<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
JULY 16, 1997
(Date of Report)
CAPSURE HOLDINGS CORP.
(Exact name of Registrant as specified in its charter)
0-3565
(Commission File No.)
DELAWARE 34-1010356
(State or other jurisdiction) (IRS Employer Identification No.)
TWO NORTH RIVERSIDE PLAZA, CHICAGO, ILLINOIS 60606
(Address of principal executive offices) (Zip code)
(312) 879-1900
(Registrant's telephone number, include area code)
<PAGE> 2
ITEM 5. OTHER EVENTS
On July 14, 1997, Capsure Holdings Corp. ("Capsure") and CNA Financial
Corporation ("CNA") executed an amendment to the definitive Reorganization
Agreement to form CNA Surety Corporation. The amendment includes, among other
items, (i) the payment of a cash dividend to the stockholders of Capsure, (ii)
a post closing exchange ratio adjustment mechanism, and (iii) changes to the
terms of one of the reinsurance agreements to be entered into by the insurance
subsidiaries of CNA and CNA Surety. The agreement and the transactions
contemplated thereby are subject to several conditions, including ratification
by the affirmative vote of Capsure stockholders and approval by insurance
regulatory authorities.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits
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.
28 Press Release issued jointly by CNA Financial Corporation and
Capsure Holdings Corp., dated July 14, 1997.
-2-
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAPSURE HOLDINGS CORP.
By: /s/ John S. Heneghan
------------------------------
John S. Heneghan
Vice President and Controller
Dated: July 16, 1997
-3-
<PAGE> 1
FIRST AMENDMENT TO THE
REORGANIZATION AGREEMENT
First Amendment dated as of July 14, 1997 to the Reorganization Agreement
(the "Amendment") among Capsure Holdings Corp., a Delaware corporation (the
"Company"), Continental Casualty Company, an Illinois corporation
("Continental"), CNA Surety Corporation, a Delaware corporation ("Newco"),
Surety Acquisition Company, a Delaware corporation ("Acquisition"), and certain
other affiliates of Continental Casualty Company listed on the signature pages
of this Amendment (such affiliates together with Continental, being collectively
referred to as "Parent");
WHEREAS, the parties hereto have executed the Reorganization Agreement,
dated as of December 19, 1996 (the "Agreement"), and the Merger as contemplated
therein is to be submitted to stockholders of the Company for their approval
pursuant to the articles of incorporation of the Company and Delaware Law;
WHEREAS, the parties to the Agreement desire to amend, alter and modify the
Agreement as set forth herein in accordance with Sections 8.4 and 8.6 of the
Agreement; and
WHEREAS, the Boards of Directors of the Company, Parent, Newco and
Acquisition have each approved the terms of the Amendment and authorized its
execution and delivery.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby, the
Company, Parent, Newco and Acquisition hereby agree as follows:
ARTICLE I
AMENDMENTS, ALTERATIONS AND
MODIFICATIONS TO THE AGREEMENT
Section 1.1 Section 5.7(a) of the Agreement. Section 5.7(a) of the
Agreement is amended to (i) add the clause ", except with respect to net written
premiums as contemplated by Section 2.13 hereof" at the end of the first
sentence of such Section 5.7(a); (ii) add the clause "and except for the $35.0
million adjustment to the net loss and loss adjustment expense reserves for the
first quarter ended March 31, 1997" after the word "Agreement" in the second
sentence of such Section 5.7(a); and (iii) delete reference to paragraph "(a)".
Section 1.2 Section 5.7(b) of the Agreement. Section 5.7(b) of the
Agreement is amended by deleting such Section in its entirety.
Section 1.3 New Section 2.13 of the Agreement. The Agreement is amended to
add the following Section immediately following Section 2.12 of the Agreement:
2.13 Post Closing Lookback Adjustment. The parties acknowledge that the
exchange ratio set forth in Section 2.12 of the Agreement is based upon, among
other things, certain projections of net written premiums for the PR66 Insurance
Business and the Company for the year ended December 31, 1997. Parent, Newco,
Acquisition and the Company agree that, in order to reflect the parties'
intention as of the Effective Time, the exchange ratio shall be adjusted either
by the surrender by Parent of shares of New Common to Newco or the issuance to
Parent by Newco of additional shares of New Common (in each case at a price
equal to $0.01 per share), as the case may be, based upon the PR66 Business Net
Written Premiums (as hereinafter defined), as adjusted by the Company Net
Written Premium Adjustment (as hereinafter defined), and in accordance with the
table set forth in Exhibit A to the Amendment (collectively, the "Lookback
Adjustment").
2.13.1 For the purpose of the Amendment, the following terms shall have the
meanings ascribed below:
(i) "PR66 Business Net Written Premiums" shall mean the actual net
written premiums of the PR66 Insurance Business for the year ended December
31, 1997 (including, for the purposes of this Section, business written
after the Closing Date which is accounted for as PR66 Insurance Business in
accordance with Section 2.13.5(i)), as determined in accordance with SAP
(based on the same accounting month convention as has been followed in the
preparation of the historical audited financial
1
<PAGE> 2
information for the PR66 Insurance Business for the year ended December 31,
1996 and for the three months ended March 31, 1997), consistently applied;
(ii) "Company Net Written Premiums" shall mean the actual aggregate
net written premiums of Western and USA for the year ended December 31,
1997, determined in accordance with SAP, consistently applied; and
(iii) "Company Net Written Premium Adjustment" shall mean the increase
or decrease, as appropriate, to the PR66 Business Net Written Premiums,
determined by adding (in the case of a positive amount) or subtracting (in
the case of a negative amount) an amount calculated in accordance with the
following equation:
Company Net Written Premium Adjustment = ($99,764,000 - Company Net Written
Premiums) X N
N = 1.5754 if the PR66 Business Net Written Premiums are greater than
$139.0 million, or 1.2954 if the PR66 Business Net Written Premiums are
equal to or less than $139.0 million.
