period,
Executive may earn an annual bonus based on the achievement of target levels of
performance achieved during the calendar year. During the first quarter of each
year during the term of this Agreement, the Compensation Committee of the Board
in its sole discretion shall determine the targets and the bonus percentage
("Bonus Target") for which the Executive shall be eligible, which bonus
percentages shall range from 0% to 150% of the Executive's Base Salary based
upon the performance targets determined by the Compensation Committee of the
Board. The actual
<PAGE> 3
CNA Surety Corporation
Employment Agreement -
Page -3-
bonus, if any, payable for any such year shall be determined
solely by the Compensation Committee of the Board based upon the performance of
the Company and/or Executive against the targets.
c. LONG-TERM INCENTIVE COMPENSATION. During the term of the Employment Period,
Executive shall participate in all of the Company's existing and future
long-term incentive compensation programs for key executives at a level
commensurate with his position at the Company and consistent with the Company's
then current policies and practices, as determined by the Compensation Committee
of the Board. Long-term Incentive Compensation shall be targeted by the
Compensation Committee of the Board to provide to the Executive awards
equivalent to 50% to 100% of the Executive's Base Salary.
d. STOCK OPTIONS. The Executive shall be eligible for additional grants of stock
options under the terms and conditions of the Stock Option Plan dated February
24, 1997.
4. BENEFITS, PERQUISITES AND EXPENSES.
a. BENEFITS. During the Employment Period, to the extent he is eligible to
participate in any welfare or retirement plans now existing or established
hereafter under their generally applicable provisions, Executive may participate
in (i) each welfare benefit plan which may be sponsored or maintained by the
Company, including, without limitation, each group life, hospitalization,
medical, dental, health, accident or disability insurance or similar plan or
program of the Company, and (ii) each retirement, profit sharing, deferred
compensation or savings plan which may be sponsored or maintained by the
Company. Nothing in this Paragraph 4(a) shall limit the Company's right to amend
or terminate any such plan. Notwithstanding any plan language to the contrary,
Executive shall be eligible for five weeks' paid vacation, for the year
commencing January 1, 1998 and each subsequent year of the Employment Period.
b. BUSINESS EXPENSES. During the Employment Period, the Company shall pay or
reimburse Executive for all reasonable expenses incurred or paid by Executive in
the performance of Executive's duties hereunder, upon presentation of expense
statements or vouchers and such other information as the Company may require and
in accordance with the generally applicable policies and procedures of the
Company as may be amended by it from time to time.
c. ADDITIONAL BENEFITS. In addition to the foregoing, during the Employment
Period, the Executive shall be entitled to reimbursement from the Corporation
for (1) professional tax advice and services and (2) up to $5,000 per year for
financial planning advice and services.
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5. TERMINATION OF EMPLOYMENT OR NON RENEWAL OF AGREEMENT.
a. EARLY TERMINATION OF THE EMPLOYMENT PERIOD. Notwithstanding Paragraph 1(b),
the Employment Period shall end upon the earliest to occur of (i) a termination
of Executive's employment on account of Executive's death or Disability, (ii) a
Termination for Cause, (iii) a Termination Without Cause, (iv) a Termination for
Good Reason or (v) Termination for Change in Control.
b. BENEFITS PAYABLE UPON TERMINATION OR NONRENEWAL. Following the early
termination of the Employment Period pursuant to Paragraph 5(a) or Nonrenewal of
this Agreement pursuant to Paragraph 1(c), Executive (or, in the event of his
death, his surviving spouse, if any, his estate, or such other beneficiary as
the Executive may designate by written notice to the Company) shall be paid
compensation in accordance with the following provisions:
(i) Should the Executive's employment with the Company terminate for any
reason, his Earned Salary and accrued vacation shall be paid through his
last day of employment at the end of the Company's next regular pay period
and Vested Benefits shall be payable in accordance with their terms. In
addition:
(ii) Should the Executive's employment with the Company terminate for Cause
or should the Executive terminate this Agreement without Good Reason, other
than the payments set forth in Paragraph 5(b)(i) above and any entitlement
to any Vested Benefits, the Company shall have no further obligations to
the Executive;
(iii) Should the Executive's employment with the Company terminate Without
Cause, for Good Reason, for Change of Control or because of the non-
renewal of this Agreement, he shall be paid the Severance Benefit,
Additional Benefits, Vested Benefits and Incentive Compensation.
Notwithstanding anything to the contrary in this Agreement, no Severance
Benefit or Incentive Compensation shall be payable if the Executive
violates the terms and covenants of section 6 of this Agreement. Moreover,
Executive agrees that if he violates section 6 of this Agreement he shall
repay forthwith the Company any amount of the Severance Benefit or
Incentive Compensation previously paid pursuant to this Paragraph 5(b)(i).
In addition, should the Executive's employment with the Company terminate
due to a Termination for Change in Control, any stock options Executive
shall have received which are unvested at the time of such termination
shall immediately accelerate and become fully vested and the exercise
period for such options shall be extended to permit the Executive to
exercise such options during the two year period immediately following the
Executive's termination.
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(iv) Should the Executive's employment with Company terminate due to death
or Disability, the Company shall pay the Executive an amount equal to a
pro-rated amount equal to the product of the Bonus Target for the year in
which termination occurs and a fraction the numerator of which is equal to
the number of days in the calendar year of the Executive's termination of
employment which have elapsed as of the date of such termination and the
denominator of which is 365; plus any long-term cash incentive compensation
awards held by the Executive at the date of his termination, which shall be
payable, if at all, based upon actual Company performance results (but
without regard to any individual performance criteria) for the applicable
pro rata portion of performance period.
c. TIMING OF PAYMENTS. The payments referred to in Paragraph 5(b) shall be made
as follows: Earned Salary shall be paid in cash in a single lump sum as soon as
practicable, but in no event more than ten business days, following the end of
the Employment Period. Severance Benefits shall be paid in equal biweekly
installments during the two year period immediately following the Executive's
termination. Incentive Compensation shall be payable at the same time as similar
awards are paid to other executives still actively employed by the Company and
participating in the plans under which the awards are payable. Vested Benefits
shall be payable in accordance with the terms of the plan (including, without
limitation, the extension of the exercise period of options under any stock
option plan) under which such benefits have been awarded or accrued. Additional
Benefits shall be provided or made available at the times specified below as to
each such Additional Benefit.
d. DEFINITIONS. For purposes of sections 5 and 6, capitalized terms have the
following meanings:
"ADDITIONAL BENEFITS" consists of the following rights and benefits:
except as otherwise provided below, Executive (and, to the extent
applicable, his dependents) will be entitled to continue participation in
all of the Company's health benefit plans (the "Health Plans"), until the
second anniversary of Executive's termination of employment (the "End
Date"); provided that Executive's participation in the Company's Health
Plans shall cease on any earlier date that Executive becomes eligible for
comparable benefits from a subsequent employer. To the extent any such
benefits cannot be provided under the terms of the applicable plan, policy
or program, the Company shall provide a comparable benefit under another
plan or from the Company's general assets. Executive's participation in the
Health Plans will be on the same terms and conditions that would have
applied had Executive continued to be employed by the Company through the
End Date. The Company shall deduct the Executive's cost of the
<PAGE> 6
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foregoing benefits from the Executive's Severance Benefit payments at the
same intervals as they were deducted from his Base Salary during the
Employment Period.
"DISABILITY" means "disability" as defined in the Company's Long Term Disability
Plan.
"EARNED SALARY" means any Base Salary earned, but unpaid, for services rendered
to the Company on or prior to the date on which the Employment Period ends
pursuant to Paragraph 5(a) or because of the Nonrenewal of this Agreement
pursuant to Paragraph 1(c).
"INCENTIVE COMPENSATION" consists of the sum of:
(i) a pro-rated amount equal to the product of the average of the actual
performance bonuses paid to the Executive by the Company during the two
calendar years prior to the year in which termination occurs ("Prior
Bonus") and a fraction the numerator of which is equal to the number of
days in the calendar year of Executive's termination of employment which
have elapsed as of the date of such termination and the denominator of
which is 365; plus
(ii) an amount equal to twice the amount of the Prior Bonus; plus
(iii) any long-term cash incentive compensation awards held by Executive at
the date of his termination, which shall be payable, if at all, based upon
actual Company performance results (but without regard to any individual
performance criteria) for the applicable pro rata portion of performance
period.
"SEVERANCE BENEFIT" means two years Base Salary based upon the Executive's Base
Salary on the date the Executive's employment terminates.
"TERMINATION FOR CHANGE IN CONTROL" means a termination of Executive's
employment by the Company for any reason other than a Termination for Cause at
the sole discretion of the Company within one year following the date upon which
(i) Continental Casualty Company and any affiliates no longer are able
collectively to elect a majority of the Board, (ii) a sale of all or
substantially all of the assets of the Company is consummated or (iii) a merger,
consolidation or other business combination involving the Company and an
unaffiliated third party is consummated in which the Company is not the
surviving corporation.
"TERMINATION FOR CAUSE" means a termination of the Executive's employment by
the Company (A) due to conduct of the Executive, which is determined by the
Board, in its sole discretion, to be to: (i) a willful and continued failure to
perform the material duties of his position, (ii) a fraud against the Company or
(iii) a material breach of any provision of this Agreement which
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has had (or is expected to have) a material adverse effect on the business of
the Company or its subsidiaries; or (B) due to the Executive's conviction of a
felony.
"TERMINATION FOR GOOD REASON" means a termination of Executive's employment by
Executive within 90 days following (i) a material diminution in Executive's
positions, duties and responsibilities from those described in Paragraph 2
hereof, (ii) the removal of Executive from, or the failure to re-elect Executive
as a member of, the Board, (iii) a reduction in Executive's annual Base Salary,
(iv) a material reduction in the aggregate value of the retirement, profit
sharing and welfare benefits provided to Executive from those in effect as of
the Commencement Date (other than a reduction which is proportionate to the
reductions applicable to other senior executives pursuant to a cost-saving plan
that includes all senior executives). Notwithstanding the foregoing, a
termination shall not be treated as a Termination for Good Reason (i) if
Executive shall have consented in writing to the occurrence of the event giving
rise to the claim of Termination for Good Reason or (ii) unless Executive first
shall have delivered a written notice to the Company within 30 days of his
having actual knowledge of the occurrence of one of such events stating that he
intends to terminate his employment for Good Reason and specifying the factual
basis for such termination, and such event, if capable of being cured, shall not
have been cured within 30 days of the receipt of such notice.
"TERMINATION WITHOUT CAUSE" means any termination of Executive's employment by
the Company other than a Termination for Cause.
"VESTED BENEFITS" means amounts which are vested or which Executive is
otherwise entitled to receive under the terms of or in accordance with any plan
maintained by the Company at or subsequent to the date of his termination
without regard to the performance by Executive of further services or the
resolution of a contingency.
e. FULL DISCHARGE OF COMPANY OBLIGATIONS. In consideration of receiving any
payments or benefits under Section 5 of this Agreement, the Executive agrees to
sign a release in the form attached to this Agreement as Exhibit A, as a
condition precedent to receiving them. The amounts payable to Executive pursuant
to this Section 5 following termination of his employment (including amounts
payable with respect to Vested Benefits) shall be in full and complete
satisfaction of Executive's rights under this Agreement and any other claims he
may have in respect of his employment by the Company or any of its subsidiaries.
Such amounts shall constitute liquidated damages with respect to any and all
such rights and claims and, upon Executive's receipt of such amounts, the
Company shall be released and discharged from any and all liability to Executive
in connection with this Agreement or otherwise in connection with Executive's
employment with the Company and its subsidiaries. Nothing in this Paragraph 5(e)
shall be construed to release the Company from any obligation to indemnify
Executive and hold Executive harmless from and against any claim, loss or cause
of action arising from or out of
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Executive's performance as an officer, director or employee of the Company or
any of its subsidiaries or in any other capacity, including any fiduciary
capacity, in which Executive served at the request of the Company to the maximum
extent permitted by applicable law and the certificate of incorporation and
by-laws of the Company.
f. MAKE-WHOLE PAYMENTS.
(i) Notwithstanding any provisions to the contrary in this Agreement, if
any payment made pursuant to this Section 5 which is in the nature of
compensation payable to the Executive by the Company (or any affiliate
thereof) under this Agreement or otherwise (a "Payment") would, if paid,
constitute a "parachute payment" under Section 280G of the Internal Revenue
Code of 1986, as amended ("the Code") or is subject to any tax under
Section 4999 of the Code, or any similar federal, state, local, or other
law (an "Excise Tax"), then the Company shall pay to the Executive an
additional amount (the "Make-Whole Amount") which, after payment of all
income, payroll, and excise taxes thereon is equal to the Excise Tax. For
purposes of determining the Make-Whole Amount, the Executive shall be
deemed to be taxed at the highest marginal rate under all applicable local,
state, and federal income tax laws for the year in which the Make-Whole
Amount is paid. The Make-Whole Amount payable with respect to an Excise Tax
shall be paid by the Company coincident with the receipt by the Executive
of the Payment with respect to which such Excise Tax relates.
(ii) All calculations under Section 5(f)(i) above shall be made initially
by the Company and the Company shall provide prompt written notice thereof
to the Executive to enable the Executive to timely file all applicable tax
returns. Upon request of the Executive, the Company shall provide the
Executive with sufficient tax and compensation data to enable the Executive
or his tax advisor to independently make the calculations described in
Section 5(f)(i) and the Company shall reimburse the Executive for
reasonable fees and expenses incurred for any such verification. If the
Executive gives written notice to the Company of any objection to the
results of the Company's calculations within 60 days of the Executive's
receipt of written notice thereof, the dispute shall be referred for
determination to tax counsel selected by the independent auditors of the
Company ("Tax Counsel"). The Company shall pay all fees and expenses of
such Tax Counsel. Pending such determination by Tax Counsel, the Company
shall pay the Executive the Make-Whole Amount as determined by it in good
faith. The determination by Tax Counsel shall be conclusive and binding
upon all parties unless the Internal Revenue Service, a court of competent
jurisdiction, or such other duly empowered governmental body or agency (a
"Tax Authority") determines that the Executive owes a greater or lesser
amount of Excise Tax with respect to any Payment than the amount determined
by Tax Counsel. At the request of the Company, the Executive shall take all
reasonable steps to appeal any
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adverse determination by a Tax Authority with respect to any Excise Tax;
provided that the Company advances to the Executive all reasonable legal
fees, costs, and other expenses incurred in such appeal. Should a Tax
Authority finally determine that an additional Excise Tax is owed, then the
Company shall pay an additional Make-Whole Amount to the Executive in a
manner consistent with this Section 5(f) with respect to any additional
Excise Tax and any assessed interest, fines, or penalties. If any Excise
Tax as calculated by the Company or Tax Counsel, as the case may be, is
finally determined by a Tax Authority to exceed the amount required to be
paid under applicable law, then the Executive shall repay such excess to
the Company within 30 days of such determination: provided that such
repayment shall be reduced by the amount of any taxes paid by the Executive
on such excess which is not offset by the tax benefit resulting from the
reduced Excess Tax.
6. NONCOMPETITION AND CONFIDENTIALITY.
By and in consideration of the salary, benefits and other consideration,
contained in this Agreement, the adequacy and receipt of which is hereby
acknowledged, the Executive agrees that:
a. NONCOMPETITION. During the Employment Period and during the two year period
(the "Restriction Period") following any termination or Nonrenewal of the
Executive's employment , the Executive shall not whether as a principal,
partner, employee, agent, consultant, shareholder (other than as a holder, or a
member of a group which is a holder, of not in excess of 1% of the outstanding
voting shares of any publicly traded company) or in any other relationship or
capacity: (i) become associated with any entity that is actively engaged or
takes any steps to plan to be engaged in any geographic area in the surety
business or in any other business which is in competition with the business in
which the Company is engaged or to the Executive's knowledge is actively
considering becoming engaged, (ii) contact, call upon, solicit business from,
sell, or render services to, any customer or licensed agent of the Company with
respect to any service or product identical or similar to any services or
products provided or sold by the Company, including but not limited to current
products or those under development, distribution strategy, development of
computer software and administrative systems for administration.
b. CONFIDENTIALITY. The Executive acknowledges and agrees that all records
(whether written or recorded electronically) including but not limited to agent
and client lists, files, reports, notes, internal memoranda and manuals relating
to the Company's business; business plans, business processing techniques,
systems and methods; sales processes, sales and training manuals; underwriting
procedures and manuals; budgets; financial statements; compilations; or
summaries of the foregoing, by whomever prepared, and copies or reproductions of
the foregoing, relating to the Company's operations or activities, or to the
operations or activities of any of the Company's
<PAGE> 10
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customers, agents, suppliers, vendors, or subsidiary companies thereof, made or
received by the Executive during the course of his employment with the Company
have been, are and shall remain the sole and exclusive property of the Company
and were held by the Executive during his employment only as a trustee for the
Company which, at all times, retained ownership and control of said records.
c. NON-SOLICITATION OF EMPLOYEES. During the Employment Period and the two year
period following any termination or Nonrenewal of Executive's employment,
Executive shall not directly or indirectly solicit, nor shall any entity with
which the Executive is associated encourage or induce any employee of the
Company or any of its subsidiaries to terminate employment with it, and shall
not directly or indirectly, either individually or as owner, agent, employee,
consultant or otherwise, employ or offer employment to any person who is or was
employed by the Company or a subsidiary thereof unless such person shall have
ceased to be employed by it for a period of at least six months.
d. COMPANY PROPERTY. Except as expressly provided herein, promptly following
Executive's termination of employment, Executive shall return to the Company all
property of the Company, and all copies thereof in Executive's possession or
under his control.
e. INJUNCTIVE RELIEF AND OTHER REMEDIES WITH RESPECT TO COVENANTS. Executive
acknowledges and agrees that the covenants and obligations of Executive with
respect to noncompetition, nonsolicitation, confidentiality and Company
property, relate to special, unique and extraordinary matters and that a
violation of any of the terms of such covenants and obligations will cause the
Company irreparable injury for which adequate remedies are not available at law.
Executive acknowledges and agrees that the geographic scope of his employment
with the Company is national, and that the national geographic and the two year
restrictions placed upon him in Paragraph 6 of this Agreement are reasonable and
necessary to the preservation and vitality of the Company's business,
reputation, and good will due to the nature of the Company's business, and given
his knowledge and expertise within the insurance industry and the consideration
provided in this Agreement, that he will be able to earn a satisfactory
livelihood or otherwise provide for his financial security without violating
such restrictions.
Therefore, Executive agrees that the Company shall (i) be entitled to, on both
an interim and final basis, an injunction, restraining order or such other
equitable relief (without the requirement to post bond) restraining Executive
from committing any violation of the covenants and obligations contained in this
section 6 and (ii) have no further obligation to make any payments to Executive
hereunder following any material violation of the covenants and obligations
contained in this section 6. These remedies are cumulative and are in addition
to any other rights and remedies the Company may have at law or in equity. In
connection with the foregoing provisions of this section 6, Executive represents
that his economic means and circumstances are such that such provisions will not
prevent him from providing for himself and his family on a basis satisfactory to
him.
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The Executive and Company agree that section 6 of this Agreement is not subject
to the provisions of Paragraph 7(b). The Executive agrees that in the event he
violates said section 6 he will pay all costs and expenses with respect to the
prosecution or defense of any claim or suit brought by or against the Company
including, but not limited to, reasonable attorneys' fees. The Executive further
agrees that in the event he in any way violates the provisions set forth in
section 6, the Company would suffer irreparable harm for which both preliminary
and final injunctive relief would be an appropriate remedy in addition to such
other relief to which the Company may also be entitled.
f. For purposes of Section 6 of this agreement "the Company" shall include its
subsidiaries.
g. Notwithstanding anything herein to the contrary, should the Executive
terminate the employment period without Good Reason or should the Company
terminate it for Cause, the two year period referred to at various points in
this paragraph shall be reduced to one year.
7. MISCELLANEOUS.
a. SURVIVAL. Paragraphs 5 (relating to early termination), 6 (relating to
noncompetition, nonsolicitation and confidentiality, 7(b) (relating to
arbitration), 7(c) (relating to legal fees) and 7(o) (relating to governing law)
shall survive the termination hereof.
b. ARBITRATION. Except for disputes arising out of or relating to the provisions
of section 6, any dispute arising out of or relating to this Agreement,
including each and every aspect of the relationship of the Executive and the
Company, shall be resolved by binding arbitration. The arbitrator shall be a
retired federal judge. If the parties cannot agree on an acceptable arbitrator,
the dispute shall be heard by a panel of three retired judges, one appointed by
each of the parties and the third appointed by the other two arbitrators. The
arbitrator shall hear and decide the dispute not by compromise but according to
law as if sitting in court applying the rules of evidence. The arbitrator's
decision shall be in writing and shall set forth the facts and law supporting
such decision. The arbitration shall be held in Chicago, Illinois and except as
otherwise provided in this Paragraph, shall be conducted in accordance with the
Voluntary Labor Arbitration Rules of the American Arbitration Association then
in effect at the time of the arbitration.
c. BINDING EFFECT. This Agreement shall be binding on, and shall inure to the
benefit of, the Company and any person or entity that succeeds to the interest
of the Company (regardless of whether such succession does or does not occur by
operation of law) by reason of the sale of all or a portion of the Company's
stock, a merger, consolidation or reorganization involving the Company or,
unless the Company otherwise elects in writing, a sale of the assets of the
business of the Company (or portion thereof) in which Executive performs a
majority of his services. This Agreement shall also inure to the Benefit of
Executive's heirs, executors, administrators and legal representatives.
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d. ASSIGNMENT. Except as provided under Paragraph 7(c), neither this Agreement
nor any of the rights or obligations hereunder shall be assigned or delegated by
any party hereto without the prior written consent of the other party.
e. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the
parties hereto with respect to the matters referred to herein. No other
agreement relating to the terms of Executive's employment by the Company, oral
or otherwise, shall be binding between the parties unless it is in writing and
signed by the party against whom enforcement is sought. There are no promises,
representations, inducements, or statements between the parties other than those
that are expressly contained herein. Executive acknowledges that he is entering
into this Agreement of his own free will and accord, and with no duress, that he
has read this Agreement and that he understands it and its legal consequences.
f. SEVERABILITY; REFORMATION. In the event that one or more of the provisions of
this Agreement shall become invalid, illegal or unenforceable in any respect,
the validity, legality and enforceability of the remaining provisions contained
herein shall not be affected thereby. In the event that any of the provisions of
any of Paragraphs 6(a), (b) or (c) is not enforceable in accordance with its
terms, Executive and the Company agree that such Paragraph shall be reformed to
make such Paragraph enforceable in a manner which provides the Company the
maximum rights permitted at law.
g. WAIVER. Waiver by any party hereto of any breach or default by the other
party of any of the terms of this Agreement shall not operate as a waiver of any
other breach or default, whether similar to or different from the breach or
default waived. No waiver of any provision of this Agreement shall be implied
from any course of dealing between the parties hereto or from any failure by
either party hereto to assert its or his rights hereunder on any occasion or
series of occasions.
h. NOTICES. Any notice required or desired to be delivered under this Agreement
shall be in writing and shall be delivered personally, by courier service, by
registered mail, return receipt requested, or by telecopy and shall be effective
upon actual receipt by the party to which such notice shall be directed, and
shall be addressed as follows (or to such other address as the party entitled to
notice shall hereafter designate in accordance with the terms hereof):
If to the Company:
CNA Surety Corporation
CNA Plaza
Chicago, Illinois 60685
Attention: General Counsel
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If to Executive:
The home address of Executive noted on the records of the
Company.
i. AMENDMENTS. This Agreement may not be altered, modified or amended except by
a written instrument signed by an authorized representative of the Company and
by the Executive.
j. HEADINGS. Headings to Paragraphs in this Agreement are for the convenience of
the parties only and are not intended to be part of or to affect the meaning or
interpretation hereof.
k. COUNTERPARTS. This Agreement may be executed in counterparts, each of which
shall be deemed an original but all of which together shall constitute one and
the same instrument.
l. WITHHOLDING. Any payments provided for herein shall subject to withholding
pursuant to applicable Federal, State, and local law then in effect.
m. GOVERNING LAW. This Agreement shall be governed by the laws of the State of
Delaware, without reference to principles of conflicts or choice of law under
which the law of any other jurisdiction would apply.
n. SOURCE OF PAYMENT. The payments and benefits provided for herein other than
stock options may, at the option of the Company, be provided by one or more of
its subsidiaries, rather than the Company, itself.
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IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its
duly authorized officer and the Executive has hereunto set his hand as of the
day and year first above written.
CNA SURETY CORPORATION
By: By:
------------------------------- -------------------------------
Thomas A. Pottle John S. Heneghan
Chief Operating Officer Chief Financial Officer
-------------------------------
Mark C. Vonnahme
<PAGE> 1
EXHIBIT 10(10)
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of ______________, 1999, by and between CNA
SURETY CORPORATION a Delaware corporation ("the Company"), and Robert E. Ayo
("the Executive").
WITNESSETH:
WHEREAS, the Company wishes to continue to employ the Executive and the
Company and the Executive desires to enter into an agreement embodying the terms
of such employment (the "Agreement"); and
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the Company and the Executive hereby agree as follows:
1. EMPLOYMENT.
a. AGREEMENT TO EMPLOY. Upon the terms and subject to the conditions of
this Agreement, the Company hereby agrees to continue to employ
Executive and Executive hereby agrees to employment by the Company.
b. TERM OF EMPLOYMENT. Except as provided in Paragraph 5(a), the Company
shall employ Executive for the period commencing on January 1, 2000
(the "Commencement Date") and ending on December 31, 2001. The period
during which Executive is employed pursuant to this Agreement and any
extensions set forth in Paragraph 1(c) of this Agreement shall be
referred to as the "Employment Period."
c. RENEWAL. Upon expiration of the original term of this Agreement set
forth in Paragraph 1(b) of this Agreement, this Agreement shall renew
automatically for one (1) additional one (1) year term unless the
Company or the Executive provides the other thirty days written
notice that the Agreement will not be renewed.
2. POSITION AND DUTIES.
a. POSITION. During the Employment Period, Executive shall serve as
Senior Vice President, Contract Surety of the Company or in such
other position or positions in the Company and/or in any of its
subsidiaries as he and the Company shall mutually agree. In addition,
Executive shall serve in such other position or positions with the
Company and its subsidiaries commensurate with his position and
experience as the Board of Directors of the Company (the "Board")
shall from time to time specify.
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b. DUTIES. During the Employment Period, Executive shall have the
duties, responsibilities, and obligations as the Board shall from
time to time specify. Executive shall devote his full time to the
services required of him hereunder, except for vacation time and
reasonable periods of absence due to sickness, personal injury or
other disability, and shall use his best efforts, judgment, skill and
energy to perform such services in a manner consonant with the duties
of his position and to improve and advance the business and interests
of the Company and its subsidiaries. Nothing contained herein shall
preclude Executive from (i) serving on the board of directors of any
business corporation with the consent of the Board or (ii) serving on
the Board of, or working for, any charitable or community
organization.
c. LOCATION. Subject to normal business travel, Executive shall perform
his service hereunder in, and shall not be required to change his
place of residence from, the Chicago metropolitan area.
3. COMPENSATION.
a. BASE SALARY. During the Employment Period, the Company shall pay
Executive an annual base salary of $250,000 per year, payable in
bi-weekly installments. The Compensation Committee of the Board shall
annually review Executive's base salary in light of competitive
practices and the performance of Executive and the Company, and may,
in its discretion, increase such base salary by an amount it
determines to be appropriate. Any such increase shall not reduce or
limit any other obligation of the Company hereunder. Executive's base
salary as set forth above or as may be increased from time to time
and shall not be reduced without the mutual written consent of the
Company and the Executive. Executive's base salary as defined in this
paragraph may be referred to hereinafter as "Base Salary."
b. ANNUAL BONUS. For each calendar year ending during the Employment
Period, Executive may earn an annual bonus based on the achievement
of target levels of performance achieved during the calendar year.
During the first quarter of each year during the term of this
Agreement, the Compensation Committee of the Board in its sole
discretion shall determine the targets and the bonus percentage
("Bonus Target") for which the Executive shall be eligible, which
bonus percentages shall range from 0% to 80% of the Executive's Base
Salary based upon the performance
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targets determined by the Compensation Committee of the Board. The
actual bonus, if any, payable for any such year shall be determined
solely by the Compensation Committee of the Board based upon the
performance of the Company and/or Executive against the targets with
a 40% target for "good performance."
c. LONG-TERM INCENTIVE COMPENSATION. During the term of the Employment
Period, Executive shall participate in all of the Company's existing
and future long-term incentive compensation programs for key
executives at a level commensurate with his position at the Company
and consistent with the Company's then current policies and
practices, as determined by the Compensation Committee of the Board.
Long-term Incentive Compensation shall be determined by the
Compensation Committee of the Board in accordance with the terms of
the Company's Long-Term Incentive Compensation Plan.
d. STOCK OPTIONS. The Executive shall be eligible for additional grants
of stock options under the terms and conditions of the Stock Option
Plan dated February 24, 1997.
4. BENEFITS, PERQUISITES AND EXPENSES.
a. BENEFITS. During the Employment Period, to the extent he is eligible
to participate in any welfare or retirement plans now existing or
established hereafter under their generally applicable provisions,
Executive may participate in (i) each welfare benefit plan which may
be sponsored or maintained by the Company, including, without
limitation, each group life, hospitalization, medical, dental,
health, accident or disability insurance or similar plan or program
of the Company, and (ii) each retirement, profit sharing, deferred
compensation or savings plan which may be sponsored or maintained by
the Company. Nothing in this Paragraph 4(a) shall limit the Company's
right to amend or terminate any such plan. Notwithstanding any plan
language to the contrary, Executive shall be eligible for four (4)
weeks' paid vacation, for the year commencing January 1, 2000 and
each subsequent year of the Employment Period.
b. BUSINESS EXPENSES. During the Employment Period, the Company shall
pay or reimburse Executive for all reasonable expenses incurred or
paid by Executive in the performance of Executive's duties hereunder,
upon
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presentation of expense statements or vouchers and such other
information as the Company may require and in accordance with the
generally applicable policies and procedures of the Company as may be
amended by it from time to time.
c. ADDITIONAL BENEFITS. In addition to the foregoing, during the
Employment Period, the Executive shall be entitled to reimbursement
from the Corporation for (1) professional tax advice and services and
(2) up to $5,000 per year for financial planning advice and services.
5. TERMINATION OF EMPLOYMENT OR NON RENEWAL OF AGREEMENT.
a. EARLY TERMINATION OF THE EMPLOYMENT PERIOD. Notwithstanding Paragraph
1(b), the Employment Period shall end upon the earliest to occur of
(i) a termination of Executive's employment on account of Executive's
death or Disability, (ii) a Termination for Cause, (iii) a
Termination Without Cause, (iv) a Termination for Good Reason or (v)
Termination for Change in Control.
b. BENEFITS PAYABLE UPON TERMINATION OR NONRENEWAL. Following the early
termination of the Employment Period pursuant to Paragraph 5(a) or
Nonrenewal of this Agreement pursuant to Paragraph 1(c), Executive
(or, in the event of his death, his surviving spouse, if any, his
estate, or such other beneficiary as the Executive may designate by
written notice to the Company) shall be paid compensation in
accordance with the following provisions:
(i) Should the Executive's employment with the Company terminate
for any reason, his Earned Salary and accrued vacation shall
be paid through his last day of employment at the end of the
Company's next regular pay period and Vested Benefits shall
be payable in accordance with their terms. In addition:
(ii) Should the Executive's employment with the Company terminate
for Cause or should the Executive terminate this Agreement
without Good Reason, other than the payments set forth in
Paragraph 5(b)(i) above and any entitlement to
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any Vested Benefits, the Company shall have no further
obligations to the Executive;
(iii) Should the Executive's employment with the Company
terminate Without Cause, for Good Reason, for Change of
Control or because of the non- renewal of this Agreement, he
shall be paid the Severance Benefit, Additional Benefits,
Vested Benefits and Incentive Compensation. Notwithstanding
anything to the contrary in this Agreement, no Severance
Benefit or Incentive Compensation shall be payable if the
Executive violates the terms and covenants of section 6 of
this Agreement. Moreover, Executive agrees that if he
violates section 6 of this Agreement he shall repay
forthwith the Company any amount of the Severance Benefit or
Incentive Compensation previously paid pursuant to this
Paragraph 5(b)(i). In addition, should the Executive's
employment with the Company terminate due to a Termination
for Change in Control, any stock options Executive shall
have received which are unvested at the time of such
termination shall immediately accelerate and become fully
vested and the exercise period for such options shall be
extended to permit the Executive to exercise such options
during the two year period immediately following the
Executive's termination.
(iv) Should the Executive's employment with Company terminate due
to death or Disability, the Company shall pay the Executive
an amount equal to a pro-rated amount equal to the product
of the Bonus Target for the year in which termination occurs
and a fraction the numerator of which is equal to the number
of days in the calendar year of the Executive's termination
of employment which have elapsed as of the date of such
termination and the denominator of which is 365; plus any
long-term cash Incentive Compensation awards held by the
Executive at the date of his termination, which shall be
payable, if at all, based upon actual Company performance
results (but without regard to any individual performance
criteria) for the applicable pro rata portion of performance
period.
C. TIMING OF PAYMENTS. The payments referred to in Paragraph 5(b) shall
be made as follows: Earned Salary shall be paid in cash in a single
lump sum as soon as practicable, but in no event more than ten
business days,
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following the end of the Employment Period. Severance
Benefits shall be paid in equal biweekly installments during the two
year period immediately following the Executive's termination.
Incentive Compensation shall be payable at the same time as similar
awards are paid to other executives still actively employed by the
Company and participating in the plans under which the awards are
payable. Vested Benefits shall be payable in accordance with the
terms of the plan (including, without limitation, the extension of
the exercise period of options under any stock option plan) under
which such benefits have been awarded or accrued. Additional Benefits
shall be provided or made available at the times specified below as
to each such Additional Benefit.
D. DEFINITIONS. For purposes of sections 5 and 6, capitalized terms have
the following meanings:
"ADDITIONAL BENEFITS" consists of the following rights and benefits:
except as otherwise provided below, Executive (and, to the extent
applicable, his dependents) will be entitled to continue participation in
all of the Company's health benefit plans (the "Health Plans"), until the
second anniversary of Executive's termination of employment (the "End
Date"); provided that Executive's participation in the Company's Health
Plans shall cease on any earlier date that Executive becomes eligible for
comparable benefits from a subsequent employer. To the extent any such
benefits cannot be provided under the terms of the applicable plan, policy
or program, the Company shall provide a comparable benefit under another
plan or from the Company's general assets. Executive's participation in the
Health Plans will be on the same terms and conditions that would have
applied had Executive continued to be employed by the Company through the
End Date. The Company shall deduct the Executive's cost of the foregoing
benefits from the Executive's Severance Benefit payments at the same
intervals as they were deducted from his Base Salary during the Employment
Period.
"DISABILITY" means "disability" as defined in the Company's Long Term
Disability Plan.
"EARNED SALARY" means any Base Salary earned, but unpaid, for services
rendered to the Company on or prior to the date on which the Employment Period
ends pursuant to Paragraph 5(a) or because of the Nonrenewal of this Agreement
pursuant to Paragraph 1(c).
