-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, U1no7XJpBB89sLitNDEHZLxw7XSWAUHOSR0MgbiWX9jcI4WPcIVlbV3BAcfnMjBH Lw7HSD/HW9cpYfAd7mjasA== 0000950124-95-002072.txt : 199507140000950124-95-002072.hdr.sgml : 19950714 ACCESSION NUMBER: 0000950124-95-002072 CONFORMED SUBMISSION TYPE: 10-K CONFIRMING COPY: PUBLIC DOCUMENT COUNT: 20 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950713 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPSURE HOLDINGS CORP CENTRAL INDEX KEY: 0000073313 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 341010356 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-03565 FILM NUMBER: 00000000 BUSINESS ADDRESS: STREET 1: 2 N RIVERSIDE PLZ STE 600 CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3128791900 MAIL ADDRESS: STREET 1: TWO NORTH RIVERSIDE PLAZA CITY: CHICAGO STATE: IL ZIP: 60606 10-K 1 FORM 10-K 1 THIS DOCUMENT IS A COPY OF THE ANNUAL REPORT ON FORM 10-K FILED ON MARCH 30, 1995 PURSUANT TO A RULE 202 CONTINUING HARDSHIP EXEMPTION FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 0-3565 CAPSURE HOLDINGS CORP. (Exact name of registrant as specified in its charter) DELAWARE 34-1010356 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) TWO NORTH RIVERSIDE PLAZA, CHICAGO, ILLINOIS 60606 (Address of principal executive offices) (Zip Code) (312) 879-1900 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $0.05 PAR VALUE (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by nonaffiliates was $132.8 million based upon the closing price of $12.63 on March 24, 1995, using beneficial ownership of stock rules adopted pursuant to Section 13 of the Securities Exchange Act of 1934 to exclude voting stock owned by Directors and Officers, some of whom may not be held to be affiliates upon judicial determination. At March 24, 1995, 15,394,149 shares of the Registrant's Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Part III incorporates by reference the Registrant's Proxy Statement relating to the Annual Meeting of Shareholders to be held May 24, 1995. 2 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES TABLE OF CONTENTS
Page ---- PART I. Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Summary of Insurance Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 A.M. Best Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Surety and Fidelity Bond Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Excess and Surplus Lines Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Unpaid Losses and Loss Adjustment Expenses . . . . . . . . . . . . . . . . . . . . . . . . . 13 Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Net Operating Tax Loss Carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . 17 PART II. Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters . . . . . . . . 18 Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . 27 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 PART III. Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . 29 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . 29 Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . 29 PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . . 30
-2- 3 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES PART I ITEM 1. BUSINESS GENERAL Capsure Holdings Corp. and its subsidiaries ("Capsure" or the "Company") are engaged in the property and casualty insurance business. Capsure's principal property and casualty insurance entities are Western Surety Company ("Western Surety"), acquired in August 1992, United Capitol Insurance Company ("United Capitol"), acquired in February 1990, and Universal Surety of America ("Universal Surety"), acquired on September 22, 1994. Western Surety writes small fidelity and noncontract surety bonds, referred to as "miscellaneous" bonds, and errors and omissions ("E&O") liability insurance, as a licensed insurer in all 50 states and the District of Columbia. United Capitol writes specialty property and casualty insurance, primarily as an excess and surplus ("E&S") lines insurer. United Capitol is licensed in Wisconsin and Arizona and conducts business on a nonadmitted basis in all other states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. Universal Surety specializes in the underwriting of small contract and miscellaneous surety bonds. Universal Surety is licensed in 16 states with most of its business generated in Texas. The Company's business strategy with respect to its existing insurance operations is to emphasize the underwriting of risks where reasonable expectations of underwriting profits exist. At Western Surety, whose business is relatively low risk and relatively insensitive to industry pricing cycles, delivery of excellent service to its vast network of agents is emphasized. At Universal Surety, whose business includes both miscellaneous surety and the comparatively more risky contract surety, responsiveness to agents coupled with sound conservative underwriting are the guiding principles. Contract bonds are more affected by prevailing market and general economic conditions than are noncontract bonds. At United Capitol, whose business is relatively high risk and extremely cyclical, strict underwriting discipline is the critical factor in effecting underwriting profitability during soft market periods. The Company's primary growth strategy is to expand its operations in the specialty insurance and financial services industries by capitalizing on Western Surety's licenses, distribution system and A+ rating by A.M. Best Company, Inc. ("A.M. Best") and United Capitol's underwriting expertise and management resources, and by acquiring profitable, well-managed businesses with established market positions in the insurance or financial services industry. The September 22, 1994 acquisition of Universal Surety is an example of this philosophy. Universal Surety has been a highly successful regional underwriter of miscellaneous and small- to medium-sized