2.13.2 The Lookback Adjustment provided in this Section 2.13 shall be
determined by adding (in the case of a positive amount) or subtracting (in the
case of a negative amount) the Company Net Written Premium Adjustment to or
from, respectively, the PR66 Business Net Written Premiums and applying such
result to the table set forth in Exhibit A hereto to determine the number of
shares to be surrendered by Parent or issued by Newco (any shares surrendered
are based on the initial negotiated value of the New Common shares as of the
Closing Date).
2.13.3 The Lookback Adjustment shall be initially determined as of a date
no later than the date of the audit opinion issued with respect to Newco's
financial statements for the year ended December 31, 1997, and Newco's chief
executive officer will deliver a certificate relating to the Lookback Adjustment
to the Newco Audit Committee and Parent no later than five business days after
the date of the audit opinion, but in no event later than March 25, 1998. The
certificate, which shall be signed by Newco's chief executive officer, shall
contain the specific Lookback Adjustment, a schedule which indicates in
reasonable detail how the Lookback Adjustment was determined, and a statement
that, based upon such officer's reasonable belief, the Lookback Adjustment was
prepared on a basis consistent with the provisions of this Section 2.13 and
Newco has complied with the provisions of Section 2.13.5. Such certificate shall
be accompanied by a report of Deloitte & Touche, L.L.P., with respect to the
Lookback Adjustment prepared pursuant to the Statement on Auditing Standards No.
35 of the American Institute of Certified Public Accountants or any successor
pronouncement, in either case, as in effect on the date of such report. Such
certificate shall verify the accuracy of the computation of the Lookback
Adjustment, if any, based upon procedures customarily employed in a certified
audit. The Newco Audit Committee and Parent shall have the right, upon written
notice to Deloitte & Touche, L.L.P., to receive and review all workpapers of
Deloitte & Touche, L.L.P. relating to the matters covered hereby.
2.13.4 The shares of New Common shall be surrendered by Parent or issued by
Newco, as the case may be, on March 31, 1998. Except as otherwise indicated in
this Section 2.13.4, the number of shares surrendered or issued pursuant to
Section 2.13 shall not be adjusted for the issuance or repurchase of shares by
Newco, the purchase or sale of shares by Parent, or the making of any dividends
or distributions by Newco after the Effective Time. In case Newco shall, after
the Effective Time but prior to March 31, 1998:
(i) pay a dividend or make a distribution on the New Common shares of
New Common,
(ii) subdivide its outstanding shares of New Common into a greater
number of shares, or
(iii) combine its outstanding shares into a smaller number of shares,
the number of shares to be surrendered or issued, as the case may be, shall be
equitably adjusted as if such dividend, distribution, subdivision or combination
had been made immediately after the Effective Time and immediately prior to the
Lookback Adjustment.
2
<PAGE> 3
2.13.5 The parties acknowledge that for purposes of this Section 2.13:
(i) Newco may combine the PR66 Insurance Business with those
businesses of the Company and will continue to maintain separate accounting
records with respect to the PR66 Business for purposes of the Lookback
Adjustment.
(ii) Subject to subparagraph (iii) below, Newco will through December
31, 1997 continue to operate each of the PR66 Insurance Business and the
Company's businesses in a manner consistent with each of their prior
practices.
(iii) Newco may effect such changes to the operations or practices of
each of the businesses as Newco management believes is in the best
interests of Newco stockholders generally, and the effects, if any, of such
changes will be allocated and adjusted equitably among the PR66 Insurance
Business and the Company's businesses in order to achieve the intentions
and purposes of this Section 2.13.
2.13.6 All claims, disputes and other matters in question arising out of,
or relating to, this Section 2.13 shall be submitted to, and determined by,
arbitration if good faith negotiations between Parent and Newco Audit Committee
do not resolve such claim, dispute or other matter within 60 days. Such
arbitration shall proceed in accordance with the Commercial Arbitration Rules of
the American Arbitration Association ("AAA") then pertaining (the "Rules") but
not under the auspices of AAA, unless the Newco Audit Committee and Parent
mutually agree otherwise, and pursuant to the following procedures:
(i) notice of the demand for arbitration shall be filed in writing
with the Newco Audit Committee or Parent, as the case may be. Newco Audit
Committee and Parent shall each appoint an arbitrator, and such arbitrators
shall appoint a third neutral arbitrator within 10 days. If the appointed
arbitrators fail to appoint a third, neutral arbitrator within 10 days,
such third, neutral arbitrator shall be appointed by the CPR Institute for
Dispute Resolution or such other neutral organization as may be mutually
agreed to by Newco Audit Committee and Parent. Newco Audit Committee and
the Parent agree that each will appoint an arbitrator who is a current or
retired executive of an insurance company. A determination by a majority of
the panel shall be binding;
(ii) reasonable discovery shall be allowed in arbitration;
(iii) all proceedings before the arbitrators shall be held in the
principal office of Newco;
(iv) the governing law shall be as specified in Section 9.4 of the
Agreement;
(v) the costs and fees of the arbitration, including attorneys' fees,
shall be allocated by the arbitrators; and
(vi) the award rendered by the arbitrators shall be final and judgment
may be entered in accordance with applicable law and in any court having
jurisdiction thereof.
