<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-13277
CNA SURETY CORPORATION
(Exact name of Registrant as specified in its Charter)
DELAWARE 36-4144905
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
CNA PLAZA, CHICAGO, ILLINOIS 60685
(Address of principal executive offices) (Zip Code)
(312) 822-5000
(Registrant's telephone number, including area code)
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
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
42,915,594 shares of Common Stock, $.01 par value as of November 3, 2000.
<PAGE> 2
CNA SURETY CORPORATION AND SUBSIDIARIES
INDEX
Page
----
Part I. Financial Information (Unaudited):
Item 1. Condensed Consolidated Financial Statements:
Independent Accountants' Report................. 3
Condensed Consolidated Balance Sheets at
September 30, 2000 and at December 31, 1999..... 4
Condensed Consolidated Statements of Income
for the Three- and Nine- Months Ended
September 30, 2000 and 1999..................... 5
Condensed Consolidated Statements of
Stockholders' Equity for the Nine Months Ended
September 30, 2000 and 1999..................... 6
Condensed Consolidated Statements of Cash
Flows for the Nine Months Ended September 30,
2000 and 1999................................... 7
Notes to Condensed Consolidated Financial
Statements at September 30, 2000 ............... 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations... 11
Part II. Other Information:
Item 1. Legal Proceedings............................... 20
Item 2. Changes in the Rights of the Company's
Security Holders................................ 20
Item 3. Defaults Upon Senior Securities................. 20
Item 4. Submission of Matters to a Vote of
Security Holders................................ 20
Item 5. Other Information............................... 21
Item 6. Exhibits and Reports on Form 8-K ............... 21
2
<PAGE> 3
INDEPENDENT ACCOUNTANTS' REPORT
-------------------------------
To the Board of Directors and Stockholders of
CNA Surety Corporation
Chicago, Illinois
We have reviewed the accompanying condensed consolidated balance sheet of CNA
Surety Corporation and subsidiaries as of September 30, 2000, and the related
condensed consolidated statements of income for the three-month and nine-month
periods ended September 30, 2000 and 1999 and the related condensed consolidated
statements of stockholders' equity and of cash flows for the nine-month periods
ended September 30, 2000 and 1999. These financial statements are the
responsibility of the Corporation's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of CNA
Surety Corporation and subsidiaries as of December 31, 1999, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended (not presented herein); and in our report dated February 22,
2000, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 1999 is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
Deloitte & Touche LLP
Chicago, Illinois
November 6, 2000
3
<PAGE> 4
CNA SURETY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
September 30, December 31,
2000 1999
----------- -----------
ASSETS Invested assets and cash:
Fixed income securities, at fair value
(amortized cost: $452,561 and $436,690)....... $ 444,541 $ 417,956
Equity securities, at fair value
(cost: $34,699 and $23,968)................... 34,038 25,897
Short-term investments, at cost
(approximates fair value)..................... 57,353 43,033
Other investments, at fair value................ 5,093 5,277
Cash 13,730 7,237
---------- ----------
Total invested assets and cash............... 554,755 499,400
Deferred policy acquisition costs................. 93,357 84,924
Insurance receivables:
Premiums........................................ 9,068 9,822
Reinsurance, including $39,371 and $57,129
from affiliates............................... 73,854 76,158
Intangible assets(net of accumulated
amortization: $17,902 and $13,329)............ 151,407 155,980
Property and equipment, at cost (less accumulated
depreciation: $13,076 and $11,094).............. 15,766 14,769
Prepaid reinsurance premiums...................... 4,174 2,302
Other assets...................................... 7,888 8,220
---------- ----------
Total assets................................. $ 910,269 $ 851,575
========== ==========
LIABILITIES
Reserves:
Unpaid losses and loss adjustment expenses...... $ 169,245 $ 157,933
Unearned premiums............................... 209,105 199,300
---------- ----------
Total reserves............................... 378,350 357,233
Debt ............................................. 101,556 101,900
Deferred income taxes, net........................ 15,281 10,447
Payable for securities purchased.................. 2,069 7,487
Current income taxes payable...................... 8,140 7,076
Reinsurance and other payables to affiliates...... 10,963 7,229
Other liabilities................................. 32,239 33,899
---------- ----------
Total liabilities............................ $ 548,598 $ 525,271
---------- ----------
Commitments and contingencies (See Note 4)
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; 44,143 shares
issued and 42,916 shares outstanding at
September 30, 2000 and 44,123 shares issued
and 43,006 shares outstanding at
December 31, 1999............................. 441 441
Additional paid-in capital........................ 253,480 253,366
Retained earnings................................. 126,680 95,419
Accumulated other comprehensive (loss)............ (5,948) (11,150)
Treasury stock, at cost........................... (12,982) (11,772)