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"INCENTIVE COMPENSATION" consists of the sum of:
(i) a pro-rated amount equal to the product of the average of
the actual performance bonuses paid to the Executive by the
Company during the two calendar years prior to the year in
which termination occurs ("Prior Bonus") and a fraction the
numerator of which is equal to the number of days in the
calendar year of Executive's termination of employment which
have elapsed as of the date of such termination and the
denominator of which is 365; plus
(ii) an amount equal to twice the amount of the Prior Bonus; plus
(iii) any long-term cash incentive compensation awards held by
Executive at the date of his termination, which shall be
payable, if at all, based upon actual Company performance
results (but without regard to any individual performance
criteria) for the applicable pro rata portion of performance
period.
"SEVERANCE BENEFIT" means two years Base Salary based upon the Executive's
Base Salary on the date the Executive's employment terminates.
"TERMINATION FOR CHANGE IN CONTROL" means a termination of Executive's
employment by the Company for any reason other than a Termination for Cause at
the sole discretion of the Company within one year following the date upon which
(i) Continental Casualty Company and any affiliates no longer are able
collectively to elect a majority of the Board, (ii) a sale of all or
substantially all of the assets of the Company is consummated or (iii) a merger,
consolidation or other business combination involving the Company and an
unaffiliated third party is consummated in which the Company is not the
surviving corporation.
"TERMINATION FOR CAUSE" means a termination of the Executive's employment
by the Company (A) due to conduct of the Executive, which is determined by the
Board, in its sole discretion, to be to: (i) a willful and continued failure to
perform the material duties of his position, (ii) a fraud against the Company or
(iii) a material breach of any provision of this Agreement which has had (or is
expected to have) a material adverse effect on the business of the Company or
its subsidiaries; or (B) due to the Executive's conviction of a felony.
"TERMINATION FOR GOOD REASON" means a termination of Executive's employment
by Executive within 90 days following (i) a material diminution in Executive's
positions, duties and responsibilities from those described in Paragraph 2
hereof, (ii) the removal of Executive from, or the failure to re-elect Executive
as a member of, the Board, (iii) a reduction in Executive's
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annual Base Salary, (iv) a material reduction in the aggregate value of the
retirement, profit sharing and welfare benefits provided to Executive from those
in effect as of the Commencement Date (other than a reduction which is
proportionate to the reductions applicable to other senior executives pursuant
to a cost-saving plan that includes all senior executives). Notwithstanding the
foregoing, a termination shall not be treated as a Termination for Good Reason
(i) if Executive shall have consented in writing to the occurrence of the event
giving rise to the claim of Termination for Good Reason or (ii) unless Executive
first shall have delivered a written notice to the Company within 30 days of his
having actual knowledge of the occurrence of one of such events stating that he
intends to terminate his employment for Good Reason and specifying the factual
basis for such termination, and such event, if capable of being cured, shall not
have been cured within 30 days of the receipt of such notice.
"TERMINATION WITHOUT CAUSE" means any termination of Executive's employment
by the Company other than a Termination for Cause.
"VESTED BENEFITS" means amounts which are vested or which Executive is
otherwise entitled to receive under the terms of or in accordance with any plan
maintained by the Company at or subsequent to the date of his termination
without regard to the performance by Executive of further services or the
resolution of a contingency.
e. FULL DISCHARGE OF COMPANY OBLIGATIONS. In consideration of receiving
any payments or benefits under Section 5 of this Agreement, the
Executive agrees to sign a release in the form attached to this
Agreement as Exhibit A, as a condition precedent to receiving them.
The amounts payable to Executive pursuant to this Section 5 following
termination of his employment (including amounts payable with respect
to Vested Benefits) shall be in full and complete satisfaction of
Executive's rights under this Agreement and any other claims he may
have in respect of his employment by the Company or any of its
subsidiaries. Such amounts shall constitute liquidated damages with
respect to any and all such rights and claims and, upon Executive's
receipt of such amounts, the Company shall be released and discharged
from any and all liability to Executive in connection with this
Agreement or otherwise in connection with Executive's employment with
the Company and its subsidiaries. Nothing in this Paragraph 5(e)
shall be construed to release the Company from any obligation to
indemnify Executive and hold Executive harmless from and against any
claim, loss or cause of action arising from or out of Executive's
performance as an officer, director or employee of the Company or any
of its subsidiaries or in any other capacity, including any fiduciary
capacity, in which Executive served at the request of the
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Company to the maximum extent permitted by applicable law and the
certificate of incorporation and by-laws of the Company.
6. NONCOMPETITION AND CONFIDENTIALITY.
By and in consideration of the salary, benefits and other consideration,
contained in this Agreement, the adequacy and receipt of which is hereby
acknowledged, the Executive agrees that:
a. NONCOMPETITION. During the Employment Period and during the two year
period (the "Restriction Period") following any termination or
Nonrenewal of the Executive's employment , the Executive shall not
whether as a principal, partner, employee, agent, consultant,
shareholder (other than as a holder, or a member of a group which is
a holder, of not in excess of 1% of the outstanding voting shares of
any publicly traded company) or in any other relationship or
capacity: (i) become associated with any entity that is actively
engaged or takes any steps to plan to be engaged in any geographic
area in the surety business or in any other business which is in
competition with the business in which the Company is engaged or to
the Executive's knowledge is actively considering becoming engaged,
(ii) contact, call upon, solicit business from, sell, or render
services to, any customer or licensed agent of the Company with
respect to any service or product identical or similar to any
services or products provided or sold by the Company, including but
not limited to current products or those under development,
distribution strategy, development of computer software and
administrative systems for administration.
b. CONFIDENTIALITY. The Executive acknowledges and agrees that all
records (whether written or recorded electronically) including but
not limited to agent and client lists, files, reports, notes,
internal memoranda and manuals relating to the Company's business;
business plans, business processing techniques, systems and methods;
sales processes, sales and training manuals; underwriting procedures
and manuals; budgets; financial statements; compilations; or
summaries of the foregoing, by whomever prepared, and copies or
reproductions of the foregoing, relating to the Company's operations
or activities, or to the operations or activities of any of the
Company's customers, agents, suppliers, vendors, or subsidiary
companies thereof, made or received by the Executive during the
course of his employment with the Company have been, are and shall
remain the sole and exclusive property of the Company and were held
by the Executive during his
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employment only as a trustee for the Company which, at all times,
retained ownership and control of said records.
c. NON-SOLICITATION OF EMPLOYEES. During the Employment Period and the
one year period following any termination or Nonrenewal of
Executive's employment, Executive shall not directly or indirectly
solicit, nor shall any entity with which the Executive is associated
encourage or induce any employee of the Company or any of its
subsidiaries to terminate employment with it, and shall not directly
or indirectly, either individually or as owner, agent, employee,
consultant or otherwise, employ or offer employment to any person who
is or was employed by the Company or a subsidiary thereof unless such
person shall have ceased to be employed by it for a period of at
least six months.
d. COMPANY PROPERTY. Except as expressly provided herein, promptly
following Executive's termination of employment, Executive shall
return to the Company all property of the Company, and all copies
thereof in Executive's possession or under his control.
e. INJUNCTIVE RELIEF AND OTHER REMEDIES WITH RESPECT TO COVENANTS.
Executive acknowledges and agrees that the covenants and obligations
of Executive with respect to noncompetition, nonsolicitation,
confidentiality and Company property, relate to special, unique and
extraordinary matters and that a violation of any of the terms of
such covenants and obligations will cause the Company irreparable
injury for which adequate remedies are not available at law.
Executive acknowledges and agrees that the geographic scope of his
employment with the Company is national, and that the national
geographic and the two year restrictions placed upon him in Paragraph
6 of this Agreement are reasonable and necessary to the preservation
and vitality of the Company's business, reputation, and good will due
to the nature of the Company's business, and given his knowledge and
expertise within the insurance industry and the consideration
provided in this Agreement, that he will be able to earn a
satisfactory livelihood or otherwise provide for his financial
security without violating such restrictions.
Therefore, Executive agrees that the Company shall (i) be entitled to, on
both an interim and final basis, an injunction, restraining order or such other
equitable relief (without the requirement to post bond) restraining Executive
from committing any violation of the covenants and obligations contained in this
section 6 and (ii) have no further obligation to make any payments to Executive
hereunder following any material violation of the covenants and obligations
contained in this section
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6. These remedies are cumulative and are in addition to any other rights and
remedies the Company may have at law or in equity. In connection with the
foregoing provisions of this section 6, Executive represents that his economic
means and circumstances are such that such provisions will not prevent him from
providing for himself and his family on a basis satisfactory to him.
The Executive and Company agree that section 6 of this Agreement is not
subject to the provisions of Paragraph 7(b). The Executive agrees that in the
event he violates said section 6 he will pay all costs and expenses with respect
to the prosecution or defense of any claim or suit brought by or against the
Company including, but not limited to, reasonable attorneys' fees. The Executive
further agrees that in the event he in any way violates the provisions set forth
in section 6, the Company would suffer irreparable harm for which both
preliminary and final injunctive relief would be an appropriate remedy in
addition to such other relief to which the Company may also be entitled.
f. For purposes of Section 6 of this agreement "the Company" shall
include its subsidiaries.
g. Notwithstanding anything herein to the contrary, should the Executive
terminate the employment period without Good Reason or should the
Company terminate it for Cause, the two year period referred to at
various points in this Section 6 shall be reduced to one year.
7. MISCELLANEOUS.
a. SURVIVAL. Paragraphs 5 (relating to early termination), 6 (relating
to noncompetition, nonsolicitation and confidentiality, 7(b)
(relating to arbitration), 7(c) (relating to legal fees) and 7(o)
(relating to governing law) shall survive the termination hereof.
b. ARBITRATION. Except for disputes arising out of or relating to the
provisions of Section 6, any dispute arising out of or relating to
this Agreement, including each and every aspect of the relationship
of the Executive and the Company, shall be resolved by binding
arbitration. The arbitrator shall be a retired federal judge. If the
parties cannot agree on an acceptable arbitrator, the dispute shall
be heard by a panel of three retired judges, one appointed by each of
the parties and the third appointed by the other two arbitrators. The
arbitrator shall hear and decide the dispute not by compromise but
according to law as if sitting in court applying the rules of
evidence. The arbitrator's decision shall be in writing and shall set
forth the facts and law supporting such decision. The arbitration
shall be held in Chicago, Illinois and except as otherwise provided
in this Paragraph, shall be conducted in accordance with
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the Voluntary Labor Arbitration Rules of the American Arbitration
Association then in effect at the time of the arbitration.
c. BINDING EFFECT. This Agreement shall be binding on, and shall inure
to the benefit of, the Company and any person or entity that succeeds
to the interest of the Company (regardless of whether such succession
does or does not occur by operation of law) by reason of the sale of
all or a portion of the Company's stock, a merger, consolidation or
reorganization involving the Company or, unless the Company otherwise
elects in writing, a sale of the assets of the business of the
Company (or portion thereof) in which Executive performs a majority
of his services. This Agreement shall also inure to the Benefit of
Executive's heirs, executors, administrators and legal
representatives.
d. ASSIGNMENT. Except as provided under Paragraph 7(c), neither this
Agreement nor any of the rights or obligations hereunder shall be
assigned or delegated by any party hereto without the prior written
consent of the other party.
e. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto with respect to the matters referred to
herein. No other agreement relating to the terms of Executive's
employment by the Company, oral or otherwise, shall be binding
between the parties unless it is in writing and signed by the party
against whom enforcement is sought. There are no promises,
representations, inducements, or statements between the parties other
than those that are expressly contained herein. Executive
acknowledges that he is entering into this Agreement of his own free
will and accord, and with no duress, that he has read this Agreement
and that he understands it and its legal consequences.
f. SEVERABILITY; REFORMATION. In the event that one or more of the
provisions of this Agreement shall become invalid, illegal or
unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein shall not
be affected thereby. In the event that any of the provisions of any
of Paragraphs 6(a), (b) or (c) is not enforceable in accordance with
its terms, Executive and the Company agree that such Paragraph shall
be reformed to make such Paragraph enforceable in a manner which
provides the Company the maximum rights permitted at law.
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g. WAIVER. Waiver by any party hereto of any breach or default by the
other party of any of the terms of this Agreement shall not operate
as a waiver of any other breach or default, whether similar to or
different from the breach or default waived. No waiver of any
provision of this Agreement shall be implied from any course of
dealing between the parties hereto or from any failure by either
party hereto to assert its or his rights hereunder on any occasion or
series of occasions.
h. NOTICES. Any notice required or desired to be delivered under this
Agreement shall be in writing and shall be delivered personally, by
courier service, by registered mail, return receipt requested, or by
telecopy and shall be effective upon actual receipt by the party to
which such notice shall be directed, and shall be addressed as
follows (or to such other address as the party entitled to notice
shall hereafter designate in accordance with the terms hereof):
If to the Company:
CNA Surety Corporation
CNA Plaza
Chicago, Illinois 60685
Attention: General Counsel
If to Executive:
The home address of Executive noted on the records of the Company.
i. AMENDMENTS. This Agreement may not be altered, modified or amended
except by a written instrument signed by an authorized representative
of the Company and by the Executive.
j. HEADINGS. Headings to Paragraphs in this Agreement are for the
convenience of the parties only and are not intended to be part of or
to affect the meaning or interpretation hereof.
k. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed an original but all of which together shall
constitute one and the same instrument.
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l. WITHHOLDING. Any payments provided for herein shall subject to
withholding pursuant to applicable Federal, State, and local law then
in effect.
m. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of Delaware, without reference to principles of conflicts or
choice of law under which the law of any other jurisdiction would
apply.
n. SOURCE OF PAYMENT. The payments and benefits provided for herein
other than stock options may, at the option of the Company, be
provided by one or more of its subsidiaries, rather than the Company,
itself.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by
its duly authorized officer and the Executive has hereunto set his hand as of
the day and year first above written.
CNA SURETY CORPORATION EXECUTIVE
By:
----------------------------- -----------------------------
Mark C. Vonnahme Robert E. Ayo
<PAGE> 1
EXHIBIT 10(11)
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of ______________, 1999, by and between CNA
SURETY CORPORATION a Delaware corporation ("the Company"), and Michael A.
Dougherty ("the Executive").
WITNESSETH:
WHEREAS, the Company wishes to continue to employ the Executive and the
Company and the Executive desires to enter into an agreement embodying the terms
of such employment (the "Agreement'); and
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the Company and the Executive hereby agree as follows:
1. EMPLOYMENT.
a. AGREEMENT TO EMPLOY. Upon the terms and subject to the conditions
of this Agreement, the Company hereby agrees to continue to
employ Executive and Executive hereby agrees to employment by the
Company.
b. TERM OF EMPLOYMENT. Except as provided in Paragraph 5(a), the
Company shall employ Executive for the period commencing on
January 1, 2000 (the "Commencement Date") and ending on December
31, 2001. The period during which Executive is employed pursuant
to this Agreement and any extensions set forth in Paragraph 1(c)
of this Agreement shall be referred to as the "Employment
Period."
c. RENEWAL. Upon expiration of the original term of this Agreement
set forth in Paragraph 1(b) of this Agreement, this Agreement
shall renew automatically for one (1) additional one (1) year
term unless the Company or the Executive provides the other
thirty days written notice that the Agreement will not be
renewed.
2. POSITION AND DUTIES.
a. POSITION. During the Employment Period, Executive shall serve as
Senior Vice President & Chief Marketing Officer of the Company or
in such other position or positions in the Company and/or in any
of its subsidiaries as he and the Company shall mutually agree.
In addition, Executive shall serve in such other position or
positions with the Company and its subsidiaries commensurate with
his position and experience as the Board of Directors of the
Company (the "Board") shall from time to time specify.
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b. DUTIES. During the Employment Period, Executive shall have the
duties, responsibilities, and obligations as the Board shall from
time to time specify. Executive shall devote his full time to the
services required of him hereunder, except for vacation time and
reasonable periods of absence due to sickness, personal injury or
other disability, and shall use his best efforts, judgment, skill
and energy to perform such services in a manner consonant with
the duties of his position and to improve and advance the
business and interests of the Company and its subsidiaries.
Nothing contained herein shall preclude Executive from (i)
serving on the board of directors of any business corporation
with the consent of the Board or (ii) serving on the Board of, or
working for, any charitable or community organization.
c. LOCATION. Subject to normal business travel, Executive shall
perform his service hereunder in, and shall not be required to
change his place of residence from, the Chicago metropolitan
area.
3. COMPENSATION.
a. BASE SALARY. During the Employment Period, the Company shall pay
Executive an annual base salary of $180,000 per year, payable in
bi-weekly installments. The Compensation Committee of the Board
shall annually review Executive's base salary in light of
competitive practices and the performance of Executive and the
Company, and may, in its discretion, increase such base salary by
an amount it determines to be appropriate. Any such increase
shall not reduce or limit any other obligation of the Company
hereunder. Executive's base salary as set forth above or as may
be increased from time to time and shall not be reduced without
the mutual written consent of the Company and the Executive.
Executive's base salary as defined in this paragraph may be
referred to hereinafter as "Base Salary."
b. ANNUAL BONUS. For each calendar year ending during the Employment
Period, Executive may earn an annual bonus based on the
achievement of target levels of performance achieved during the
calendar year. During the first quarter of each year during the
term of this Agreement, the Compensation Committee of the Board
in its sole discretion shall determine the targets and the bonus
percentage ("Bonus Target") for which the Executive shall be
eligible, which bonus percentages shall range from 0%
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to 80% of the Executive's Base Salary based upon the performance
targets determined by the Compensation Committee of the Board.
The actual bonus, if any, payable for any such year shall be
determined solely by the Compensation Committee of the Board
based upon the performance of the Company and/or Executive
against the targets with a 40% target for "good performance."
c. LONG-TERM INCENTIVE COMPENSATION. During the term of the
Employment Period, Executive shall participate in all of the
Company's existing and future long-term incentive compensation
programs for key executives at a level commensurate with his
position at the Company and consistent with the Company's then
current policies and practices, as determined by the President.
Long-term Incentive Compensation shall be determined by the
President in accordance with the terms of the Company's Long-Term
Incentive Compensation Plan.
d. STOCK OPTIONS. The Executive shall be eligible for additional
grants of stock options under the terms and conditions of the
Stock Option Plan dated February 24, 1997.
4. BENEFITS, PERQUISITES AND EXPENSES.
a. BENEFITS. During the Employment Period, to the extent he is
eligible to participate in any welfare or retirement plans now
existing or established hereafter under their generally
applicable provisions, Executive may participate in (i) each
welfare benefit plan which may be sponsored or maintained by the
Company, including, without limitation, each group life,
hospitalization, medical, dental, health, accident or disability
insurance or similar plan or program of the Company, and (ii)
each retirement, profit sharing, deferred compensation or savings
plan which may be sponsored or maintained by the Company. Nothing
in this Paragraph 4(a) shall limit the Company's right to amend
or terminate any such plan. Notwithstanding any plan language to
the contrary, Executive shall be eligible for four (4) weeks'
paid vacation, for the year commencing January 1, 2000 and each
subsequent year of the Employment Period.
b. BUSINESS EXPENSES. During the Employment Period, the Company
shall pay or reimburse Executive for all reasonable expenses
incurred or paid by Executive in the performance of Executive's
duties hereunder, upon presentation of expense statements or
vouchers and such other information
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as the Company may require and in accordance with the generally
applicable policies and procedures of the Company as may be
amended by it from time to time.
c. ADDITIONAL BENEFITS. In addition to the foregoing, during the
Employment Period, the Executive shall be entitled to
reimbursement from the Corporation for (1) professional tax
advice and services and (2) up to $5,000 per year for financial
planning advice and services.
5. TERMINATION OF EMPLOYMENT OR NON RENEWAL OF AGREEMENT.
a. EARLY TERMINATION OF THE EMPLOYMENT PERIOD. Notwithstanding
Paragraph 1(b), the Employment Period shall end upon the earliest
to occur of (i) a termination of Executive's employment on
account of Executive's death or Disability, (ii) a Termination
for Cause, (iii) a Termination Without Cause, (iv) a Termination
for Good Reason or (v) Termination for Change in Control.
b. BENEFITS PAYABLE UPON TERMINATION OR NONRENEWAL. Following the
early termination of the Employment Period pursuant to Paragraph
5(a) or Nonrenewal of this Agreement pursuant to Paragraph 1(c),
Executive (or, in the event of his death, his surviving spouse,
if any, his estate, or such other beneficiary as the Executive
may designate by written notice to the Company) shall be paid
compensation in accordance with the following provisions:
(i) Should the Executive's employment with the Company
terminate for any reason, his Earned Salary and accrued
vacation shall be paid through his last day of
employment at the end of the Company's next regular pay
period and Vested Benefits shall be payable in
accordance with their terms. In addition:
(ii) Should the Executive's employment with the Company
terminate for Cause or should the Executive terminate
this Agreement without Good Reason, other than the
payments set forth in Paragraph 5(b)(i) above and any
entitlement to any Vested Benefits, the Company shall
have no further obligations to the Executive;
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(iii) Should the Executive's employment with the Company
terminate Without Cause, for Good Reason, for Change
of Control or because of the non-renewal of this
Agreement, he shall be paid the Severance Benefit,
Additional Benefits, Vested Benefits and Incentive
Compensation. Notwithstanding anything to the contrary
in this Agreement, no Severance Benefit or Incentive
Compensation shall be payable if the Executive
violates the terms and covenants of section 6 of this
Agreement. Moreover, Executive agrees that if he
violates section 6 of this Agreement he shall repay
forthwith the Company any amount of the Severance
Benefit or Incentive Compensation previously paid
pursuant to this Paragraph 5(b)(i). In addition,
should the Executive's employment with the Company
terminate due to a Termination for Change in Control,
any stock options Executive shall have received which
are unvested at the time of such termination shall
immediately accelerate and become fully vested and the
exercise period for such options shall be extended to
permit the Executive to exercise such options during
the two year period immediately following the
Executive's termination.
(iv) Should the Executive's employment with Company
terminate due to death or Disability, the Company
shall pay the Executive an amount equal to a pro-rated
amount equal to the product of the Bonus Target for
the year in which termination occurs and a fraction
the numerator of which is equal to the number of days
in the calendar year of the Executive's termination of
employment which have elapsed as of the date of such
termination and the denominator of which is 365; plus
any long-term cash Incentive Compensation awards held
by the Executive at the date of his termination, which
shall be payable, if at all, based upon actual Company
performance results (but without regard to any
individual performance criteria) for the applicable
pro rata portion of performance period.
c. TIMING OF PAYMENTS. The payments referred to in Paragraph
5(b) shall be made as follows: Earned Salary shall be paid
in cash in a single lump sum as soon as practicable, but in
no event more than ten business days, following the end of
the Employment Period. Severance Benefits shall be paid in
equal biweekly installments during the two year period
immediately following the Executive's termination. Incentive
Compensation shall be
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payable at the same time as similar awards are paid to other
executives still actively employed by the Company and
participating in the plans under which the awards are
payable. Vested Benefits shall be payable in accordance with
the terms of the plan (including, without limitation, the
extension of the exercise period of options under any stock
option plan) under which such benefits have been awarded or
accrued. Additional Benefits shall be provided or made
available at the times specified below as to each such
Additional Benefit.
d. DEFINITIONS. For purposes of sections 5 and 6, capitalized
terms have the following meanings:
"ADDITIONAL BENEFITS" consists of the following rights and benefits:
except as otherwise provided below, Executive (and, to the extent
applicable, his dependents) will be entitled to continue participation
in all of the Company's health benefit plans (the "Health Plans"),
until the second anniversary of Executive's termination of employment
(the "End Date"); provided that Executive's participation in the
Company's Health Plans shall cease on any earlier date that Executive
becomes eligible for comparable benefits from a subsequent employer.
To the extent any such benefits cannot be provided under the terms of
the applicable plan, policy or program, the Company shall provide a
comparable benefit under another plan or from the Company's general
assets. Executive's participation in the Health Plans will be on the
same terms and conditions that would have applied had Executive
continued to be employed by the Company through the End Date. The
Company shall deduct the Executive's cost of the foregoing benefits
from the Executive's Severance Benefit payments at the same intervals
as they were deducted from his Base Salary during the Employment
Period.
"DISABILITY" means "disability" as defined in the Company's Long Term
Disability Plan.
"EARNED SALARY" means any Base Salary earned, but unpaid, for services
rendered to the Company on or prior to the date on which the Employment Period
ends pursuant to Paragraph 5(a) or because of the Nonrenewal of this Agreement
pursuant to Paragraph 1(c).
"INCENTIVE COMPENSATION" consists of the sum of:
(i) a pro-rated amount equal to the product of the average of
the actual performance bonuses paid to the Executive by the
Company during the two calendar years prior to the year in
which termination occurs ("Prior Bonus") and a fraction the
numerator of which is equal to the number of
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days in the calendar year of Executive's termination of
employment which have elapsed as of the date of such
termination and the denominator of which is 365; plus
(ii) an amount equal to twice the amount of the Prior Bonus;
plus
(iii) any long-term cash incentive compensation awards held by
Executive at the date of his termination, which shall be
payable, if at all, based upon actual Company performance
results (but without regard to any individual performance
criteria) for the applicable pro rata portion of
performance period.
"SEVERANCE BENEFIT" means two years Base Salary based upon the
Executive's Base Salary on the date the Executive's employment terminates.
"TERMINATION FOR CHANGE IN CONTROL" means a termination of Executive's
employment by the Company for any reason other than a Termination for Cause at
the sole discretion of the Company within one year following the date upon which
(i) Continental Casualty Company and any affiliates no longer are able
collectively to elect a majority of the Board, (ii) a sale of all or
substantially all of the assets of the Company is consummated or (iii) a merger,
consolidation or other business combination involving the Company and an
unaffiliated third party is consummated in which the Company is not the
surviving corporation.
"TERMINATION FOR CAUSE" means a termination of the Executive's
employment by the Company (A) due to conduct of the Executive, which is
determined by the Board, in its sole discretion, to be to: (i) a willful and
continued failure to perform the material duties of his position, (ii) a fraud
against the Company or (iii) a material breach of any provision of this
Agreement which has had (or is expected to have) a material adverse effect on
the business of the Company or its subsidiaries; or (B) due to the Executive's
conviction of a felony.
"TERMINATION FOR GOOD REASON" means a termination of Executive's
employment by Executive within 90 days following (i) a material diminution in
Executive's positions, duties and responsibilities from those described in
Paragraph 2 hereof, (ii) the removal of Executive from, or the failure to
re-elect Executive as a member of, the Board, (iii) a reduction in Executive's
annual Base Salary, (iv) a material reduction in the aggregate value of the
retirement, profit sharing and welfare benefits provided to Executive from those
in effect as of the Commencement Date (other than a reduction which is
proportionate to the reductions applicable to other senior executives pursuant
to a cost-saving plan that includes all senior executives). Notwithstanding the
foregoing, a termination shall not be treated as a Termination for Good Reason
(i) if Executive shall have consented in writing to the occurrence of the event
giving rise to the claim of Termination for
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Good Reason or (ii) unless Executive first shall have delivered a written notice
to the Company within 30 days of his having actual knowledge of the occurrence
of one of such events stating that he intends to terminate his employment for
Good Reason and specifying the factual basis for such termination, and such
event, if capable of being cured, shall not have been cured within 30 days of
the receipt of such notice.
"TERMINATION WITHOUT CAUSE" means any termination of Executive's
employment by the Company other than a Termination for Cause.
"VESTED BENEFITS" means amounts which are vested or which Executive is
otherwise entitled to receive under the terms of or in accordance with any plan
maintained by the Company at or subsequent to the date of his termination
without regard to the performance by Executive of further services or the
resolution of a contingency.
e. FULL DISCHARGE OF COMPANY OBLIGATIONS. In consideration of
receiving any payments or benefits under Section 5 of this
Agreement, the Executive agrees to sign a release in the
form attached to this Agreement as Exhibit A, as a condition
precedent to receiving them. The amounts payable to
Executive pursuant to this Section 5 following termination
of his employment (including amounts payable with respect to
Vested Benefits) shall be in full and complete satisfaction
of Executive's rights under this Agreement and any other
claims he may have in respect of his employment by the
Company or any of its subsidiaries. Such amounts shall
constitute liquidated damages with respect to any and all
such rights and claims and, upon Executive's receipt of such
amounts, the Company shall be released and discharged from
any and all liability to Executive in connection with this
Agreement or otherwise in connection with Executive's
employment with the Company and its subsidiaries. Nothing in
this Paragraph 5(e) shall be construed to release the
Company from any obligation to indemnify Executive and hold
Executive harmless from and against any claim, loss or cause
of action arising from or out of Executive's performance as
an officer, director or employee of the Company or any of
its subsidiaries or in any other capacity, including any
fiduciary capacity, in which Executive served at the request
of the Company to the maximum extent permitted by applicable
law and the certificate of incorporation and by-laws of the
Company.
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6. NONCOMPETITION AND CONFIDENTIALITY.
By and in consideration of the salary, benefits and other consideration,
contained in this Agreement, the adequacy and receipt of which is hereby
acknowledged, the Executive agrees that:
a. NONCOMPETITION. During the Employment Period and during the two
year period (the "Restriction Period") following any termination
or Nonrenewal of the Executive's employment, the Executive shall
not whether as a principal, partner, employee, agent, consultant,
shareholder (other than as a holder, or a member of a group which
is a holder, of not in excess of 1% of the outstanding voting
shares of any publicly traded company) or in any other
relationship or capacity: (i) become associated with any entity
that is actively engaged or takes any steps to plan to be engaged
in any geographic area in the surety business or in any other
business which is in competition with the business in which the
Company is engaged or to the Executive's knowledge is actively
considering becoming engaged, (ii) contact, call upon, solicit
business from, sell, or render services to, any customer or
licensed agent of the Company with respect to any service or
product identical or similar to any services or products provided
or sold by the Company, including but not limited to current
products or those under development, distribution strategy,
development of computer software and administrative systems for
administration.
b. CONFIDENTIALITY. The Executive acknowledges and agrees that all
records (whether written or recorded electronically) including
but not limited to agent and client lists, files, reports, notes,
internal memoranda and manuals relating to the Company's
business; business plans, business processing techniques, systems
and methods; sales processes, sales and training manuals;
underwriting procedures and manuals; budgets; financial
statements; compilations; or summaries of the foregoing, by
whomever prepared, and copies or reproductions of the foregoing,
relating to the Company's operations or activities, or to the
operations or activities of any of the Company's customers,
agents, suppliers, vendors, or subsidiary companies thereof, made
or received by the Executive during the course of his employment
with the Company have been, are and shall remain the sole and
exclusive property of the Company and were held by the Executive
during his employment only as a trustee for the Company which, at
all times, retained ownership and control of said records.
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c. NON-SOLICITATION OF EMPLOYEES. During the Employment Period and
the one year period following any termination or Nonrenewal of
Executive's employment, Executive shall not directly or
indirectly solicit, nor shall any entity with which the Executive
is associated encourage or induce any employee of the Company or
any of its subsidiaries to terminate employment with it, and
shall not directly or indirectly, either individually or as
owner, agent, employee, consultant or otherwise, employ or offer
employment to any person who is or was employed by the Company or
a subsidiary thereof unless such person shall have ceased to be
employed by it for a period of at least six months.
d. COMPANY PROPERTY. Except as expressly provided herein, promptly
following Executive's termination of employment, Executive shall
return to the Company all property of the Company, and all copies
thereof in Executive's possession or under his control.
e. INJUNCTIVE RELIEF AND OTHER REMEDIES WITH RESPECT TO COVENANTS.
Executive acknowledges and agrees that the covenants and
obligations of Executive with respect to noncompetition,
nonsolicitation, confidentiality and Company property, relate to
special, unique and extraordinary matters and that a violation of
any of the terms of such covenants and obligations will cause the
Company irreparable injury for which adequate remedies are not
available at law. Executive acknowledges and agrees that the
geographic scope of his employment with the Company is national,
and that the national geographic and the two year restrictions
placed upon him in Paragraph 6 of this Agreement are reasonable
and necessary to the preservation and vitality of the Company's
business, reputation, and good will due to the nature of the
Company's business, and given his knowledge and expertise within
the insurance industry and the consideration provided in this
Agreement, that he will be able to earn a satisfactory livelihood
or otherwise provide for his financial security without violating
such restrictions.
Therefore, Executive agrees that the Company shall (i) be entitled to, on
both an interim and final basis, an injunction, restraining order or such other
equitable relief (without the requirement to post bond) restraining Executive
from committing any violation of the covenants and obligations contained in this
section 6 and (ii) have no further obligation to make any payments to Executive
hereunder following any material violation of the covenants and obligations
contained in this section 6. These remedies are cumulative and are in addition
to any other rights and remedies the Company may have at law or in equity. In
connection with the foregoing provisions of this section 6, Executive
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represents that his economic means and circumstances are such that such
provisions will not prevent him from providing for himself and his family on a
basis satisfactory to him.
The Executive and Company agree that section 6 of this Agreement is not
subject to the provisions of Paragraph 7(b). The Executive agrees that in the
event he violates said section 6 he will pay all costs and expenses with respect
to the prosecution or defense of any claim or suit brought by or against the
Company including, but not limited to, reasonable attorneys' fees. The Executive
further agrees that in the event he in any way violates the provisions set forth
in section 6, the Company would suffer irreparable harm for which both
preliminary and final injunctive relief would be an appropriate remedy in
addition to such other relief to which the Company may also be entitled.
f. For purposes of Section 6 of this agreement "the Company" shall
include its subsidiaries.
g. Notwithstanding anything herein to the contrary, should the
Executive terminate the employment period without Good Reason or
should the Company terminate it for Cause, the two year period
referred to at various points in this Section 6 shall be reduced
to one year.
7. MISCELLANEOUS.
a. SURVIVAL. Paragraphs 5 (relating to early termination), 6
(relating to noncompetition, nonsolicitation and confidentiality,
7(b) (relating to arbitration), 7(c) (relating to legal fees) and
7(o) (relating to governing law) shall survive the termination
hereof.
b. ARBITRATION. Except for disputes arising out of or relating to
the provisions of Section 6, any dispute arising out of or
relating to this Agreement, including each and every aspect of
the relationship of the Executive and the Company, shall be
resolved by binding arbitration. The arbitrator shall be a
retired federal judge. If the parties cannot agree on an
acceptable arbitrator, the dispute shall be heard by a panel of
three retired judges, one appointed by each of the parties and
the third appointed by the other two arbitrators. The arbitrator
shall hear and decide the dispute not by compromise but according
to law as if sitting in court applying the rules of evidence. The
arbitrator's decision shall be in writing and shall set forth the
facts and law supporting such decision. The arbitration shall be
held in Chicago, Illinois and except as otherwise provided in
this Paragraph, shall be conducted in accordance with the
Voluntary Labor Arbitration Rules of the American Arbitration
Association then in effect at the time of the arbitration.