Section 1.4 Section 2.12 of the Agreement
Section 2.12 of the Agreement is amended by deleting the
number "27,078,219" in the first sentence and replacing it with the number
"27,096,337."
Section 1.5 Section 6.1.2 of the Agreement
Section 6.1.2 of the Agreement is amended by adding the clause
"and as specifically provided in Section 6.26 below" in the first line after
"Schedule 6.1.2."
Section 1.6 Section 6.26 of the Agreement
The following is added as new Section 6.26 of the Agreement:
"Section 6.26 Pre-Closing Distribution. Parent, Newco and
Acquisition agree that, subject to the representations, warranties and
conditions set forth herein, the Company may declare prior to the Effective Time
a dividend or a distribution payable in cash to its stockholders, provided that
such dividend or distribution shall be in an amount no greater in aggregate than
an amount equal to the sum of (i) $3,500,000
3
<PAGE> 4
and (ii) the product of (X) the number of calendar days between June 1, 1997 and
the calendar day immediately preceding the Effective Time (inclusive of both
such dates) and (Y) $58,600. Such dividend or distribution shall be paid as soon
as practicable after the Effective Time."
Section 1.7 Section 8.1.2 of the Agreement. Section 8.1.2 of the Agreement
is amended by substituting "September 30, 1997" for "July 31, 1997."
Section 1.8 Section 4.2 of the Agreement. Section 4.2 of the Agreement is
amended by (i) deleting the number "15,751,749" in the third line of the first
sentence and replacing it with the number "15,850,245" and (ii) deleting the
number "1,021,399" in the third sentence and replacing it with the number
"934,126."
Section 1.9 Section 7.3.4 of the Agreement. Section 7.3.4 of the Agreement
is amended by deleting the entire text of such Section and inserting the words
"Intentionally left blank." in its place.
Section 1.10 Section 6.25 of the Agreement. Section 6.25 of the Agreement
is amended by deleting the words "April 30, 1997" in the second line and
inserting the words "June 30, 1997" in its place.
Section 1.11 Annex D of the Agreement. The agreement included in Appendix I
to this Amendment shall replace and be substituted for the corresponding
agreement included in Annex D of the Agreement.
Section 1.12 Section 6.27 of the Agreement. The Agreement is amended to add
the following Section immediately following Section 6.26 of the Agreement (as
set forth in Section 1.6 of this Amendment):
"6.27 Capsure Designated Directors. Parent agrees that, if any of
Messrs. Esselborn, Dammeyer or Knox, ceases to serve as a director of Newco
prior to the 1999 annual meeting of stockholders of Newco, the remaining
individuals designated by Capsure or their successors shall appoint the
individual to fill such vacancy."
Section 1.13 Section 6.10.1 of the Agreement. Section 6.10.1 of the
Agreement is amended by adding the following sentence immediately after the
first sentence in Section 6.10.1:
"Parent and Company agree that Newco will include in the registration
statement on Form S-4 the shares to be reoffered by certain directors and
officers of the Company; provided, that such shares shall not exceed
590,622 shares in aggregate; and provided further, that Newco shall be
permitted to withdraw the registration of such shares at any time and from
time to time after the 90th calendar day following the Effective Time."
ARTICLE II
MISCELLANEOUS
Section 2.1 Effective Time. This Amendment shall be effective on the date
first written above.
Section 2.2 Ratification. Except as hereby otherwise expressly provided,
the Agreement is in all respects ratified and confirmed, and all the terms,
provisions and conditions thereof shall be and remain in full force and effect.
Section 2.3 Conforming Changes. All section, subsection and other similar
references in the Agreement shall be changed to conform to the amendments,
alterations and modification thereto made hereby.
Section 2.4 Definitions. Capitalized terms used herein and not otherwise
defined herein shall have the meaning ascribed thereto in the Agreement.
Section 2.5 Counterparts. This Amendment may be executed in counterparts,
each of which shall be deemed an original and each of which shall constitute one
and the same instrument.
Section 2.7 Amendments. This Amendment and the Agreement may not be further
amended, altered or modified except by a written instrument executed by the
parties to the Agreement.
4
<PAGE> 5
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its representatives thereunto duly authorized, all as
of the day and year first above written.