---------- ----------
Total stockholders' equity................... 361,671 326,304
---------- ----------
Total liabilities and stockholders' equity... $ 910,269 $ 851,575
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
CNA SURETY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Net earned premiums............................. $ 73,541 $ 72,009 $ 224,782 $ 209,567
Net investment income........................... 7,428 6,387 21,896 18,900
Net realized investment gains (losses).......... (39) 6 191 426
---------- ---------- ---------- ----------
80,930 78,402 246,869 228,893
---------- ---------- ---------- ----------
Expenses:
Net losses and loss adjustment expenses......... 11,683 9,447 38,943 33,119
Net commissions, brokerage and other
underwriting.................................. 46,325 42,661 135,158 124,477
Interest expense................................ 1,809 1,464 5,159 4,284
Non-recurring charge............................ -- -- 500 --
Amortization of intangible assets............... 1,525 1,508 4,573 4,458
---------- ---------- ---------- ----------
61,342 55,080 184,333 166,338
---------- ---------- ---------- ----------
Income before income taxes........................ 19,588 23,322 62,536 62,555
Income taxes...................................... 6,250 8,118 20,978 21,470
---------- ---------- ---------- ----------
Net income........................................ $ 13,338 $ 15,204 $ 41,558 $ 41,085
========== ========== ========== ==========
Earnings per share................................ $ 0.31 $ 0.34 $ 0.97 $ 0.93
========== ========== ========== ==========
Earnings per share, assuming dilution............. $ 0.31 $ 0.34 $ 0.97 $ 0.93
========== ========== ========== ==========
Weighted average shares outstanding............... 42,909 44,102 42,922 44,100
========== ========== ========== ==========
Weighted average shares outstanding,
assuming dilution............................. 43,001 44,261 43,056 44,245
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 6
CNA SURETY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Common Accumulated
Stock Additional Other Treasury Total
Shares Common Paid-In Comprehensive Retained Comprehensive Stock Stockholders'
Outstanding Stock Capital Income Earnings Income (Loss) (at cost) Equity
----------- -------- ---------- ------------- -------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998..... 44,093 $ 441 $ 253,215 $ 52,984 $ 3,257 $ -- $ 309,897
Comprehensive income:
Net income................... -- -- -- $ 41,085 41,085 -- -- 41,085
Other comprehensive income:
Change in unrealized
gains (losses) on securities
(after income taxes), net
of reclassification
adjustment of $813........ -- -- -- (13,119) -- (13,119) -- (13,119)
---------
Total comprehensive
income................ $ 27,966
=========
Issuance of common stock....... -- -- -- -- -- -- --
Purchase of treasury stock..... (38) -- -- -- -- (473) (473)
Stock options exercised........ 22 -- 110 -- -- -- 110
Dividends paid to stockholders. -- -- -- (10,585) -- -- (10,585)
------ -------- ---------- -------- --------- -------- ---------
Balance, September 30, 1999.... 44,077 $ 441 $ 253,325 $ 83,484 $ (9,862) $ (473) $ 326,915
====== ======== ========== ======== ========= ======== =========
Balance, December 31, 1999..... 43,006 $ 441 $ 253,366 $ 95,419 $ (11,150) $(11,772) $326,304
Comprehensive income:
Net income................... -- -- -- $ 41,558 41,558 -- -- 41,558
Other comprehensive income:
Change in unrealized
gains (losses) on
securities (after income
taxes), net of
reclassification
adjustment of $520........ -- -- -- 5,202 -- 5,202 -- 5,202
---------
Total comprehensive
income................ $ 46,760
=========
Purchase of treasury stock..... (110) -- -- -- -- (1,210) (1,210)
Stock options exercised
and other.................... 20 -- 114 -- -- -- 114
Dividends paid to stockholders. -- -- -- (10,297) -- -- (10,297)
------ -------- ---------- -------- --------- -------- ---------
Balance, September 30, 2000.... 42,916 $ 441 $ 253,480 $126,680 $ (5,948) $(12,982) $ 361,671
====== ======== ========== ======== ========= ======== =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE> 7
CNA SURETY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
September 30,
------------------------
2000 1999
---------- ----------
OPERATING ACTIVITIES:
Net income...................................... $ 41,558 $ 41,085
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization................ 6,933 5,939
Accretion of bond discount, net.............. 822 1,630
Net realized investment (gains).............. (191) (426)
Changes in:
Insurance receivables........................ 3,058 1,200
Reserve for unearned premiums................ 9,805 15,054
Reserve for unpaid losses and loss
adjustment expenses........................ 11,312 172
Deferred policy acquisition costs............ (8,433) (9,838)
Deferred income taxes, net................... 2,009 2,027
Reinsurance and other payables to affiliates. 3,734 8,537
Other assets and liabilities................. (1,811) 978
---------- ----------
Net cash provided by operating activities.. 68,796 66,358
---------- ----------
INVESTING ACTIVITIES:
Fixed income securities:
Purchases.................................... (92,226) (154,212)
Maturities................................... 56,783 31,195
Sales........................................ 16,461 98,267
Purchases of equity securities.................. (15,809) (15,145)
Proceeds from the sale of equity securities..... 7,203 161
Changes in short-term investments............... (13,967) (5,508)