contract surety bonds in Texas (75% of 1994 gross written premiums) and adjacent southern states. Universal Surety's preacquisition financial results have been exceptional. Gross written premiums have grown from $5.1 million for the year ended December 31, 1990 to $15.3 million for the year ended December 31, 1994 (including results prior to acquisition). A weighted average combined ratio below 80% was maintained over this same period. These results compare favorably to national contract surety bond insurers. Universal Surety's overall growth in gross written premiums and underwriting income during this period was attributable to its product specialization, underwriting expertise and the strong economy in its geographic region. Such growth was restricted by Universal Surety's ability to attract qualified underwriting and claims personnel and maintain distinctive service to its agents. The planned expansion of Universal Surety's contract surety business through Western Surety's broad distribution network will be similarly controlled. There can be no assurance, however, that Universal Surety's preacquisition results will be indicative of future operating results under the ownership and management of Capsure. In addition, in 1993 the Company acquired Fischer Underwriting Group, Incorporated ("Fischer"), a managing general agency engaged in producing and underwriting specialty directors' and officers' ("D&O") and miscellaneous professional liability insurance. Formerly acting on behalf of Lloyds' of London and other insurers, Fischer commenced producing and underwriting on behalf of United Capitol in December 1993. -3- 4 SUMMARY OF INSURANCE OPERATIONS Capsure's insurance companies operate in two principal markets within the property and casualty insurance industry - surety and fidelity and excess and surplus lines. The principal lines of business of Western Surety and Universal Surety are surety and fidelity. United Capitol underwrites principally other liability, product liability and commercial property, primarily on an E&S basis. On August 14, 1992, the Company acquired Western Surety. Founded in 1900, Western Surety is one of the largest writers of miscellaneous bonds in the United States. Bonds underwritten by Western Surety are relatively low-risk, low-premium products where prompt service, easy-to-use forms and availability of an extensive array of bond products are emphasized. Western Surety's success is attributable to its product specialization, underwriting expertise and broad distribution network. Substantially all of Western Surety's bonds are mandated by various state statutes and local ordinances. On September 22, 1994, the Company acquired Universal Surety. Founded in 1984, Universal Surety specializes in writing miscellaneous and small- to medium-sized contract surety bonds in the southern United States. Contract bonds underwritten by Universal Surety are primarily contractor performance and payment bonds in amounts under $3.0 million for which underwriting expertise and distinctive service to agents are emphasized. Universal Surety underwrites primarily standard and some specialty accounts for which it will utilize supplemental collateral arrangements and excess rates for contractors not qualified for standard surety rates. Universal Surety also reduces its exposure through participation in the Small Business Administration ("SBA") Surety Bond Guarantee Program. Under this program, the SBA will generally reimburse Universal Surety for 80% of losses and loss adjustment expenses incurred on any SBA guaranteed bond in exchange for 20% of the premium. In addition, a significant portion of the Company's premiums consist of miscellaneous bonds underwritten in the same geographic area. On February 20, 1990, the Company acquired United Capitol, a specialty property and casualty insurer. United Capitol provides principally general liability insurance, including D&O liability, product liability and other liability, to businesses which have hazardous, unique or unusual risk characteristics and which require individual risk underwriting and pricing expertise. Policies underwritten by United Capitol are relatively high- risk, high-premium products. Since its founding in 1986, United Capitol has been able to consistently achieve its primary objective of generating underwriting profits by adhering to a strategy of strict underwriting discipline. The Company believes this strategy is a critical factor affecting underwriting profitability during soft market conditions, which have prevailed in the property and casualty industry since 1987. United Capitol has experienced significant declines in premium volume since 1987 as it has exercised underwriting discipline and has declined to write what it believes to be underpriced business. A.M. BEST RATINGS Western Surety, Universal Surety and United Capitol are currently rated A+ (Superior), A (Excellent) and A (Excellent), respectively, by A.M. Best. A.M. Best's letter ratings range from A++ (Superior) to C- (Fair) with A++ being highest. An A+ (Superior) rating is assigned to those companies which A.M. Best believes have achieved superior overall performance when compared to the norms of the property and casualty insurance industry. A+ (Superior) rated insurers have been shown to be among the strongest in ability to meet policyholder and other contractual obligations. A rating of A (Excellent) is assigned to those companies which A.M. Best believes have achieved excellent overall performance when compared to the norms of the property and casualty insurance industry and generally have demonstrated a strong ability to meet their respective policyholder and other contractual obligations. A.M. Best reviews its ratings at least annually and reaffirmed each company's rating in June 1994. There can be no assurance that these ratings will continue to be reaffirmed. SURETY AND FIDELITY BOND OPERATIONS According