CAPSURE HOLDINGS CORP.,
a Delaware corporation
By: /s/ Bruce A. Esselborn
--------------------------------------
Name: Bruce A. Esselborn
Title: President
CONTINENTAL CASUALTY COMPANY,
an Illinois corporation
By: /s/ David T. Cumming
--------------------------------------
Name: David T. Cumming
Title: Group Vice President & Deputy
General Counsel
CNA SURETY CORPORATION,
a Delaware corporation
By: /s/ Mark C. Vonnahme
--------------------------------------
Name: Mark C. Vonnahme
Title: President
SURETY ACQUISITION COMPANY,
a Delaware corporation
By: /s/ Mark C. Vonnahme
--------------------------------------
Name: Mark C. Vonnahme
Title: President
FIREMEN'S INSURANCE COMPANY OF
NEWARK, NEW JERSEY,
a New Jersey corporation
By: /s/ David T. Cumming
--------------------------------------
Name: David T. Cumming
Title: Group Vice President & Deputy
General Counsel
CONTINENTAL INSURANCE COMPANY,
a New Hampshire corporation
By: /s/ David T. Cumming
--------------------------------------
Name: David T. Cumming
Title: Group Vice President & Deputy
General Counsel
5
<PAGE> 6
NATIONAL FIRE INSURANCE COMPANY
OF HARTFORD,
a Connecticut corporation
By: /s/ David T. Cumming
--------------------------------------
Name: David T. Cumming
Title: Group Vice President & Deputy
General Counsel
AMERICAN CASUALTY COMPANY OF
READING, PENNSYLVANIA,
a Pennsylvania corporation
By: /s/ David T. Cumming
--------------------------------------
Name: David T. Cumming
Title: Group Vice President & Deputy
General Counsel
6
<PAGE> 7
EXHIBIT A
<TABLE>
<CAPTION>
PR66 BUSINESS NUMBER OF SHARES
NET WRITTEN PREMIUMS FOR THE OF NEW COMMON PARENT PERCENTAGE
YEAR ENDED DECEMBER 31, 1997 (SURRENDERED BY PARENT) OWNERSHIP
AS ADJUSTED OR ISSUED BY NEWCO AFTER ADJUSTMENT*
---------------------------- ----------------------- -----------------
($ MILLIONS)
GREATER THAN - EQUAL TO OR LESS THAN
<S> <C> <C>
0 - $120.2 (7,495,772) 53.87%
120.2 - 122.7 (6,959,522) 54.54%
122.7 - 125.2 (6,423,955) 55.19%
125.2 - 127.7 (5,889,828) 55.82%
127.7 - 130.2 (5,357,938) 56.43%
130.2 - 132.7 (4,820,035) 57.03%
132.7 - 135.2 (4,285,589) 57.61%
135.2 - 137.7 (3,745,914) 58.18%
137.7 - 140.2 (3,211,042) 58.73%
140.2 - 142.7 (2,681,957) 59.26%
142.7 - 145.2 (2,138,925) 59.79%
145.2 - 147.7 (1,602,695) 60.30%
147.7 - 150.2 (1,074,355) 60.79%
150.2 - 160.2 0 61.75%
160.2 - 162.7 1,069,402 62.66%
162.7 - 165.2 1,605,392 63.10%
165.2 or greater 2,141,697 63.53%
</TABLE>
- -------------------------
* The percentages are based upon the beneficial ownership by Parent of
27,096,337 shares of New Common and total outstanding shares and options of
43,880,708 at the Effective Time.
7
<PAGE> 8
AGGREGATE STOP LOSS REINSURANCE CONTRACT
(hereinafter referred to as "Contract")
EFFECTIVE DATE: XXXXXXX X, XXXX
(hereinafter referred to as "Effective Date")
entered into by and between
WESTERN SURETY COMPANY
UNIVERSAL SURETY OF AMERICA
SURETY BONDING COMPANY OF AMERICA
(hereinafter collectively referred to as "Company")
and
CONTINENTAL CASUALTY COMPANY
(hereinafter referred to as "Reinsurer")
Witnesseth:
In consideration of the mutual covenants contained herein, and upon the terms
and conditions hereinafter set forth the Company and the Reinsurer hereby agree
as follows:
ARTICLE 1 - SCOPE OF THE CONTRACT
This Contract is solely between the Company and the Reinsurer. Performance of
respective obligations of each party under this Contract shall be rendered
solely to the other party, except as specifically and expressly provided for in
the Insolvency Article. The provisions of this Contract are intended solely
for the benefit of the parties to and executing this Contract, and nothing in
this Contract shall in any manner create, or be construed to create, any
obligations to or establish any rights against any party to this Contract in
favor of any third parties or other persons not parties to and executing this
Contract.
The retention of the Company and the liability of the Reinsurer and all other
benefits accruing to the Company, as provided in this Contract or any
amendments thereof, shall apply to the parties comprising the Company as a
group and not separately to each of the parties. Any payments by the Reinsurer
to any of the parties comprising the Company shall discharge the Reinsurer's
liability under this Contract to the extent of such payments with respect to
that loss.
Page 1 of 11
<PAGE> 9
ARTICLE 2 - BUSINESS COVERED
This Contract and the reinsurance provided hereunder applies to the Net Losses
incurred by the Company during the term of this Contract on an individual
accident year basis for any and all CCC Accounts surety business underwritten,
renewed or assumed by the Company under policies, contracts and binders of
insurance or reinsurance (hereinafter called "policies")
The Company's Net Losses incurred shall be determined consistent with the
manner by which such losses are determined in the Company's Statutory
Consolidated Annual Statements prior to any loss recoveries hereunder.
ARTICLE 3 - COMMENCEMENT AND TERMINATION
A. This Contract shall become effective at 12:01 a.m. Central Standard Time
on XXXXXXX X, XXXX and shall remain in force until 12:00 Midnight Central
Standard Time, December 31, 2000, both days inclusive.