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c. BINDING EFFECT. This Agreement shall be binding on, and shall
inure to the benefit of, the Company and any person or entity
that succeeds to the interest of the Company (regardless of
whether such succession does or does not occur by operation of
law) by reason of the sale of all or a portion of the Company's
stock, a merger, consolidation or reorganization involving the
Company or, unless the Company otherwise elects in writing, a
sale of the assets of the business of the Company (or portion
thereof) in which Executive performs a majority of his services.
This Agreement shall also inure to the Benefit of Executive's
heirs, executors, administrators and legal representatives.
d. ASSIGNMENT. Except as provided under Paragraph 7(c), neither this
Agreement nor any of the rights or obligations hereunder shall be
assigned or delegated by any party hereto without the prior
written consent of the other party.
e. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto with respect to the matters referred
to herein. No other agreement relating to the terms of
Executive's employment by the Company, oral or otherwise, shall
be binding between the parties unless it is in writing and signed
by the party against whom enforcement is sought. There are no
promises, representations, inducements, or statements between the
parties other than those that are expressly contained herein.
Executive acknowledges that he is entering into this Agreement of
his own free will and accord, and with no duress, that he has
read this Agreement and that he understands it and its legal
consequences.
f. SEVERABILITY; REFORMATION. In the event that one or more of the
provisions of this Agreement shall become invalid, illegal or
unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein shall
not be affected thereby. In the event that any of the provisions
of any of Paragraphs 6(a), (b) or (c) is not enforceable in
accordance with its terms, Executive and the Company agree that
such Paragraph shall be reformed to make such Paragraph
enforceable in a manner which provides the Company the maximum
rights permitted at law.
g. WAIVER. Waiver by any party hereto of any breach or default by
the other party of any of the terms of this Agreement shall not
operate as a waiver of any other breach or default, whether
similar to or different from the breach or default waived. No
waiver of any provision of this Agreement shall be
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implied from any course of dealing between the parties hereto or
from any failure by either party hereto to assert its or his
rights hereunder on any occasion or series of occasions.
h. NOTICES. Any notice required or desired to be delivered under
this Agreement shall be in writing and shall be delivered
personally, by courier service, by registered mail, return
receipt requested, or by telecopy and shall be effective upon
actual receipt by the party to which such notice shall be
directed, and shall be addressed as follows (or to such other
address as the party entitled to notice shall hereafter designate
in accordance with the terms hereof):
If to the Company:
CNA Surety Corporation
CNA Plaza
Chicago, Illinois 60685
Attention: General Counsel
If to Executive:
The home address of Executive noted on the records of the Company.
i. AMENDMENTS. This Agreement may not be altered, modified or
amended except by a written instrument signed by an authorized
representative of the Company and by the Executive.
j. HEADINGS. Headings to Paragraphs in this Agreement are for the
convenience of the parties only and are not intended to be part
of or to affect the meaning or interpretation hereof.
k. COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
l. WITHHOLDING. Any payments provided for herein shall subject to
withholding pursuant to applicable Federal, State, and local law
then in effect.
m. GOVERNING LAW. This Agreement shall be governed by the laws of
the State of Delaware, without reference to principles of
conflicts or choice of law under which the law of any other
jurisdiction would apply.
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n. SOURCE OF PAYMENT. The payments and benefits provided for herein
other than stock options may, at the option of the Company, be
provided by one or more of its subsidiaries, rather than the
Company, itself.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by
its duly authorized officer and the Executive has hereunto set his hand as of
the day and year first above written.
CNA SURETY CORPORATION EXECUTIVE
By:
-------------------------- ------------------------------
Mark C. Vonnahme Michael A. Dougherty
<PAGE> 1
EXHIBIT 10(12)
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of ______________, 2000 by and between CNA
SURETY CORPORATION a Delaware corporation ("the Company"), and John S. Heneghan
("the Executive").
WITNESSETH:
WHEREAS, the Company wishes to continue to employ the Executive and the
Company and the Executive desires to enter into an agreement embodying the terms
of such employment (the "Agreement'); and
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the Company and the Executive hereby agree as follows:
1. EMPLOYMENT.
a. AGREEMENT TO EMPLOY. Upon the terms and subject to the conditions
of this Agreement, the Company hereby agrees to continue to
employ Executive and Executive hereby agrees to employment by the
Company.
b. TERM OF EMPLOYMENT. Except as provided in Paragraph 5(a), the
Company shall employ Executive for the period commencing on
January 1, 2000 (the "Commencement Date") and ending on December
31, 2001. The period during which Executive is employed pursuant
to this Agreement and any extensions set forth in Paragraph 1(c)
of this Agreement shall be referred to as the "Employment
Period."
c. RENEWAL. Upon expiration of the original term of this Agreement
set forth in Paragraph 1(b) of this Agreement, this Agreement
shall renew automatically for one (1) additional one (1) year
term unless the Company or the Executive provides the other
thirty days written notice that the Agreement will not be
renewed.
2. POSITION AND DUTIES.
a. POSITION. During the Employment Period, Executive shall serve as
Vice President and Chief Financial Officer of the Company or in
such other position or positions in the Company and/or in any of
its subsidiaries as he and the Company shall mutually agree. In
addition, Executive shall serve in such other position or
positions with the Company and its subsidiaries commensurate with
his position and experience as the Board of Directors of the
Company (the "Board") shall from time to time specify.
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b. DUTIES. During the Employment Period, Executive shall have the
duties, responsibilities, and obligations as the Board shall from
time to time specify. Executive shall devote his full time to the
services required of him hereunder, except for vacation time and
reasonable periods of absence due to sickness, personal injury or
other disability, and shall use his best efforts, judgment, skill
and energy to perform such services in a manner consonant with
the duties of his position and to improve and advance the
business and interests of the Company and its subsidiaries.
Nothing contained herein shall preclude Executive from (i)
serving on the board of directors of any business corporation
with the consent of the Board or (ii) serving on the Board of, or
working for, any charitable or community organization.
c. LOCATION. Subject to normal business travel, Executive shall
perform his service hereunder in, and shall not be required to
change his place of residence from, the Chicago metropolitan
area.
3. COMPENSATION.
a. BASE SALARY. During the Employment Period, the Company shall pay
Executive an annual base salary of $180,000 per year, payable in
bi-weekly installments. The President shall annually review
Executive's base salary in light of competitive practices and the
performance of Executive and the Company, and may, in his
discretion, increase such base salary by an amount he determines
to be appropriate. Any such increase shall not reduce or limit
any other obligation of the Company hereunder. Executive's base
salary as set forth above or as may be increased from time to
time and shall not be reduced without the mutual written consent
of the Company and the Executive. Executive's base salary as
defined in this paragraph may be referred to hereinafter as "Base
Salary."
b. ANNUAL BONUS. For each calendar year ending during the Employment
Period, Executive may earn an annual bonus based on the
achievement of target levels of performance achieved during the
calendar year. During the first quarter of each year during the
term of this Agreement, the President in his sole discretion
shall determine the targets and the bonus percentage ("Bonus
Target") for which the Executive shall be eligible, which bonus
percentages shall range from 0% to 70% of the Executive's Base
Salary based upon the performance targets determined by the
President. The actual bonus, if any, payable for any such year
shall be determined solely by
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the President based upon the performance of the Company and/or
Executive against the targets with a 35% target for "good
performance."
c. LONG-TERM INCENTIVE COMPENSATION. During the term of the
Employment Period, Executive shall participate in all of the
Company's existing and future long-term incentive compensation
programs for key executives at a level commensurate with his
position at the Company and consistent with the Company's then
current policies and practices, as determined by the President.
Long-term Incentive Compensation shall be determined by the
President in accordance with the terms of the Company's Long-Term
Incentive Compensation Plan.
d. STOCK OPTIONS. The Executive shall be eligible for additional
grants of stock options under the terms and conditions of the
Stock Option Plan dated February 24, 1997.
4. BENEFITS, PERQUISITES AND EXPENSES.
a. BENEFITS. During the Employment Period, to the extent he is
eligible to participate in any welfare or retirement plans now
existing or established hereafter under their generally
applicable provisions, Executive may participate in (i) each
welfare benefit plan which may be sponsored or maintained by the
Company, including, without limitation, each group life,
hospitalization, medical, dental, health, accident or disability
insurance or similar plan or program of the Company, and (ii)
each retirement, profit sharing, deferred compensation or savings
plan which may be sponsored or maintained by the Company. Nothing
in this Paragraph 4(a) shall limit the Company's right to amend
or terminate any such plan. Notwithstanding any plan language to
the contrary, Executive shall be eligible for four (4) weeks'
paid vacation, for the year commencing January 1, 2000 and each
subsequent year of the Employment Period.
b. BUSINESS EXPENSES. During the Employment Period, the Company
shall pay or reimburse Executive for all reasonable expenses
incurred or paid by Executive in the performance of Executive's
duties hereunder, upon presentation of expense statements or
vouchers and such other information as the Company may require
and in accordance with the generally applicable policies and
procedures of the Company as may be amended by it from time to
time.
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c. ADDITIONAL BENEFITS. In addition to the foregoing, during the
Employment Period, the Executive shall be entitled to
reimbursement from the Corporation for (1) professional tax
advice and services and (2) up to $5,000 per year for financial
planning advice and services.
5. TERMINATION OF EMPLOYMENT OR NON RENEWAL OF AGREEMENT.
a. EARLY TERMINATION OF THE EMPLOYMENT PERIOD. Notwithstanding
Paragraph 1(b), the Employment Period shall end upon the earliest
to occur of (i) a termination of Executive's employment on
account of Executive's death or Disability, (ii) a Termination
for Cause, (iii) a Termination Without Cause, (iv) a Termination
for Good Reason or (v) Termination for Change in Control.
b. BENEFITS PAYABLE UPON TERMINATION OR NONRENEWAL. Following the
early termination of the Employment Period pursuant to Paragraph
5(a) or Nonrenewal of this Agreement pursuant to Paragraph 1(c),
Executive (or, in the event of his death, his surviving spouse,
if any, his estate, or such other beneficiary as the Executive
may designate by written notice to the Company) shall be paid
compensation in accordance with the following provisions:
(i) Should the Executive's employment with the Company
terminate for any reason, his Earned Salary and accrued
vacation shall be paid through his last day of employment
at the end of the Company's next regular pay period and
Vested Benefits shall be payable in accordance with their
terms. In addition:
(ii) Should the Executive's employment with the Company
terminate for Cause or should the Executive terminate this
Agreement without Good Reason, other than the payments set
forth in Paragraph 5(b)(i) above and any entitlement to any
Vested Benefits, the Company shall have no further
obligations to the Executive;
(iii) Should the Executive's employment with the Company
terminate Without Cause, for Good Reason, for Change of
Control or because of the non-renewal of this Agreement,
he shall be paid the Severance Benefit, Additional
Benefits, Vested Benefits and Incentive Compensation.
Notwithstanding anything to the contrary
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in this Agreement, no Severance Benefit or Incentive
Compensation shall be payable if the Executive violates the
terms and covenants of section 6 of this Agreement.
Moreover, Executive agrees that if he violates section 6 of
this Agreement he shall repay forthwith the Company any
amount of the Severance Benefit or Incentive Compensation
previously paid pursuant to this Paragraph 5(b)(i). In
addition, should the Executive's employment with the
Company terminate due to a Termination for Change in
Control, any stock options Executive shall have received
which are unvested at the time of such termination shall
immediately accelerate and become fully vested and the
exercise period for such options shall be extended to
permit the Executive to exercise such options during the
two year period immediately following the Executive's
termination.
(iv) Should the Executive's employment with Company terminate
due to death or Disability, the Company shall pay the
Executive an amount equal to a pro-rated amount equal to
the product of the Bonus Target for the year in which
termination occurs and a fraction the numerator of which is
equal to the number of days in the calendar year of the
Executive's termination of employment which have elapsed as
of the date of such termination and the denominator of
which is 365; plus any long-term cash Incentive
Compensation awards held by the Executive at the date of
his termination, which shall be payable, if at all, based
upon actual Company performance results (but without regard
to any individual performance criteria) for the applicable
pro rata portion of performance period.
c. TIMING OF PAYMENTS. The payments referred to in Paragraph 5(b)
shall be made as follows: Earned Salary shall be paid in cash in
a single lump sum as soon as practicable, but in no event more
than ten business days, following the end of the Employment
Period. Severance Benefits shall be paid in equal biweekly
installments during the two year period immediately following the
Executive's termination. Incentive Compensation shall be payable
at the same time as similar awards are paid to other executives
still actively employed by the Company and participating in the
plans under which the awards are payable. Vested Benefits shall
be payable in accordance with the terms of the plan (including,
without limitation, the extension of the exercise period of
options under any stock option plan) under which such benefits
have been awarded or accrued. Additional
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Benefits shall be provided or made available at the times
specified below as to each such Additional Benefit.
d. DEFINITIONS. For purposes of sections 5 and 6, capitalized terms
have the following meanings:
"ADDITIONAL BENEFITS" consists of the following rights and benefits:
except as otherwise provided below, Executive (and, to the extent
applicable, his dependents) will be entitled to continue participation in
all of the Company's health benefit plans (the "Health Plans"), until the
second anniversary of Executive's termination of employment (the "End
Date"); provided that Executive's participation in the Company's Health
Plans shall cease on any earlier date that Executive becomes eligible for
comparable benefits from a subsequent employer. To the extent any such
benefits cannot be provided under the terms of the applicable plan, policy
or program, the Company shall provide a comparable benefit under another
plan or from the Company's general assets. Executive's participation in the
Health Plans will be on the same terms and conditions that would have
applied had Executive continued to be employed by the Company through the
End Date. The Company shall deduct the Executive's cost of the foregoing
benefits from the Executive's Severance Benefit payments at the same
intervals as they were deducted from his Base Salary during the Employment
Period.
"DISABILITY" means "disability" as defined in the Company's Long Term
Disability Plan.
"EARNED SALARY" means any Base Salary earned, but unpaid, for services
rendered to the Company on or prior to the date on which the Employment Period
ends pursuant to Paragraph 5(a) or because of the Nonrenewal of this Agreement
pursuant to Paragraph 1(c).
"INCENTIVE COMPENSATION" consists of the sum of:
(i) a pro-rated amount equal to the product of the average of the
actual performance bonuses paid to the Executive by the Company
during the two calendar years prior to the year in which
termination occurs ("Prior Bonus") and a fraction the numerator
of which is equal to the number of days in the calendar year of
Executive's termination of employment which have elapsed as of
the date of such termination and the denominator of which is 365;
plus
(ii) an amount equal to twice the amount of the Prior Bonus; plus
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(iii) any long-term cash incentive compensation awards held by
Executive at the date of his termination, which shall be
payable, if at all, based upon actual Company performance
results (but without regard to any individual performance
criteria) for the applicable pro rata portion of performance
period.
"SEVERANCE BENEFIT" means two years Base Salary based upon the Executive's
Base Salary on the date the Executive's employment terminates.
"TERMINATION FOR CHANGE IN CONTROL" means a termination of Executive's
employment by the Company for any reason other than a Termination for Cause at
the sole discretion of the Company within one year following the date upon which
(i) Continental Casualty Company and any affiliates no longer are able
collectively to elect a majority of the Board, (ii) a sale of all or
substantially all of the assets of the Company is consummated or (iii) a merger,
consolidation or other business combination involving the Company and an
unaffiliated third party is consummated in which the Company is not the
surviving corporation.
"TERMINATION FOR CAUSE" means a termination of the Executive's employment
by the Company (A) due to conduct of the Executive, which is determined by the
Board, in its sole discretion, to be to: (i) a willful and continued failure to
perform the material duties of his position, (ii) a fraud against the Company or
(iii) a material breach of any provision of this Agreement which has had (or is
expected to have) a material adverse effect on the business of the Company or
its subsidiaries; or (B) due to the Executive's conviction of a felony.
"TERMINATION FOR GOOD REASON" means a termination of Executive's employment
by Executive within 90 days following (i) a material diminution in Executive's
positions, duties and responsibilities from those described in Paragraph 2
hereof, (ii) the removal of Executive from, or the failure to re-elect Executive
as a member of, the Board, (iii) a reduction in Executive's annual Base Salary,
(iv) a material reduction in the aggregate value of the retirement, profit
sharing and welfare benefits provided to Executive from those in effect as of
the Commencement Date (other than a reduction which is proportionate to the
reductions applicable to other senior executives pursuant to a cost-saving plan
that includes all senior executives). Notwithstanding the foregoing, a
termination shall not be treated as a Termination for Good Reason (i) if
Executive shall have consented in writing to the occurrence of the event giving
rise to the claim of Termination for Good Reason or (ii) unless Executive first
shall have delivered a written notice to the Company within 30 days of his
having actual knowledge of the occurrence of one of such events stating that he
intends to terminate his employment for Good Reason and specifying the factual
basis for such termination, and such event, if capable of being cured, shall not
have been cured within 30 days of the receipt of such notice.
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"TERMINATION WITHOUT CAUSE" means any termination of Executive's employment
by the Company other than a Termination for Cause.
"VESTED BENEFITS" means amounts which are vested or which Executive is
otherwise entitled to receive under the terms of or in accordance with any plan
maintained by the Company at or subsequent to the date of his termination
without regard to the performance by Executive of further services or the
resolution of a contingency.
e. FULL DISCHARGE OF COMPANY OBLIGATIONS. In consideration of
receiving any payments or benefits under Section 5 of this
Agreement, the Executive agrees to sign a release in the form
attached to this Agreement as Exhibit A, as a condition precedent
to receiving them. The amounts payable to Executive pursuant to
this Section 5 following termination of his employment (including
amounts payable with respect to Vested Benefits) shall be in full
and complete satisfaction of Executive's rights under this
Agreement and any other claims he may have in respect of his
employment by the Company or any of its subsidiaries. Such
amounts shall constitute liquidated damages with respect to any
and all such rights and claims and, upon Executive's receipt of
such amounts, the Company shall be released and discharged from
any and all liability to Executive in connection with this
Agreement or otherwise in connection with Executive's employment
with the Company and its subsidiaries. Nothing in this Paragraph
5(e) shall be construed to release the Company from any
obligation to indemnify Executive and hold Executive harmless
from and against any claim, loss or cause of action arising from
or out of Executive's performance as an officer, director or
employee of the Company or any of its subsidiaries or in any
other capacity, including any fiduciary capacity, in which
Executive served at the request of the Company to the maximum
extent permitted by applicable law and the certificate of
incorporation and by-laws of the Company.
6. NONCOMPETITION AND CONFIDENTIALITY.
By and in consideration of the salary, benefits and other consideration,
contained in this Agreement, the adequacy and receipt of which is hereby
acknowledged, the Executive agrees that:
a. NONCOMPETITION. During the Employment Period and during the two
year period (the "Restriction Period") following any termination
or Nonrenewal of the Executive's employment, the Executive shall
not whether as a principal, partner, employee, agent, consultant,
shareholder (other than as a holder, or a member of a group which
is a holder, of not in excess of 1% of the
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outstanding voting shares of any publicly traded company) or in
any other relationship or capacity: (i) become associated with
any entity that is actively engaged or takes any steps to plan to
be engaged in any geographic area in the surety business or in
any other business which is in competition with the business in
which the Company is engaged or to the Executive's knowledge is
actively considering becoming engaged, (ii) contact, call upon,
solicit business from, sell, or render services to, any customer
or licensed agent of the Company with respect to any service or
product identical or similar to any services or products provided
or sold by the Company, including but not limited to current
products or those under development, distribution strategy,
development of computer software and administrative systems for
administration.
b. CONFIDENTIALITY. The Executive acknowledges and agrees that all
records (whether written or recorded electronically) including
but not limited to agent and client lists, files, reports, notes,
internal memoranda and manuals relating to the Company's
business; business plans, business processing techniques, systems
and methods; sales processes, sales and training manuals;
underwriting procedures and manuals; budgets; financial
statements; compilations; or summaries of the foregoing, by
whomever prepared, and copies or reproductions of the foregoing,
relating to the Company's operations or activities, or to the
operations or activities of any of the Company's customers,
agents, suppliers, vendors, or subsidiary companies thereof, made
or received by the Executive during the course of his employment
with the Company have been, are and shall remain the sole and
exclusive property of the Company and were held by the Executive
during his employment only as a trustee for the Company which, at
all times, retained ownership and control of said records.
c. NON-SOLICITATION OF EMPLOYEES. During the Employment Period and
the one year period following any termination or Nonrenewal of
Executive's employment, Executive shall not directly or
indirectly solicit, nor shall any entity with which the Executive
is associated encourage or induce any employee of the Company or
any of its subsidiaries to terminate employment with it, and
shall not directly or indirectly, either individually or as
owner, agent, employee, consultant or otherwise, employ or offer
employment to any person who is or was employed by the Company or
a subsidiary thereof unless such person shall have ceased to be
employed by it for a period of at least six months.
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d. COMPANY PROPERTY. Except as expressly provided herein, promptly
following Executive's termination of employment, Executive shall
return to the Company all property of the Company, and all copies
thereof in Executive's possession or under his control.
e. INJUNCTIVE RELIEF AND OTHER REMEDIES WITH RESPECT TO COVENANTS.
Executive acknowledges and agrees that the covenants and
obligations of Executive with respect to noncompetition,
nonsolicitation, confidentiality and Company property, relate to
special, unique and extraordinary matters and that a violation of
any of the terms of such covenants and obligations will cause the
Company irreparable injury for which adequate remedies are not
available at law. Executive acknowledges and agrees that the
geographic scope of his employment with the Company is national,
and that the national geographic and the two year restrictions
placed upon him in Paragraph 6 of this Agreement are reasonable
and necessary to the preservation and vitality of the Company's
business, reputation, and good will due to the nature of the
Company's business, and given his knowledge and expertise within
the insurance industry and the consideration provided in this
Agreement, that he will be able to earn a satisfactory livelihood
or otherwise provide for his financial security without violating
such restrictions.
Therefore, Executive agrees that the Company shall (i) be entitled to, on
both an interim and final basis, an injunction, restraining order or such other
equitable relief (without the requirement to post bond) restraining Executive
from committing any violation of the covenants and obligations contained in this
section 6 and (ii) have no further obligation to make any payments to Executive
hereunder following any material violation of the covenants and obligations
contained in this section 6. These remedies are cumulative and are in addition
to any other rights and remedies the Company may have at law or in equity. In
connection with the foregoing provisions of this section 6, Executive represents
that his economic means and circumstances are such that such provisions will not
prevent him from providing for himself and his family on a basis satisfactory to
him.
The Executive and Company agree that section 6 of this Agreement is not
subject to the provisions of Paragraph 7(b). The Executive agrees that in the
event he violates said section 6 he will pay all costs and expenses with respect
to the prosecution or defense of any claim or suit brought by or against the
Company including, but not limited to, reasonable attorneys' fees. The Executive
further agrees that in the event he in any way violates the provisions set forth
in section 6, the Company would suffer irreparable harm for which both
preliminary and final injunctive relief would be an appropriate remedy in
addition to such other relief to which the Company may also be entitled.
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f. For purposes of Section 6 of this agreement "the Company" shall
include its subsidiaries.
g. Notwithstanding anything herein to the contrary, should the
Executive terminate the employment period without Good Reason or
should the Company terminate it for Cause, the two year period
referred to at various points in this Section 6 shall be reduced
to one year.
7. MISCELLANEOUS.
a. SURVIVAL. Paragraphs 5 (relating to early termination), 6
(relating to noncompetition, nonsolicitation and confidentiality,
7(b) (relating to arbitration), 7(c) (relating to legal fees) and
7(o) (relating to governing law) shall survive the termination
hereof.
b. ARBITRATION. Except for disputes arising out of or relating to
the provisions of Section 6, any dispute arising out of or
relating to this Agreement, including each and every aspect of
the relationship of the Executive and the Company, shall be
resolved by binding arbitration. The arbitrator shall be a
retired federal judge. If the parties cannot agree on an
acceptable arbitrator, the dispute shall be heard by a panel of
three retired judges, one appointed by each of the parties and
the third appointed by the other two arbitrators. The arbitrator
shall hear and decide the dispute not by compromise but according
to law as if sitting in court applying the rules of evidence. The
arbitrator's decision shall be in writing and shall set forth the
facts and law supporting such decision. The arbitration shall be
held in Chicago, Illinois and except as otherwise provided in
this Paragraph, shall be conducted in accordance with the
Voluntary Labor Arbitration Rules of the American Arbitration
Association then in effect at the time of the arbitration.
c. BINDING EFFECT. This Agreement shall be binding on, and shall
inure to the benefit of, the Company and any person or entity
that succeeds to the interest of the Company (regardless of
whether such succession does or does not occur by operation of
law) by reason of the sale of all or a portion of the Company's
stock, a merger, consolidation or reorganization involving the
Company or, unless the Company otherwise elects in writing, a
sale of the assets of the business of the Company (or portion
thereof) in which Executive performs a majority of his services.
This Agreement shall also inure to the Benefit of Executive's
heirs, executors, administrators and legal representatives.
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d. ASSIGNMENT. Except as provided under Paragraph 7(c), neither this
Agreement nor any of the rights or obligations hereunder shall be
assigned or delegated by any party hereto without the prior
written consent of the other party.
e. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto with respect to the matters referred
to herein. No other agreement relating to the terms of
Executive's employment by the Company, oral or otherwise, shall
be binding between the parties unless it is in writing and signed
by the party against whom enforcement is sought. There are no
promises, representations, inducements, or statements between the
parties other than those that are expressly contained herein.
Executive acknowledges that he is entering into this Agreement of
his own free will and accord, and with no duress, that he has
read this Agreement and that he understands it and its legal
consequences.
f. SEVERABILITY; REFORMATION. In the event that one or more of the
provisions of this Agreement shall become invalid, illegal or
unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein shall
not be affected thereby. In the event that any of the provisions
of any of Paragraphs 6(a), (b) or (c) is not enforceable in
accordance with its terms, Executive and the Company agree that
such Paragraph shall be reformed to make such Paragraph
enforceable in a manner which provides the Company the maximum
rights permitted at law.
g. WAIVER. Waiver by any party hereto of any breach or default by
the other party of any of the terms of this Agreement shall not
operate as a waiver of any other breach or default, whether
similar to or different from the breach or default waived. No
waiver of any provision of this Agreement shall be implied from
any course of dealing between the parties hereto or from any
failure by either party hereto to assert its or his rights
hereunder on any occasion or series of occasions.
h. NOTICES. Any notice required or desired to be delivered under
this Agreement shall be in writing and shall be delivered
personally, by courier service, by registered mail, return
receipt requested, or by telecopy and shall be effective upon
actual receipt by the party to which such notice shall be
directed, and shall be addressed as follows (or to such other
address as the party entitled to notice shall hereafter designate
in accordance with the terms hereof):
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If to the Company:
CNA Surety Corporation
CNA Plaza
Chicago, Illinois 60685
Attention: General Counsel
If to Executive:
The home address of Executive noted on the records of the Company.
i. AMENDMENTS. This Agreement may not be altered, modified or
amended except by a written instrument signed by an authorized
representative of the Company and by the Executive.
j. HEADINGS. Headings to Paragraphs in this Agreement are for the
convenience of the parties only and are not intended to be part
of or to affect the meaning or interpretation hereof.
k. COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
l. WITHHOLDING. Any payments provided for herein shall subject to
withholding pursuant to applicable Federal, State, and local law
then in effect.
m. GOVERNING LAW. This Agreement shall be governed by the laws of
the State of Delaware, without reference to principles of
conflicts or choice of law under which the law of any other
jurisdiction would apply.
n. SOURCE OF PAYMENT. The payments and benefits provided for herein
other than stock options may, at the option of the Company, be
provided by one or more of its subsidiaries, rather than the
Company, itself.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by
its duly authorized officer and the Executive has hereunto set his hand as of
the day and year first above written.
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CNA SURETY CORPORATION EXECUTIVE
By:
--------------------------- ---------------------------
Mark C. Vonnahme John Heneghan
<PAGE> 1
EXHIBIT 10(13)
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of ______________, 1999, by and between CNA
SURETY CORPORATION a Delaware corporation ("the Company"), and Stephen T. Pate
("the Executive").
WITNESSETH:
WHEREAS, the Company wishes to continue to employ the Executive and the
Company and the Executive desires to enter into an agreement embodying the terms
of such employment (the "Agreement'); and
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the Company and the Executive hereby agree as follows:
1. EMPLOYMENT.
a. AGREEMENT TO EMPLOY. Upon the terms and subject to the conditions
of this Agreement, the Company hereby agrees to continue to
employ Executive and Executive hereby agrees to employment by the
Company.
b. TERM OF EMPLOYMENT. Except as provided in Paragraph 5(a), the
Company shall employ Executive for the period commencing on
January 1, 2000 (the "Commencement Date") and ending on December
31, 2001. The period during which Executive is employed pursuant
to this Agreement and any extensions set forth in Paragraph 1(c)
of this Agreement shall be referred to as the "Employment
Period."
c. RENEWAL. Upon expiration of the original term of this Agreement
set forth in Paragraph 1(b) of this Agreement, this Agreement
shall renew automatically for one (1) additional one (1) year
term unless the Company or the Executive provides the other
thirty days written notice that the Agreement will not be
renewed.
2. POSITION AND DUTIES.
a. POSITION. During the Employment Period, Executive shall serve as
Senior Vice President, Field Management & Distribution of the
Company or in such other position or positions in the Company
and/or in any of its subsidiaries as he and the Company shall
mutually agree. In addition, Executive shall serve in such other
position or positions with the Company and its subsidiaries
commensurate with his position and experience as the
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Board of Directors of the Company (the "Board") shall from time
to time specify.
b. DUTIES. During the Employment Period, Executive shall have the
duties, responsibilities, and obligations as the Board shall from
time to time specify. Executive shall devote his full time to the
services required of him hereunder, except for vacation time and
reasonable periods of absence due to sickness, personal injury or
other disability, and shall use his best efforts, judgment, skill
and energy to perform such services in a manner consonant with
the duties of his position and to improve and advance the
business and interests of the Company and its subsidiaries.
Nothing contained herein shall preclude Executive from (i)
serving on the board of directors of any business corporation
with the consent of the Board or (ii) serving on the Board of, or
working for, any charitable or community organization.
c. LOCATION. Subject to normal business travel, Executive shall
perform his service hereunder in, and shall not be required to
change his place of residence from, the Sioux Falls metropolitan
area.
3. COMPENSATION.
a. BASE SALARY. During the Employment Period, the Company shall pay
Executive an annual base salary of $275,000 per year, payable in
bi-weekly installments. The Compensation Committee of the Board
shall annually review Executive's base salary in light of
competitive practices and the performance of Executive and the
Company, and may, in its discretion, increase such base salary by
an amount it determines to be appropriate. Any such increase
shall not reduce or limit any other obligation of the Company
hereunder. Executive's base salary as set forth above or as may
be increased from time to time and shall not be reduced without
the mutual written consent of the Company and the Executive.
Executive's base salary as defined in this paragraph may be
referred to hereinafter as "Base Salary."
b. ANNUAL BONUS. For each calendar year ending during the Employment
Period, Executive may earn an annual bonus based on the
achievement of target levels of performance achieved during the
calendar year. During the first quarter of each year during the
term of this Agreement, the Compensation Committee of the Board
in its sole discretion shall
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determine the targets and the bonus percentage ("Bonus Target")
for which the Executive shall be eligible, which bonus
percentages shall range from 0% to 80% of the Executive's Base
Salary based upon the performance targets determined by the
Compensation Committee of the Board. The actual bonus, if any,
payable for any such year shall be determined solely by the
Compensation Committee of the Board based upon the performance of
the Company and/or Executive against the targets with a 40%
target for "good performance."
c. LONG-TERM INCENTIVE COMPENSATION. During the term of the
Employment Period, Executive shall participate in all of the
Company's existing and future long-term incentive compensation
programs for key executives at a level commensurate with his
position at the Company and consistent with the Company's then
current policies and practices, as determined by the Compensation
Committee of the Board. Long-term Incentive Compensation shall be
determined by the Compensation Committee of the Board in
accordance with the terms of the Company's Long-Term Incentive
Compensation Plan.
d. STOCK OPTIONS. The Executive shall be eligible for additional
grants of stock options under the terms and conditions of the
Stock Option Plan dated February 24, 1997.
4. BENEFITS, PERQUISITES AND EXPENSES.
a. BENEFITS. During the Employment Period, to the extent he is
eligible to participate in any welfare or retirement plans now
existing or established hereafter under their generally
applicable provisions, Executive may participate in (i) each
welfare benefit plan which may be sponsored or maintained by the
Company, including, without limitation, each group life,
hospitalization, medical, dental, health, accident or disability
insurance or similar plan or program of the Company, and (ii)
each retirement, profit sharing, deferred compensation or savings
plan which may be sponsored or maintained by the Company. Nothing
in this Paragraph 4(a) shall limit the Company's right to amend
or terminate any such plan. Notwithstanding any plan language to
the contrary, Executive shall be eligible for four (4) weeks'
paid vacation, for the year commencing January 1, 2000 and each
subsequent year of the Employment Period.
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b. BUSINESS EXPENSES. During the Employment Period, the Company
shall pay or reimburse Executive for all reasonable expenses
incurred or paid by Executive in the performance of Executive's
duties hereunder, upon presentation of expense statements or
vouchers and such other information as the Company may require
and in accordance with the generally applicable policies and
procedures of the Company as may be amended by it from time to
time.
c. ADDITIONAL BENEFITS. In addition to the foregoing, during the
Employment Period, the Executive shall be entitled to
reimbursement from the Corporation for (1) professional tax
advice and services and (2) up to $5,000 per year for financial
planning advice and services.
5. TERMINATION OF EMPLOYMENT OR NON RENEWAL OF AGREEMENT.
a. EARLY TERMINATION OF THE EMPLOYMENT PERIOD. Notwithstanding
Paragraph 1(b), the Employment Period shall end upon the earliest
to occur of (i) a termination of Executive's employment on
account of Executive's death or Disability, (ii) a Termination
for Cause, (iii) a Termination Without Cause, (iv) a Termination
for Good Reason or (v) Termination for Change in Control.
b. BENEFITS PAYABLE UPON TERMINATION OR NONRENEWAL. Following the
early termination of the Employment Period pursuant to Paragraph
5(a) or Nonrenewal of this Agreement pursuant to Paragraph 1(c),
Executive (or, in the event of his death, his surviving spouse,
if any, his estate, or such other beneficiary as the Executive
may designate by written notice to the Company) shall be paid
compensation in accordance with the following provisions:
(i) Should the Executive's employment with the Company
terminate for any reason, his Earned Salary and accrued
vacation shall be paid through his last day of
employment at the end of the Company's next regular pay
period and Vested Benefits shall be payable in
accordance with their terms. In addition:
(ii) Should the Executive's employment with the Company
terminate for Cause or should the Executive terminate
this
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Agreement without Good Reason, other than the payments
set forth in Paragraph 5(b)(i) above and any
entitlement to any Vested Benefits, the Company shall
have no further obligations to the Executive;
(iii) Should the Executive's employment with the Company
terminate Without Cause, for Good Reason, for Change
of Control or because of the non-renewal of this
Agreement, he shall be paid the Severance Benefit,
Additional Benefits, Vested Benefits and Incentive
Compensation. Notwithstanding anything to the contrary
in this Agreement, no Severance Benefit or Incentive
Compensation shall be payable if the Executive
violates the terms and covenants of section 6 of this
Agreement. Moreover, Executive agrees that if he
violates section 6 of this Agreement he shall repay
forthwith the Company any amount of the Severance
Benefit or Incentive Compensation previously paid
pursuant to this Paragraph 5(b)(i). In addition,
should the Executive's employment with the Company
terminate due to a Termination for Change in Control,
any stock options Executive shall have received which
are unvested at the time of such termination shall
immediately accelerate and become fully vested and the
exercise period for such options shall be extended to
permit the Executive to exercise such options during
the two year period immediately following the
Executive's termination.