Acquisition of businesses, net of cash acquired -- (5,900)
Purchases of property and equipment............. (3,635) (3,870)
Other, net...................................... (5,353) (1,166)
---------- ---------
Net cash used in investing activities...... (50,543) (56,178)
---------- ----------
FINANCING ACTIVITIES:
Principal payments on long-term debt............ (344) (13,000)
Proceeds from long-term debt.................... -- 1,900
Dividends to stockholders....................... (10,297) (10,585)
Purchase of treasury stock...................... (1,210) (473)
Other........................................... 91 64
---------- ----------
Net cash used in financing activities...... (11,760) (22,094)
---------- ----------
Increase (Decrease) in cash....................... 6,493 (11,914)
Cash at beginning of period....................... 7,237 17,746
---------- ----------
Cash at end of period............................. $ 13,730 $ 5,832
========== ==========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest..................................... $ 5,604 $ 4,853
Income taxes................................. $ 17,250 $ 13,800
The accompanying notes are an integral part of these condensed consolidated
financial statements.
7
<PAGE> 8
CNA SURETY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of CNA Surety
Corporation and all majority-owned subsidiaries.
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.
Basis of Presentation
These unaudited Condensed Consolidated Financial Statements should be read
in conjunction with the Consolidated Financial Statements and Notes thereto
included in the Company's 1999 Annual Report to Shareholders. Certain financial
information that is normally included in annual financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America has been condensed or omitted as it is not required for interim
reporting. The accompanying unaudited Condensed Consolidated Financial
Statements reflect, in the opinion of management, all adjustments necessary for
a fair presentation of the interim financial statements. All such adjustments
are of a normal and recurring nature. The financial results for interim periods
may not be indicative of financial results for a full year. Certain
reclassifications have been made to the 1999 Financial Statements to conform
with the presentation in the 2000 Condensed Consolidated Financial Statements.
8
<PAGE> 9
2. INVESTMENTS
The estimated amortized cost and fair value of fixed income securities
held by CNA Surety at September 30, 2000 and December 31, 1999, by investment
category, were as follows (dollars in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Cost Unrealized Unrealized Estimated Fair
September 30, 2000 or Cost Gains Losses Value
------------------------------------------ -------------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Fixed income securities:
U.S. Treasury securities and
obligations of U.S.
Government and agencies:
U.S. Treasury........................ $ 19,747 $ 88 $ (55) $ 19,780
U.S. Agencies........................ 52,765 400 (1,172) 51,993
Collateralized mortgage obligations.. 1,208 -- (16) 1,192
Mortgage pass-through securities..... 50,649 41 (989) 49,701
Obligations of states and political
subdivisions............................ 224,410 2,092 (5,456) 221,046
Corporate bonds........................... 46,836 167 (2,634) 44,369
Non-agency collateralized mortgage
obligations............................. 12,970 31 (206) 12,795
Other asset-backed securities:
Second mortgages/home equity loans...... 15,314 19 (168) 15,165
Credit card receivables................. 10,522 2 (185) 10,339
Manufactured housing.................... 7,879 78 (293) 7,664
Other................................... 1,297 32 (4) 1,325
Redeemable preferred stock................ 8,964 208 -- 9,172
---------- ---------- ---------- ----------
Total fixed income securities........ 452,561 3,158 (11,178) 444,541
Equity securities......................... 34,699 3,905 (4,566) 34,038
---------- ---------- ---------- ----------
Total................................ $ 487,260 $ 7,063 $ (15,744) $ 478,579
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Cost Unrealized Unrealized Estimated Fair
December 31, 1999 or Cost Gains Losses 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>
9
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3. REINSURANCE
The effect of reinsurance on the Company's written and earned premium was
as follows (dollars in thousands):
Nine Months Ended September 30,
----------------------------------------------
2000 1999
--------------------- ----------------------
Written Earned Written Earned
--------- --------- --------- ----------
Direct........................ $ 87,174 $ 80,740 $ 82,453 $ 76,982
Assumed from affiliates....... 155,250 154,611 147,970 137,743
Ceded......................... (9,709) (10,569) (5,920) (5,158)
--------- --------- --------- ----------
$ 232,715 $ 224,782 $ 224,503 $ 209,567
========= ========= ========= ==========
The effect of reinsurance on the Company's provision for loss and loss
adjustment expenses was as follows (dollars in thousands):
Nine Months Ended
September 30,
----------------------
2000 1999
--------- ----------
Gross loss and loss adjustment expenses.............. $ 77,126 $ 39,063
Ceded amounts........................................ (38,183) (5,944)
--------- ----------
Net loss and loss adjustment expenses................ $ 38,943 $ 33,119
========= ==========
4. 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.