B. At the option of the Company, this Contract may be renewed effective at
the termination date referenced in paragraph A and at each subsequent
termination date thereafter, for a 12 month term with each renewal at a
loss ratio and rate to be mutually agreed to by the Company and the
Reinsurer.
Notwithstanding the expiration of this Agreement, the provisions of this
Agreement shall continue to apply to all unfinished business hereunder until
all obligations and liabilities incurred by each party under this Agreement,
prior to said date shall be fully performed and discharged.
ARTICLE 4 - RETENTION AND LIMIT
The Reinsurer shall indemnify the Company as respects the business covered
under this Contract, as described in Article 2:
A. for accident year 1997, if the Company's loss ratio for the 1997 accident
year exceeds 24.0%. The Reinsurer shall then be liable for an amount
equal to the Company's Net Earned Premium for that accident year, times
the difference in percentage points between the Company's Loss Ratio for
that accident year and 24.0%. Solely for purposes of this Agreement, the
1997 accident year shall commence on the Effective Date.
B. for accident year 1998, if the Company's loss ratio for the 1998 accident
year exceeds 24.0%. The Reinsurer shall then be liable for an amount
equal to the Company's Net Earned Premium for that accident year, times
the difference in percentage points between the Company's Loss Ratio for
that accident year and 24.0%.
Page 2 of 11
<PAGE> 10
C. for accident year 1999, if the Company's loss ratio for the 1999 accident
year exceeds 24.0%. The Reinsurer shall then be liable for an amount
equal to the Company's Net Earned Premium for that accident year, times
the difference in percentage points between the Company's Loss Ratio for
that accident year and 24.0%.
D. for accident year 2000, if the Company's loss ratio for the 2000 accident
year exceeds 24.0%. The Reinsurer shall then be liable for an amount
equal to the Company's Net Earned Premium for the accident year times the
difference in percentage points between the Company's Loss Ratio for that
accident year and 24.0%.
In calculating the Company's Loss Ratio, the Reinsurer and Company agree that
the convention to be followed is that (1) when assigning reported losses to an
accident year the date of notice of the actual event of loss or default will be
the date the loss is incurred, except that when the date of notice of the
actual event of loss or default occurs after the expiration of a policy then
the date immediately preceding the date the policy expires will be deemed to be
the date the loss is incurred, and (2) premium is earned on an exposure year
basis.
The Company's Loss Ratio for each accident year and the amount due hereunder
shall be calculated at the end of each calendar quarter and reported as
provided in the Reports and Remittances Article of this Agreement.
ARTICLE 5 - DEFINITIONS
A. "CCC Accounts" as used herein shall mean (1) those surety accounts coded
as PR66 that as of the Effective Date are maintained in Continental
Casualty Company's or its affiliated insurer's records, and (2) those
insureds and principals that are a party to surety policies at any point
in time on or after the Effective Date and prior to December 31, 2000 with
(i) Continental Casualty Company or its affiliated insurers, or (ii) the
Company, excluding those insureds and principals which in the judgment of
the Company would have been underwritten in the normal course of business
by the Company prior to the Effective Date. The Reinsurer may request
detailed reports of underlying premium and loss data supporting the
designation as CCC accounts and shall have the right to challenge such
designations.
B. "Loss Ratio" for a particular accident year as used herein shall mean the
ratio of the Company's Net Losses for that accident year to its Net Earned
Premium for that accident year.
C. "Net Losses" for a particular accident year, as used herein, shall mean
(1) the Company's net losses and loss adjustment expenses (allocated and
unallocated) paid, plus (2) the loss and loss adjustment expense reserves,
including reserves for losses incurred but not reported and for
unallocated loss adjustment expenses, as respects losses incurred during
Page 3 of 11
<PAGE> 11
that accident year.
D. "Gross Net Earned Premium" as used herein shall mean the Company's gross
earned premium for the accident year, or part thereof, under
consideration, less only the earned portion of premiums ceded for
reinsurance which inures to the benefit of this Contract.
E. "Net Earned Premium" as used herein shall mean the Company's gross net
earned premium for the accident year, or part thereof, under
consideration, less premium ceded to the Reinsurer under this Contract.
ARTICLE 6 - PREMIUM
On the Effective Date, the Company shall pay to the Reinsurer a premium equal
to $20,000 multiplied by a fraction, the numerator of which shall be the number
of calendar days remaining in calendar year 1997 as of the Effective Date of
this contract and the denominator of which shall be 365. Within 15 days after
each subsequent January 1st during the term of this Contract, the Company shall
pay to the Reinsurer an annual premium of $20,000.
ARTICLE 7 - REPORTS AND REMITTANCES
A. Within 30 days following the end of each calendar quarter, the Company
shall provide the Reinsurer with a detailed report showing the cumulative
amount of each of the following until all amounts recoverable hereunder
have been settled. Such amounts shall be segregated by accident year.
1. Gross Net Earned Premium;
2. Net Earned Premiums;
3. Paid losses and loss adjustment expenses (allocated and
unallocated), net of salvage, recoveries, and inuring reinsurances;
4. Reserves for outstanding losses and loss adjustment expenses
(including IBNR and unallocated loss adjustment expenses), net of
inuring reinsurances.
In addition, the Company shall furnish to the Reinsurer a calculation of
its Loss Ratio and any amounts recoverable hereunder, if any, as respects
each covered accident year period as set forth in Article 4.