(iv) Should the Executive's employment with Company
terminate due to death or Disability, the Company
shall pay the Executive an amount equal to a pro-rated
amount equal to the product of the Bonus Target for
the year in which termination occurs and a fraction
the numerator of which is equal to the number of days
in the calendar year of the Executive's termination of
employment which have elapsed as of the date of such
termination and the denominator of which is 365; plus
any long-term cash Incentive Compensation awards held
by the Executive at the date of his termination, which
shall be payable, if at all, based upon actual Company
performance results (but without regard to any
individual performance criteria) for the applicable
pro rata portion of performance period.
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c. TIMING OF PAYMENTS. The payments referred to in Paragraph
5(b) shall be made as follows: Earned Salary shall be paid
in cash in a single lump sum as soon as practicable, but in
no event more than ten business days, following the end of
the Employment Period. Severance Benefits shall be paid in
equal biweekly installments during the two year period
immediately following the Executive's termination. Incentive
Compensation shall be payable at the same time as similar
awards are paid to other executives still actively employed
by the Company and participating in the plans under which
the awards are payable. Vested Benefits shall be payable in
accordance with the terms of the plan (including, without
limitation, the extension of the exercise period of options
under any stock option plan) under which such benefits have
been awarded or accrued. Additional Benefits shall be
provided or made available at the times specified below as
to each such Additional Benefit.
d. DEFINITIONS. For purposes of sections 5 and 6, capitalized
terms have the following meanings:
"ADDITIONAL BENEFITS" consists of the following rights and benefits:
except as otherwise provided below, Executive (and, to the extent
applicable, his dependents) will be entitled to continue participation in
all of the Company's health benefit plans (the "Health Plans"), until the
second anniversary of Executive's termination of employment (the "End
Date"); provided that Executive's participation in the Company's Health
Plans shall cease on any earlier date that Executive becomes eligible for
comparable benefits from a subsequent employer. To the extent any such
benefits cannot be provided under the terms of the applicable plan, policy
or program, the Company shall provide a comparable benefit under another
plan or from the Company's general assets. Executive's participation in the
Health Plans will be on the same terms and conditions that would have
applied had Executive continued to be employed by the Company through the
End Date. The Company shall deduct the Executive's cost of the foregoing
benefits from the Executive's Severance Benefit payments at the same
intervals as they were deducted from his Base Salary during the Employment
Period.
"DISABILITY" means "disability" as defined in the Company's Long Term
Disability Plan.
"EARNED SALARY" means any Base Salary earned, but unpaid, for services
rendered to the Company on or prior to the date on which the Employment Period
ends pursuant to Paragraph 5(a) or because of the Nonrenewal of this Agreement
pursuant to Paragraph 1(c).
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"INCENTIVE COMPENSATION" consists of the sum of:
(i) a pro-rated amount equal to the product of the average of the
actual performance bonuses paid to the Executive by the
Company during the two calendar years prior to the year in
which termination occurs ("Prior Bonus") and a fraction the
numerator of which is equal to the number of days in the
calendar year of Executive's termination of employment which
have elapsed as of the date of such termination and the
denominator of which is 365; plus
(ii) an amount equal to twice the amount of the Prior Bonus; plus
(iii) any long-term cash incentive compensation awards held by
Executive at the date of his termination, which shall be
payable, if at all, based upon actual Company performance
results (but without regard to any individual performance
criteria) for the applicable pro rata portion of performance
period.
"SEVERANCE BENEFIT" means two years Base Salary based upon the Executive's
Base Salary on the date the Executive's employment terminates.
"TERMINATION FOR CHANGE IN CONTROL" means a termination of Executive's
employment by the Company for any reason other than a Termination for Cause at
the sole discretion of the Company within one year following the date upon which
(i) Continental Casualty Company and any affiliates no longer are able
collectively to elect a majority of the Board, (ii) a sale of all or
substantially all of the assets of the Company is consummated or (iii) a merger,
consolidation or other business combination involving the Company and an
unaffiliated third party is consummated in which the Company is not the
surviving corporation.
"TERMINATION FOR CAUSE" means a termination of the Executive's employment
by the Company (A) due to conduct of the Executive, which is determined by the
Board, in its sole discretion, to be to: (i) a willful and continued failure to
perform the material duties of his position, (ii) a fraud against the Company or
(iii) a material breach of any provision of this Agreement which has had (or is
expected to have) a material adverse effect on the business of the Company or
its subsidiaries; or (B) due to the Executive's conviction of a felony.
"TERMINATION FOR GOOD REASON" means a termination of Executive's employment
by Executive within 90 days following (i) a material diminution in Executive's
positions, duties and responsibilities from those described in Paragraph 2
hereof, (ii) the removal of Executive from, or the failure to re-elect Executive
as a member of, the Board, (iii) a reduction in Executive's
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annual Base Salary, (iv) a material reduction in the aggregate value of the
retirement, profit sharing and welfare benefits provided to Executive from those
in effect as of the Commencement Date (other than a reduction which is
proportionate to the reductions applicable to other senior executives pursuant
to a cost-saving plan that includes all senior executives). Notwithstanding the
foregoing, a termination shall not be treated as a Termination for Good Reason
(i) if Executive shall have consented in writing to the occurrence of the event
giving rise to the claim of Termination for Good Reason or (ii) unless Executive
first shall have delivered a written notice to the Company within 30 days of his
having actual knowledge of the occurrence of one of such events stating that he
intends to terminate his employment for Good Reason and specifying the factual
basis for such termination, and such event, if capable of being cured, shall not
have been cured within 30 days of the receipt of such notice.
"TERMINATION WITHOUT CAUSE" means any termination of Executive's employment
by the Company other than a Termination for Cause.
"VESTED BENEFITS" means amounts which are vested or which Executive is
otherwise entitled to receive under the terms of or in accordance with any plan
maintained by the Company at or subsequent to the date of his termination
without regard to the performance by Executive of further services or the
resolution of a contingency.
e. FULL DISCHARGE OF COMPANY OBLIGATIONS. In consideration of
receiving any payments or benefits under Section 5 of this
Agreement, the Executive agrees to sign a release in the form
attached to this Agreement as Exhibit A, as a condition precedent
to receiving them. The amounts payable to Executive pursuant to
this Section 5 following termination of his employment (including
amounts payable with respect to Vested Benefits) shall be in full
and complete satisfaction of Executive's rights under this
Agreement and any other claims he may have in respect of his
employment by the Company or any of its subsidiaries. Such
amounts shall constitute liquidated damages with respect to any
and all such rights and claims and, upon Executive's receipt of
such amounts, the Company shall be released and discharged from
any and all liability to Executive in connection with this
Agreement or otherwise in connection with Executive's employment
with the Company and its subsidiaries. Nothing in this Paragraph
5(e) shall be construed to release the Company from any
obligation to indemnify Executive and hold Executive harmless
from and against any claim, loss or cause of action arising from
or out of Executive's performance as an officer, director or
employee of the Company or any of its subsidiaries or in any
other capacity, including any fiduciary capacity, in which
Executive served at the request of the
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Company to the maximum extent permitted by applicable law and the
certificate of incorporation and by-laws of the Company.
6. NONCOMPETITION AND CONFIDENTIALITY.
By and in consideration of the salary, benefits and other consideration,
contained in this Agreement, the adequacy and receipt of which is hereby
acknowledged, the Executive agrees that:
a. NONCOMPETITION. During the Employment Period and during the two
year period (the "Restriction Period") following any termination
or Nonrenewal of the Executive's employment, the Executive shall
not whether as a principal, partner, employee, agent, consultant,
shareholder (other than as a holder, or a member of a group which
is a holder, of not in excess of 1% of the outstanding voting
shares of any publicly traded company) or in any other
relationship or capacity: (i) become associated with any entity
that is actively engaged or takes any steps to plan to be engaged
in any geographic area in the surety business or in any other
business which is in competition with the business in which the
Company is engaged or to the Executive's knowledge is actively
considering becoming engaged, (ii) contact, call upon, solicit
business from, sell, or render services to, any customer or
licensed agent of the Company with respect to any service or
product identical or similar to any services or products provided
or sold by the Company, including but not limited to current
products or those under development, distribution strategy,
development of computer software and administrative systems for
administration.
b. CONFIDENTIALITY. The Executive acknowledges and agrees that all
records (whether written or recorded electronically) including
but not limited to agent and client lists, files, reports, notes,
internal memoranda and manuals relating to the Company's
business; business plans, business processing techniques, systems
and methods; sales processes, sales and training manuals;
underwriting procedures and manuals; budgets; financial
statements; compilations; or summaries of the foregoing, by
whomever prepared, and copies or reproductions of the foregoing,
relating to the Company's operations or activities, or to the
operations or activities of any of the Company's customers,
agents, suppliers, vendors, or subsidiary companies thereof, made
or received by the Executive during the course of his employment
with the Company have been, are and shall remain the sole and
exclusive property of the Company and were held by the Executive
during his
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employment only as a trustee for the Company which, at all times,
retained ownership and control of said records.
c. NON-SOLICITATION OF EMPLOYEES. During the Employment Period and
the one year period following any termination or Nonrenewal of
Executive's employment, Executive shall not directly or
indirectly solicit, nor shall any entity with which the Executive
is associated encourage or induce any employee of the Company or
any of its subsidiaries to terminate employment with it, and
shall not directly or indirectly, either individually or as
owner, agent, employee, consultant or otherwise, employ or offer
employment to any person who is or was employed by the Company or
a subsidiary thereof unless such person shall have ceased to be
employed by it for a period of at least six months.
d. COMPANY PROPERTY. Except as expressly provided herein, promptly
following Executive's termination of employment, Executive shall
return to the Company all property of the Company, and all copies
thereof in Executive's possession or under his control.
e. INJUNCTIVE RELIEF AND OTHER REMEDIES WITH RESPECT TO COVENANTS.
Executive acknowledges and agrees that the covenants and
obligations of Executive with respect to noncompetition,
nonsolicitation, confidentiality and Company property, relate to
special, unique and extraordinary matters and that a violation of
any of the terms of such covenants and obligations will cause the
Company irreparable injury for which adequate remedies are not
available at law. Executive acknowledges and agrees that the
geographic scope of his employment with the Company is national,
and that the national geographic and the two year restrictions
placed upon him in Paragraph 6 of this Agreement are reasonable
and necessary to the preservation and vitality of the Company's
business, reputation, and good will due to the nature of the
Company's business, and given his knowledge and expertise within
the insurance industry and the consideration provided in this
Agreement, that he will be able to earn a satisfactory livelihood
or otherwise provide for his financial security without violating
such restrictions.
Therefore, Executive agrees that the Company shall (i) be entitled to, on
both an interim and final basis, an injunction, restraining order or such other
equitable relief (without the requirement to post bond) restraining Executive
from committing any violation of the covenants and obligations contained in this
section 6 and (ii) have no further obligation to make any payments to Executive
hereunder following any material violation of the covenants and obligations
contained in this section
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6. These remedies are cumulative and are in addition to any other rights and
remedies the Company may have at law or in equity. In connection with the
foregoing provisions of this section 6, Executive represents that his economic
means and circumstances are such that such provisions will not prevent him from
providing for himself and his family on a basis satisfactory to him.
The Executive and Company agree that section 6 of this Agreement is not
subject to the provisions of Paragraph 7(b). The Executive agrees that in the
event he violates said section 6 he will pay all costs and expenses with respect
to the prosecution or defense of any claim or suit brought by or against the
Company including, but not limited to, reasonable attorneys' fees. The Executive
further agrees that in the event he in any way violates the provisions set forth
in section 6, the Company would suffer irreparable harm for which both
preliminary and final injunctive relief would be an appropriate remedy in
addition to such other relief to which the Company may also be entitled.
f. For purposes of Section 6 of this agreement "the Company" shall
include its subsidiaries.
g. Notwithstanding anything herein to the contrary, should the
Executive terminate the employment period without Good Reason or
should the Company terminate it for Cause, the two year period
referred to at various points in this Section 6 shall be reduced
to one year.
7. MISCELLANEOUS.
a. SURVIVAL. Paragraphs 5 (relating to early termination), 6
(relating to noncompetition, nonsolicitation and confidentiality,
7(b) (relating to arbitration), 7(c) (relating to legal fees) and
7(o) (relating to governing law) shall survive the termination
hereof.
b. ARBITRATION. Except for disputes arising out of or relating to
the provisions of Section 6, any dispute arising out of or
relating to this Agreement, including each and every aspect of
the relationship of the Executive and the Company, shall be
resolved by binding arbitration. The arbitrator shall be a
retired federal judge. If the parties cannot agree on an
acceptable arbitrator, the dispute shall be heard by a panel of
three retired judges, one appointed by each of the parties and
the third appointed by the other two arbitrators. The arbitrator
shall hear and decide the dispute not by compromise but according
to law as if sitting in court applying the rules of evidence. The
arbitrator's decision shall be in writing and shall set forth the
facts and law supporting such decision. The arbitration shall be
held in Chicago, Illinois and except as otherwise provided in
this Paragraph, shall be conducted in accordance with
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the Voluntary Labor Arbitration Rules of the American Arbitration
Association then in effect at the time of the arbitration.
c. BINDING EFFECT. This Agreement shall be binding on, and shall
inure to the benefit of, the Company and any person or entity
that succeeds to the interest of the Company (regardless of
whether such succession does or does not occur by operation of
law) by reason of the sale of all or a portion of the Company's
stock, a merger, consolidation or reorganization involving the
Company or, unless the Company otherwise elects in writing, a
sale of the assets of the business of the Company (or portion
thereof) in which Executive performs a majority of his services.
This Agreement shall also inure to the Benefit of Executive's
heirs, executors, administrators and legal representatives.
d. ASSIGNMENT. Except as provided under Paragraph 7(c), neither this
Agreement nor any of the rights or obligations hereunder shall be
assigned or delegated by any party hereto without the prior
written consent of the other party.
e. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto with respect to the matters referred
to herein. No other agreement relating to the terms of
Executive's employment by the Company, oral or otherwise, shall
be binding between the parties unless it is in writing and signed
by the party against whom enforcement is sought. There are no
promises, representations, inducements, or statements between the
parties other than those that are expressly contained herein.
Executive acknowledges that he is entering into this Agreement of
his own free will and accord, and with no duress, that he has
read this Agreement and that he understands it and its legal
consequences.
f. SEVERABILITY; REFORMATION. In the event that one or more of the
provisions of this Agreement shall become invalid, illegal or
unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein shall
not be affected thereby. In the event that any of the provisions
of any of Paragraphs 6(a), (b) or (c) is not enforceable in
accordance with its terms, Executive and the Company agree that
such Paragraph shall be reformed to make such Paragraph
enforceable in a manner which provides the Company the maximum
rights permitted at law.
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g. WAIVER. Waiver by any party hereto of any breach or default by
the other party of any of the terms of this Agreement shall not
operate as a waiver of any other breach or default, whether
similar to or different from the breach or default waived. No
waiver of any provision of this Agreement shall be implied from
any course of dealing between the parties hereto or from any
failure by either party hereto to assert its or his rights
hereunder on any occasion or series of occasions.
h. NOTICES. Any notice required or desired to be delivered under
this Agreement shall be in writing and shall be delivered
personally, by courier service, by registered mail, return
receipt requested, or by telecopy and shall be effective upon
actual receipt by the party to which such notice shall be
directed, and shall be addressed as follows (or to such other
address as the party entitled to notice shall hereafter designate
in accordance with the terms hereof):
If to the Company:
CNA Surety Corporation
CNA Plaza
Chicago, Illinois 60685
Attention: General Counsel
If to Executive:
The home address of Executive noted on the records of the Company.
i. AMENDMENTS. This Agreement may not be altered, modified or
amended except by a written instrument signed by an authorized
representative of the Company and by the Executive.
j. HEADINGS. Headings to Paragraphs in this Agreement are for the
convenience of the parties only and are not intended to be part
of or to affect the meaning or interpretation hereof.
k. COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
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l. WITHHOLDING. Any payments provided for herein shall subject to
withholding pursuant to applicable Federal, State, and local law
then in effect.
m. GOVERNING LAW. This Agreement shall be governed by the laws of
the State of Delaware, without reference to principles of
conflicts or choice of law under which the law of any other
jurisdiction would apply.
n. SOURCE OF PAYMENT. The payments and benefits provided for herein
other than stock options may, at the option of the Company, be
provided by one or more of its subsidiaries, rather than the
Company, itself.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by
its duly authorized officer and the Executive has hereunto set his hand as of
the day and year first above written.
CNA SURETY CORPORATION EXECUTIVE
By:
---------------------------- -----------------------------
Mark C. Vonnahme Stephen T. Pate
<PAGE> 1
EXHIBIT 10(14)
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated as of ______________, 2000, by and between CNA
SURETY CORPORATION a Delaware corporation ("the Company"), and David F. Paul
("the Executive").
WITNESSETH:
WHEREAS, the Company wishes to continue to employ the Executive and the
Company and the Executive desires to enter into an agreement embodying the terms
of such employment (the "Agreement'); and
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the Company and the Executive hereby agree as follows:
1. EMPLOYMENT.
a. AGREEMENT TO EMPLOY. Upon the terms and subject to the conditions of
this Agreement, the Company hereby agrees to continue to employ
Executive and Executive hereby agrees to employment by the Company.
b. TERM OF EMPLOYMENT. Except as provided in Paragraph 5(a), the Company
shall employ Executive for the period commencing on January 1, 2000
(the "Commencement Date") and ending on December 31, 2001. The period
during which Executive is employed pursuant to this Agreement and any
extensions set forth in Paragraph 1(c) of this Agreement shall be
referred to as the "Employment Period."
c. RENEWAL. Upon expiration of the original term of this Agreement set
forth in Paragraph 1(b) of this Agreement, this Agreement shall renew
automatically for one (1) additional one (1) year term unless the
Company or the Executive provides the other thirty days written
notice that the Agreement will not be renewed.
2. POSITION AND DUTIES.
a. POSITION. During the Employment Period, Executive shall serve as Vice
President, International Surety of the Company or in such other
position or positions in the Company and/or in any of its
subsidiaries as he and the Company shall mutually agree. In addition,
Executive shall serve in such other position or positions with the
Company and its subsidiaries commensurate with his position and
experience as the Board of Directors of the Company (the "Board")
shall from time to time specify.
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b. DUTIES. During the Employment Period, Executive shall have the
duties, responsibilities, and obligations as the Board shall from
time to time specify. Executive shall devote his full time to the
services required of him hereunder, except for vacation time and
reasonable periods of absence due to sickness, personal injury or
other disability, and shall use his best efforts, judgment, skill and
energy to perform such services in a manner consonant with the duties
of his position and to improve and advance the business and interests
of the Company and its subsidiaries. Nothing contained herein shall
preclude Executive from (i) serving on the board of directors of any
business corporation with the consent of the Board or (ii) serving on
the Board of, or working for, any charitable or community
organization.
c. LOCATION. Subject to normal business travel, Executive shall perform
his service hereunder in, and shall not be required to change his
place of residence from, the Atlanta metropolitan area.
3. COMPENSATION.
a. BASE SALARY. During the Employment Period, the Company shall pay
Executive an annual base salary of $180,000 per year, payable in
bi-weekly installments. The President shall annually review
Executive's base salary in light of competitive practices and the
performance of Executive and the Company, and may, in his discretion,
increase such base salary by an amount he determines to be
appropriate. Any such increase shall not reduce or limit any other
obligation of the Company hereunder. Executive's base salary as set
forth above or as may be increased from time to time and shall not be
reduced without the mutual written consent of the Company and the
Executive. Executive's base salary as defined in this paragraph may
be referred to hereinafter as "Base Salary."
b. ANNUAL BONUS. For each calendar year ending during the Employment
Period, Executive may earn an annual bonus based on the achievement
of target levels of performance achieved during the calendar year.
During the first quarter of each year during the term of this
Agreement, the President in his sole discretion shall determine the
targets and the bonus percentage ("Bonus Target") for which the
Executive shall be eligible, which bonus percentages shall range from
0% to 70% of the Executive's Base Salary based upon the performance
targets determined by the President. The actual bonus, if any,
payable for any such year shall be determined solely by
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the President based upon the performance of the Company and/or
Executive against the targets with a 35% target for "good
performance."
c. LONG-TERM INCENTIVE COMPENSATION. During the term of the Employment
Period, Executive shall participate in all of the Company's existing
and future long-term incentive compensation programs for key
executives at a level commensurate with his position at the Company
and consistent with the Company's then current policies and
practices, as determined by the President. Long-term Incentive
Compensation shall be determined by the President in accordance with
the terms of the Company's Long-Term Incentive Compensation Plan.
d. STOCK OPTIONS. The Executive shall be eligible for additional grants
of stock options under the terms and conditions of the Stock Option
Plan dated February 24, 1997.
4. BENEFITS, PERQUISITES AND EXPENSES.
a. BENEFITS. During the Employment Period, to the extent he is eligible
to participate in any welfare or retirement plans now existing or
established hereafter under their generally applicable provisions,
Executive may participate in (i) each welfare benefit plan which may
be sponsored or maintained by the Company, including, without
limitation, each group life, hospitalization, medical, dental,
health, accident or disability insurance or similar plan or program
of the Company, and (ii) each retirement, profit sharing, deferred
compensation or savings plan which may be sponsored or maintained by
the Company. Nothing in this Paragraph 4(a) shall limit the Company's
right to amend or terminate any such plan. Notwithstanding any plan
language to the contrary, Executive shall be eligible for four (4)
weeks' paid vacation, for the year commencing January 1, 2000 and
each subsequent year of the Employment Period.
b. BUSINESS EXPENSES. During the Employment Period, the Company shall
pay or reimburse Executive for all reasonable expenses incurred or
paid by Executive in the performance of Executive's duties hereunder,
upon presentation of expense statements or vouchers and such other
information as the Company may require and in accordance with the
generally applicable policies and procedures of the Company as may be
amended by it from time to time.
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c. ADDITIONAL BENEFITS. In addition to the foregoing, during the
Employment Period, the Executive shall be entitled to reimbursement
from the Corporation for (1) professional tax advice and services and
(2) up to $5,000 per year for financial planning advice and services.
5. TERMINATION OF EMPLOYMENT OR NON RENEWAL OF AGREEMENT.
a. EARLY TERMINATION OF THE EMPLOYMENT PERIOD. Notwithstanding Paragraph
1(b), the Employment Period shall end upon the earliest to occur of
(i) a termination of Executive's employment on account of Executive's
death or Disability, (ii) a Termination for Cause, (iii) a
Termination Without Cause, (iv) a Termination for Good Reason or (v)
Termination for Change in Control.
b. BENEFITS PAYABLE UPON TERMINATION OR NONRENEWAL. Following the early
termination of the Employment Period pursuant to Paragraph 5(a) or
Nonrenewal of this Agreement pursuant to Paragraph 1(c), Executive
(or, in the event of his death, his surviving spouse, if any, his
estate, or such other beneficiary as the Executive may designate by
written notice to the Company) shall be paid compensation in
accordance with the following provisions:
(i) Should the Executive's employment with the Company terminate
for any reason, his Earned Salary and accrued vacation shall
be paid through his last day of employment at the end of the
Company's next regular pay period and Vested Benefits shall
be payable in accordance with their terms. In addition:
(ii) Should the Executive's employment with the Company terminate
for Cause or should the Executive terminate this Agreement
without Good Reason, other than the payments set forth in
Paragraph 5(b)(i) above and any entitlement to any Vested
Benefits, the Company shall have no further obligations to
the Executive;
(iii) Should the Executive's employment with the Company
terminate Without Cause, for Good Reason, for Change of
Control or because of the non- renewal of this Agreement, he
shall be paid the
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Severance Benefit, Additional Benefits,
Vested Benefits and Incentive Compensation. Notwithstanding
anything to the contrary in this Agreement, no Severance
Benefit or Incentive Compensation shall be payable if the
Executive violates the terms and covenants of section 6 of
this Agreement. Moreover, Executive agrees that if he
violates section 6 of this Agreement he shall repay
forthwith the Company any amount of the Severance Benefit or
Incentive Compensation previously paid pursuant to this
Paragraph 5(b)(i). In addition, should the Executive's
employment with the Company terminate due to a Termination
for Change in Control, any stock options Executive shall
have received which are unvested at the time of such
termination shall immediately accelerate and become fully
vested and the exercise period for such options shall be
extended to permit the Executive to exercise such options
during the two year period immediately following the
Executive's termination.
(iv) Should the Executive's employment with Company terminate due
to death or Disability, the Company shall pay the Executive
an amount equal to a pro-rated amount equal to the product
of the Bonus Target for the year in which termination occurs
and a fraction the numerator of which is equal to the number
of days in the calendar year of the Executive's termination
of employment which have elapsed as of the date of such
termination and the denominator of which is 365; plus any
long-term cash Incentive Compensation awards held by the
Executive at the date of his termination, which shall be
payable, if at all, based upon actual Company performance
results (but without regard to any individual performance
criteria) for the applicable pro rata portion of performance
period.
c. TIMING OF PAYMENTS. The payments referred to in Paragraph 5(b) shall
be made as follows: Earned Salary shall be paid in cash in a single
lump sum as soon as practicable, but in no event more than ten
business days, following the end of the Employment Period. Severance
Benefits shall be paid in equal biweekly installments during the two
year period immediately following the Executive's termination.
Incentive Compensation shall be payable at the same time as similar
awards are paid to other executives still actively employed by the
Company and participating in the plans under which the awards are
payable. Vested Benefits shall be payable in accordance with the
terms of the plan (including, without limitation, the
<PAGE> 6
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Employment Agreement -
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extension of the exercise period of options under any stock option
plan) under which such benefits have been awarded or accrued.
Additional Benefits shall be provided or made available at the times
specified below as to each such Additional Benefit.
d. DEFINITIONS. For purposes of sections 5 and 6, capitalized terms have
the following meanings:
"ADDITIONAL BENEFITS" consists of the following rights and benefits:
except as otherwise provided below, Executive (and, to the extent
applicable, his dependents) will be entitled to continue participation in
all of the Company's health benefit plans (the "Health Plans"), until the
second anniversary of Executive's termination of employment (the "End
Date"); provided that Executive's participation in the Company's Health
Plans shall cease on any earlier date that Executive becomes eligible for
comparable benefits from a subsequent employer. To the extent any such
benefits cannot be provided under the terms of the applicable plan, policy
or program, the Company shall provide a comparable benefit under another
plan or from the Company's general assets. Executive's participation in the
Health Plans will be on the same terms and conditions that would have
applied had Executive continued to be employed by the Company through the
End Date. The Company shall deduct the Executive's cost of the foregoing
benefits from the Executive's Severance Benefit payments at the same
intervals as they were deducted from his Base Salary during the Employment
Period.
"DISABILITY" means "disability" as defined in the Company's Long Term
Disability Plan.
"EARNED SALARY" means any Base Salary earned, but unpaid, for services
rendered to the Company on or prior to the date on which the Employment Period
ends pursuant to Paragraph 5(a) or because of the Nonrenewal of this Agreement
pursuant to Paragraph 1(c).
"INCENTIVE COMPENSATION" consists of the sum of:
(i) a pro-rated amount equal to the product of (A) the "good
performance" level of the Bonus Target for the year in which
termination occurs (the "Deemed Bonus Amount") and a
fraction the numerator of which is equal to the number of
days in the calendar year of Executive's termination of
employment which have elapsed as of the date of such
termination and the denominator of which is 365 ("Pro Rata
Fraction"), if such termination occurs prior to the payment
to Executive by the Company of a performance bonus with
respect to a full calendar year, (B) actual bonus
<PAGE> 7
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paid to Executive by the Company for a full calendar year
prior to such termination (the "Prior Bonus Amount")
multiplied by the Pro Rata Fraction, if such termination
occurs after Executive has received payment by the Company
of a performance bonus with respect to a full calendar year
but prior to the receipt by Executive of performance bonuses
from the Company with respect to two full calendar years,
and (C) average of the actual performance bonuses paid to
Executive by the Company during the two calendar years prior
to the year in which such termination occurs (the "Average
Bonus Amount") multiplied by the Pro Rata Fraction; and
(ii) an amount equal to twice the amount of the Deemed Bonus
Amount, the Actual Bonus Amount or Average Bonus Amount, as
applicable based upon the year in which such termination
occurs; plus
(iii) any long-term cash incentive compensation awards held by
Executive at the date of his termination, which shall be
payable, if at all, based upon actual Company performance
results (but without regard to any individual performance
criteria) for the applicable pro rata portion of performance
period.
"SEVERANCE BENEFIT" means two years Base Salary based upon the Executive's
Base Salary on the date the Executive's employment terminates.
"TERMINATION FOR CHANGE IN CONTROL" means a termination of Executive's
employment by the Company for any reason other than a Termination for Cause at
the sole discretion of the Company within one year following the date upon which
(i) Continental Casualty Company and any affiliates no longer are able
collectively to elect a majority of the Board, (ii) a sale of all or
substantially all of the assets of the Company is consummated or (iii) a merger,
consolidation or other business combination involving the Company and an
unaffiliated third party is consummated in which the Company is not the
surviving corporation.
"TERMINATION FOR CAUSE" means a termination of the Executive's employment
by the Company (A) due to conduct of the Executive, which is determined by the
Board, in its sole discretion, to be to: (i) a willful and continued failure to
perform the material duties of his position, (ii) a fraud against the Company or
(iii) a material breach of any provision of this Agreement which has had (or is
expected to have) a material adverse effect on the business of the Company or
its subsidiaries; or (B) due to the Executive's conviction of a felony.
"TERMINATION FOR GOOD REASON" means a termination of Executive's employment
by Executive within 90 days following (i) a material diminution in Executive's
positions, duties and
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responsibilities from those described in Paragraph 2 hereof, (ii) the removal of
Executive from, or the failure to re-elect Executive as a member of, the Board,
(iii) a reduction in Executive's annual Base Salary, (iv) a material reduction
in the aggregate value of the retirement, profit sharing and welfare benefits
provided to Executive from those in effect as of the Commencement Date (other
than a reduction which is proportionate to the reductions applicable to other
senior executives pursuant to a cost-saving plan that includes all senior
executives). Notwithstanding the foregoing, a termination shall not be treated
as a Termination for Good Reason (i) if Executive shall have consented in
writing to the occurrence of the event giving rise to the claim of Termination
for Good Reason or (ii) unless Executive first shall have delivered a written
notice to the Company within 30 days of his having actual knowledge of the
occurrence of one of such events stating that he intends to terminate his
employment for Good Reason and specifying the factual basis for such
termination, and such event, if capable of being cured, shall not have been
cured within 30 days of the receipt of such notice.
"TERMINATION WITHOUT CAUSE" means any termination of Executive's employment
by the Company other than a Termination for Cause.
"VESTED BENEFITS" means amounts which are vested or which Executive is
otherwise entitled to receive under the terms of or in accordance with any plan
maintained by the Company at or subsequent to the date of his termination
without regard to the performance by Executive of further services or the
resolution of a contingency.
e. FULL DISCHARGE OF COMPANY OBLIGATIONS. In consideration of receiving
any payments or benefits under Section 5 of this Agreement, the
Executive agrees to sign a release in the form attached to this
Agreement as Exhibit A, as a condition precedent to receiving them.
The amounts payable to Executive pursuant to this Section 5 following
termination of his employment (including amounts payable with respect
to Vested Benefits) shall be in full and complete satisfaction of
Executive's rights under this Agreement and any other claims he may
have in respect of his employment by the Company or any of its
subsidiaries. Such amounts shall constitute liquidated damages with
respect to any and all such rights and claims and, upon Executive's
receipt of such amounts, the Company shall be released and discharged
from any and all liability to Executive in connection with this
Agreement or otherwise in connection with Executive's employment with
the Company and its subsidiaries. Nothing in this Paragraph 5(e)
shall be construed to release the Company from any obligation to
indemnify Executive and hold Executive harmless from and against any
claim, loss or cause of action arising from or out of Executive's
performance as an officer, director or employee of the Company or any
of its subsidiaries or in
<PAGE> 9
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any other capacity, including any fiduciary capacity, in which
Executive served at the request of the Company to the maximum extent
permitted by applicable law and the certificate of incorporation and
by-laws of the Company.
6. NONCOMPETITION AND CONFIDENTIALITY.
By and in consideration of the salary, benefits and other consideration,
contained in this Agreement, the adequacy and receipt of which is hereby
acknowledged, the Executive agrees that:
a. NONCOMPETITION. During the Employment Period and during the two year
period (the "Restriction Period") following any termination or
Nonrenewal of the Executive's employment, the Executive shall not
whether as a principal, partner, employee, agent, consultant,
shareholder (other than as a holder, or a member of a group which is
a holder, of not in excess of 1% of the outstanding voting shares of
any publicly traded company) or in any other relationship or
capacity: (i) become associated with any entity that is actively
engaged or takes any steps to plan to be engaged in any geographic
area in the surety business or in any other business which is in
competition with the business in which the Company is engaged or to
the Executive's knowledge is actively considering becoming engaged,
(ii) contact, call upon, solicit business from, sell, or render
services to, any customer or licensed agent of the Company with
respect to any service or product identical or similar to any
services or products provided or sold by the Company, including but
not limited to current products or those under development,
distribution strategy, development of computer software and
administrative systems for administration.
b. CONFIDENTIALITY. The Executive acknowledges and agrees that all
records (whether written or recorded electronically) including but
not limited to agent and client lists, files, reports, notes,
internal memoranda and manuals relating to the Company's business;
business plans, business processing techniques, systems and methods;
sales processes, sales and training manuals; underwriting procedures
and manuals; budgets; financial statements; compilations; or
summaries of the foregoing, by whomever prepared, and copies or
reproductions of the foregoing, relating to the Company's operations
or activities, or to the operations or activities of any of the
Company's customers, agents, suppliers, vendors, or subsidiary
companies thereof, made or received by the Executive during the
course of his employment with the Company have been, are and shall
remain the sole and exclusive property of
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the Company and were held by the Executive during his employment only
as a trustee for the Company which, at all times, retained ownership
and control of said records.
c. NON-SOLICITATION OF EMPLOYEES. During the Employment Period and the
one year period following any termination or Nonrenewal of
Executive's employment, Executive shall not directly or indirectly
solicit, nor shall any entity with which the Executive is associated
encourage or induce any employee of the Company or any of its
subsidiaries to terminate employment with it, and shall not directly
or indirectly, either individually or as owner, agent, employee,
consultant or otherwise, employ or offer employment to any person who
is or was employed by the Company or a subsidiary thereof unless such
person shall have ceased to be employed by it for a period of at
least six months.
d. COMPANY PROPERTY. Except as expressly provided herein, promptly
following Executive's termination of employment, Executive shall
return to the Company all property of the Company, and all copies
thereof in Executive's possession or under his control.
e. INJUNCTIVE RELIEF AND OTHER REMEDIES WITH RESPECT TO COVENANTS.