5. PROPOSED TENDER OFFER
On March 20, 2000, Continental Casualty Company ("CCC") proposed a cash
tender offer to purchase the remaining common stock of CNA Surety that it and
its affiliates did not own for $13.00 per share. On May 26, 2000, CCC informed
CNA Surety that CCC did not intend to pursue a proposed tender offer to acquire
the remaining equity interests of the Company not currently owned by CCC. The
Company recorded a non-recurring charge of $0.5 million before income taxes, or
$0.3 million after tax (1 cent per share), for costs incurred with respect to
the proposed tender offer by CCC.
As reported in CNA Financial Corporation ("CNAF") public filings, CCC and
other insurance subsidiaries of CNAF that own shares of CNA Surety may review
their respective positions of CNA Surety shares from time to time and may
acquire additional shares depending upon market conditions or other factors
existing at the time of such review, resulting in increases or decreases in
their respective positions.
The Company postponed its Annual Meeting of Shareholders which was
originally scheduled for May 16, 2000. The Annual Meeting of Shareholders was
postponed pending the outcome of CCC's proposed tender offer. The Annual Meeting
of Shareholders was held on August 15, 2000.
10
<PAGE> 11
CNA SURETY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
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 Condensed Consolidated Financial Statements of
CNA Surety and notes thereto.
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 87% 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
("CCC Surety Operations" or "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. Management anticipates that the Administrative
Services Agreement that expired on September 30, 2000 and was subsequently
extended through December 31, 2000 will be renewed on similar terms and
conditions as the current arrangement.
PROPOSED TENDER OFFER
On March 20, 2000, CCC proposed a cash tender offer to purchase the
remaining common stock of CNA Surety that it and its affiliates did not own for
$13.00 per share. On May 26, 2000, CCC informed CNA Surety that CCC did not
intend to pursue a proposed tender offer to acquire the remaining equity
interests of the Company not currently owned by CCC. The Company recorded a
non-recurring charge of $0.5 million before income taxes, or $0.3 million after
tax (1 cent per share), for costs incurred with
11
<PAGE> 12
respect to the proposed tender offer by CCC.
As reported in CNAF public filings, CCC and other insurance subsidiaries of
CNAF that own shares of CNA Surety may review their respective positions of CNA
Surety shares from time to time and may acquire additional shares depending upon
market conditions or other factors existing at the time of such review,
resulting in increases or decreases in their respective positions.
BUSINESS
CNA Surety's insurance subsidiaries write surety and fidelity bonds in all
50 states through a combined network of approximately 38,000 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.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
The statements which are not historical facts contained in this Form 10-Q 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.