B. Within 15 days following the Reinsurer's receipt of the Company's
quarterly report, the Reinsurer shall remit to the Company that amount, if
any, due under Article 4 hereof. If the amount recoverable hereunder as
of the date of calculation is less than the amount previously paid by the
Reinsurer for the same period that computation is being made, then any
return amount due the Reinsurer shall be paid by the Company with its
report.
Page 4 of 11
<PAGE> 12
C. Reinsurance Premium amounts due the Reinsurer shall be paid by the
Company as set forth in Article 6.
D. The Company, at any time or from time to time, may compute the Loss Ratio
earlier than the end of the next calendar quarter, and will report that
calculation to the Reinsurer. If as a result of said calculation payment
is due to the Company, the Reinsurer will remit that payment within five
business days of the Reinsurer's receipt of the Company's report.
ARTICLE 8 - NET RETAINED LIABILITY
A. This Contract applies only to that portion of any policy which the
Company retains net for its own account, and in calculating the amount of
any loss hereunder and also in computing the amount or amounts in excess
of which this Contract attaches, only loss or losses in respect of that
portion of any policy which the Company retains net for its own account
shall be included.
B. The amount of the Reinsurer's liability hereunder in respect of any loss
or losses shall not be increased by reason of the inability of the Company
to collect from any other reinsurer(s), whether specific or general, any
amounts which may have become overdue from such reinsurer(s), whether such
inability arises from the insolvency of such other reinsurer(s) or
otherwise.
ARTICLE 9 - OFFSET
The Company or the Reinsurer shall have the right to offset any balance or
amounts due from one party to the other under the terms of this Contract or
under the Surety Quota Share Treaty or the Surety Excess of Loss Reinsurance
Contract between certain of the parties hereto. The party asserting the right
of offset may exercise such right at any time whether the balances due are on
account of premiums or losses. In the instance of insolvency of one or more of
the reinsured Companies, applicable state law will apply.
ARTICLE 10 - CURRENCY
Whenever the word "Dollars" or the "$" sign appears in this Contract, they
shall be construed to mean United States Dollars and all transactions under
this Contract shall be in United States Dollars.
Amounts paid or received by the Company in any other currency shall be
converted to United States Dollars at the rate of exchange at the date such
transaction is entered on the books of the Company.
Page 5 of 11
<PAGE> 13
ARTICLE 11 - ACCESS TO RECORDS
The Company shall allow the Reinsurer to inspect, at reasonable times, the
records of the Company relevant to the business reinsured under this Contract,
including but not limited to Company files concerning premium, underwriting,
claims, losses or legal proceedings which involve or may involve the Reinsurer
and the Reinsurer may make copies of any records pertaining thereto. This
right of inspection, audit and information shall survive termination of this
Contract and shall run to the natural expiry of all liabilities under the Bonds
reinsured.
ARTICLE 12 - ERRORS AND OMISSIONS
Any inadvertent delay, omission or error shall not be held to relieve either
party hereto from any liability which would attach to it hereunder if such
delay, omission, or error had not been made, provided such omission or error is
rectified as soon as possible after discovery.
ARTICLE 13 - TAXES
The Reinsurer shall maintain the required reserves as to the Reinsurer's
portion of claims and losses. The Company shall be liable for all premium
taxes on business covered hereunder. If the Reinsurer is obligated to pay any
premium taxes on this business, the Company shall reimburse the Reinsurer,
however, the Company shall not be required to pay taxes twice of the same
premium.
ARTICLE 14 - INSOLVENCY
This reinsurance shall be payable by the Reinsurer on the basis of the
liability of the Company(ies) under policy or policies reinsured without
diminution, because of the insolvency of the Company, to the Company(ies) or
its liquidator, receiver, or statutory successor.
In the event of insolvency of one or more of the Companies, the liquidator or
receiver or statutory successor of the Company (ies) shall give written notice
to the Reinsurer of the pendency of a claim filed against the Company(ies) on
the Policy or Policies reinsured within a reasonable time after such claim is
filed in the insolvency proceeding. During the pendency of such claim the
Reinsurer may investigate such claim and interpose, at its own expense, in the
proceeding where such claim is to be adjudicated, any defense or defenses which
it may deem available to the Company(ies) or its liquidator or receiver or
statutory successor. The expenses thus incurred by the Reinsurer shall be
chargeable, subject to court approval, against the Company(ies) as part of the
expense of liquidation to the extent of a proportionate share of the benefits
which may accrue to the Company(ies) solely as a result of the defense so
undertaken by the Reinsurer.
Page 6 of 11
<PAGE> 14
Should one or more of the Companies go into liquidation or should a receiver be
appointed, the Reinsurer shall be entitled to deduct from any sums which may be
or may become due to the Company(ies) any sums which are due to the Reinsurer
by the Company(ies) and which are payable at a fixed or stated date under this
Contract or under the Surety Quota Share Treaty or the Surety Excess of Loss
Reinsurance Contract between certain of the parties hereto, to the full extent
permitted under the laws of the insolvent party's state of domicile.
It is further understood and agreed that, in the event of the insolvency of the
Companies, the reinsurance under this Contract shall be payable directly by
the Reinsurer to the Company(ies) or to its liquidator, receiver or statutory
successor except a) where this Contract specifically provides another payee of
such reinsurance in the event of the insolvency of the Company(ies) and b)
where the Reinsurer with the consent of the direct insured or insureds has
assumed such policy obligations of the Company(ies) as direct obligations of
the Reinsurer to the payees under such policies and in substitution for the
obligations of the Company(ies) to such payees.