Executive acknowledges and agrees that the covenants and obligations
of Executive with respect to noncompetition, nonsolicitation,
confidentiality and Company property, relate to special, unique and
extraordinary matters and that a violation of any of the terms of
such covenants and obligations will cause the Company irreparable
injury for which adequate remedies are not available at law.
Executive acknowledges and agrees that the geographic scope of his
employment with the Company is national, and that the national
geographic and the two year restrictions placed upon him in Paragraph
6 of this Agreement are reasonable and necessary to the preservation
and vitality of the Company's business, reputation, and good will due
to the nature of the Company's business, and given his knowledge and
expertise within the insurance industry and the consideration
provided in this Agreement, that he will be able to earn a
satisfactory livelihood or otherwise provide for his financial
security without violating such restrictions.
Therefore, Executive agrees that the Company shall (i) be entitled to, on
both an interim and final basis, an injunction, restraining order or such other
equitable relief (without the requirement to post bond) restraining Executive
from committing any violation of the covenants and obligations contained in this
section 6 and (ii) have no further obligation to make any payments to Executive
<PAGE> 11
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Employment Agreement -
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hereunder following any material violation of the covenants and obligations
contained in this section 6. These remedies are cumulative and are in addition
to any other rights and remedies the Company may have at law or in equity. In
connection with the foregoing provisions of this section 6, Executive represents
that his economic means and circumstances are such that such provisions will not
prevent him from providing for himself and his family on a basis satisfactory to
him.
The Executive and Company agree that section 6 of this Agreement is not
subject to the provisions of Paragraph 7(b). The Executive agrees that in the
event he violates said section 6 he will pay all costs and expenses with respect
to the prosecution or defense of any claim or suit brought by or against the
Company including, but not limited to, reasonable attorneys' fees. The Executive
further agrees that in the event he in any way violates the provisions set forth
in section 6, the Company would suffer irreparable harm for which both
preliminary and final injunctive relief would be an appropriate remedy in
addition to such other relief to which the Company may also be entitled.
f. For purposes of Section 6 of this agreement "the Company" shall
include its subsidiaries.
g. Notwithstanding anything herein to the contrary, should the Executive
terminate the employment period without Good Reason or should the
Company terminate it for Cause, the two year period referred to at
various points in this Section 6 shall be reduced to one year.
7. MISCELLANEOUS.
a. SURVIVAL. Paragraphs 5 (relating to early termination), 6 (relating
to noncompetition, nonsolicitation and confidentiality, 7(b)
(relating to arbitration), 7(c) (relating to legal fees) and 7(o)
(relating to governing law) shall survive the termination hereof.
b. ARBITRATION. Except for disputes arising out of or relating to the
provisions of Section 6, any dispute arising out of or relating to
this Agreement, including each and every aspect of the relationship
of the Executive and the Company, shall be resolved by binding
arbitration. The arbitrator shall be a retired federal judge. If the
parties cannot agree on an acceptable arbitrator, the dispute shall
be heard by a panel of three retired judges, one appointed by each of
the parties and the third appointed by the other two arbitrators. The
arbitrator shall hear and decide the dispute not by compromise but
according to law as if sitting in court applying the rules of
evidence. The arbitrator's decision shall be in writing and shall set
forth the facts and law supporting such decision. The arbitration
shall be held in Chicago, Illinois and except as
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otherwise provided in this Paragraph, shall be conducted in
accordance with the Voluntary Labor Arbitration Rules of the American
Arbitration Association then in effect at the time of the
arbitration.
c. BINDING EFFECT. This Agreement shall be binding on, and shall inure
to the benefit of, the Company and any person or entity that succeeds
to the interest of the Company (regardless of whether such succession
does or does not occur by operation of law) by reason of the sale of
all or a portion of the Company's stock, a merger, consolidation or
reorganization involving the Company or, unless the Company otherwise
elects in writing, a sale of the assets of the business of the
Company (or portion thereof) in which Executive performs a majority
of his services. This Agreement shall also inure to the Benefit of
Executive's heirs, executors, administrators and legal
representatives.
d. ASSIGNMENT. Except as provided under Paragraph 7(c), neither this
Agreement nor any of the rights or obligations hereunder shall be
assigned or delegated by any party hereto without the prior written
consent of the other party.
e. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto with respect to the matters referred to
herein. No other agreement relating to the terms of Executive's
employment by the Company, oral or otherwise, shall be binding
between the parties unless it is in writing and signed by the party
against whom enforcement is sought. There are no promises,
representations, inducements, or statements between the parties other
than those that are expressly contained herein. Executive
acknowledges that he is entering into this Agreement of his own free
will and accord, and with no duress, that he has read this Agreement
and that he understands it and its legal consequences.
f. SEVERABILITY; REFORMATION. In the event that one or more of the
provisions of this Agreement shall become invalid, illegal or
unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein shall not
be affected thereby. In the event that any of the provisions of any
of Paragraphs 6(a), (b) or (c) is not enforceable in accordance with
its terms, Executive and the Company agree that such Paragraph shall
be reformed to make such Paragraph enforceable in a manner which
provides the Company the maximum rights permitted at law.
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g. WAIVER. Waiver by any party hereto of any breach or default by the
other party of any of the terms of this Agreement shall not operate
as a waiver of any other breach or default, whether similar to or
different from the breach or default waived. No waiver of any
provision of this Agreement shall be implied from any course of
dealing between the parties hereto or from any failure by either
party hereto to assert its or his rights hereunder on any occasion or
series of occasions.
h. NOTICES. Any notice required or desired to be delivered under this
Agreement shall be in writing and shall be delivered personally, by
courier service, by registered mail, return receipt requested, or by
telecopy and shall be effective upon actual receipt by the party to
which such notice shall be directed, and shall be addressed as
follows (or to such other address as the party entitled to notice
shall hereafter designate in accordance with the terms hereof):
If to the Company:
CNA Surety Corporation
CNA Plaza
Chicago, Illinois 60685
Attention: General Counsel
If to Executive:
The home address of Executive noted on the records of the Company.
i. AMENDMENTS. This Agreement may not be altered, modified or amended
except by a written instrument signed by an authorized representative
of the Company and by the Executive.
j. HEADINGS. Headings to Paragraphs in this Agreement are for the
convenience of the parties only and are not intended to be part of or
to affect the meaning or interpretation hereof.
k. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed an original but all of which together shall
constitute one and the same instrument.
l. WITHHOLDING. Any payments provided for herein shall subject to
withholding pursuant to applicable Federal, State, and local law then
in effect.
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CNA Surety Corporation
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m. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of Delaware, without reference to principles of conflicts or
choice of law under which the law of any other jurisdiction would
apply.
n. SOURCE OF PAYMENT. The payments and benefits provided for herein
other than stock options may, at the option of the Company, be
provided by one or more of its subsidiaries, rather than the Company,
itself.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by
its duly authorized officer and the Executive has hereunto set his hand as of
the day and year first above written.
CNA SURETY CORPORATION EXECUTIVE
By:
------------------------------ ------------------------------
Mark C. Vonnahme David F. Paul
<PAGE> 1
EXHIBIT 10(18)
CNA SURETY CORPORATION
DEFERRED COMPENSATION PLAN
EFFECTIVE APRIL 1, 2000
<PAGE> 2
CNA SURETY CORPORATION
DEFERRED COMPENSATION PLAN
Effective April 1, 2000
Preamble and Purpose
CNA Surety Corporation hereby establishes the CNA Surety Corporation
Deferred Compensation Plan, effective April 1, 2000. The Company intends to
establish and maintain the Plan as an unfunded, nonqualified deferred
compensation plan for a select group of management or highly compensated
employees, and intends that the Plan constitute a "top-hat" plan within the
meaning of Section 201(2) of ERISA.
The purpose of the Plan is to permit designated employees of the Company
and participating affiliates to accumulate additional retirement income through
a nonqualified deferred compensation plan that enables them to defer
compensation to which they will become entitled in the future.
ARTICLE I
Definitions
1.1 "Account" means an account established on the books of the Employer for
the purpose of recording amounts credited on behalf of a Participant under the
Plan.
1.2 "Administrator" means Western Surety Company or such other person,
entity or committee appointed by the Company's president to administer the Plan.
1.3 "Beneficiary" means the person or persons designated by a Participant
or otherwise entitled to receive any undistributed amount credited to the
Participant's Account upon the death of the Participant.
1.4 "Code" means the Internal Revenue Code of 1986, as amended.
1.5 "Company" means CNA Surety Corporation, a corporation duly organized
under the laws of the State of Delaware.
1.6 "Compensation" means "Compensation" as that term is defined in the CNA
Surety Corporation 401(k) Plan, as amended from time to time, provided however,
that for purposes of this Plan, "Compensation" shall include a Participant's
salary reduction contributions under the CNA Surety Corporation 401(k) Plan, a
Participant's salary reduction deferrals under this Plan, and shall not be
limited by Code section 401(a)(17).
1.7 "Deferral Agreement" means the written agreement between a Participant
and the Employer whereby the Participant elects to defer a portion of the
Participant's Compensation pursuant to the terms of the Plan.
1.8 "Disability" means "Disability" as that term is defined in the CNA
Surety Corporation 401(k) Plan, as amended from time to time.
<PAGE> 3
1.9 "Effective Date" means April 1, 2000.
1.10 "Elective Contribution" means the amount credited to a Participant's
Account pursuant to a Deferral Agreement.
1.11 "Eligible Employee" means any employee employed on or after the
Effective Date by the Employer and designated by the Employer's board of
directors as eligible for participation in the Plan. An employee's designation
as an "Eligible Employee" may be revoked by the Employer's board of directors at
any time.
1.12 "Employer" means the Company and any Related Company that adopts the
Plan with the Company's consent as provided in Section 7.1.
1.13 "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
1.14 "Hour of Service" means "Hour of Service" as that term is defined in
the CNA Surety Corporation 401(k) Plan, as amended from time to time.
1.15 "Investment Funds" means the investment funds designated by the
Company which, when selected by a Participant, shall be used to measure the
investment experience credited to the Participant's Account.
1.16 "Matching Contribution" means the amount credited to a Participant's
Account by the Employer pursuant to Section 4.2 of the Plan.
1.17 "Participant" means an Eligible Employee who satisfies the
requirements of Section 2.1 of the Plan.
1.18 "Plan" means the CNA Surety Corporation Deferred Compensation Plan, as
amended from time to time.
1.19 "Plan Year" means the calendar year.
1.20 "Profit Sharing Contribution" means the amount credited to a
Participant's Account by the Employer pursuant to Section 4.4 of the Plan.
1.21 "Related Company" means any corporation or business organization which
is a member of a controlled group of corporations which includes the Company (as
determined under Code Section 414(b)); a corporation or business organization
which is under common control with the Company (as determined under Code Section
414(c)); any corporation or business organization which is a member of an
affiliated service group that includes the Company (as determined under Code
Section 414(m); and any other entity required to be aggregated with the Company
under Treasury regulations to be issued under Code Section 414(o).
1.22 "Termination of Employment" means a Participant's separation from
service of the Employer by reason of resignation, retirement, discharge or
death.
2
<PAGE> 4
ARTICLE II
Participation
2.1 Commencement of Participation.
(a) Each employee who (i) is an Eligible Employee on the Effective
Date and (ii) has completed and executed a Deferral Agreement prior to the
Effective Date shall become a Participant on the Effective Date.
(b) Each employee of the Employer who is not an Eligible Employee (i)
on the Effective Date, or (ii) at the time his employment with the Employer
commences, but who subsequently becomes an Eligible Employee, shall become a
Participant on the January 1 coincident with or next following the date on which
such employee becomes an Eligible Employee; provided such Eligible Employee
shall have completed and executed a Deferral Agreement.
(c) Each employee of the Employer who (i) first commences employment
on a date subsequent to the Effective Date and (ii) is designated an Eligible
Employee as of such employment commencement date shall become a Participant as
soon as reasonably practicable following the date on which such Eligible
Employee submits a Deferral Agreement to the Administrator; provided however,
that such Eligible Employee submits a Deferral Agreement to the Administrator
within thirty (30) days of his employment commencement date.
(d) An Eligible Employee who fails or declines to submit a Deferral
Agreement may subsequently become a Participant on the January 1 coincident with
or next following the date on which such Eligible Employee submits a Deferral
Agreement to the Administrator. An Eligible Employee's failure to submit a
Deferral Agreement prior to his first entry date shall not preclude such
Eligible Employee's future participation in the Plan.
2.2 Resumption of Participation Following Reemployment. If a Participant
ceases to be an Eligible Employee by reason of a Termination of Employment and
thereafter returns to the employ of the Employer and is again designated as an
Eligible Employee, such individual shall be treated as a newly-hired Eligible
Employee and may again become a Participant upon satisfying the requirements of
Section 2.1.
2.3 Cessation or Resumption of Participation Following a Change in Status.
If a Participant
(a) continues in the employ of the Employer but ceases to be an
Eligible Employee, or
(b) continues in the employ of the Employer as an Eligible Employee
but elects to discontinue Elective Contributions,
3
<PAGE> 5
such individual shall continue to be a Participant in the Plan until the entire
balance of the Participant's Account has been distributed; provided, the
individual shall not be entitled to make Election Contributions or receive an
allocation of Matching Contributions during the period that such individual is
not actively participating in the Plan.
ARTICLE III
Participant Accounts
3.1 Establishment of Accounts. The Employer shall maintain an Account for
each Participant employed by such Employer for the purpose of recording the
current value of Elective Contributions, Matching Contributions, Profit Sharing
Contributions, and any investment experience credited thereto. All Accounts
shall be maintained in United States currency on the books of the Employer as an
Employer liability; provided, the Employer shall be under no obligation to
segregate any assets to provide for such liabilities. The Company's obligation
under this Plan shall be an unfunded and unsecured promise to pay. Nothing
contained in this Plan shall be deemed to create a trust of any kind for the
benefit of the Participants or create any fiduciary relationship between the
Company and the Participants or their Beneficiaries. To the extent that any
person acquires a right to receive benefits under this Plan, such rights shall
be no greater than the right of any unsecured general creditor of the Company.
3.2 Valuation of Accounts. The value of each Participant's Account shall
equal the sum of (a) the Elective Contributions credited to the Participant's
Account, (b) the Matching Contributions credited to the Participant's Account,
(c) the Profit Sharing Contributions credited to the Participant's Account, and
(d) the investment experience credited to the Participant's Account. The value
of a Participant's Account shall be further reduced by any distributions from
the Account. The Administrator shall furnish Participants with a statement of
their Accounts at least once per Plan Year.
ARTICLE IV
Contributions
4.1 Elective Contributions. The Employer shall reduce the Compensation of
each Participant by the Elective Contribution specified in the Participant's
Deferral Agreement and credit such Elective Contribution to the Participant's
Account. Once executed, the Deferral Agreement shall be effective to defer
Compensation relating to all services performed by the Participant for the Plan
Year for which it is executed, and shall remain in effect until a subsequent
Deferral Agreement is executed; provided, however, that in the case of (a) the
initial Plan Year, if the effective date is later than January 1 of such Plan
Year, or (b) an employee who first commences employment as an Eligible Employee
after the Effective Date, the initial Deferral Agreement shall have prospective
application only; provided further, no Participant shall have his or her
Compensation reduced pursuant to a Deferral Agreement, or have any amount
credited to his or her Account as Elective Contributions or Matching
Contributions until such Participant has made the maximum Elective Salary
Deferral Contributions to the CNA Surety Corporation 401(k) Plan allowable for
such year, taking into consideration the application of the compensation limit
of Code section 401(a)(17), the annual pre-tax contribution limit under Code
section 402(g) and the annual amount limit under Code section 415. A
Participant's subsequent Deferral
4
<PAGE> 6
Agreement shall be effective as of the first day of the Plan Year next following
its date of execution. A Deferral Agreement shall be deemed to have been revoked
if the Participant who executed it ceases to be eligible to participate in the
Plan. Participants shall be fully vested in their Elective Contributions at all
times but early distributions are subject to a ten percent (10%) withdrawal
penalty, as provided in Section 5.5. No Elective Contribution shall be less than
1% of a Participant's Compensation. No Elective Contribution shall be more than
16% of a Participant's Compensation, and the amount of any Compensation that a
Participant shall be entitled to defer pursuant to the foregoing shall be
reduced by the amount of any Elective Salary Deferral Contributions credited to
the Participant's account under the CNA Surety Corporation 401(k) Plan for such
Plan Year.
4.2 Matching Contributions. For each Plan Year, each Employer shall credit
a Matching Contribution to the Account of each Participant who has a Deferral
Agreement in effect. The amount of the Matching Contribution shall equal the sum
of (a) one hundred percent (100%) of the Participant's Elective Contributions
for such Plan Year that do not exceed three percent (3%) of the Participant's
Compensation; and (b) if the Participant's Elective Contributions exceed three
(3%) percent of such Participant's Compensation, 50% of the amount of the
Participant's Elective Contributions that exceed three percent of the
Participant's Elective Contribution, which do not exceed six percent (6%) of the
Participant's Compensation. However, the amount of any Matching Contribution to
which a Participant shall be entitled pursuant to the foregoing shall be reduced
by the amount of any Matching Contributions credited to the Participant's
account under the CNA Surety Corporation 401(k) Plan for such Plan Year.
4.3 Vesting of Matching Contributions. Subject to the provisions of Section
4.9 hereof, Participants shall be fully vested in the Matching Contributions
credited to their Accounts but early distributions are subject to a ten percent
(10%) withdrawal penalty, as provided in Section 5.5.
4.4 Profit Sharing Contributions. (a) For each Plan Year, a Participant's
Employer shall credit to the Account of such Participant a Profit Sharing
Contribution equal to the product of (a) the amount of the Participant's
Compensation for such Plan Year, multiplied by (b) the "Profit Sharing
Percentage" for such Plan Year; provided however, that the amount of any Profit
Sharing Contribution to which a Participant shall be entitled pursuant to the
foregoing shall be reduced by the amount of any Profit Sharing Contributions
credited to the Participant's account under the CNA Surety Corporation 401(k)
Plan for such Plan Year. "Profit Sharing Percentage" means the profit sharing
percentage (expressed as a percentage of compensation) established by the
Company's Board of Directors for the CNA Surety Corporation 401(k) Plan for such
Plan Year.
(b) If the initial Plan Year is less than 12 months, this Section
4.4(b) shall apply. A Participant's Profit Sharing Contribution for an initial
Plan Year of less than twelve months shall be determined as provided under
Section 4.4(a) except that the Participant's Profit Sharing Percentage shall be
multiplied by the amount of the Participant's Compensation paid during the
entire calendar year that includes such Plan Year.
5
<PAGE> 7
4.5 Vesting of Profit Sharing Contributions. Subject to the provisions of
Section 4.9 hereof, Participants shall be fully vested in the Profit Sharing
Contributions credited to their Accounts but early distributions are subject to
a ten percent (10%) withdrawal penalty, as provided in Section 5.5.
4.6 Timing of Crediting. All Elective Contributions under the Plan shall be
credited to the Accounts of Participants as soon as reasonably practicable
following the payday to which such contributions relate; provided, the Employer
shall credit such contributions no later than the 15th business day of the month
following the month in which occurred the payday to which such contributions
relate. All Matching Contributions under the Plan shall be credited to the
Accounts of Participants no later than the 15th day of the third month following
the close of the Plan Year to which they relate. All Profit Sharing
Contributions under the Plan shall be credited to the Accounts of Participants
no later than the due date, including extensions, for filing the Employer's
federal income tax return for the fiscal year of the Employer to which the
Profit Sharing Contributions relate.
4.7 Crediting of Investment Experience. A Participant may select one or
more Investment Funds by which the investment experience credited to the
Participant's Account shall be measured. A Participant may periodically
reallocate the investment of his Account among the Investment Funds. Until a
Participant's Account is completely distributed, each Participant's Account
shall be adjusted periodically, as specified by the Administrator but no less
than annually, to reflect (a) the investment experience of the Investment Fund
or Funds which the Participant has selected, and (b) any reallocation of the
Participant's Account among the Investment Funds during the period. Nothing in
this Section 4.7 shall require the Participant's Employer to actually invest
money in the Investment Funds designated by a Participant. The Administrator
shall establish such rules and procedures governing the manner, frequency and
timing of Investment Fund selections by Participants, and such rules and
procedures may change in the Administrator's sole discretion prospectively
without consent of the Participants.
4.8 Nonalienability. The benefits provided under the Plan shall not be
subject to alienation, assignment, garnishment, attachment, execution or levy of
any kind, either voluntary or involuntary, and any attempt to cause such
benefits to be subjected shall not be recognized, except to the extent as may be
required by applicable law.
4.9 Forfeiture on Account of Misconduct. Notwithstanding any other
provision of the Plan, the Administrator, at the direction of the board of
directors of the Company, shall direct that the portion of a Participant's
Account consisting of Matching Contributions and Profit Sharing Contributions be
forfeited to the extent of any direct financial loss to a Employer that the
board of directors of the Company determines has been caused by the
Participant's embezzlement, theft, conviction of any felony crime or other gross
misconduct.
6
<PAGE> 8
ARTICLE V
Distributions
5.1 Manner of Distribution. The vested amount credited to a Participant's
Account shall be distributed to him (or, in the event of his death before
distribution, to his Beneficiary) in (a) a single sum, (b) in a series of five
(5) equal annual installments, or (c) in a combination of (i) a single sum
payment, and (ii) five (5) equal annual installments, as elected by the
Participant in his Deferral Agreement. A Participant may change his or her
distribution election in accordance with rules and procedures established by the
Administrator in its sole discretion; provided, however, that to be effective,
any change in a distribution election must be made at least six (6) months prior
to the Participant's Distribution Date described in Section 5.2 hereof. If the
Participant fails to make any distribution election, the vested amount credited
to the Participant's Account shall be distributed in the form of a single sum
payment.
5.2 Distribution Date. The distribution of the Participant's Account shall
commence as soon as reasonably practicable following the earliest of (a) the
date of the Participant's Termination of Employment, and (b) the date on which
the Participant is determined to have suffered a Disability.
5.3 Facility of Payment. If at any time any distributee is, in the sole
judgment and discretion of the Administrator, legally, physically, or mentally
incapable of receiving any distribution due to such distributee, the
distribution may be made to the guardian or legal representative of the
distributee, or, if none exists, to any other person or institution that, in the
Administrator's sole judgment and discretion, will apply the distribution in the
best interests of the intended distributee. Any payment made in accordance with
the provisions of this Section shall be a complete discharge of any liability
for the making of such payment under the provisions of the Plan.
5.4 Designation or Change of Beneficiary. As part of completing a Deferral
Agreement, each Eligible Employee shall designate one or more Beneficiaries and
successor Beneficiaries by completing a Beneficiary designation form. A
Participant may change any Beneficiary designation in accordance with such rules
and procedures established by the Administrator in its sole discretion. The
consent of the Participant's current Beneficiary shall not be required for a
change of Beneficiary, and no Beneficiary shall have any rights under this Plan
except as provided by its terms. The rights of a Beneficiary who predeceases the
Participant shall immediately terminate upon the Beneficiary's death, unless the
Participant specified otherwise. Unless a different Beneficiary has been
designated in accordance with this Section 5.4, the Beneficiary of any
Participant who is lawfully married on the date of the Participant's death shall
be the Participant's surviving spouse. The Beneficiary of any other Participant
who dies without having designated a Beneficiary shall be the Participant's
estate.
5.5 Early Distribution. At any time prior to the Distribution Date set
forth in Section 5.2 hereof, a Participant may elect to receive all or a portion
of such Participant's current Account balance in the form of a lump sum cash
payment. However, a Participant shall irrevocably forfeit to the Company ten
percent (10%) of each distribution made pursuant to this Section 5.5. An early
distribution of a Participant's Account shall be made as soon as reasonably
practicable following the Administrator's receipt of the Participant's written
request.
7
<PAGE> 9
5.6 Unforeseeable Emergency. Notwithstanding any other provision of this
Plan to the contrary, a Participant may receive a distribution of a portion of
his or her Account in the event of an approved hardship due to an Unforeseeable
Emergency. "Unforeseeable Emergency" means a severe financial hardship to the
Participant resulting from (i) a sudden and unexpected illness or accident of
the Participant or of a dependent of the Participant (as defined in Code Section
152(a)), (ii) a loss of the Participant's property due to casualty, or (iii)
such other similar extraordinary and unforeseeable circumstances arising as a
result of events beyond the control of the Participant. The circumstances that
constitute an "Unforeseeable Emergency" shall be determined by the Administrator
on a case by case basis; provided, payment shall not be made in the event that
such hardship is or may be relieved:
(1) Through reimbursement or compensation by insurance or otherwise;
(2) by liquidation of the Participant's assets, to the extent that
liquidation of such assets would not itself cause severe financial hardship; or
(3) by cessation of Elective Contributions under the Plan.
The need to send a Participant's child to college or the desire to purchase a
home shall not constitute an Unforeseeable Emergency. A Participant may request
a distribution due to Unforeseeable Emergency by submitting a written request to
the Administrator accompanied by evidence to demonstrate that the circumstances
being experienced qualify as an Unforeseeable Emergency. The Administrator shall
have the authority to require such evidence as it deems necessary to determine
if a distribution is warranted. If an application for a hardship distribution
due to an Unforeseeable Emergency is approved, the distribution shall be limited
to an amount sufficient to meet the severe financial hardship. The allowed
distribution shall not be subject to the ten percent (10%) withdrawal penalty
for early distributions, and shall be payable in a method determined by the
Administrator in its sole discretion as soon as reasonably practicable following
approval of such distribution.
5.7 Taxes. The Plan Administrator shall make provision for the reporting
and withholding of any federal, state or local taxes that may be required to be
withheld with respect to the payment of benefits pursuant to the terms of the
Plan and shall pay amounts withheld to the appropriate taxing authorities or
determine that such amounts have been reported, withheld and paid by the
Employer.
ARTICLE VI
Amendment and Termination of the Plan
6.1 Company's Right to Amend or Terminate Plan. The Company may in its sole
discretion, at any time and from time to time, amend in whole or in part, any of
the provisions of this Plan or may terminate it as a whole with respect to any
Participant or group of Participants. Any such amendment shall be binding upon
all Participants and their Beneficiaries and all other parties in interest.
6.2 Form of Amendment. Any amendment or termination of the Plan shall be
effectuated by a written resolution of the board of directors of the Company,
and shall become effective as of the date specified therein.
8
<PAGE> 10
6.3 Restriction on Retroactive Amendments. No amendment may be made that
retroactively deprives a Participant of any amount credited to his Account
before the date of the amendment.
6.4 Distribution upon Termination. Upon termination of the Plan, no further
Elective Contributions or Matching Contributions shall be made under the Plan.
Accounts of Participants shall continue to be governed by the terms of the Plan
as in effect on the date of termination, until distributed in accordance with
the terms of the Plan. Notwithstanding the foregoing, the Company in its sole
discretion may provide for the immediate distribution of all Accounts in the
form of a single lump sum payment.
ARTICLE VII
Adoption of Plan by Related Companies
7.1 Adoption of the Plan. A Related Company may, with the approval of the
board of directors of the Company, and by written resolution of its own board of
directors, adopt the Plan. From and after the date as of which such Related
Company shall adopt the Plan, it shall be included within the meaning of the
term "Employer" for all purposes hereunder.
7.2 Withdrawal of a Participating Employer. A participating Employer may,
by resolution of its board of directors, withdraw from the Plan as of any date
upon ninety (90) days advance written notice to the Administrator. If an
Employer shall cease to exist, it shall automatically be withdrawn from
participation in the Plan unless a successor organization adopts the Plan in
accordance with Section 7.1. Upon the withdrawal of a participating Employer,
such Employer shall distribute each applicable Participant's vested Account as
though his employment terminated on the date of withdrawal in accordance with
Article V of the Plan.
ARTICLE VIII
Plan Administration
8.1 Generally. The Plan shall be administered by the Administrator. If the
president of the Company establishes an administrative committee to serve as the
Administrator, the president may terminate the administrative committee, reduce
its membership or may remove any member of the administrative committee at any
time in his sole discretion, with or without cause, and may fill any vacancy.
Any person appointed by the president to serve as a member of an administrative
committee may resign by delivering a written resignation to the president of the
Company. Any such resignation shall become effective upon its receipt by the
president or on such other date as is agreed by the president and the resigning
person. If the president of the Company appoints an administrative committee,
the administrative committee shall act by a majority of its members in office
and may take action either by vote at a meeting or by consent in writing without
a meeting. The Administrator may adopt such rules and regulations as it deems
desirable for the conduct of its affairs and the administration of the Plan.
8.2 Powers of the Administrator. In carrying out its duties with respect to
the general administration of the Plan, the Administrator shall have, in
addition to any other powers conferred by the Plan or by applicable law, the
following powers:
9
<PAGE> 11
(a) to maintain the Plan's Accounts and all records necessary for the
administration of the Plan;
(b) to interpret and construe the provisions of the Plan and to make
and publish such rules and regulations for the administration of the Plan as are
not inconsistent with the terms thereof;
(c) to establish and modify the method of accounting for the Plan;
(d) to employ legal counsel, accountants and other consultants to aid
in exercising its powers and carrying out its duties hereunder; and
(e) to perform any other acts which are necessary for the proper and
efficient administration of the Plan.
8.3 Indemnification of Administrator. The Employer shall indemnify and hold
harmless the Administrator against any and all expenses and liabilities arising
out of the Administrator's action or failure to act in its capacity as
Administrator, excepting only expenses and liabilities arising out of the
Administrator's own willful misconduct or gross negligence. The right of
indemnification shall be in addition to any other legal rights to which the
Administrator may be entitled. The liabilities and expenses against which the
Administrator shall be indemnified hereunder by the Employer shall include,
without limitation, the amount of any settlement or judgment costs, legal
counsel fees and related charges reasonably incurred in connection with a claim
asserted or a proceeding brought against the Administrator or settlement
thereof.
8.4 Right to Settle Claims. The Employer may, at its own expense and in its
sole discretion, settle any claim asserted or proceeding brought against the
Administrator.
8.5 Claims Procedure. If a dispute arises between the Administrator and a
Participant or Beneficiary over the amount of benefits payable under the Plan,
such claims for benefits shall be subject to the claims procedures set forth in
the CNA Surety Corporation 401(k) Plan, as amended from time to time.
8.6 Expenses of the Administrator. All reasonable expenses of the
Administrator incurred in connection with the administration of the Plan shall
be paid by the Employer.
10
<PAGE> 12
ARTICLE IX
Miscellaneous
9.1 No Employment Guarantee. Neither the establishment of the Plan, any
modification thereof, the creation of any fund or account, nor the payment of
any benefits under the Plan shall be construed as giving to any Participant or
other person any legal or equitable right against the Employer or the
Administrator except as provided herein. Under no circumstances shall the
maintenance of this Plan constitute a contract of employment or shall the terms
of employment of any Participant be modified in any way affected hereby.
Accordingly, participation in the Plan shall not give any Participant a right to
be retained in the employ of the Employer or derogates from the right of the
Employer to discharge any Participant at any time without regard to the effect
of such discharge upon his rights as a Participant in the Plan.
9.2 No Rights Under Plan Except as Set Forth Herein. Nothing in this Plan,
express or implied, is intended, or shall be construed, to confer upon or give
any person, firm, association, or corporation, other than the parties hereto and
their successors in interest, any right, remedy, or claim under or by reason of
this Plan or any covenant, condition, or stipulation hereof, and all covenants,
conditions and stipulations in this Plan, by or on behalf of any party, are for
the sole and exclusive benefit of the parties hereto.
9.3 Governing Law. This Plan shall be interpreted and construed in
accordance with ERISA, and to the extent not preempted thereby, the laws of the
State of Illinois.
9.4 Headings. The headings used in the Plan are for convenience only, shall
not constitute a part of the Plan, and shall not be deemed to limit,
characterize, or affect in any way any provisions of the Plan. All provisions of
the Plan shall be construed as if no captions had been used in the Plan.
9.5 Construction. Whenever used herein, the masculine pronoun shall be
deemed to include the feminine, and the singular to include the plural, unless
the context clearly indicated otherwise.
9.6 Severability. If any provision of this Plan is held illegal or invalid
for any reason, the remaining provisions shall remain in full force and effect
and shall be construed and enforced in accordance with the purposes of the Plan
as if the illegal or invalid provision did not exist.
IN WITNESS WHEREOF, the Company has caused this document to be executed
by its ________________, this ____ day of __________________________, 2000.
CNA SURETY CORPORATION
By: ____________________________
Its: ____________________________
11
<PAGE> 1
EXHIBIT 11
CNA SURETY CORPORATION AND SUBSIDIARIES
EARNINGS PER SHARE COMPUTATION
<TABLE>
<CAPTION>
SEPTEMBER 30,
(DATE OF
INCEPTION),
YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------ ------------ -------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net Income.............................................. $56,498 $45,515 $10,996
======= ======= =======
Shares:
Weighted average shares outstanding..................... 43,957 43,625 43,294
Weighted average shares of options exercised.......... 17 97 8
------- ------- -------
Total weighted average shares outstanding............... 43,974 43,722 43,302
Effect of dilutive options............................ 146 153 250
------- ------- -------
Total weighted average shares outstanding, assuming
dilution.............................................. 44,120 43,875 43,552
======= ======= =======
Earnings per share...................................... $ 1.28 $ 1.04 $ 0.25
======= ======= =======
Earnings per share, assuming dilution................... $ 1.28 $ 1.04 $ 0.25
======= ======= =======
</TABLE>
<PAGE> 1
EXHIBIT 13
Fidelity and other
$24.6
Net written premiums by product ------------------------ Total premiums
In millions $299.0
Commercial
$128.8
------------------------
A Well-balanced Product Portfolio Contract
$145.6
CNA Surety Corporation, the largest
publicly traded surety company in the
United States, provides a full range
of surety and fidelity bonds in all
50 states through a combined network
of approximately 37,000 independent
agents. CNA Surety's balanced product
mix supports earnings consistency
under various economic conditions.
FINANCIAL HIGHLIGHTS
In millions, except per share data
----------------------------------------------------------------------
Net written premium $ 299.0 $ 270.6 10
Underwriting income* 71.9 61.8 16
Net investment income and realized gains 25.9 25.1 3
Pretax income 85.9 73.8 16
Net income 56.5 45.5 24
Net income per share 1.28 1.04 23
Net operating income per share 1.28 1.03 24
----------------------------------------------------------------------
*Includes the effect of recording favorable revisions of prior year
reserves which were $13.1 million and $4.4 million for the periods
presented, respectively.
BALANCE SHEETS
In millions, except per share data
----------------------------------------------------------------------
Invested assets and cash $ 499.4 $ 505.4 -1
Intangible assets 156.0 156.1 0
Total assets 851.6 819.4 4
Insurance reserves 357.2 333.7 7
Debt 101.9 113.0 -10
Total liabilities 525.3 509.5 3
Stockholders' equity 326.3 309.9 5
Book value per share 7.59 7.03 8
Tangible book value per share 4.11 3.64 13
Debt to total capitalization 24% 27%
----------------------------------------------------------------------
<PAGE> 2
CNA Surety Corporation 1999 AR 13
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following is a discussion and analysis of CNA Surety Corporation ("CNA
Surety" or the "Company") and its insurance subsidiaries' operating results,
liquidity and capital resources and financial condition. This discussion should
be read in conjunction with the Consolidated Financial Statements of CNA Surety
and notes thereto.