12
<PAGE> 13
RESULTS OF OPERATIONS
CNA SURETY RESULTS FOR THREE- AND NINE- MONTHS ENDED SEPTEMBER 30, 2000
AND 1999
The components of net income for the Company for the three and nine months
ended September 30, 2000 and 1999 are summarized as follows (dollars in
thousands, except per share amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ----------
Total revenues........... $ 80,930 $ 78,402 $ 246,869 $ 228,893
========= ========= ========= ==========
Underwriting income...... $ 15,533 $ 19,901 $ 50,681 $ 51,971
Net investment income.... 7,428 6,387 21,896 18,900
Net realized investment
gains (losses).......... (39) 6 191 426
Interest expense......... 1,809 1,464 5,159 4,284
Non-recurring charge..... -- -- 500 --
Amortization of
intangible assets....... 1,525 1,508 4,573 4,458
--------- --------- --------- ----------
Income before income
taxes................... 19,588 23,322 62,536 62,555
Income taxes............. 6,250 8,118 20,978 21,470
--------- --------- --------- ----------
Net income............... $ 13,338 $ 15,204 $ 41,558 $ 41,085
========= ========= ========= ==========
Net income per share..... $ 0.31 $ 0.34 $ 0.97 $ 0.93
========= ========= ========= ==========
Insurance Underwriting
Underwriting results for the Company for the three and nine months ended
September 30, 2000 and 1999 are summarized in the following table (dollars in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ----------
Gross written premiums... $ 79,393 $ 80,718 $ 242,424 $ 230,423
========= ========= ========= ==========
Net written premiums..... $ 75,126 $ 78,968 $ 232,715 $ 224,503
========= ========= ========= ==========
Net earned premiums...... $ 73,541 $ 72,009 $ 224,782 $ 209,567
Net losses and loss
adjustment expenses..... 11,683 9,447 38,943 33,119
Net commissions,
brokerage and other..... 46,325 42,661 135,158 124,477
--------- --------- --------- ----------
Underwriting income...... $ 15,533 $ 19,901 $ 50,681 $ 51,971
========= ========= ========= ==========
Loss ratio............... 15.9% 13.1% 17.3% 15.8%
Expense ratio............ 63.0 59.3 60.2 59.4
--------- --------- --------- ----------
Combined ratio........... 78.9% 72.4% 77.5% 75.2%
========= ========= ========= ==========
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
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dishonesty and other insurance products.
Gross written premiums are shown in the table below (dollars in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ----------
Contract................. $ 43,512 $ 43,835 $ 123,079 $ 113,552
Commercial............... 29,446 30,680 98,932 96,947
Fidelity and other....... 6,435 6,203 20,413 19,924
--------- --------- --------- ----------
$ 79,393 $ 80,718 $ 242,424 $ 230,423
========= ========= ========= ==========
Gross written premiums decreased 1.6%, or $1.3 million, for the three
months ended September 30, 2000 over the comparable period in 1999. This
decrease in third quarter gross production reflects an estimated $3.0 million
reduction in commercial surety associated with the decision by CNA Reinsurance
Company, Limited (London) ("CNA Re") to discontinue writing assumed
international credit and surety business. Excluding international reinsurance
business assumed from CNA Re, gross written premiums increased 2.2%, or $1.7
million, to $79.4 million. Commercial surety, excluding international
reinsurance business assumed from CNA Re, increased 6.4%, or $1.8 million, for
the three months ended September 30, 2000, primarily due to increased writings
of small commercial products. Contract surety gross written premiums decreased
0.7%, or $0.3 million, as compared to 1999. This decrease reflects a slower pace
of public construction spending and new contract awards in the quarter. Fidelity
and other products increased 3.7% to $6.4 million for the three months ended
September 30, 2000 as compared to the same period in 1999.
Gross written premiums for the first nine months of 2000 increased 5.2%, or
$12.0 million, compared to the same period in 1999. Contract surety accounted
for the majority of this increase with growth of 8.4%, or $9.5 million, in gross
written premiums as compared to 1999. This increase reflects generally favorable
economic conditions for public construction in the first half of the year. 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. Excluding international reinsurance
business assumed from CNA Re, gross written premiums increased 6.4% to $236.4
million for the first nine months of 2000. Assumed international surety and
credit business from CNA Re for the nine months ended September 30, 2000
decreased to $6.0 million from $8.3 million in 1999 due to CNA Re's decision to
discontinue this line. Gross written premiums for commercial surety, excluding
international reinsurance business assumed from CNA Re, increased 4.8%, or $4.2
million, for the nine months ended September 30, 2000, primarily due to
increased writings of small commercial products. Fidelity and other products
increased 2.5% to $20.4 million for the nine months ended September 30, 2000 as
compared to the same period in 1999.