In no event shall anyone other than the parties to this Contract or, in the
event of the insolvency of one or more of the Companies, its liquidator,
receiver, or statutory successor, have any rights under this Contract.
ARTICLE 15 - AMENDMENTS
This Contract may be altered or amended in any of its terms and conditions by
mutual written consent of the Company and the Reinsurer. Such written mutual
consent will then constitute a part of this Contract.
ARTICLE 16 - ARBITRATION
As a condition precedent to any right of action hereunder, any dispute arising
out of the interpretation, performance or breach of this Contract, including
the formation or validity thereof, shall be submitted for decision to a panel
of three arbitrators. Notice requesting arbitration will be in writing and
sent certified mail, return receipt requested.
One arbitrator shall be chosen by each party and the two arbitrators shall,
before instituting the hearing, choose an impartial third arbitrator who shall
preside at the hearing. If either party fails to appoint its arbitrator within
thirty (30) days after being requested to do so by the other party, the latter,
after ton (10) days notice by certified mail of its intention to do so, may
appoint the second arbitrator.
If the two arbitrators are unable to agree upon the third arbitrator within
thirty (30) days of their appointment, the third arbitrator shall be selected
from a list of six individuals (three named by each arbitrator) by a judge of
the federal district court having jurisdiction over the geographical
Page 7 of 11
<PAGE> 15
area in which the arbitration is to take place, or if the federal court
declines to act the state court having general jurisdiction in such area.
All arbitrators shall be disinterested active or former executive officers of
insurance or reinsurance companies or Underwriters at Lloyd's's London.
Within thirty (30) days after notice of appointment of all arbitrators, the
panel shall meet and determine timely periods for briefs, discovery procedures
and schedules for hearings.
The panel shall be relieved of all judicial formality and shall not be bound by
the strict rules of procedure and evidence. Arbitration shall take place in
XXXXXXXX, South Dakota, or a location mutually agreed to by the panel. Insofar
as the arbitration panel looks to substantive law, it shall consider the law of
the State of South Dakota. The decision of any two arbitrators when rendered
in writing shall be final and binding. The panel is empowered to grant interim
relief as it may deem appropriate.
The panel shall make its decision considering the custom and practice of the
applicable insurance and reinsurance business as promptly as possible following
the termination of the hearings. Judgment upon the award may be entered in any
court having jurisdiction thereof.
Each party shall bear the expense of its own arbitrator and shall jointly and
equally bear with the other party the cost of the third arbitrator. The
remaining costs of the arbitration shall be allocated by the panel. The panel
may, at its discretion, award such further costs and expenses as it considers
appropriate, including but not limited to attorneys fees, to the extent
permitted by law. The panel is prohibited from awarding punitive, exemplary or
treble damages, of whatever nature, in connection with any arbitration
proceeding concerning this Contract.
ARTICLE 17 - CHOICE OF LAW
This Contract, including all matters relating to formation, validity and
performance thereof, shall be interpreted in accordance with the law of the
State of South Dakota.
ARTICLE 18 - AGENCY
For purposes of sending and receiving notices and payments required by this
Contract, the reinsured Company that is set forth first in the Title section to
this Contract will be deemed the agent for all other reinsured companies
referenced in the Title of this Contract. In no event however, will any
reinsured Company be deemed the agent of the other with respect to the terms of
the Insolvency Article.
Page 8 of 11
<PAGE> 16
ARTICLE 19 - ENTIRE CONTRACT
This Agreement, and that certain Services and Indemnity Agreement between the
parties dated _________________, 1997, represent the entire agreement and
understanding among the parties. No other oral or written agreements or
contracts relating to the risks reinsured hereunder currently exist and/or are
contemplated between the parties.
ARTICLE 20 - SEVERABILITY
If any law or regulation of any Federal, State, or Local Government of the
United States of America, or the ruling of officials having supervision over
insurance companies, should render illegal this Contract, or any portion
thereof, as to risks or properties located in the jurisdiction of such
authority, either the Company or the Reinsurer may upon written notice to the
other suspend, abrogate, or amend this Contract insofar as it relates to risks
or properties located within such jurisdiction to such extent as may be
necessary to comply with such law, regulations, or ruling.
Such illegality, suspension, abrogation, or amendment of a portion of this
Contract shall in no way affect any other portion thereof.
ARTICLE 21 - HONORABLE UNDERTAKING
The purposes of this Contract are not to be defeated by narrow or technical
legal interpretations of its provisions. The Contract shall be construed as an
honorable undertaking and should be interpreted for the purpose of giving
effect to the real intentions of the parties hereto.