FORMATION OF CNA SURETY CORPORATION AND MERGER
In December 1996, CNA Financial Corporation ("CNAF") and Capsure Holdings Corp.
("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 CNA Surety Corporation ("CNA Surety"
or the "Company"). CNAF, through its operating subsidiaries, writes multiple
lines of property and casualty insurance, including surety business that is
reinsured by Western Surety. CNAF owns approximately 63% of the outstanding
common stock of CNA Surety. Loews Corporation owns approximately 86% of the
outstanding common stock of CNAF. The principal operating subsidiaries of CNAF
that wrote the surety line of business for their own account prior to the Merger
were Continental Casualty Company and its property and casualty affiliates
(collectively, "CCC") and The Continental Insurance Company and its property and
casualty affiliates (collectively, "CIC"). CIC was acquired by CNAF on May 10,
1995. The combined surety operations of CCC and CIC are referred to herein as
CCC Surety Operations ("Predecessor").
Pursuant to a reorganization agreement, CCC Surety Operations and Capsure
merged their respective operations at the close of business on September 30,
1997 ("Merger Date"). CNAF, through its property and casualty subsidiaries, CCC
and CIC, contributed $52.25 million of capital to CNA Surety. Through
reinsurance agreements, CCC and CIC ceded to Western Surety all of their net
unearned premiums and loss and loss adjustment expense reserves, as of the
Merger Date, and will cede to Western Surety all surety business written or
renewed by CCC and CIC for a period of five years thereafter. Further, CCC and
CIC have agreed to assume the obligation for any adverse development on recorded
reserves for CCC Surety Operations as of the Merger Date, to limit the loss
ratio on certain defined business written by CNA Surety through December 31,
2000 and to provide certain additional excess of loss reinsurance. CCC also
agreed to provide certain administrative services at specified rates, subject to
inflationary increases, for three years after the Merger, if CNA Surety chooses
to purchase such services.
BUSINESS
CNA Surety's insurance subsidiaries write surety and fidelity bonds in all 50
states through a combined network of approximately 37,000 independent agencies.
CNA Surety's principal insurance subsidiaries are Western Surety and USA. The
insurance subsidiaries write, on a direct basis or as business assumed from CCC
and CIC, small fidelity and non-contract surety bonds, referred to as commercial
bonds; small, medium and large contract bonds; international surety and credit
insurance; and errors and omissions ("E&O") liability insurance. Western Surety
is a licensed insurer in all 50 states and the District of Columbia. USA is
licensed in 44 states and the District of Columbia. Western Surety's affiliated
company, Surety Bonding Company of America ("SBCA"), is licensed in 24 states.
The Company's corporate objective is to be the leading provider of surety
and surety-related products in the United States and in select international
markets and to be the surety of choice for its customers and independent agents
and brokers.
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.
<PAGE> 3
14
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Western Surety and USA are both currently rated A (Strong), by
Standard and Poor's ("S&P"). CCC is currently rated A by S&P. S&P's letter
ratings range from AAA+ (Extremely Strong) to CC (Extremely Weak) with AAA+
being highest. An insurer rated "A" has strong financial security
characteristics, but is somewhat more likely to be affected by adverse business
conditions than are insurers with higher ratings.
RESULTS OF OPERATIONS
Comparison of CNA Surety Actual Results for the Years Ended December 31, 1999
and 1998 and Pro Forma Results for the Year Ended December 31, 1997
As set forth in Note 1 to the Consolidated Financial Statements, the
results of operations of the Predecessor do not reflect investment income and
investment gains and losses. Additionally, certain general and administrative
expenses, which were indirect or overhead in nature, were not allocated to the
Predecessor by CNAF or its subsidiaries. As a result of these factors and
because the merger with Capsure significantly affected the combined
organization, it is not useful to compare CNA Surety operations to Predecessor
operations in 1997. Accordingly, the remainder of this discussion and analysis
is formatted to compare 1999 and 1998 operating information for CNA Surety to
pro forma results for the 1997 period.
The 1997 pro forma financial information gives effect to the following:
(i) adjustment to the Capsure statement of operations for the year ended
December 31, 1996, as reported, to reflect the income effects as if the $10 per
share special distribution was made on January 1, 1996; (ii) consummation of the
Merger and the related transactions and the contribution of capital to and the
incurrence of additional debt by CNA Surety; (iii) purchase accounting
adjustments to reflect Capsure's assets and liabilities at fair value; (iv)
estimated indirect and overhead expenses for the CCC Surety Operations; and (v)
estimated interest expense related to the additional debt. The pro forma
financial information does not include the estimated net investment income
resulting from investment of merger-related cash flows, including (i) the $50
million debt proceeds, (ii) the $52.25 million capital contribution from CCC,
and (iii) collection of the receivable from CCC.
The components of income for the Company for the years ended December 31,
1999, 1998 and 1997 are summarized as follows:
Pro Forma
In thousands 1999 1998 1997
- -------------------------------------------------------------------------------
Total revenues $309,405 $283,840 $258,682
===============================================================================
Underwriting income $ 71,894 $ 61,773 $ 87,146
Net investment income 25,850 24,259 14,534
Net realized investment gains 15 844 723
Interest expense 5,846 7,218 7,232
Non-recurring charges and merger costs -- -- 12,087
Amortization of intangible assets 5,982 5,900 5,788
- -------------------------------------------------------------------------------
Income before income taxes 85,931 73,758 77,296
Income taxes 29,433 28,243 42,921
- -------------------------------------------------------------------------------
Net income $ 56,498 $ 45,515 $ 34,375
===============================================================================
Net income per share $ 1.28 $ 1.04 $ 0.79
===============================================================================
<PAGE> 4
CNA Surety Corporation 1999 AR 15
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Insurance Underwriting
Underwriting results for the Company for the years ended December 31, 1999,
1998 and 1997 are summarized in the following table:
Pro Forma
In thousands 1999 1998 1997
- ------------------------------------------------------------------------------
Gross written premium $306,859 $278,224 $266,418
==============================================================================
Net written premiums $298,987 $270,602 $257,067
==============================================================================
Net earned premiums $283,540 $258,737 $243,425
Net losses and loss adjustment expenses 44,672 44,998 5,648
Net commissions, brokerage and other 166,974 151,966 150,631
- ------------------------------------------------------------------------------
Underwriting income $ 71,894 $ 61,773 $ 87,146
==============================================================================
Loss ratio 15.7% 17.4% 2.3%
Expense ratio 58.9 58.7 61.9
- ------------------------------------------------------------------------------
Combined ratio 74.6% 76.1% 64.2%
==============================================================================
Premiums Written
CNA Surety primarily markets contract and commercial surety bonds. Contract
surety bonds secure a contractor's performance and/or payment obligation
generally with respect to a construction project. Contract surety bonds are
generally required by federal, state and local governments for public works
projects. The most common types include bid, performance and payment bonds.
Commercial surety bonds include all surety bonds other than contract and cover
obligations typically required by law or regulation. The commercial surety
market includes numerous types of bonds categorized as court judicial, court
fiduciary, public official, license and permit and many miscellaneous bonds that
include guarantees of financial performance. The Company also writes fidelity
bonds which cover losses arising from employee dishonesty and other insurance
products.
Gross written premiums for the years ended December 31, 1999, 1998 and
1997 are shown in the table below:
Pro Forma
In thousands 1999 1998 1997
- ------------------------------------------------------------------------------
Contract $150,022 $132,242 $123,014
Commercial 130,502 121,046 119,662
Fidelity and other 26,335 24,936 23,742
$306,859 $278,224 $266,418
Gross written premiums increased 10.3%, or $28.6 million, for the year ended
December 31, 1999 over the comparable period in 1998. Gross written premiums for
contract surety increased 13.4%, or $17.8 million, as compared to 1998. This
increase reflects volume growth from new account activity, generally favorable
economic conditions for public construction nationwide and an increase of $8.0
million of direct international premium. The highway/bridge sector has shown
particular strength in new account and bid activity since the United States
Congressional passage of the Transportation Equity Act for the 21st Century
("TEA-21"). 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. Commercial surety, excluding international reinsurance business
assumed from CNA Reinsurance Company, Limited (London) ("CNA Re"), increased
7.4%, or $8.2 million, for the year ended December 31, 1999 reflecting positive
new and renewal activity on larger accounts during the fourth quarter and the
addition of $1.0 million in non-recurring premiums associated with large court
bond obligations. CNA Surety assumed $11.3 million and $10.0 million of
international surety and credit business in 1999 and 1998, respectively, through
a quota share reinsurance treaty with CNA Re, an affiliate of CCC. Fidelity and
other products increased 5.6%, or $1.4 million, to $26.3 million for the year
ended December 31, 1999.
<PAGE> 5
16
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Gross written premiums increased 4.4%, or $11.8 million, for the year
ended December 31, 1998 over the comparable pro forma period in 1997. This
increase was primarily attributable to a 7.5%, or $9.2 million, increase in
contract surety. This increase reflected volume growth from new account activity
and generally favorable economic conditions for public construction nationwide
due to the previously mentioned passage of TEA-21. Commercial surety, exclusive
of international reinsurance business assumed, increased 1.4% in 1998 reflecting
increased competition in this business, particularly on Fortune 1000 and large
accounts. Fidelity and other products increased 5.0%, or $1.2 million, to $24.9
million for the year ended December 31, 1998.
Net written premiums for the years ended December 31, 1999, 1998 and 1997
are shown in the table below:
Pro Forma
In thousands 1999 1998 1997
- -------------------------------------------------------------------------------
Contract $145,616 $127,114 $118,138
Commercial 128,834 120,638 117,162
Fidelity and other 24,537 22,850 21,767
- -------------------------------------------------------------------------------
$298,987 $270,602 $257,067
===============================================================================
For the year ended December 31, 1999, net written premiums increased 10.5%, or
$28.4 million, over the comparable period in 1998 consistent with the changes in
gross written premiums described above and changes in reinsurance. Net written
premiums increased 14.6%, or $18.5 million, for the contract surety business.
Commercial surety net written premiums, excluding international reinsurance
business assumed, increased 6.3%, or $6.9 million, in 1999. Fidelity and other
products increased 7.4%, or $1.7 million, in 1999.
For the year ended December 31, 1998, net written premiums increased 5.3%,
or $13.5 million, over the comparable pro forma period in 1997. Net written
premiums increased 7.6%, or $9.0 million, for contract surety. Commercial surety
net written premiums increased 3.0%, or $3.5 million, in 1998 with domestic
commercial surety up 3.4%, reflecting a full year of increased net retentions.
Effective September 30, 1997, the Company renegotiated its reinsurance
agreements with its reinsurers, increasing the Company's net retention to $5
million per bonded principal on its commercial surety business. Fidelity and
other products increased 5.0%, or $1.1 million, in 1998.
Underwriting Income
Underwriting income increased 16.4% to $71.9 million for the year ended December
31, 1999 compared to 1998. Underwriting income for 1998 decreased 29.1% compared
to pro forma 1997. The period to period changes in underwriting income were due
to fluctuations in both the loss and expense ratios as more fully described
below.
Loss Ratio
The loss ratios for the years ended December 31, 1999, 1998 and pro forma 1997
were 15.7%, 17.4% and 2.3%, respectively. The loss ratios included $13.1
million, $4.4 million and $40.9 million in favorable reserve development for the
years ended December 31, 1999, 1998 and pro forma 1997, respectively. The
foregoing 1999 favorable development primarily relates to accident years prior
to 1997 and reflects increased salvage and subrogation recoveries received.
Approximately $35.0 million in favorable reserve development in 1997 relates to
the Predecessor as more fully described in Note 8 to the Consolidated Financial
Statements. Excluding the impact of the favorable reserve development, the loss
ratio would have been 20.4% for the year ended December 31, 1999 and 19.1% for
both 1998 and 1997. The increase in the adjusted loss ratio in 1999 relates
primarily to changes in business mix.
In the second half of calendar year 1999, the Company experienced an
increase in claim severity in the most recent accident years, primarily with
respect to large commercial risks. This contributed to an increase in net claim
payments in 1999 over a relatively moderate 1998 calendar year.
<PAGE> 6
CNA Surety Corporation 1999 AR 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Expense Ratio
The expense ratio increased slightly to 58.9% for the year ended December 31,
1999 as compared to 58.7% for 1998. The 1999 increase is primarily due to the
additional costs to support technology investments and related back-office
integration efforts and expansion in select international and domestic markets.
Net earned premiums increased 9.6% in 1999 and operating expenses increased at a
slightly higher rate of 9.9%. The expense ratio decreased to 58.7% for the year
ended December 31, 1998 compared to 61.9% for pro forma 1997. The 1998 decline
is primarily due to the increased scale of the Company as net earned premiums
increased 6% and operating expenses increased a modest 1%. In addition, the
Company consolidated certain administrative and back-office processing
functions in 1998. The most significant of those consolidation activities was
the fourth quarter 1998 migration to a common premium processing platform,
including billing and collection functions.
Investment Income
For the year ended December 31, 1999, net investment income was $25.9 million
compared to net investment income for the years ended December 31, 1998 and pro
forma 1997 of $24.3 million and $14.5 million, respectively. The increase in
investment income for the year ended December 31, 1999 is attributable to higher
average invested assets and general interest rate increases offset by the
effects of a higher proportion of the portfolio being invested in tax exempt
securities. The annualized pretax yield was 5.2% and 5.4% for the years ended
December 31, 1999 and 1998, respectively. The annualized after-tax yield was
4.0% and 3.8% for the years ended December 31, 1999 and 1998, respectively.
The increase in investment income for the year ended December 31, 1998 is
the result of a higher actual invested cash balance which reflects an increase
from underwriting cash flow and the investment of merger-related cash flow in
the fourth quarter of 1997. However, pro forma investment income for the period
prior to the Merger does not include the pro forma effects of estimated net
investment income resulting from investment of merger-related cash flows as
described below.
The above unaudited pro forma financial information does not include the
estimated net investment income resulting from investment of merger-related cash
flows, including (i) the $50 million debt proceeds, (ii) the $52.25 million
capital contribution from CCC, and (iii) collection of the receivable from CCC.
Investment earnings are an integral part of an insurance entity's operations. If
proceeds from these sources of funds were assumed to have been invested in
high-quality, taxable fixed income securities with an average duration of
approximately three years, yielding 6.4%, net investment income would increase
approximately $11.3 million ($7.3 million net of tax, or $0.17 in pro forma
earnings per share) for the pro forma year ended December 31, 1997.
Net realized investment gains were $15,000 for the year ended December 31,
1999 compared to net realized investment gains of $0.8 million and $0.7 million
for the years ended December 31, 1998 and pro forma 1997, respectively.
Analysis of Other Operations
Amortization expense was $6.0 million for the year ended December 31, 1999
compared to $5.9 million and $5.8 million for the years ended December 31, 1998
and pro forma 1997, respectively. Intangible assets represent goodwill and
identified intangibles arising from the acquisition of Capsure, goodwill arising
from the May 1995 acquisition of CIC by CNAF that was allocated to the surety
business of CIC and goodwill arising from a subsequent acquisition. Intangible
assets are generally amortized over 30 years.
On July 28, 1999, CNA Surety acquired certain assets of Clark Bonding
Company, Inc., a Charlotte, North Carolina, insurance agency and brokerage doing
business as The Bond Exchange. The Bond Exchange specializes in the distribution
of surety and fidelity bonds with 1999 premium production of approximately $4
million. Goodwill arising from this acquisition was $5.9 million and will be
amortized over 30 years.
<PAGE> 7
18
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Interest expense decreased 19.0% for the year ended December 31, 1999 compared
to the same period in 1998, primarily due to lower debt levels. Average debt
outstanding was $103.7 million in 1999 compared to $117.6 million and $119.2
million in 1998 and pro forma 1997, respectively. The weighted average interest
rate for the year ended December 31, 1999 was 5.4% compared to 5.9% and 5.8% for
periods ended December 31, 1998 and pro forma 1997, respectively.
Income Taxes
Income tax expense was $29.4 million, $28.2 million and $42.9 million and the
effective income tax rates were 34.3%, 38.3% and 55.5% for the years ended
December 31, 1999, 1998 and pro forma 1997, respectively. The decrease in the
effective tax rate in 1999 primarily relates to increased tax exempt interest
income. The effective rate for the full year 1997 reflects the effects of
limitations on the Company's ability to utilize Capsure's available net
operating losses to offset future taxable income.
LIQUIDITY AND CAPITAL RESOURCES
It is anticipated that the liquidity requirements of CNA Surety will be met
primarily by funds generated from operations. The principal operating cash flow
sources are premiums, investment income and sales and maturities of investments.
CNA Surety also may generate funds from additional borrowings under the credit
facility described below. The primary cash flow uses are payments for claims,
operating expenses, federal income taxes, debt service for the credit facility,
as well as dividends to CNA Surety stockholders. In general, surety operations
generate premium collections from customers in advance of cash outlays for
claims. Premiums are invested until such time as funds are required to pay
claims and claims adjusting expenses.
The Company believes that total invested assets, including cash and
short-term investments, are sufficient in the aggregate and have suitably
scheduled maturities to satisfy all policy claims and other operating
liabilities, including dividend and income tax sharing payments of its insurance
subsidiaries. At December 31, 1999, the carrying value of the Company's
insurance subsidiaries' invested assets was comprised of $418.0 million of fixed
income securities, $25.9 million of equity securities, $31.4 million of
short-term investments, $5.3 million of other investments and $5.8 million of
cash. At December 31, 1998, the carrying value of the Company's insurance
subsidiaries' invested assets was comprised of $423.9 million of fixed income
securities, $43.4 million of short-term investments, $5.8 million of other
investments and $1.8 million of cash.
Cash flow at the parent company level is derived principally from dividend
and tax sharing payments from its insurance subsidiaries. The principal
obligations at the parent company level are to service debt, pay operating
expenses and pay dividends to stockholders. At December 31, 1999, the parent
company's invested assets consisted of $11.6 million of short-term investments
and $1.4 million of cash. At December 31, 1998, the parent company's invested
assets consisted of $14.5 million of short-term investments and $15.9 million of
cash.
The Company's consolidated net cash flow provided by operating activities
was $67.6 million for the year ended December 31, 1999, $88.7 million for the
year ended December 31, 1998 and $29.0 million for the three months ended
December 31, 1997. The decrease in net cash flow provided by operating
activities in 1999 primarily relates to an increase in insurance receivables
associated with increased premiums written and reinsured losses.
CNA Surety's bank borrowings are under a five-year unsecured revolving
credit facility (the "Credit Facility") that provides for borrowings of up to
$130.0 million. CNA Surety borrowed $105.0 million as of September 30, 1997 and
used the proceeds to retire the existing Capsure debt of approximately $54.0
million and to make a $50.0 million capital contribution to Western Surety. On
October 6, 1997, CNA Surety borrowed an additional $13.0 million to pay the
$10.6 million closing dividend to Capsure stockholders and other merger-related
costs. As of December 31, 1999, CNA Surety has repaid $18.0 million of this debt
and has unused capacity under the revolver of approximately $30 million.
<PAGE> 8
CNA Surety Corporation 1999 AR 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The interest rate on borrowings under the Credit Facility may be fixed, at CNA
Surety's option, for a period of one, two, three or six months and is based on,
among other rates, the London Interbank Offered Rate ("LIBOR"), plus the
applicable margin. The margin, including the facility fee, varies based on CNA
Surety's leverage ratio (debt to total capitalization) and ranges from 0.25% to
0.40%. As of December 31, 1999, the weighted average interest rate was 6.4% on
the $100.0 million of outstanding borrowings. As of December 31, 1998, the
weighted average interest rate was 5.5% on the $113.0 million of outstanding
borrowings.
The Credit Facility contains, among other conditions, limitations on CNA
Surety with respect to the incurrence of additional indebtedness and requires
the maintenance of certain financial ratios. As of December 31, 1999, the
Company was in compliance with all restrictions and covenants contained in the
Credit Facility agreement. The Credit Facility provides for the payment of all
outstanding principal balances after five years with no required principal
payments prior to such time. Principal prepayments, if any, and interest
payments are expected to be funded primarily through dividends from CNA Surety's
insurance subsidiaries.
On July 28, 1999, CNA Surety acquired certain assets of Clark Bonding
Company, Inc., a Charlotte, North Carolina, insurance agency and brokerage doing
business as The Bond Exchange for $5.9 million. As part of this acquisition, the
Company incurred an additional $1.9 million of debt in the form of a promissory
note. The promissory note matures on July 27, 2004 and has an interest rate of
5.0%.
As an insurance holding company, CNA Surety is dependent upon dividends
and other permitted payments from its insurance subsidiaries to pay cash
dividends, as well as to pay operating expenses and meet debt service
requirements. The payment of dividends by the insurance subsidiaries is subject
to varying degrees of supervision by the insurance regulatory authorities in
South Dakota and Texas. In South Dakota, where Western Surety and SBCA are
domiciled, insurance companies may only pay dividends from earned surplus
excluding surplus arising from unrealized capital gains or revaluation of
assets. In Texas, where USA is domiciled, an insurance company may only declare
or pay dividends to stockholders from the insurer's earned surplus. The
insurance subsidiaries may pay dividends without obtaining prior regulatory
approval only if such dividend or distribution (together with dividends or
distributions made within the preceding 12-month period) is less than, as of the
end of the immediately preceding year, the greater of (i) 10% of the insurer's
surplus to policyholders or (ii) statutory net income. In South Dakota, net
income includes net realized capital gains in an amount not to exceed 20% of net
unrealized capital gains. All dividends must be reported to the appropriate
insurance department prior to payment.
The dividends that may be paid without prior regulatory approval are
determined by formulas established by the applicable insurance regulations, as
described above. The formulas that determine dividend capacity in the current
year are dependent on, among other items, the prior year's ending statutory
surplus and statutory net income. Dividend capacity for 2000 will be based on
statutory surplus and income at and for the year ended December 31, 1999.
Without prior regulatory approval in 2000, CNA Surety's insurance subsidiaries
may pay stockholder dividends of $60.5 million in the aggregate. CNA Surety
received $33.3 million in dividends from its insurance subsidiaries in 1999 and
$6.6 million in 1998.
In accordance with the provisions of intercompany tax sharing agreements
between CNA Surety and its subsidiaries, the tax of each subsidiary shall be
determined based upon each subsidiary's separate return liability. Intercompany
tax payments are made at such times as estimated tax payments would be required
by the Internal Revenue Service ("IRS"). CNA Surety received tax sharing
payments from its subsidiaries of $28.7 million for the year ended December 31,
1999 and $28.5 million for the year ended through December 31, 1998.
CNA Surety management believes that the Company has sufficient available
resources to meet its present capital needs.
<PAGE> 9
20
Management's Discussion and Analysis of Financial Condition and Results of
Operations
FINANCIAL CONDITION
Investment Portfolio
The following table summarizes the distribution of the Company's fixed income
and equity portfolios at estimated fair values as of December 31, 1999
and 1998:
Estimated Estimated
Fair Value Fair Value
December 31 December 31
1999 Percent 1998 Percent
- ------------------------------------------------------------------------------
Fixed income securities:
U.S. Treasury securities and
obligations of U.S. Government
and agencies:
U.S. Treasury $ 17,452 3.9% $ 19,421 4.5%
U.S. Agencies 48,080 10.8 71,111 16.8
Collateralized mortgage
obligations 2,116 0.5 17,743 4.2
Mortgage pass-through
securities 45,091 10.2 25,005 5.9
Obligations of states and
political subdivisions 218,153 49.2 208,238 49.1
Corporate bonds 40,464 9.1 36,759 8.7
Non-agency collateralized
mortgage obligations 12,567 2.8 18,694 4.4
Other asset-backed securities:
Second mortgages/home
equity loans 18,820 4.2 12,387 2.9
Credit card receivables 7,779 1.8 4,898 1.2
Other 7,434 1.7 9,658 2.3
- ------------------------------------------------------------------------------
Total fixed income
securities 417,956 94.2% 423,914 100.0%
Equity securities 25,897 5.8 -- --
- ------------------------------------------------------------------------------
Total $443,853 100.0% $423,914 100.0%
==============================================================================
The Company's investment portfolio is managed to maximize after-tax investment
return while minimizing credit risk with investments concentrated in high
quality fixed income securities to support its insurance underwriting
operations. The Company's investment policies emphasize high credit quality and
diversification by industry, issue and issuer.
The following table sets forth the ratings assigned by The Standard &
Poor's Corporation ("S&P") or Moody's Investor Services, Inc. ("Moody's") of the
fixed income securities portfolio of the Company as of December 31, 1999 and
1998:
In thousands 1999 1998
- ------------------------------------------------------------------------------
Credit Rating Fair Value Percent Fair Value Percent
- ------------------------------------------------------------------------------
AAA/Aaa $275,488 65.9% $278,792 65.8%
AA/Aa 92,811 22.2 89,090 21.0
A/A 24,574 5.9 34,676 8.2
BBB 25,083 6.0 21,356 5.0
- ------------------------------------------------------------------------------
Total $417,956 100.0% $423,914 100.0%
==============================================================================
As of December 31, 1999 and 1998, 100% of the Company's fixed income securities
were considered investment grade by S&P or Moody's and 88% and 87% were rated at
least AA by those agencies for 1999 and 1998, respectively. The Company's
investments in fixed income securities do not contain any industry concentration
of credit risk.
Municipal securities of the State of Texas and related political
subdivisions represent 8% of the estimated fair value of the Company's fixed
income portfolio. Municipal securities of each other state individually
represent less than 6% of the Company's fixed income portfolio.
<PAGE> 10
CNA Surety Corporation 1999 AR 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Market Risk
CNA Surety's investment portfolio is subject to economic losses due to adverse
changes in the fair value of its financial instruments, or market risk. Interest
rate risk represents the largest market risk factor affecting the Company's
consolidated financial condition due to its significant level of investments in
fixed income securities. Increases and decreases in prevailing interest rates
generally translate into decreases and increases in the fair value of the
Company's fixed income portfolio. The fair value of these interest rate
sensitive instruments may also be affected by the creditworthiness of the
issuer, prepayment options, relative value of alternative investments, the
liquidity of the instrument, income tax considerations and general market
conditions. The Company manages its exposure to interest rate risk primarily
through an asset/liability matching strategy. The Company's exposure to interest
rate risk is mitigated by the relative short-term nature of its insurance and
other liabilities. The targeted effective duration of the Company's investment
portfolio is approximately 4.75 years consistent with the expected duration of
its insurance and other liabilities.
The table below summarizes the estimated effects of certain hypothetical
increases and decreases in interest rates. It is assumed that the changes occur
immediately and uniformly across each investment category. The hypothetical
changes in market interest rates selected reflect the Company's expectations of
the reasonably possible best or worst case scenarios over a one-year period. The
hypothetical fair values are based upon the same prepayment assumptions that
were utilized in computing fair values as of December 31, 1999. Significant
variations in market interest rates could produce changes in the timing of
repayments due to ~prepayment options available. The fair value of such
instruments could be affected and, therefore, actual results might differ from
those reflected in the following table.
<TABLE>
<CAPTION>
Hypothetical
Estimated Fair Percentage
Hypothetical Value after Increase
Fair Value at Change in Hypothetical (Decrease) in
December 31 Interest Rate Change in Stockholders'
1999 (bp=basis points) Interest Rate Equity
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed Income Securities:
U.S. Government and government
agencies and authorities $112,739 200 bp increase $104,108 (1.7)%
100 bp increase 107,847 (1.0)
100 bp decrease 117,220 0.9
200 bp decrease 120,561 1.6
States, municipalities
and political subdivisions 218,153 200 bp increase 198,855 (3.8)
100 bp increase 207,697 (2.1)
100 bp decrease 228,990 2.2
200 bp decrease 241,474 4.6
Corporate bonds and all other 87,064 200 bp increase 79,573 (1.5)
- ------------------------------------------ 100 bp increase 82,805 (0.8)
100 bp decrease 91,790 0.9
200 bp decrease 95,862 1.8
Total fixed income securities $417,956 200 bp increase 382,536 (7.1)
========================================== 100 bp increase 398,349 (3.9)
100 bp decrease 438,000 4.0
200 bp decrease 457,897 8.0
</TABLE>
<PAGE> 11
22
Management's Discussion and Analysis of Financial Condition and Results of
Operations
<TABLE>
<CAPTION>
Hypothetical
Estimated Fair Percentage
Hypothetical Value after Increase
Fair Value at Change in Hypothetical (Decrease) in
December 31 Interest Rate Change in Stockholders'
1998 (bp=basis points) Interest Rate Equity
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed Income Securities:
U.S. Government and government
agencies and authorities $133,280 200 bp increase $126,416 (1.4)%
100 bp increase 129,964 (0.7)
100 bp decrease 136,484 0.7
200 bp decrease 139,790 1.4
States, municipalities
and political subdivisions 208,238 200 bp increase 186,658 (4.5)
100 bp increase 196,769 (2.4)
100 bp decrease 221,119 2.7
200 bp decrease 235,014 5.6
Corporate bonds and all other 82,396 200 bp increase 76,436 (1.3)
- ------------------------------------------ 100 bp increase 79,453 (0.6)
100 bp decrease 86,794 0.9
200 bp decrease 93,296 2.3
Total fixed income securities $423,914 200 bp increase 389,510 (7.2)
========================================== 100 bp increase 406,186 (3.7)
100 bp decrease 444,397 4.3
200 bp decrease 468,100 9.3
</TABLE>
The Company is also exposed to equity price risk as a result of its investment
in equity securities. Equity price risk results from changes in the level or
volatility of equity prices which affect the value of equity securities. The
carrying values of investments subject to equity price risk are based on quoted
market prices or management's estimates of fair value as of the balance sheet
dates. Market prices are subject to fluctuation and, consequently, the amount
realized in the subsequent sale of an investment may significantly differ from
the reported market value. Fluctuation in the market price of a security may
result from perceived changes in the underlying economic characteristics of the
investee, the relative price of alternative investments and general market
conditions. Furthermore, amounts realized in the sale of a particular security
may be affected by the relative quantity of the security being sold.
The table below summarizes the Company's equity price risk as of December
31, 1999 and shows the effects of a hypothetical 25% increase and a 25% decrease
in market prices as of those dates. The selected hypothetical change does not
reflect what could be considered the best or worst case scenarios.
<TABLE>
<CAPTION>
Hypothetical
Estimated Fair Percentage
Value after Increase
Fair Value at Hypothetical (Decrease) in
December 31 Hypothetical Change in Stockholders'
1999 Price Change Price Equity
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity Securities $25,897 25% increase $32,371 1.3%
25% decrease $19,423 (1.3)
</TABLE>
The Company did not hold any investments in equity securities as of December 31,
1998.
<PAGE> 12
CNA Surety Corporation 1999 AR 23
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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
independent actuarial firms 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.
The Company recorded net favorable reserve development which resulted in
reductions in the estimated liability of $13.1 million for the year ended
December 31, 1999, $4.4 million for the year ended December 31, 1998 and $0.6
million for the period from inception through December 31, 1997. On a pro forma
basis, favorable development was $40.9 million ($35.0 million related to the
Predecessor) for the year ended December 31, 1997. Note 8 to the accompanying
Consolidated Financial Statements 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.
Risk Based Capital ("RBC") and Other Regulatory Ratios
The National Association of Insurance Commissioners ("NAIC") has promulgated RBC
requirements for property and casualty insurance companies to evaluate the
adequacy of statutory capital and surplus in relation to investment and
insurance risks such as asset quality, loss reserve adequacy and other business
factors. The RBC information is used by state insurance regulators as an early
warning mechanism to identify insurance companies that potentially are
inadequately capitalized. In addition, the formula defines new minimum capital
standards that supplement the current system of fixed minimum capital and
surplus requirements on a state-by-state basis. Regulatory compliance is
determined by a ratio (the "Ratio") of the enterprise's regulatory total
adjusted capital, as defined by the NAIC, to its authorized control level RBC,
as defined by the NAIC. Generally, a Ratio in excess of 200% of authorized
control level RBC requires no corrective actions on behalf of the Company or
regulators. As of December 31, 1999, each of CNA Surety's insurance subsidiaries
had a Ratio that was in compliance with minimum RBC requirements.
CNA Surety's insurance subsidiaries require capital to support premium
writings. In accordance with industry and regulatory guidelines, the net written
premiums to surplus ratio of a property and casualty insurer should not exceed 3
to 1 (the terms of the Credit Facility also limit this ratio to 3 to 1 for
Western Surety and USA). On December 31, 1999, the Company had a combined
statutory surplus of $193.5 million. The combined statutory surplus of Western
Surety and SBCA was $177.2 million and its net written premiums to surplus ratio
was 1.6 to 1. USA's statutory surplus was $16.3 million and the net written
premiums to surplus ratio was ~1.3 to 1. On December 31, 1998, the Company had a
combined statutory surplus of $169.9 million. The combined statutory surplus of
Western Surety and SBCA was $153.2 million and its net written premiums to
surplus ratio was 1.6 to 1. USA's statutory surplus was $16.7 million and its
net written premiums to surplus ratio was 1.4 to 1. The Company believes that
each insurance company's statutory surplus is sufficient to support its current
and anticipated premium levels.
<PAGE> 13
24
The NAIC has also developed a rating system, the Insurance Regulatory
Information System ("IRIS"), primarily intended to assist state insurance
departments in overseeing the financial condition of all insurance companies
operating within their respective states. IRIS consists of eleven key financial
ratios that address various aspects of each insurer's financial condition and
stability. In 1999, USA's and SBCA's IRIS ratios were within all the "usual"
ranges as defined by the NAIC. Western failed the Agents Balance to Surplus
ratio, primarily due to increased premiums written. In 1998, USA's IRIS ratios
were within all the "usual" ranges as defined by the NAIC. Western and its
affiliated company SBCA failed one ratio each; Agents Balance to Surplus and
Change in Net Writings, respectively. Due to the Merger that occurred on
September 30, 1997, and related reinsurance transactions, Western Surety's
agents balances increased significantly, causing this ratio to be outside the~
"usual" range.
IMPACT OF YEAR 2000 ON THE COMPANY
The widespread use of computer programs, both in the United States and
internationally, that rely on two digit date fields to perform computations and
decision making functions was identified as a possible cause for computer
systems malfunctions when processing information involving dates beginning after
1999. Such malfunctions could lead to business delays and disruptions. The
Company experienced minimal disruptions in its business activities with respect
to the Year 2000 date change.
As of December 31, 1999, approximately $538,000 was incurred in Year 2000
related expenditures. This amount includes expenses incurred for third party
remediation and testing and additional equipment hardware purchased to
facilitate further testing.
Although the Company has not received any claims based on alleged losses
resulting from the Year 2000 issues, there can be no assurance that bond
obligees or insureds will not suffer losses of this type and seek compensation
under the Company's bonds or policies. If any claims are made, the Company's
obligations, if any, will depend upon the facts and circumstances of the claims
and provisions of the bond or policy. At this time, the Company is unable to
determine whether the adverse impact, if any, in connection with the foregoing
circumstances would be material to the Company's results of operations,
financial condition and liquidity.