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<PAGE> 15
Net written premiums are shown in the table below (dollars in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
2000 1999 2000 1999
----------- --------- --------- ----------
Contract................. $ 39,630 $ 42,469 $ 114,106 $ 109,966
Commercial............... 29,058 30,722 97,727 96,117
Fidelity and other....... 6,438 5,777 20,882 18,420
--------- --------- --------- ----------
$ 75,126 $ 78,968 $ 232,715 $ 224,503
========= ========= ========= ==========
For the three months ended September 30, 2000, net written premiums
decreased 4.9%, or $3.8 million, over the comparable period in 1999 primarily
due to higher reinsurance costs and the previously mentioned impact of CNA Re's
decision to discontinue writing assumed international credit and surety
business. The reinsurance rate used to compute ceded premiums is based upon
reinsurers' loss experience under the Company's surety excess of loss
reinsurance contract. Due to increased claims reported to reinsurers through
June 30, 2000 ceded premiums increased $2.5 million to $4.3 million in the third
quarter. Net written premiums decreased 6.7%, or $2.8 million, for the contract
surety business. Commercial surety net written premiums decreased 5.4%, or $1.7
million for the three months ended September 30, 2000. The fidelity and other
products increased 11.4%, or $0.7 million, for the third quarter in 2000 as
compared to the same period in 1999. This increase is primarily due to the
cancellation of reinsurance for other products as of September 30, 1999 that
increased the Company's retention rate on this business from 20% to 100%.
For the first nine months of 2000, net written premiums increased 3.7%, or
$8.2 million, over the comparable period in 1999 with contract surety and
commercial surety up 3.8% and 1.7%, respectively. The fidelity and other book of
business increased 13.4%, or $2.5 million, for the nine months ended September
30, 2000 as compared to the same period in 1999.
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. As a result of this increase in large loss
activity where the Company cedes loss amounts in excess of $5 million per
principal under its excess of loss reinsurance program, CNA Surety is paying
higher costs for reinsurance. The increase in reinsurance costs reduced net
earned premiums in the third quarter of 2000 by approximately $2.4 million.
Assuming a return to more normal loss experience going forward, the Company's
reinsurance costs are not expected to return to historical levels until mid-year
of 2001. The expected increase in reinsurance costs will have an adverse impact
on the Company's future results of operations.
Underwriting Income
Underwriting income decreased 22.0% to $15.5 million for the three months
ended September 30, 2000 compared to the same period in 1999 primarily
reflecting the impact of increased reinsurance costs on net earned premium and
lower net favorable loss reserve development during the third quarter of 2000.
Underwriting income decreased 2.5% to $50.7 million for the nine months ended
September 30, 2000 compared to the same period in 1999 primarily due to lower
net favorable loss reserve development. The nine month period to period change
in underwriting income reflects a 7.3% increase in earned premiums offset by a
17.6% increase in net losses and loss adjustment expenses.
Loss Ratio
The loss ratios for the three months ended September 30, 2000 and 1999 were
15.9% and 13.1%, respectively. The loss ratios included $2.9 million and $4.7
million of net favorable reserve development
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<PAGE> 16
for the three months ended September 30, 2000 and 1999, respectively. Excluding
the impact of the favorable reserve development, the loss ratios would have been
19.8% and 19.7% for the three month periods ended September 30, 2000 and 1999,
respectively. For the nine months ended September 30, 2000 and 1999, the loss
ratios were 17.3% and 15.8%, respectively. The loss ratios included $6.8 million
and $8.8 million of net favorable reserve development for the nine months ended
September 30, 2000 and 1999, respectively. Excluding the impact of the favorable
reserve development, the loss ratios would have been 20.3% and 20.0% for the
nine month periods ended September 30, 2000 and 1999, respectively.
The net favorable development taken in 2000 reflects on-going positive loss
trends primarily with respect to accident years prior to 1997 partially offset
by adverse development in more recent years. These reserve developments also
primarily relate to surety business assumed from CCC and CIC. Approximately $2.0
million of the net favorable loss reserve development of $2.9 million taken in
the third quarter and approximately $6.0 million of the $8.9 million in net
favorable development taken for the first nine months of 2000 relates to
business assumed from CCC and CIC. The adverse loss reserve development in more
recent accident years primarily relates to increased severity in large
commercial risks. The surety business assumed from CCC and CIC is subject to an
aggregate stop loss reinsurance contract between CCC and the Company that limits
the Company's accident year net loss ratio on this business to 24% for accident
years 1997 (October 1, 1997 to December 31, 1997), 1998, 1999 and 2000. The
third quarter reserve strengthening for the 1998 and 1999 accident years brought
the estimated accident year net loss ratios to 23.8% and 23.6%, respectively.
The increase in the adjusted loss ratio in 2000 relates primarily to changes in
business mix to a higher proportion of contract surety business which carries a
higher accident year loss ratio and increased retentions on agent E&O business.