ARTICLE 22 - NOTICES
Any notice relating to this Contract shall be in writing and shall be
sufficiently given if delivered by certified mail to the Reinsurer at the
following address:
Continental Casualty Company
CNA Plaza
Attn.: The Chief Financial Officer
Diversified Operations Department
Chicago, IL 60685
and to the Company at the following address:
Western Surety Company
Attn.: XXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXX
XXXXXXX,XXXXX
Page 9 of 11
<PAGE> 17
IN WITNESS WHEREOF the parties acknowledge that no intermediary is involved in,
or brought about this transaction, and the parties hereto, by their authorized
representatives, have executed this Contract:
on this day of 199___
WESTERN SURETY COMPANY
By: __________________________________________________________________
Title: _______________________________________________________________
Attested by: _________________________________________________________
and on this day of 199___
UNIVERSAL SURETY OF AMERICA
By: __________________________________________________________________
Title: _______________________________________________________________
Attested by: _________________________________________________________
and on this day of 199___
SURETY BONDING COMPANY OF AMERICA
By: __________________________________________________________________
Title: _______________________________________________________________
Attested by: _________________________________________________________
and on this day of 199___
CONTINENTAL CASUALTY COMPANY
By: __________________________________________________________________
Title: _______________________________________________________________
Attested by: _________________________________________________________
Page 10 of 11
<PAGE> 18
AGGREGATE STOP LOSS REINSURANCE CONTRACT
(REFERRED TO AS "CONTRACT")
EFFECTIVE DATE: XXXXXXX X, XXXX
(REFERRED TO AS "EFFECTIVE DATE")
ENTERED INTO BY AND BETWEEN
WESTERN SURETY COMPANY
UNIVERSAL SURETY OF AMERICA
SURETY BONDING COMPANY OF AMERICA
(COLLECTIVELY REFERRED TO AS "COMPANY")
AND
CONTINENTAL CASUALTY COMPANY
(REFERRED TO AS "REINSURER")
Page 11 of 11
<PAGE> 1
EXHIBIT 28
NEWS RELEASE
CONTACT: CNA Capsure Holdings
--- ----------------
Roger Morris (Media) Mary Jane Robertson
312-822-4195 770-668-1216
Deborah Kamp (Analyst)
312-822-7752
FOR IMMEDIATE RELEASE
CNA AND CAPSURE HOLDINGS AMEND TERMS
FOR FORMATION OF CNA SURETY CORPORATION
CHICAGO, ILLINOIS, JULY 14, 1997 -- CNA (NYSE:CNA) and Capsure Holdings Corp.
(NYSE:CSH) today announced an amendment to their previously executed definitive
agreement to form CNA Surety Corporation, which will be the largest surety
company in the United States.
The amendment includes, among other items, (i) the payment of a cash dividend
to the stockholders of Capsure, (ii) a post closing exchange ratio adjustment
mechanism, and (iii) changes to the terms of one of the reinsurance agreements
to be entered into by the insurance subsidiaries of CNA and CNA Surety.
Shortly after the closing date, CNA Surety will pay an estimated $9.0 million
cash dividend ($0.57 per share based upon the 15,850,245 Capsure shares
outstanding as of June 30, 1997) to the stockholders of Capsure as of the
closing date, based on an estimated mid-September closing date. The dividend
has a $58,600 per diem component that will cause the actual dividend to be paid
to increase/decrease in the event the closing date is later/earlier than
estimated.
The exchange ratio will be adjusted on March 31, 1998 if the 1997 net written
premiums of Capsure or of CNA's surety businesses deviate from specified
levels. Adjustments to the exchange ratio, if any, will be effected through
the surrender or issuance of shares by or to CNA. In the event CNA is to
surrender stock, such stock will be surrendered to CNA Surety and in the event
CNA Surety stock is to be issued to CNA, CNA Surety will
-more-
<PAGE> 2
CNA and Capsure
July 14, 1997
Page 2
issue such stock to CNA. The range of CNA's ownership percentage resulting from
an adjustment, if any, is from 53.87% to 63.53%, assuming CNA neither acquires
nor disposes of any of its CNA Surety shares and the number of outstanding
shares of CNA Surety remains unchanged between the closing and March 31, 1998.
As of the closing date, CNA's stockholdings in CNA Surety will represent 61.75%
of the total outstanding shares. The negotiation of the exchange ratio
adjustment mechanism was in response to an unexpected decline in the first
quarter 1997 premium volume of the CNA surety operations relative to targeted
levels. CNA's surety premiums are subject to quarterly fluctuations due to
CNA's focus on larger contract accounts and the success and timing of
contractors being awarded new business. For the second quarter of 1997, CNA's
surety premiums were close to targeted levels.
The continued strong underwriting results in CNA's surety operations are
reflected in an expanded loss ratio guarantee agreed upon in the amendment.
The agreement allows the new CNA Surety Corporation to participate in these
results through lower loss ratio guarantees and broader account coverage in the
Aggregate Stop Loss Reinsurance Contract.
Consummation of the acquisition is subject to the receipt of Capsure
stockholder approval as well as insurance regulatory approval. "We are very
pleased to have resolved the matters addressed by the amendment and we all
look forward to an estimated September closing of the transaction," said Bruce
A. Esselborn, president of Capsure.
"CNA continues to be pleased with the underwriting results and profitability
of its surety operations. The operating units of Western Surety, Universal
Surety and CNA Surety are ready to begin building on the past successes of the
individual companies," said Mark C. Vonnahme, president and CEO, CNA Surety
Corporation. "As a leader in the surety industry, we will be offering our many
producers the broadest range of products in the business today."
CNA Surety, through Western Surety Company, Universal Surety of America and
Surety Bonding Company of America, will be the largest surety company in the
United States following the merger of Capsure Holdings Corp. and CNA Surety
Corporation.
CNA is the registered service mark and trade name of CNA Financial Corporation.
###