IMPACT OF ADOPTING ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants'
Accounting Standards Executive Committee ("AcSEC") issued Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," which provides guidance on accounting for costs of
computer software developed or obtained for internal use and for determining
whether computer software is for internal use. For the purposes of the SOP,
internal-use software is software acquired, internally developed or modified
solely to meet the entity's internal needs for which no substantive plan exists
or is being developed to market the software externally during the software's
development or modification. Accounting treatment for costs associated with
software developed or obtained for internal use, as defined by this SOP, is
based upon a number of factors, including the point in time during the project
that costs are incurred, as well as the types of costs incurred. The Company has
adopted SOP 98-1 in the accompanying Consolidated Financial Statements. The
adoption of which did not have a material effect on the Company's financial
position and results of operations.
In April 1998, AcSEC issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities," which provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs, as defined, to be expensed as incurred. The Company has
adopted SOP 98-5 in the accompanying Consolidated Financial Statements. The
adoption of which did not have a material effect on the Company's financial
position and results of operations.
<PAGE> 14
CNA Surety Corporation 1999 AR 25
In October 1998, AcSEC issued SOP 98-7, "Deposit Accounting: Accounting for
Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk," which
provides accounting guidance for insurance and reinsurance contracts that do not
transfer insurance risk, excluding long-duration life and health insurance
contracts. The Company has adopted SOP 98-7 in the accompanying Consolidated
Financial Statements. The adoption of which did not have a material effect on
the Company's financial position and results of operations.
IMPACT OF ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities," which establishes standards for the accounting and
reporting for derivative instruments and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as (a) a
hedge of the exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction or (c) a hedge of the foreign
currency exposure of a net investment in a foreign operation, an unrecognized
firm commitment, and available-for-sale security, or a
foreign-currency-denominated forecasted transaction. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and the resulting designation. This Statement, which is not required until 2001,
is still being assessed by the Company, but is not anticipated to have a
material impact on the financial position and results of operations of the
Company.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
The statements which are not historical facts contained in this Annual Report
to Shareholders 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 the Company'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.
<PAGE> 15
26
Consolidated Balance Sheets
In thousands, except per share data December 31 1999 1998
- ------------------------------------------------------------------------------
ASSETS
Invested assets and cash:
Fixed income securities, at fair value
(amortized cost: $436,690 and $418,866) $417,956 $423,914
Equity securities, at fair value
(cost: $23,968 and $0) 25,897 --
Short-term investments, at cost
(approximates fair value) 43,033 57,865
Other investments, at fair value 5,277 5,830
Cash 7,237 17,746
- ------------------------------------------------------------------------------
Total invested assets and cash 499,400 505,355
Deferred policy acquisition costs 84,924 74,488
Insurance receivables:
Premiums 9,822 8,950
Reinsurance, including $57,129 and
$47,175 from affiliates 76,158 55,350
Intangible assets, net of accumulated amortization
of $13,329 and $7,347 at December 31, 1999
and 1998, respectively 155,980 156,062
Prepaid reinsurance premiums 2,302 2,157
Property and equipment, at cost (less accumulated
depreciation: $11,094 and $9,593) 14,769 9,979
Other assets 8,220 7,029
- ------------------------------------------------------------------------------
Total assets $851,575 $819,370
==============================================================================
LIABILITIES
Reserves:
Unpaid losses and loss adjustment expenses $157,933 $150,020
Unearned premiums 199,300 183,708
- ------------------------------------------------------------------------------
Total reserves 357,233 333,728
Debt 101,900 113,000
Deferred income taxes, net 10,447 10,649
Payable for securities purchased 7,487 8,517
Current income taxes payable 7,076 6,726
Reinsurance payables to affiliates 6,882 1,424
Other liabilities 34,246 35,429
- ------------------------------------------------------------------------------
Total liabilities $525,271 $509,473
- ------------------------------------------------------------------------------
Commitments and contingencies (See Note 9)
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share,
20,000 shares authorized; none issued and
outstanding -- --
Common stock, par value $.01 per share, 100,000
shares authorized; 44,123 shares issued and
43,006 shares outstanding at December 31,
1999 and 44,093 issued and outstanding at
December 31, 1998 441 441
Additional paid-in capital 253,366 253,215
Retained earnings 95,419 52,984
Accumulated other comprehensive income (loss) (11,150) 3,257
Treasury stock, at cost (11,772) --
- ------------------------------------------------------------------------------
Total stockholders' equity 326,304 309,897
- ------------------------------------------------------------------------------
Total liabilities and stockholders' equity $851,575 $819,370
==============================================================================
The accompanying notes are an integral part of these financial statements.
<PAGE> 16
CNA Surety Corporation 1999 AR 27
Consolidated Statements of Income
and Statement of Certain Revenues and Direct Operating Expenses of Predecessor
<TABLE>
<CAPTION>
September 30
(Date of Predecessor
Inception) Nine Months
Year Ended Year Ended through Ended
December 31 December 31 December 31 September 30
In thousands, except per share data 1999 1998 1997 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Net earned premium $283,540 $258,737 $65,433 $108,564
Net investment income 25,850 24,259 5,766 --
Net realized investment gains 15 844 85 --
- --------------------------------------------------------------------------------------------------------
Total revenues 309,405 283,840 71,284 108,564
- --------------------------------------------------------------------------------------------------------
Expenses:
Net losses and loss adjustment expenses 44,672 44,998 12,134 (11,516)
Net commissions, brokerage and other underwriting 166,974 151,966 38,213 59,674
Interest expense 5,846 7,218 1,831 --
Amortization of intangible assets 5,982 5,900 1,447 --
- --------------------------------------------------------------------------------------------------------
Total expenses 223,474 210,082 53,625 48,158
- --------------------------------------------------------------------------------------------------------
Income before income taxes (Excess of net earned
premium over direct operating expenses, before
income taxes for Predecessor) 85,931 73,758 17,659 60,406
Income taxes 29,433 28,243 6,663 21,241
- --------------------------------------------------------------------------------------------------------
Net income (Excess of net earned premiums over
direct operating expenses, after income taxes
for Predecessor) $ 56,498 $ 45,515 $10,996 $ 39,165
========================================================================================================
Earnings per share $ 1.28 $ 1.04 $ 0.25
===========================================================================================
Earnings per share, assuming dilution $ 1.28 $ 1.04 $ 0.25
===========================================================================================
Weighted average shares outstanding 43,974 43,722 43,302
===========================================================================================
Weighted average shares outstanding, assuming dilution 44,120 43,875 43,552
===========================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 17
28
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Accumulated
Common Stock Other Treasury Total
Shares Common Additional Comprehensive Retained Comprehensive Stock Stockholders'
In thousands Outstanding Stock Paid-In Capital Income Earnings Income (Loss) (at cost) Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1997
(Date of Inception) -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Comprehensive income:
Net income -- -- -- 10,996 10,996 -- -- 10,996
Other comprehensive income:
Change in unrealized gains on
securities (after
income taxes), net of
reclassification
adjustment of $0 -- -- -- 474 -- 474 -- 474
- ------------------------------------ --------
Total comprehensive income $ 11,470
==================================== ========
Increase due to Capsure
Acquisition (See Note 2) 43,294 433 181,629 -- -- -- 182,062
Capital contribution and the
effects of reinsurance
agreements (See Note 2) -- -- 62,859 -- -- -- 62,859
Stock options exercised 26 -- 341 -- -- -- 341
- ------------------------------------------------------------------ ------------------------------------------------
Balance, December 31, 1997 43,320 $433 $244,829 $ 10,996 $ 474 $ -- $256,732
================================================================== ================================================
Comprehensive income:
Net income -- -- -- 45,515 45,515 -- -- 45,515
Other comprehensive income:
Change in unrealized gains on
securities (after income
taxes), net of
reclassification
adjustment of $208 -- -- -- 2,783 -- 2,783 -- 2,783
- ------------------------------------ --------
Total comprehensive income $ 48,298
==================================== ========
Issuance of common stock 628 6 7,525 -- -- -- 7,531
Stock options exercised 145 2 861 -- -- -- 863
Dividends paid to stockholders -- -- -- (3,527) -- -- (3,527)
- ------------------------------------------------------------------ ------------------------------------------------
Balance, December 31, 1998 44,093 $441 $253,215 $ 52,984 $ 3,257 $ -- $309,897
================================================================== ================================================
Comprehensive income:
Net income -- -- -- 56,498 56,498 -- -- 56,498
Other comprehensive income:
Change in unrealized (losses)
on securities (after income
taxes), net of
reclassification adjustment
of $821 -- -- -- (14,407) -- (14,407) -- (14,407)
- ------------------------------------ --------
Total comprehensive income $ 42,091
==================================== ========
Purchase of treasury stock (1,117) -- -- -- -- (11,772) (11,772)
Stock options exercised and other 30 -- 151 -- -- -- 151
Dividends paid to stockholders -- -- -- (14,063) -- -- (14,063)
- ------------------------------------------------------------------ ------------------------------------------------
Balance, December 31, 1999 43,006 $441 $253,366 $ 95,419 $(11,150) $(11,772) $326,304
================================================================== ================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 18
CNA Surety Corporation 1999 AR 29
Consolidated Statements of Cash Flows
September 30
(Date of
Inception)
Year Ended Year Ended through
December 31 December 31 December 31
In thousands 1999 1998 1997
- ------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 56,498 $ 45,515 $ 10,996
Adjustments to reconcile net income to
net cash provided by
operating activities:
Depreciation and amortization 8,414 7,720 1,915
Accretion of bond discount, net 2,085 2,065 172
Net realized investment gains (15) (844) (85)
Changes in:
Insurance receivables (21,680) 534 (13,282)
Reserve for unearned premiums 15,592 11,921 7,184
Reserve for unpaid losses and loss
adjustment expenses 7,913 19,639 8,100
Deferred policy acquisition costs (10,436) (10,344) 4,950
Deferred income taxes, net 7,506 7,485 4,038
Reinsurance payables 5,458 1,424 --
Other assets and liabilities (3,723) 3,578 5,010
- ------------------------------------------------------------------------------
Net cash provided by operating activities 67,612 88,693 28,998
- ------------------------------------------------------------------------------
INVESTING ACTIVITIES
Fixed income securities:
Purchases (172,746) (297,654) (149,580)
Maturities 45,610 56,947 8,654
Sales 107,243 86,170 5,146
Purchases of equity securities (24,444) -- --
Proceeds from the sale of
equity securities 477 -- --
Changes in short-term investments 14,832 89,370 (117,919)
Purchases of property and equipment (5,566) (3,458) (586)
Acquisition of businesses, net of
cash acquired (5,900) -- --
Other, net (789) (1,959) --
- ------------------------------------------------------------------------------
Net cash used in investing activities (41,283) (70,584) (254,285)
- ------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from debt 1,900 -- 118,000
Collection of receivable from
affiliates, net -- -- 116,939
Principal payments on debt (13,000) (5,000) (54,000)
Capital contribution from CCC -- -- 52,250
Closing dividend to Capsure stockholders -- -- (10,591)
Proceeds from issuance of common stock -- 7,531 --
Dividends to stockholders (14,063) (3,527) --
Purchase of treasury stock (11,772) -- --
Other 97 503 126
- ------------------------------------------------------------------------------
Net cash (used in) provided by
financing activities (36,838) (493) 222,724
- ------------------------------------------------------------------------------
Increase (decrease) in cash (10,509) 17,616 (2,563)
Cash at beginning of period 17,746 130 2,693
- ------------------------------------------------------------------------------
Cash at end of period $ 7,237 $ 17,746 $ 130
==============================================================================
Supplemental Disclosure of Cash
Flow Information:
Cash paid during the period for:
Interest $ 5,826 $ 6,721 $ 1,704
Income taxes $ 20,600 $ 17,750 $ --
Non-cash investing activities:
Common stock and options issued in
connection with Capsure
acquisition (See Note 2) $ -- $ -- $ 182,062
==============================================================================
The accompanying notes are an integral part of these financial statements.
<PAGE> 19
30
Notes to Consolidated Financial Statements
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Formation of CNA Surety Corporation and Merger
In December 1996, CNA Financial Corporation ("CNAF") and Capsure Holdings Corp.
("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 CNA Surety Corporation ("CNA Surety"
or the "Company"). CNAF, through its operating subsidiaries, writes multiple
lines of property and casualty insurance, including surety business that is
reinsured by Western Surety. CNAF owns approximately 63% of the outstanding
common stock of CNA Surety. Loews Corporation owns approximately 86% of the
outstanding common stock of CNAF. The principal operating subsidiaries of CNAF
that wrote the surety line of business for their own account prior to the
Merger were Continental Casualty Company and its property and casualty
affiliates (collectively, "CCC") and The Continental Insurance Company and its
property and casualty affiliates (collectively, "CIC"). CIC was acquired by CNAF
on May 10, 1995. The combined surety operations of CCC and CIC are referred to
herein as CCC Surety Operations ("Predecessor").
Pursuant to a reorganization agreement, CCC Surety Operations and Capsure
merged their respective operations at the close of business on September 30,
1997 ("Merger Date"). CNAF, through its property and casualty subsidiaries, CCC
and CIC, contributed $52.25 million of capital to CNA Surety. Through
reinsurance agreements, CCC and CIC ceded to Western Surety all of their net
unearned premiums and loss and loss adjustment expense reserves, as of the
Merger Date, and will cede to Western Surety all surety business written or
renewed by CCC and CIC for a period of five years thereafter. Further, CCC and
CIC have agreed to assume the obligation for any adverse development on recorded
reserves for CCC Surety Operations as of the Merger Date, to limit the loss
ratio on certain defined business written by CNA Surety through December 31,
2000 and to provide certain additional excess of loss reinsurance. CCC also
agreed to provide certain administrative services at specified rates, subject to
inflationary increases, for three years after the Merger, if CNA Surety chooses
to purchase such services.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of CNA Surety
Corporation and all majority-owned subsidiaries. The Consolidated Financial
Statements include the actual combined consolidated operating results of CCC
Surety Operations and Capsure since the Merger Date.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Predecessor Financial Information
The accompanying Statement of Certain Revenues and Direct Operating Expenses for
the nine months ended September 30, 1997 reflects premiums earned, losses
incurred, loss adjustment expenses (allocated and unallocated) and other direct
operating expenses of CCC Surety Operations, the Predecessor. Such operating
revenues and costs as investment income, realized gains and losses on
investments and certain general and administrative expenses, which are indirect
or overhead in nature, are not reflected in operating results since such items
were not historically allocated to CCC Surety Operations by CNAF or its
subsidiaries.
Since the accompanying Predecessor financial statements exclude certain
revenues and expenses, these financial statements are not intended to be a
complete presentation of CCC Surety Operations. Those revenues and costs that
are reflected in the accompanying financial statements have been determined in
accordance with generally accepted accounting principles.
Investments
Management believes the Company has the ability to hold all fixed income
securities to maturity. However, the Company may dispose of securities prior to
their scheduled maturity due to changes in interest rates, prepayments, tax and
credit considerations, liquidity or regulatory capital requirements or other
similar factors.
<PAGE> 20
CNA Surety Corporation 1999 AR 31
Notes to Consolidated Financial Statements
As a result, the Company considers all of its fixed income
securities (bonds and redeemable preferred stocks) and equity securities as
available-for-sale. These securities are reported at fair value, with unrealized
gains and losses, net of deferred income taxes, reported as a separate component
of stockholders' equity. Cash flows from purchases, sales and maturities are
reported gross in the investing activities section of the cash flow statement.
The amortized cost of fixed income securities is determined based on cost
and the cumulative effect of amortization of premiums and accretion of discounts
to maturity. Such amortization and accretion are included in investment income.
For mortgage-backed and certain asset-backed securities, the Company recognizes
income using the effective yield method based on estimated cash flows.
Investment gains or losses realized on the sale of securities are determined
using the specific identification method. Investments with an
other-than-temporary decline in value are written down to fair value, resulting
in losses that are included in realized investment gains and losses.
Short-term investments which generally include U.S. Treasury bills,
corporate notes, money market funds and investment grade commercial paper
equivalents, are carried at amortized cost which approximates fair value.
Deferred Policy Acquisition Costs
Policy acquisition costs, consisting of commissions and other underwriting
expenses which vary with, and are primarily related to, the production of
business, net of reinsurance commission income, are deferred and amortized as a
charge to income as the related premiums are earned.
Intangible Assets
The Merger of CCC Surety Operations and Capsure has been accounted for by CNA
Surety as an acquisition of Capsure, using purchase accounting. Intangible
assets represent goodwill and identified intangibles arising from the
acquisition of Capsure and goodwill arising from the May 1995 acquisition of CIC
by CNAF that was allocated to the surety business of CIC. Intangible assets are
amortized on a straight line basis generally over 30 years.
On July 28, 1999, CNA Surety acquired certain assets of Clark Bonding
Company, Inc., a Charlotte, North Carolina, insurance agency and brokerage doing
business as The Bond Exchange. The Bond Exchange specializes in the distribution
of surety and fidelity bonds with 1999 premium production of approximately $4
million. Goodwill arising from this acquisition was $5.9 million and will be
amortized on a straight line basis over 30 years.
Management assesses the recoverability of intangible assets based upon
estimates of undiscounted future operating cash flows whenever significant
events or changes in circumstances suggest that the carrying amount of an asset
may not be recoverable.
Reserves for Unpaid Losses and Loss Adjustment Expenses
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,
before reinsurance recoveries which are reported as an asset. These estimates
are determined based on the Company's loss experience, as well as consideration
of industry experience, 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.
Insurance Premiums
Insurance premiums are recognized as revenue ratably over the terms of the
related policies. Premium revenues are net of amounts ceded to reinsurers.
Unearned premiums represent the portion of premiums written, before ceded
reinsurance which is shown as an asset, applicable to the unexpired terms of
policies in force calculated on a daily pro rata basis.
Reinsurance
The Company assumes and cedes insurance with other insurers and reinsurers to
limit maximum loss, provide greater diversification of risk and minimize
exposure on larger risks. Premiums and loss and loss adjustment expenses that
are ceded under reinsurance arrangements reduce the respective revenues and
expenses.
<PAGE> 21
32
Notes to Consolidated Financial Statements
Amounts recoverable from reinsurers are estimated in a manner
consistent with the claim liability associated with the reinsured policy and are
reported as reinsurance receivable rather than netted against the estimated
liability for unpaid losses and loss adjustment expenses.
Stock-Based Compensation
As allowed under Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," the Company accounts for its stock
option plans in accordance with Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees." The Company has not issued stock
options where the exercise price is less than the fair market value of the
Company's common stock on the date of grant and, accordingly, no compensation
expense has been recognized.
Income Taxes
Deferred income taxes are established for the future tax effects of temporary
differences between the tax and financial reporting bases of assets and
liabilities using currently enacted tax rates. Such temporary differences
primarily relate to insurance reserves, deferred policy acquisition costs and
intangible assets. The effect on deferred taxes of a change in tax rates is
recognized in income in the period of enactment.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation.
Depreciation is based on the estimated useful lives of the various classes of
property and equipment and determined principally on a straight-line basis. The
cost of maintenance and repairs is charged to income as incurred, major
improvements are capitalized.
Earnings Per Share
Basic earnings per common share is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per common share is computed based on the
weighted average number of shares outstanding plus the dilutive effect of common
stock equivalents which is computed using the treasury stock method.
Accounting Changes
In March 1998, AcSEC issued SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which provides guidance on
accounting for costs of computer software developed or obtained for internal use
and for determining whether computer software is for internal use. For the
purposes of the SOP, internal-use software is software acquired, internally
developed or modified solely to meet the entity's internal needs for which no
substantive plan exists or is being developed to market the software externally
during the software's development or modification. Accounting treatment for
costs associated with software developed or obtained for internal use, as
defined by this SOP, is based upon a number of factors, including the point in
time during the project that costs are incurred, as well as the types of costs
incurred. The Company has adopted SOP 98-1 in the accompanying Consolidated
Financial Statements. The adoption of which did not have a material effect on
the Company's financial position and results of operations.
In April 1998, AcSEC issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities," which provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs, as defined, to be expensed as incurred. The Company has
adopted SOP 98-5 in the accompanying Consolidated Financial Statements. The
adoption of which did not have a material effect on the Company's financial
position and results of operations.
In October 1998, AcSEC issued SOP 98-7, "Deposit Accounting: Accounting
for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk,"
which provides accounting guidance for insurance and reinsurance contracts that
do not transfer insurance risk, excluding long-duration life and health
insurance contracts. The Company has adopted SOP 98-7 in the accompanying
Consolidated Financial Statements. The adoption of which did not have a material
effect on the Company's financial position and results of operations.
Reclassifications
Certain reclassifications have been made to the 1998 and 1997 financial
statements to conform with the presentation in the 1999 Consolidated Financial
Statements.
<PAGE> 22
CNA Surety Corporation 1999 AR 33
NOTE 2. CAPSURE ACQUISITION
The purchase price for Capsure has been allocated to Capsure's assets that
were acquired and to Capsure's liabilities that were assumed based on the
estimated fair value of such assets and liabilities at the Merger Date.
The purchase price for the outstanding shares of Capsure common stock was
determined as follows:
In thousands
- ------------------------------------------------------------------------------
Traded value of Capsure shares to be exchanged at
$11.00 per share $178,177
Value of Capsure options 2,527
CCC Surety Operations merger-related costs 1,358
- ------------------------------------------------------------------------------
Total purchase price $182,062
==============================================================================
The purchase price was allocated as follows:
In thousands
- ------------------------------------------------------------------------------
Capsure net assets at historical cost $100,875
Fair value adjustments:
Purchased intangibles (73,844)
Intangibles arising from Merger 155,031
- ------------------------------------------------------------------------------
Total purchase price $182,062
==============================================================================
Intangible assets arising from the Merger were allocated as follows:
In thousands Amortization
Intangible Asset Component Amount Period
- ------------------------------------------------------------------------------
Agency Force $ 20,500 20 years
Goodwill 134,531 30 years
- -----------------------------------------------------------
Total intangibles $155,031
===========================================================
CNA Surety's beginning stockholders' equity was comprised of the following:
In thousands
- ------------------------------------------------------------------------------
Purchase price $182,062
Capital contribution of $52,250 from CCC
and the effects of reinsurance agreements 62,859
- ------------------------------------------------------------------------------
Stockholders' equity $244,921
==============================================================================
Unaudited Pro Forma Results
The following table of unaudited pro forma information has been prepared as if
the acquisition of Capsure had been consummated at the beginning of 1997. This
unaudited pro forma financial information gives effect to the following: (i)
consummation of the Merger and the related transactions and the contribution of
capital to and the incurrence of additional debt by CNA Surety; (ii) purchase
accounting adjustments to reflect Capsure's assets and liabilities at fair
value; (iii) estimated indirect and overhead expenses for the CCC Surety
Operations; and (iv) estimated interest expense related to the additional debt:
Year Ended
(ProForma)
Unaudited
In thousands, except per share amounts 1997
- ------------------------------------------------------------------------------
Revenues $258,682
Net income $ 34,375
Earnings per share $ 0.79
==============================================================================
<PAGE> 23
34
Notes to Consolidated Financial Statements
The foregoing unaudited pro forma operating results include non-recurring
charges, primarily merger-related costs of Capsure, of $22.0 million, net of tax
(or $0.51 per share) for the year ended December 31, 1997.
This unaudited pro forma financial information is intended for information
purposes only and is not necessarily indicative of the results of operations
which would have been achieved and reported had the Merger and related
transactions been consummated on the date assumed, nor is it necessarily
indicative of the future consolidated operating results of CNA Surety.
NOTE 3. INVESTMENTS
The estimated fair value and amortized cost of fixed income and equity
securities held by CNA Surety by investment category, were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Cost Unrealized Unrealized Estimated
In thousands December 31, 1999 or Cost Gains Losses Fair Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed income securities:
U.S. Treasury securities and obligations of
U.S. Government and agencies:
U.S. Treasury $ 17,575 $ 6 $ (129) $ 17,452
U.S. Agencies 49,786 58 (1,764) 48,080
Collateralized mortgage obligations 2,123 3 (10) 2,116
Mortgage pass-through securities 46,701 -- (1,610) 45,091
Obligations of states and political subdivisions 229,499 56 (11,402) 218,153
Corporate bonds 43,395 3 (2,934) 40,464
Non-agency collateralized mortgage obligations 12,845 -- (278) 12,567
Other asset-backed securities:
Second mortgages/home equity loans 19,041 16 (237) 18,820
Credit card receivables 8,101 1 (323) 7,779
Other 7,624 2 (192) 7,434
- -------------------------------------------------------------------------------------------------
Total fixed income securities 436,690 145 (18,879) 417,956
Equity securities 23,968 3,274 (1,345) 25,897
- -------------------------------------------------------------------------------------------------
Total $460,658 $3,419 $(20,224) $443,853
=================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Cost Unrealized Unrealized Estimated
In thousands December 31, 1999 or Cost Gains Losses Fair Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed income securities:
U.S. Treasury securities and obligations of
U.S. Government and agencies:
U.S. Treasury $ 19,009 $ 412 $ -- $ 19,421
U.S. Agencies 68,922 2,189 -- 71,111
Collateralized mortgage obligations 17,741 78 (76) 17,743
Mortgage pass-through securities 24,834 172 (1) 25,005
Obligations of states and political subdivisions 206,264 2,329 (355) 208,238
Corporate bonds 36,538 686 (465) 36,759
Non-agency collateralized mortgage obligations 18,811 32 (149) 18,694
Other asset-backed securities:
Second mortgages/home equity loans 12,169 219 (1) 12,387
Credit card receivables 4,896 5 (3) 4,898
Other 9,682 24 (48) 9,658
- -------------------------------------------------------------------------------------------------
Total fixed income securities 418,866 6,146 (1,098) 423,914
Equity securities -- -- -- --
- -------------------------------------------------------------------------------------------------
Total $418,866 $6,146 $ (1,098) $423,914
=================================================================================================
</TABLE>
<PAGE> 24
CNA Surety Corporation 1999 AR 35
Notes to Consolidated Financial Statements
The Company's insurance subsidiaries, as required by state law, deposit certain
securities with state insurance regulatory authorities. At December 31, 1999,
securities on deposit had an aggregate carrying value of $3.3 million.
Short-term investments are generally comprised of U.S. Treasury bills,
corporate notes, money market funds and investment-grade commercial paper
equivalents.
The amortized cost and estimated fair value of fixed income securities,
by contractual maturity, at December 31, 1999 and 1998 are shown below. Actual
maturities will differ from contractual maturities as borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties:
<TABLE>
<CAPTION>
In thousands 1999 1998
- ----------------------------------------------------------------------------------------------
Amortized Estimated Amortized Estimated
Fixed Income Securities: Cost Fair Value Cost Fair Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due within one year $ -- $ -- $ 3,354 $ 3,364
Due after one year but within five years 47,697 47,022 67,091 68,817
Due after five years but within ten years 117,047 112,286 160,158 163,152
Due after ten years 175,511 164,841 100,130 100,196
- ----------------------------------------------------------------------------------------------
340,255 324,149 330,733 335,529
Mortgage pass-through securities,
collateralized mortgage obligations and
asset-backed securities 96,435 93,807 88,133 88,385
- ----------------------------------------------------------------------------------------------
$436,690 $417,956 $418,866 $423,914
==============================================================================================
</TABLE>
Major categories of net investment income and net realized investment gains
(losses) were as follows:
<TABLE>
<CAPTION>
September 30
(Date of
Inception)
Year Ended Year Ended through
December 31 December 31 December 31
In thousands 1999 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment income:
Fixed income securities $ 22,593 $ 22,111 $ 3,061
Equity securities 92 -- --
Short-term investments 2,917 2,233 2,707
Other 866 523 112
- ----------------------------------------------------------------------------------------------
Total investment income 26,468 24,867 5,880
Investment expenses (618) (608) (114)
- ----------------------------------------------------------------------------------------------
Net investment income $ 25,850 $ 24,259 $ 5,766
- ----------------------------------------------------------------------------------------------
Gross realized investment gains:
Fixed income securities $ 690 $ 867 $ 90
Equity securities 2 -- --
Other -- 2 11
Gross realized investment losses:
Fixed income securities (674) (19) --
Equity securities (1) -- --
Other (2) (6) (16)
- ----------------------------------------------------------------------------------------------
Net realized investment gain $ 15 $ 844 $ 85
==============================================================================================
</TABLE>
<PAGE> 25
36
Notes to Consolidated Financial Statements
Net unrealized gain and loss on securities included in stockholders' equity at
December 31, 1999 and 1998 was comprised of the following:
In thousands 1999 1998
- -----------------------------------------------------------------------------
Gains Losses Net Gains Losses Net
Fixed income securities $ 145 $(18,879) $(18,734) $6,146 $(1,098) $ 5,048
Equity securities 3,274 (1,345) 1,929 -- -- --
Other -- (349) (349) -- (37) (37)
- -----------------------------------------------------------------------------
$3,419 $(20,573) (17,154) $6,146 $(1,135) 5,011
- -----------------------------------------------------------------------------
Deferred income taxes 6,004 (1,754)
- -----------------------------------------------------------------------------
Net unrealized (loss)
gain on securities $(11,150) $ 3,257
=============================================================================
NOTE 4. DEBT
CNA Surety has a five-year unsecured revolving credit facility that provides for
borrowings of up to $130.0 million. The interest rate on borrowings under the
credit facility may be fixed, at CNA Surety's option, for a period of one, two,
three or six months and is based on, among other rates, the London Interbank
Offered Rate ("LIBOR") plus applicable margin. The margin, including the
facility fee, varies based on CNA Surety's leverage ratio (debt to total
capitalization) and ranges from 0.25% to 0.40%. The credit facility provides for
the payment of all outstanding principal balances after five years with no
required principal payments prior to such time.
The credit facility contains among other conditions, limitations on CNA
Surety with respect to the incurrence of additional indebtedness and requires
the maintenance of certain financial ratios. As of December 31, 1999, management
believes that the Company was in compliance with all restrictions or covenants
contained in the credit facility agreement.
On July 28, 1999, CNA Surety acquired certain assets of Clark Bonding
Company, Inc., a Charlotte, North Carolina, insurance agency and brokerage doing
business as The Bond Exchange for $5.9 million. As part of this acquisition, the
Company incurred an additional $1.9 million of debt in the form of a promissory
note. The promissory note matures on July 27, 2004 and has an interest rate of
5.0%.
The Consolidated Balance Sheet at December 31, 1999 reflects total debt
of $101.9 million and $113.0 million at December 31, 1998. The weighted average
interest rate on outstanding borrowings was 6.33% and 5.53% at December 31,
1999 and 1998, respectively.
NOTE 5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table summarizes fair value information about financial
instruments, whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. In cases where quoted market prices are not
available, fair values may be based on estimates using present value or other
valuation techniques. These techniques are significantly affected by the
assumptions used, including the discount rates and estimates of future cash
flows. Potential taxes and other transaction costs have not been considered in
estimating fair value. Accordingly, the estimates presented herein are
subjective in nature and are not necessarily indicative of the amounts that the
Company could realize in a current market exchange. This information excludes
certain financial instruments and all non-financial instruments such as
insurance contracts from fair value disclosure. Therefore, these fair value
amounts cannot be aggregated to determine the underlying economic value of the
Company.
<PAGE> 26
CNA Surety Corporation 1999 AR 37
Notes to Consolidated Financial Statements
The carrying amounts and estimated fair values of financial instruments at
December 31, 1999 and 1998 were as follows:
1999 1998
- -------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
In thousands Amount Fair Value Amount Fair Value
- -------------------------------------------------------------------------------
Fixed income securities $417,956 $417,956 $423,914 $423,914
Equity securities 25,897 25,897 -- --
Short-term investments 43,033 43,033 57,865 57,865
Other investments 5,277 5,277 5,830 5,830
Cash 7,237 7,237 17,746 17,746
Debt 101,900 101,900 113,000 113,000
===============================================================================
The following methods and assumptions were used by the Company in estimating
fair values of financial instruments: Investments-The estimated fair values for
the fixed income securities and equity securities are based upon quoted market
prices, where available. For fixed income securities not actively traded, the
estimated fair values are determined using values obtained from independent
pricing services or, in the case of private placements, by discounting expected
future cash flows using a current market rate applicable to the yield, credit
quality and maturity of the investments.
Cash, Short-Term Investments and Other Investments-The carrying value for these
instruments approximates their estimated fair values. Debt-The estimated fair
value of the Company's debt is based on the quoted market prices for the same or
similar issues or on the current rates offered to the Company for debt of the
same remaining maturity.
NOTE 6. DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs deferred and the related amortization of deferred
policy acquisition costs were as follows:
<TABLE>
<CAPTION>
September 30
(Date of Predecessor
Inception Nine(1) Months
Year Ended Year Ended through Ended
December 31 December 31 December 31 September 30
In thousands 1999 1998 1997 1997
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 74,488 $ 64,144 $ 69,094 $ 37,689
Costs deferred 130,182 115,764 20,931 48,126
Amortization (119,746) (105,420) (25,881) (48,075)
Deferred policy acquisition
costs of Capsure at
September 30, 1997, date
of Merger -- -- -- 31,354
- ----------------------------------------------------------------------------------
Balance at end of period $ 84,924 $ 74,488 $ 64,144 $ 69,094
==================================================================================
</TABLE>
(1)Amounts are for Predecessor except for the deferred policy acquisition costs
of Capsure acquired and the balance at the end of the period which is for CNA
Surety.
NOTE 7. 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 the reinsurance agreements. The Company evaluates the financial condition
of its reinsurers, establishes allowances for uncollectible amounts and monitors
concentrations of credit risk. At December 31, 1999, CNA Surety's largest
reinsurance receivable, including prepaid reinsurance premiums of $0.8 million,
was approximately $8.5 million with a company rated A++ (Superior) by A.M. Best
Company, Inc.
<PAGE> 27
38
Notes to Consolidated Financial Statement
The effect of reinsurance on premiums written and earned was as
follows:
<TABLE>
<CAPTION>
September 30 Predecessor
Year Ended Year Ended (Date of Inception) Nine Months
December 31 December 31 through December 31 Ended September 30
In thousands 1999 1998 1997 1997
- ----------------------------------------------------------------------------------------------------------------------------
Written Earned Written Earned Written Earned Written Earned
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Direct $108,968 $103,993 $105,288 $103,298 $24,561 $27,159 $114,969 $112,751
Assumed from affiliates 197,891 186,939 172,935 163,003 50,691 40,653 -- --
Assumed from
non-affiliates -- -- -- -- -- -- 1,106 2,034
Ceded (7,872) (7,392) (7,621) (7,564) (1,263) (2,379) (7,445) (6,221)
- ----------------------------------------------------------------------------------------------------------------------------
Net premiums $298,987 $283,540 $270,602 $258,737 $73,989 $65,433 $108,630 $108,564
============================================================================================================================
</TABLE>
Assumed premiums from affiliates are comprised of all surety business written or
renewed, net of reinsurance, by CCC and CIC after the Merger Date that is
reinsured by Western Surety pursuant to intercompany reinsurance and related
agreements.