Expense Ratio
The expense ratio increased to 63.0% for the three months ended September
30, 2000 compared to 59.3% for the same period in 1999. For the nine months
ended September 30, 2000, the expense ratio increased to 60.2% from 59.4% for
the same period in 1999. The increase in expense ratios for the quarter and nine
months ended September primarily reflects the impact of higher reinsurance costs
on net earned premiums. The Company is working to offset higher reinsurance
costs and softness in certain markets with continued productivity improvements
and operating efficiencies.
Investment Income
For the three months ended September 30, 2000, net investment income
increased 16.3% to $7.4 million from $6.4 million for the same period in 1999.
The increase in investment income for the three months ended September 30, 2000
reflects higher average invested assets and higher interest rates. The average
pretax yield was 5.6% and 5.1% for the three months ended September 30, 2000 and
1999, respectively. Net investment income for the nine months ended September
30, 2000 increased 15.9% to $21.9 million from $18.9 million for the same period
in 1999. The average pretax yields were 5.6% and 5.1% for the nine months ended
September 30, 2000 and 1999, respectively.
Net realized investment gains (losses) were minimal for the three months
ended September 30, 2000 and 1999. For the nine months ended September 30, 2000,
net realized investment gains were $0.2 million compared to $0.4 million for the
same period in 1999.
Analysis of Other Operations
Amortization expense was $1.5 million for the three months ended September
30, 2000 and 1999. For the nine months ended September 30, 2000 and 1999,
amortization of intangibles was $4.6 million and
16
<PAGE> 17
$4.5 million, respectively. Intangible assets represent goodwill and identified
intangibles primarily 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 generally amortized over 30 years.
Interest expense increased 23.6% for the third quarter of 2000 as compared
to the same period in 1999, primarily due to higher interest rates. Average debt
outstanding was $101.7 million for the third quarter in 2000 compared to $101.3
million in the third quarter of 1999. The weighted average interest rate for the
three months ended September 30, 2000 was 6.8% compared to 5.4% for the same
period in 1999. Interest expense increased 20.4% for the first nine months of
2000 as compared to the same period in 1999. Average debt outstanding was $101.8
million for the first nine months in 2000 compared to $104.3 million in the
first nine months of 1999. The weighted average interest rate for the nine
months ended September 30, 2000 was 6.5% compared to 5.3% for the same period in
1999.
During the first nine months of 2000, CNA Surety incurred a $0.3 million
non-recurring charge, after applicable income taxes, or $0.01 per share, for
costs incurred with respect to the proposed tender offer by CNAF.
Income Taxes
Income tax expense was $6.3 million and $8.1 million and the effective
income tax rates were 31.9% and 34.8% for the three months ended September 30,
2000 and 1999, respectively. For the nine months ended September 30, 2000 and
1999, income tax expense was $21.0 million and $21.5 million and the effective
income tax rates were 33.6% and 34.3%, respectively.
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 on the credit
facility and 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 income tax sharing payments of its insurance
subsidiaries. At September 30, 2000, the carrying value of the Company's
insurance subsidiaries' invested assets was comprised of $444.5 million of fixed
income securities, $34.0 million of equity securities, $20.2 million of
short-term investments, $5.1 million of other investments and $12.3 million of
cash. 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.
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 September 30, 2000, the parent
company's invested assets consisted of $37.2 million of short-term investments
and $1.5 million of cash. 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.
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<PAGE> 18
The Company's consolidated net cash flow provided by operating activities
was $68.8 million for the nine months ended September 30, 2000 and $66.4 million
for the comparable period in 1999.
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 million. CNA Surety borrowed $105 million as of September 30, 1997 and used
the proceeds to retire the existing Capsure debt of approximately $54 million
and to make a $50 million capital contribution to Western Surety. On October 6,
1997, CNA Surety borrowed an additional $13 million to pay the $10.6 million
closing dividend to Capsure stockholders and other merger-related costs. As of
September 30, 2000, CNA Surety has repaid $18 million of this debt and has
unused capacity under the revolver of approximately $30 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 nine 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 September 30, 2000, the weighted average interest rate was 6.8%
on the $100.0 million of outstanding borrowings. As of December 31, 1999, the
weighted average interest rate was 6.4% on the $100.0 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 September 30, 2000, 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.
During 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 of September 30, 2000, the outstanding balance of this promissory note was
$1.6 million.
As an insurance holding company, CNA Surety is dependent upon dividends and
other permitted payments from its insurance subsidiaries to pay cash dividends,
if any, as well as to pay operating expenses and meet debt service requirements.