The effect of reinsurance on losses and loss adjustment expenses incurred
was as follows:
<TABLE>
<CAPTION>
September 30
(Date of Predecessor
Inception) Nine Months
Year Ended Year Ended through Ended
December 31 December 31 December 31 September 30
In thousands 1999 1998 1997 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross losses and loss adjustment expenses $ 63,933 $ 53,828 $ 12,613 $ (7,265)
Reinsurance recoveries (19,261) (8,830) (479) (4,251)
- -----------------------------------------------------------------------------------------------
Net losses and loss adjustment expenses $ 44,672 $ 44,998 $ 12,134 $ (11,516)
===============================================================================================
</TABLE>
NOTE 8. RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Activity in the reserves for unpaid losses and loss adjustment expenses was as
follows:
<TABLE>
<CAPTION>
September 30
(Date of Predecessor
Inception) Nine(1)Months
Year Ended Year Ended through Ended
December 31 December 31 December 31 September 30
In thousands 1999 1998 1997 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Reserves at beginning of period:
Gross $150,020 $130,381 $122,281 $ 119,151
Ceded reinsurance 7,986 7,656 7,273 15,467
- -----------------------------------------------------------------------------------------------
Net reserves at beginning of period 142,034 122,725 115,008 103,684
- -----------------------------------------------------------------------------------------------
Net incurred loss and loss
adjustment expenses:
Provision for insured events of
current period 57,757 49,350 12,781 23,484
Decrease in provision for insured events
of prior periods (13,085) (4,352) (647) (35,000)
- -----------------------------------------------------------------------------------------------
Total net incurred 44,672 44,998 12,134 (11,516)
- -----------------------------------------------------------------------------------------------
Net payments attributable to:
Current period events 16,809 6,094 4,256 4,307
Prior period events 32,428 19,595 161 3,780
- -----------------------------------------------------------------------------------------------
Total net payments 49,237 25,689 4,417 8,087
- -----------------------------------------------------------------------------------------------
Net reserves of Capsure at September 30,
1997, date of Merger -- -- -- 30,927
Net reserves at end of period 137,469 142,034 122,725 115,008
Ceded reinsurance at end of period 20,464 7,986 7,656 7,273
- -----------------------------------------------------------------------------------------------
Gross reserves at end of period $157,933 $150,020 $130,381 $ 122,281
===============================================================================================
</TABLE>
(1)Amounts are for Predecessor except for the net reserves of Capsure and both
ceded reinsurance and gross reserves at the end of the period which are for CNA
Surety.
<PAGE> 28
CNA Surety Corporation 1999 AR 39
Notes to Consolidated Financial Statements
The Company recorded net favorable reserve development which resulted in
reductions in the estimated liability of $13.1 million for the year ended
December 31, 1999, $4.4 million for the year ended December 31, 1998 and $0.6
million for the period from inception through December 31, 1997. Net favorable
reserve development of $13.1 million in 1999 primarily reflects increased
salvage and subrogation recoveries received with respect to accident years prior
to 1997.
On a pro forma basis, favorable development was $40.9 million ($35.0
million related to the Predecessor) for the year ended December 31, 1997. Based
on the CCC Surety Operations' 1997 study of reserves, management determined that
it had been overly cautious in interpreting claim data and had discounted
favorable trends. Consistent with the CCC Surety Operations' regular study of
reserve levels, the CCC Surety Operations released $35.0 million of prior year
reserves in 1997. Approximately $33 million of this reserve development related
to CIC and principally to accident years prior to 1996.
NOTE 9. COMMITMENTS AND CONTINGENCIES
At December 31, 1999, the future minimum commitment under operating leases was
as follows: 2000-$3.5 million; 2001-$2.4 million; 2002-$1.0 million, 2003-$0.6
million and 2004 and thereafter-$0.8 million. Total rental expense for the years
ended December 31, 1999 and 1998 was $3.4 million and $3.3 million,
respectively, and $0.8 million for the period from September 30, 1997 (date of
inception) through December 31, 1997.
The Company is party 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.
NOTE 10. INCOME TAXES
The components of deferred income taxes as of December 31, 1999 and 1998 were
as follows:
In thousands 1999 1998
- ------------------------------------------------------------------------------
Deferred tax assets related to:
Net operating losses $ -- $ 3,767
Unearned premium reserve 13,790 12,709
Unrealized loss on securities 6,004 --
Accrued expenses 1,288 3,768
Loss and loss adjustment expense reserve 2,785 3,059
Other 4,200 2,644
- ------------------------------------------------------------------------------
Total deferred tax assets 28,067 25,947
- ------------------------------------------------------------------------------
Deferred tax liabilities related to:
Deferred policy acquisition costs 29,963 26,071
Intangible assets 6,368 6,727
Unrealized gain on securities -- 1,754
Other 2,183 2,044
- ------------------------------------------------------------------------------
Total deferred tax liabilities 38,514 36,596
- ------------------------------------------------------------------------------
Net deferred tax liability $10,447 $10,649
==============================================================================
CNA Surety and its subsidiaries file a consolidated federal income tax return.
As of December 31, 1999, the Company utilized net operating loss carryforwards
of approximately $10.8 million of the remaining consolidated net operating
losses which were available as of December 31, 1998.
<PAGE> 29
40
Notes to Consolidated Financial Statements
The income tax provisions consisted of the following:
September 30
(Date of Predecessor
Inception) Nine Months
Year Ended Year Ended through Ended
December 31 December 31 December 31 September 30
In thousands 1999 1998 1997 1997
- ------------------------------------------------------------------------------
Federal current $21,074 $20,087 $2,558 $21,466
Federal deferred 7,506 7,485 4,038 (225)
State 853 671 67 --
- ------------------------------------------------------------------------------
Total income tax expense $29,433 $28,243 $6,663 $21,241
==============================================================================
A reconciliation from the federal statutory tax rate to the effective tax rate
is as follows:
September 30
(Date of Predecessor
Inception) Nine Months
Year Ended Year Ended through Ended
December 31 December 31 December 31 September 30
1999 1998 1997 1997
- ------------------------------------------------------------------------------
Federal statutory rate 35.0% 35.0% 35.0% 35.0%
Tax exempt income deduction (3.4) (1.7) -- --
Non-deductible expenses,
principally amortization
of goodwill 2.2 2.6 2.4 0.2
State income tax, net of
federal income tax benefit 0.6 1.0 0.2 --
Other (0.1) 1.4 0.1 --
- ------------------------------------------------------------------------------
Total income tax expense 34.3% 38.3% 37.7% 35.2%
==============================================================================
NOTE 11. EMPLOYEE BENEFITS
CNA Surety sponsors a tax deferred savings plan ("401(k) plan") covering
substantially all of its employees. Under the 401(k) plan, the Company matches
70% of the participating employee's contribution up to 6% of eligible
compensation (4.2% maximum matching). Effective January 1, 2000, the Company
match was increased 100% of the participating employee's contribution up to 3%
of eligible compensation and 50% of the participating employee's contribution
between 3% and 6% of eligible compensation (4.5% maximum matching). In addition,
the Company may also make an annual discretionary profit sharing contribution to
the 401(k) plan, subject to the approval of the Company's Board of Directors.
The profit sharing contribution may be restricted by plan and regulatory
limitations. The Company contribution, including profit sharing, to the 401(k)
plan was $3.3 million and $3.2 million for the years ended December 31, 1999 and
1998 and $0.6 million for the period from September 30, 1997 through December
31, 1997.
Western Surety sponsors two post-retirement benefit plans covering certain
employees. One plan provides medical benefits, and the other plan provides sick
leave termination payments. The post-retirement health care plan is contributory
and the sick leave plan is non-contributory. The actuarially determined net
periodic post-retirement costs for these plans were $0.6 million and $0.4
million, respectively, for the years ended December 31, 1999 and 1998 and $0.1
million for the period from September 30, 1997 (date of inception) through
December 31, 1997. The unfunded accumulated post-retirement benefit obligation
(for retirees and fully vested active plan participants) was $5.4 million and
$4.9 million as of December 31, 1999 and 1998, respectively, and is included in
other liabilities in the consolidated balance sheet. The following table
summarizes the actuarial accounting assumptions for post-retirement benefit
plans:
1999 1998 1997
- ------------------------------------------------------------------------------
Discount Rate 6.5% 7.0% 7.0%
Initial healthcare cost trend 8.0% 9.0% 9.0%
Ultimate healthcare cost trend 5.0% 5.0% 5.0%
Ultimate medical trend reached in fiscal year 2002 2002 2002
==============================================================================
<PAGE> 30
CNA Surety Corporation 1999 AR 41
Notes to Consolidated Financial Statements
NOTE 12. STOCKHOLDERS' EQUITY
The Company has reserved shares of its common stock for issuance to directors,
officers, employees and certain advisors of the Company through incentive stock
options, non-qualified stock options and stock appreciation rights ("SARs") to
be granted under the CNA Surety 1997 Long-Term Equity Compensation Plan ("CNA
Surety Plan"). The Company has also reserved shares of its common stock for
issuance to Capsure option holders under the CNA Surety Corporation Replacement
Stock Option Plan ("Replacement Plan"). The CNA Surety Plan and Replacement Plan
are collectively referred to as the "Plan." The aggregate number of shares
available for which options may be granted under the Plan is 3,000,000.
Options issued under the Replacement Plan have the same exercise price,
rights, benefits, terms and conditions as the Capsure options replaced. The
number of unexercised and outstanding Capsure options issued to the holders
under the Replacement Plan on September 30, 1997 was 335,235. The exercise
prices of the replacement options ranged between $0.05 and $8.00 per share on
September 30, 1997.
The Compensation Committee (the "Committee") of the Board of Directors,
consisting of independent members of the Board of Directors, administers the
Plan. The Committee determines the option prices. Prices may not be less than
the fair market value of the Company's common stock on the date of grant for
incentive stock options and may not be less than the par value of the Company's
common stock for non-qualified stock options.
The Plan provides for the granting of incentive stock options as defined
under the Code. All non-qualified stock options and incentive stock options
granted under the Plan expire ten years after the date of grant and in the case
of the Replacement Plan the options expire ten years from the original Capsure
grant date.
Weighted
Shares Subject Average Option
to Option Price Per Share
- ------------------------------------------------------------------------------
Balance at September 30, 1997 335,235 $ 3.46
Options granted 463,500 $15.82
Options cancelled (23,363) $15.58
Options exercised (26,000) $ 4.86
- -------------------------------------------------------------
Balance at December 31, 1997 749,372 $10.68
=============================================================
Options granted 153,200 $15.50
Options cancelled (15,475) $15.87
Options exercised (145,031) $ 3.47
- -------------------------------------------------------------
Balance at December 31, 1998 742,066 $13.34
=============================================================
Options granted 570,200 $11.06
Options cancelled (61,300) $13.83
Options exercised (29,437) $ 2.97
- -------------------------------------------------------------
Balance at December 31, 1999 1,221,529 $12.50
=============================================================
As of December 31, 1999, the number of shares available for granting of
options under the Plan were 1,578,003. The following table summarizes
information about stock options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------------------------
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2.25 to $15.875 1,221,529 8.3 years $12.50 204,465 $8.77
====================================================================================================
</TABLE>
The weighted average fair market value (at grant date) per option granted was
$4.29, $5.04 and $6.62, respectively, for options granted during 1999, 1998 and
the period from September 30, 1997 (date of inception) through December 31,
1997. The fair value of these options was estimated at grant date using a
Black-Scholes option pricing model with the following weighted average
assumptions for the year ended December 31, 1999: risk free interest rate of
5.25%; dividend yield of 2.0%; expected option life of six years; and volatility
of 40.3%. Similar assumptions for the year ended December 31, 1998 and the
period from September 30, 1997 (date of inception)
<PAGE> 31
42
Notes to Consolidated Financial Statements
through December 31, 1997 were: risk free interest rate of 4.45% and 5.76%;
dividend yield of 2.0% and 0%; expected option life of 6 years and volatility of
33.4% and 30.6%, respectively.
The Company adopted the financial disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" with respect to its stock-based
incentive plans. The Company applies APB Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations, in accounting for its plans
as allowed for under the provisions of SFAS No. 123. Accordingly, no
compensation cost has been recognized for its stock-based incentive plans as
the exercise price of the granted options equals the market price at the grant
date. Had compensation cost for these plans been determined on the fair value at
the grant date for options granted, the Company's pro forma net income for the
year ended December 31, 1999 and 1998 would have been $55.2 million and $44.8
million, respectively; and $10.9 million for the period from September 30, 1997
to December 31, 1997. Diluted net income per share would have been $1.25 and
$1.02 for the 1999 and 1998 and $0.25 for the period from September 30, 1997
through December 31, 1997.
Effective January 1, 1998, the Company established the CNA Surety
Corporation Non-Employee Directors Deferred Compensation Plan. Under this plan,
each director who is not a full-time employee of the Company or any of its
affiliates may defer all or a portion of the annual retainer fee that would
otherwise be paid to such director. The deferral amount, which must be in
multiples of 10% of the retainer fee, will be credited to a deferred
compensation account and will be deemed invested in Common Stock Units equal to
the deferred fees divided by the fair market value of CNA Surety common stock as
of each quarterly meeting date. Each director will be fully vested in his or her
deferred compensation amount. Aggregate common stock units outstanding as of
December 31, 1999 were 17,291. Common Stock Units are convertible into CNA
Surety common stock at the election of the director.
NOTE 13. SEGMENT INFORMATION
The Company is a leading provider of surety and fidelity bonds in the United
States. According to A.M. Best, the surety and fidelity segment of the domestic
property and casualty insurance industry aggregates approximately $3.8 billion
in direct written premiums, comprised of approximately $3.0 billion in surety
premiums and $0.8 billion in fidelity premiums.
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. There are two broad types of surety
products--contract surety and commercial surety bonds.
Contract surety bonds secure a contractor's performance and/or payment
obligation generally with respect to a construction project. Contract surety
bonds are generally required by federal, state and local governments for public
works projects. Commercial surety bonds include all surety bonds other than
contract and cover obligations typically required by law or regulation. Fidelity
bonds cover losses arising from employee dishonesty.
Although all of its products are sold through the same independent
insurance agent and broker distribution network, the Company's underwriting and
management reporting are organized by the two broad types of surety
products--contract surety and commercial surety, which also includes fidelity
bonds and other insurance products for these purposes. These two operating
segments have been aggregated into one reportable business segment for financial
reporting purposes because of their similar economic and operating
characteristics.
<PAGE> 32
CNA Surety Corporation 1999 AR 43
Notes to Consolidated Financial Statements
The following tables set forth gross and net written premiums, in thousands of
dollars, by product and between domestic and international risks and the
respective percentage of the total for the past three years.
Gross Written Premium
<TABLE>
<CAPTION>
Pro Forma
For the years ended December 31 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
Dollars Percent Dollars Percent Dollars Percent
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Contract $150,022 48.9% $132,242 47.5% $123,014 46.2%
Commercial 130,502 42.5 121,046 43.5 119,662 44.9
Fidelity and other 26,335 8.6 24,936 9.0 23,742 8.9
- ----------------------------------------------------------------------------------------------------------
Total $306,859 100.0% $278,224 100.0% $266,418 100.0%
==========================================================================================================
Domestic $286,253 93.3% $266,998 96.0% $255,635 96.0%
International 20,606 6.7 11,226 4.0 10,783 4.0
- ----------------------------------------------------------------------------------------------------------
Total $306,859 100.0% $278,224 100.0% $266,418 100.0%
==========================================================================================================
</TABLE>
Net Written Premium
<TABLE>
<CAPTION>
Pro Forma
For the years ended December 31 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
Dollars Percent Dollars Percent Dollars Percent
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Contract $145,616 48.7% $127,114 47.0% $118,138 46.0%
Commercial 128,834 43.1 120,638 44.6 117,162 45.6
Fidelity and other 24,537 8.2 22,850 8.4 21,767 8.4
- ----------------------------------------------------------------------------------------------------------
Total $298,987 100.0% $270,602 100.0% $257,067 100.0%
==========================================================================================================
Domestic $280,463 93.8% $260,506 96.3% $246,923 96.1%
International 18,524 6.2 10,096 3.7 10,144 3.9
- ----------------------------------------------------------------------------------------------------------
Total $298,987 100.0% $270,602 100.0% $257,067 100.0%
==========================================================================================================
</TABLE>
Approximately $57.9 million, or 18.9%, of gross written premiums were generated
from national insurance brokers in 1999 with the single largest national broker
production comprising $21.7 million, or 7.1%, of gross written premiums.
NOTE 14. STATUTORY FINANCIAL DATA
CNA Surety's insurance subsidiaries file financial statements prepared in
accordance with statutory accounting practices prescribed or permitted by
applicable insurance regulatory authorities. Prescribed statutory accounting
practices include state laws, regulations and general administrative rules, as
well as guidance provided in a variety of publications of the National
Association of Insurance Commissioners ("NAIC"). Permitted statutory accounting
practices encompass all accounting practices that are not prescribed. The
permitted statutory accounting practices of CNA Surety's insurance subsidiaries
did not have a material effect on reported statutory surplus or income. The
principal differences between statutory financial statements and financial
statements prepared in accordance with generally accepted accounting principles
are that statutory financial statements do not reflect deferred policy
acquisition costs and deferred income taxes and fixed income securities are
generally carried at amortized cost in statutory financial statements.
In 1998, the NAIC adopted the Codification of Statutory Accounting
Principles ("Codification"). The states of South Dakota and Texas have not yet
adopted the Codification. The Company has not yet quantified the effects of
Codification on its statutory financial statements. The Codification, which is
intended to standardize regulatory accounting and reporting for the insurance
industry, is proposed to be effective January 1, 2001 if adopted by the
domiciliary state.
The NAIC has promulgated Risk Based Capital ("RBC") requirements for
property and casualty insurance companies to evaluate the adequacy of statutory
capital and surplus in relation to investment and insurance risks such as asset
quality, loss reserve adequacy and other business factors. The RBC information
is used by state insurance regulators as an early warning mechanism to identify
insurance companies that potentially are inadequately capitalized. In addition,
the formula defines new minimum capital standards that supplement the current
system of fixed minimum capital and surplus requirements on a state-by-state
basis. Regulatory compliance is
<PAGE> 33
44
Notes to Consolidated Financial Statements
determined by a ratio (the "Ratio") of the enterprise's regulatory total
adjusted capital, as defined by the NAIC, to its authorized control level RBC,
as defined by the NAIC. Generally, a Ratio in excess of 200% of authorized
control level RBC requires no corrective actions by the company or regulators.
As of December 31, 1999, each of CNA Surety's insurance subsidiaries had a Ratio
that was in compliance with the minimum RBC requirements.
CNA Surety's insurance subsidiaries are subject to regulation and
supervision by the various state insurance regulatory authorities in which they
conduct business. Such regulation is generally designed to protect policyholders
and includes such matters as maintenance of minimum statutory surplus and
restrictions on the payment of dividends. Generally, statutory surplus of each
insurance subsidiary in excess of a statutorily prescribed minimum is available
for payment of dividends to the parent company. However, such distributions as
dividends may be subject to prior regulatory approval. Without prior regulatory
approval in 2000, CNA Surety's insurance subsidiaries may pay stockholder
dividends of $60.5 million in the aggregate. Combined statutory surplus for the
insurance subsidiaries at December 31, 1999 was $193.5 million.
NOTE 15. RELATED PARTY TRANSACTIONS
CCC and the insurance subsidiaries of the Company have entered into various
reinsurance agreements designed to protect against adverse loss reserve
development related to the CCC Surety Operations reserves at the Merger Date,
and help preserve, through the year 2000, the profitability of CCC Surety
Operations and certain additional accounts. The reinsurance agreements together
with the Services and Indemnity Agreement, that is described below, provided
for the initial transfer of the CCC Surety Operations to CNA Surety's insurance
subsidiaries. The reinsurance agreements entered into at the Merger Date are:
(i) the Surety Quota Share Treaty (the "Quota Share Treaty"); (ii) the Aggregate
Stop Loss Reinsurance Contract (the "Stop Loss Contract") and (iii) the Surety
Excess of Loss Reinsurance Contract (the "Excess of Loss Contract").
The Services and Indemnity Agreement provides the insurance subsidiaries
with the authority to perform various administrative, management, underwriting
and claim functions in order to conduct the business of the CCC Surety
Operations and to be reimbursed by CCC for services rendered. In consideration
for providing the foregoing services, CCC has agreed to pay the insurance
subsidiaries a quarterly fee of $50,000. There was no amount due to the CNA
Surety insurance subsidiaries as of December 31, 1999.
Through the Quota Share Treaty, CCC and CIC ceded, as of the Merger Date,
and subsequently paid on October 1, 1997, to Western Surety all of its net
unearned premiums and loss and loss adjustment expense reserves, net of $29.0
million of ceded commissions. The payment totaled $116.9 million.
Through the Quota Share Treaty, CCC and CIC transfer to Western Surety all
surety business written or renewed by CCC and CIC after the Merger Date. CCC and
CIC transfer the related liabilities of such business and pay to Western Surety
an amount in cash equal to CCC's and CIC's net written premiums written on all
such business, minus a quarterly ceding commission to be retained by CCC and CIC
equal to $50,000 plus 28% of net written premiums written on such business. CCC
and CIC paid Western Surety, net of commissions and reinsured loss payments,
$103.8 million for the year ended December 31, 1999, $100.8 million for the year
ended December 31, 1998 and $21.2 million during the period from September 30,
1997 (date of inception) through December 31, 1997. As of December 31, 1999 and
1998, CNA Surety had a reinsurance receivable balance from CCC and CIC of $57.1
million and $47.2 million, respectively. This balance is primarily comprised of
direct premium receivables of CCC and CIC with respect to the surety business
ceded to Western Surety. CNA Surety had reinsurance payables to CCC and CIC of
$6.9 million and $1.4 million as of December 31, 1999 and 1998, respectively,
primarily related to reinsured losses.
Under the terms of the Quota Share Treaty, CCC has guaranteed the loss and
loss adjustment expenses transferred to Western Surety by agreeing to pay
Western Surety, within 30 days following the end of each calendar quarter, the
amount of any adverse development on such reserves, as reestimated as of the end
of such calendar quarter. There was not any adverse reserve development for the
period from September 30, 1997 (date of inception) through December 31, 1999.
The Quota Share Treaty has a term of five years from the Merger Date.
The Stop Loss Contract protects the insurance subsidiaries from adverse
loss experience on certain business underwritten after the Merger Date. The Stop
Loss Contract between the insurance subsidiaries and CCC limits the insurance
subsidiaries' prospective net loss ratios with respect to certain accounts and
lines of insured business for at least three fiscal years following the Merger
Date. In the event the insurance subsidiaries' accident year net loss ratio
exceeds 24% in any of 1997 through 2000 on certain insured accounts (the "Loss
Ratio Cap"), the Stop Loss Contract requires CCC at the end of each calendar
quarter following the Merger Date, to pay to the insurance
<PAGE> 34
CNA Surety Corporation 1999 AR 45
Notes to Consolidated Financial Statements
subsidiaries a dollar amount equal to (i) the amount, if any, by which their
actual accident year net loss ratio exceeds the applicable Loss Ratio Cap,
multiplied by (ii) the applicable net earned premiums. In consideration for the
coverage provided by the Stop Loss Contract, the insurance subsidiaries will pay
to CCC an annual premium of $20,000. The CNA Surety insurance subsidiaries have
paid CCC all required annual premiums. There was no amount due to the CNA Surety
insurance subsidiaries from CCC under the Stop Loss Contract as of December 31,
1999.
The Excess of Loss Contract provides the insurance subsidiaries of CNA
Surety with the capacity to underwrite large surety bond exposures by providing
reinsurance support from CCC. The Excess of Loss Contract provides $75 million
of coverage in excess of the $55 million of coverage provided to the insurance
subsidiaries by third party reinsurers, which is in turn in excess of the $5
million of coverage per principal to be retained by the CNA Surety insurance
subsidiaries. Subsequent to the Merger Date, the Company entered into a second
excess of loss contract with CCC ("Second Excess of Loss Contract"). The Second
Excess of Loss Contract provides additional coverage for principal losses that
exceed the foregoing coverage of $75 million per principal provided by the
Excess of Loss Contract, or aggregate losses per principal in excess of $135
million. The two Excess of Loss Contracts collectively provide coverage for
losses discovered on surety bonds in force as of the Merger Date and for losses
discovered on new and renewal business written during the term of the Excess of
Loss Contracts. CCC is also obligated to act as a joint insurer, or "co-surety,"
for business covered by the Excess of Loss 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. There were no amounts due to CCC under
the Excess of Loss Contract and Second Excess of Loss Contract as of December
31, 1999. Both Excess of Loss Contracts commenced immediately following the
Merger Date and continue for a period of five years from the Merger Date.
CNA Surety also entered into an Administrative Services Agreement with CCC
as of the Merger Date. The agreement allows the Company continued use of certain
real and personal property owned or leased by CCC. The Company may cancel,
without penalty, any lease under the agreement by giving CCC sixty days notice.
The Company can also purchase many of the administrative services provided to
the CCC Surety Operations by CCC. CNA Surety, however, is under no obligation to
purchase any services under the Administrative Services Agreement. The aggregate
maximum annual cost for the use of real and personal property and for services
available under the agreement is approximately $7.9 million. Administrative
services are provided at specified rates, subject to inflationary increases. The
Company was charged $5.5 million, $7.5 million and $2.5 million for the year
ended December 31, 1999, 1998 and the period from September 30, 1997 (date of
inception) through December 31, 1997, respectively, for rents and services
provided under the agreement. In addition, the Company was charged $3.0 million
and $2.2 million for direct costs incurred by CCC on the Company's behalf during
1999 and 1998, respectively. The Company paid CCC $8.7 million and owed $0.6
million which was reflected in other liabilities in the Company's Consolidated
Balance Sheet at December 31, 1999.
Western Surety has entered into a series of business transactions with
entities in which either or both CCC or affiliates of CCC have an interest. This
series of transactions involves two separate refundment guarantees for the
benefit of Hellespont Shipping Corporation ("Hellespont"). Hellespont is 49
percent owned by Majestic Shipping Corporation, which is a wholly owned
subsidiary of Loews Corporation ("Loews"). Loews owns approximately 86 percent
of the outstanding stock of CNA Financial Corporation ("CNAF"), CNAF owns
approximately 63 percent of CNA Surety, and CCC is a principal operating
subsidiary of CNAF. As one of several sureties participating in the surety
program for Samsung Heavy Industries Co., Ltd., Seoul, Korea ("Samsung"), CCC
has provided refundment guarantees for repayment of advance payments made by
Hellespont on two shipbuilding contracts between Samsung and Hellespont's
subsidiaries, should Samsung not perform the contracts. Loews is also a
subordinated beneficiary of the guarantees. These refundment guarantees were
transferred to Western Surety through the Quota Share Treaty and are covered by
the Excess of Loss Contracts
<PAGE> 35
46
Notes to Consolidated Financial Statements
provided by CCC. Each guarantee is in the amount of $55.4 million, plus
interest, and will terminate on acceptance of the ships by their buyers. These
acceptances are currently anticipated to be made upon delivery of the ships now
scheduled for December 2001 and March 2002, respectively. Premiums written on
these guarantees in 1999 totaled $1.3 million to Western Surety of which 28
percent was paid to CCC as a ceding commission.
NOTE 16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the results of operations of CNA Surety for the
year ended December 31, 1999, 1998 and for the period from September 30, 1997
(date of inception) through December 31, 1997 and a summary of unaudited
quarterly results of the Predecessor for the nine months ended September 30,
1997:
CNA Surety
<TABLE>
<CAPTION>
In thousands, except per share amounts First Quarter Second Quarter Third Quarter Fourth Quarter
- -------------------------------------------------------------------------------------------------------------
1999
<S> <C> <C> <C> <C>
Revenues $74,607 $75,884 $78,402 $80,512
=============================================================================================================
Income before income taxes $19,751 $19,482 $23,322 $23,376
Income taxes 6,708 6,644 8,118 7,963
- -------------------------------------------------------------------------------------------------------------
Net income $13,043 $12,838 $15,204 $15,413
=============================================================================================================
Basic and diluted earnings per common share $ 0.30 $ 0.29 $ 0.34 $ 0.35
=============================================================================================================
1998
Revenues $65,534 $69,399 $75,325 $73,582
=============================================================================================================
Income before income taxes $15,981 $17,800 $18,507 $21,470
Income taxes 6,166 6,643 7,025 8,409
- -------------------------------------------------------------------------------------------------------------
Net income $ 9,815 $11,157 $11,482 $13,061
=============================================================================================================
Basic and diluted earnings per common share $ 0.23 $ 0.25 $ 0.26 $ 0.30
=============================================================================================================
</TABLE>
Inception to
December 31
- ------------------------------------------------------------------------------
1997
Revenues $71,284
==============================================================================
Income before income taxes $17,659
Income taxes 6,663
- ------------------------------------------------------------------------------
Net income $10,996
==============================================================================
Basic and diluted earnings per common share $ 0.25
==============================================================================
Predecessor
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
Net earned premiums $33,829 $36,155 $38,580 $ --
=============================================================================================================
Excess of net earned premiums over direct
operating costs $41,878 $ 8,174 $10,354 $ --
Income taxes 14,690 2,894 3,657 --
- -------------------------------------------------------------------------------------------------------------
Excess of net earned premiums over direct
operating costs, net of income taxes $27,188 $ 5,280 $ 6,697 $ --
=============================================================================================================
</TABLE>
<PAGE> 36
CNA Surety Corporation 1999 AR 47
Independent Auditors' Report
THE BOARD OF DIRECTORS AND STOCKHOLDERS
CNA SURETY CORPORATION
We have audited the consolidated balance sheets of CNA Surety Corporation and
subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of income, stockholders' equity and cash flows for the years ended
December 31, 1999 and 1998 and for the period from September 30, 1997 (date of
inception) through December 31, 1997. We have also audited the accompanying
special-purpose financial statement of certain revenues and direct operating
expenses of CCC Surety Operations, a business unit of CNA Financial Corporation,
for the nine-month period ended September 30, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying special-purpose financial statement was prepared to
present certain revenues and direct operating expenses of CCC Surety Operations
and is not intended to be a complete presentation of CCC Surety Operations. Note
1 to the consolidated financial statements describes the basis of presentation
of this special-purpose financial statement.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of CNA Surety Corporation and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for the years ended December 31, 1999 and 1998,
and for the period from September 30, 1997 (date of inception) through December
31, 1997, in conformity with generally accepted accounting principles.
Furthermore, in our opinion, such special-purpose financial statement presents
fairly in all material respects, certain revenues and direct operating expenses
of CCC Surety Operations for the nine-month period ended September 30, 1997, in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
- -------------------------
Chicago, Illinois
February 22, 2000
<PAGE> 37
48
DIRECTORS
GIORGIO BALZER
Business Men's Assurance
Company of America
PHILIP H. BRITT
Bank One N.A.
ROD F. DAMMEYER
Equity Group
Investments, Inc.
EDWARD DUNLOP
The Chubb Corp.
Retired
MELVIN GRAY
Graycor, Inc.
JOE P. KIRBY
Western Surety Company
Retired
WILLIAM C. PATE
Equity Group
Investments, Inc.
ROY E. POSNER
Loews Corporation
Retired
THOMAS F. TAYLOR
CNA
ADRIAN M. TOCKLIN
CNA
Retired
MARK C. VONNAHME
CNA Surety Corporation
OFFICERS
ROBERT E. AYO
Senior Vice President and
Chief Underwriting Officer,
Contract Surety
MICHAEL A. DOUGHERTY
Vice President and
Chief Marketing Officer
MELITA H. GEOGHEGAN
Vice President
and Chief Human
Resources Officer
THOMAS P. GREASEL
Vice President and
Chief Claims Officer
JOHN S. HENEGHAN
Vice President,
Chief Financial Officer
and Treasurer
DAN L. KIRBY
Vice President,
Legislative Affairs
PAUL T. LIVELY
Vice President,
General Counsel
and Secretary
STEPHEN T. PATE
Senior Vice President
and Chief Operating Officer,
Western Surety
DAVID F. PAUL
Vice President,
International Surety
THOMAS A. POTTLE
Senior Vice President
and Chief Operations Officer
SHARON A. SARTORI
Senior Vice President and
Chief Underwriting Officer,
Commercial Surety
MARK C. VONNAHME
President and
Chief Executive Officer
Design Petrick Design Printing Active Graphics Photography Greg Pease
Photography
<PAGE> 1
EXHIBIT 21
CNA SURETY CORPORATION AND SUBSIDIARIES
AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
COMPANY INCORPORATED IN
------- ---------------
<S> <C>
CNA Surety Corporation...................................... Delaware
Capsure Holdings Corp. (f/k/a Nucorp, Inc.)................. Delaware
Capsure Financial Group, Inc.............................. Oklahoma
(f/k/a/ Nucorp Energy of Oklahoma, Inc.)
NI Acquisition Corp.................................. Texas
SI Acquisition Corp.................................. Texas
Surewest Financial Corp........................... South Dakota
Surety Bonding Company of America............... South Dakota
Western Surety Company.......................... South Dakota
Troy Fain Insurance, Inc..................... Florida
Universal Surety Holding Corp........................ Texas
Universal Surety of America....................... Texas
</TABLE>
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-37207 and Registration Statement No. 333-64135 of CNA Surety Corporation on
Forms S-8, filed on October 3, 1997 and September 24, 1998, respectively, of our
report dated February 22, 2000, appearing in and incorporated by reference in
the Annual Report on Form 10-K of CNA Surety Corporation for the year ended
December 31, 1999.
Deloitte & Touche LLP
Chicago, Illinois
March 24, 2000
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION OF CNA SURETY CORPORATION
AND CCC SURETY OPERATIONS EXTRACTED FROM FINANCIAL STATEMENTS AND RELATED NOTES
AND SCHEDULES THERETO INCLUDED IN THIS QUARTERLY REPORT ON FORM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 417956
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 25897
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 492163
<CASH> 7237
<RECOVER-REINSURE> 76158
<DEFERRED-ACQUISITION> 84924
<TOTAL-ASSETS> 851575
<POLICY-LOSSES> 157933
<UNEARNED-PREMIUMS> 199300
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 101900
0
0
<COMMON> 441
<OTHER-SE> 325863
<TOTAL-LIABILITY-AND-EQUITY> 851575
283540
<INVESTMENT-INCOME> 25850
<INVESTMENT-GAINS> 15
<OTHER-INCOME> 0
<BENEFITS> 44672
<UNDERWRITING-AMORTIZATION> 119746
<UNDERWRITING-OTHER> 47228
<INCOME-PRETAX> 85931
<INCOME-TAX> 29433
<INCOME-CONTINUING> 56498
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 56498
<EPS-BASIC> 1.28
<EPS-DILUTED> 1.28
<RESERVE-OPEN> 142034
<PROVISION-CURRENT> 57757
<PROVISION-PRIOR> (13085)
<PAYMENTS-CURRENT> 16809
<PAYMENTS-PRIOR> 32428
<RESERVE-CLOSE> 137469
<CUMULATIVE-DEFICIENCY> (13085)
</TABLE>