The payment of dividends by the insurance subsidiaries are 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
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<PAGE> 19
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 is 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 up to $60.5 million in
the aggregate. CNA Surety received $35.0 million in dividends from its insurance
subsidiaries during the first nine months of 2000 and $20.0 million in the first
nine months of 1999.
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, as calculated
in accordance with the Internal Revenue Code of 1986 (the "Code") as amended.
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 $21.3 million for the nine months
ended September 30, 2000 and $20.7 million for the same period in 1999.
CNA Surety management believes that it will have sufficient available
resources to meet its present capital needs.
ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 entitled "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 was
subsequently amended by SFAS No. 137, which delayed the effective date by one
year, and SFAS No. 138, which clarified four areas which were causing
difficulties in implementation. SFAS No. 133 requires the recognition of all
derivative financial instruments, including embedded derivative instruments, as
either assets or liabilities in the statement of financial position and
measurement of those instruments at fair value. The accounting for gains and
losses associated with changes in the fair value of a derivative and the effect
on the consolidated financial statements will depend on its hedge designation
and whether the hedge is highly effective in achieving offsetting changes in the
fair value or cash flows of the asset or liability hedged. If the derivative is
designated in a fair value hedge, the changes in the fair value of the
derivative and the hedged item will be recognized in earnings. If the derivative
is designated as a cash flow hedge, changes in the fair value of the derivative
will be recorded in other comprehensive income and will be recognized in the
income statement when the hedged item affects earnings. A derivative that does
not qualify as a hedge will be marked to fair value through earnings.
The Company is required to adopt FAS 133 effective January 1, 2001. The
transition adjustments resulting from adoption must be reported in net income or
other comprehensive income, as appropriate, as the cumulative effect of a change
in accounting principle. Based on current facts and circumstances, adoption of
FAS 133 will not have a material impact on total equity of the Company. It is
estimated that the adoption will not result in a material impact upon earnings.
This estimate is based on the Company's current derivative holdings and hedging
strategies. Changes therein, or changes in financial market conditions, during
the fourth quarter could result in changes in the transition adjustment
estimates.
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<PAGE> 20
CNA SURETY CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings:
The Company, its directors and majority stockholders had been named as
defendants in several lawsuits seeking class action status in connection with
the proposed cash tender offer by Continental Casualty Company, a subsidiary of
CNA Financial Corporation, to purchase the shares of CNA Surety common stock
that it or its affiliates do not currently own. These lawsuits were filed within
the Delaware Chancery Court and requested unspecified damages. On July 6, 2000,
notices of voluntary dismissal were filed in all cases connected with this
proposed tender offer which named CNA Surety as a defendant.
ITEM 2. Changes in the Rights of the Company's Security Holders - None.
ITEM 3. Defaults Upon Senior Securities - None.
ITEM 4. Submission of Matters to a Vote of Security Holders -
At the Annual Meeting of Shareholders of CNA Surety Corporation
held on August 15, 2000, the Company's shareholders voted on the
following proposals. The number of shares issued, outstanding and
eligible to vote as of the record date of July 7, 2000 were
42,898,656. Proxies representing 40,405,493 shares or 94 percent
of the eligible voting shares were tabulated.
PROPOSAL I
Election of Directors.
Number of Shares/Votes
For Authority Withheld
Giorgio Balzer 38,015,059 2,390,434
Philip H. Britt 38,019,304 2,386,189
Edward Dunlop 38,019,304 2,386,189
Melvin Gray 38,019,308 2,386,185
Joe P. Kirby 40,386,394 19,099
Roy E. Posner 38,019,308 2,386,185
Thomas F. Taylor 38,020,894 2,384,599
Adrian M. Tocklin 38,019,308 2,386,185
Mark C. Vonnahme 40,386,294 19,199
PROPOSAL II
To approve the CNA Surety Corporation Employee Stock Purchase Plan.
For 36,637,516
Against 820,878
Abstain 52,708
No Vote 2,894,391
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<PAGE> 21
CNA SURETY CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION (continued)
PROPOSAL III
To ratify the Board of Directors' appointment of the Company's
independent auditors, Deloitte & Touche LLP for fiscal year 2000.
For 40,269,292
Against 97,046
Abstain 39,155
ITEM 5. Other Information - None.
ITEM 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
27. Financial Data Schedule.
(b) Reports on Form 8-K:
August 11, 2000; CNA Surety Corporation Press Release issued
on August 7, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
CNA SURETY CORPORATION
(Registrant)
/s/ John S. Heneghan
-------------------------------------------
John S. Heneghan
-
Vice President and Chief Financial Officer
Date: November 10, 2000
22