to 1993 statistics published by the Surety Association of America ("SAA"), the surety and fidelity bond market had direct written premiums of approximately $2.7 billion, of which the miscellaneous bond segment accounted for approximately $724 million. Western Surety targets a subset of the miscellaneous bond segment of the surety and fidelity market because of its favorable risk characteristics. Universal Surety targets both the miscellaneous bond and small contract surety bond segments of the market. -4- 5 PRODUCTS AND POLICIES Surety and fidelity bonds differ in some respects from conventional insurance policies. A surety bond is a three-party arrangement wherein the issuer of the bond (the surety) guarantees to a third party (the obligee) an obligation made by another entity (the principal). The surety is the party who guarantees fulfillment of the principal's obligation to the obligee. In addition, sureties are generally entitled to recover from the principal any losses and expenses paid to third parties. The surety's responsibility is to evaluate the risk and determine if the principal meets the underwriting requirements for the bond. Accordingly, surety bond premiums primarily reflect the type and class of risk and related costs associated with both processing the bond transaction and investigating the applicant including, if necessary, an analysis of the applicant's creditworthiness and ability to perform. Western Surety issues thousands of different noncontract bond forms representing the many types of bonds available in each of the jurisdictions in which it operates. Universal Surety issues both contract and noncontract surety bonds. The terms of such bonds in many cases are prescribed by federal, state and local laws or regulations. The principal types of surety and fidelity bonds underwritten are as follows: License and Permit - Bonds required by statutes or ordinances for a number of purposes including guaranteeing the payment of certain taxes and fees and providing consumer protection as a condition to granting licenses related to selling real estate or motor vehicles and contracting services. Judicial and Fiduciary - Bonds required by statutes, courts or legal documents for the protection of those on whose behalf a fiduciary acts. Examples of such fiduciaries include executors and administrators of estates, and guardians of minors and incompetents. Fidelity - Bonds which cover losses arising from employee dishonesty. Examples of purchasers of fidelity bonds are law firms, insurance agencies and janitorial service companies. Public Official - Bonds required by statutes and ordinances to guarantee the lawful and faithful performance of the duties of office by public officials. Notary Public - Bonds required by statutes to protect against losses resulting from the improper actions of notaries public. Contract - Bonds which secure the payment and/or performance of an obligation under a written contract. Each company also writes E&O policies for two classes of insureds: notaries public and tax preparers. The notary public E&O policy is marketed as a companion product to the notary public bond and the tax preparer E&O policy is marketed to small tax return preparation firms. In addition, Western Surety introduced an Insurance Agents & Brokers E&O Insurance product in 1994. The following tables set forth, for each principal class of bonds, combined Western Surety and Universal Surety gross written premiums, net written premiums, net earned premiums and number of bonds and policies in force in 1994, 1993 and 1992 and the respective percentages of the total. All tables in this section contain information reflecting the operations of both Western Surety and Universal Surety prior to their respective acquisitions by Capsure. As such, the financial information is not necessarily indicative of the financial results that would have occurred under the ownership and management of Capsure (amounts in thousands, except percentages and average bond amounts): -5- 6
GROSS WRITTEN PREMIUMS ------------------------------------------------------------------------------- % of % of % of 1994 Total 1993 Total 1992 Total ----------- ----------- ---------- ----------- ---------- ----------- Surety and fidelity bonds: License and permit . . . . . . $ 28,160 32.5% $ 27,934 32.5% $ 26,906 33.8% Judicial and fiduciary . . . . 13,116 15.2 13,493 15.7 13,263 16.7 Fidelity . . . . . . . . . . . 13,821 16.0 13,111 15.3 12,364 15.6 Public official . . . . . . . . 6,874 7.9 7,628 8.9 7,003 8.8 Notary public . . . . . . . . . 7,989 9.2 8,804 10.3 8,203 10.3 Contract . . . . . . . . . . . 10,393 12.0 9,111 10.6 6,914 8.7 Other . . . . . . . . . . . . . 1,935 2.3 1,723 2.0 1,124 1.4 ---------- ------ ---------- ------ ---------- ------ 82,288 95.1 81,804 95.3 75,777 95.3 E&O policies . . . . . . . . . . 4,261 4.9 4,031 4.7 3,763 4.7 ---------- ------ ---------- ------ ---------- ------ $ 86,549 100.0% $ 85,835 100.0% $ 79,540 100.0% ========== ====== ========== ====== ========== ====== Premiums by company: Western Surety . . . . . . . . $ 71,286 82.4% $ 72,064 84.0% $ 68,552 86.2% Universal Surety . . . . . . . 15,263 17.6 13,771 16.0 10,988 13.8 ---------- ------ ---------- ------ ---------- ------ $ 86,549 100.0% $ 85,835 100.0% $ 79,540 100.0% ========== ====== ========== ====== ========== ====== Premiums generated by largest agency: Western Surety . . . . . . . . 1.2% 1.3% 1.6% ========== ========== ========== Universal Surety . . . . . . . 4.0% 6.0% 6.0% ========== ========== ========== Percentage of premiums in the top five states: Western Surety . . . . . . . . 26.5% 26.9% 25.9% ========== ========== ========== Universal Surety . . . . . . . 92.0% 95.0% 97.0% ========== ========== ==========
NET WRITTEN PREMIUMS ------------------------------------------------------------------------------- % of % of % of 1994 Total 1993 Total 1992 Total ----------- ----------- ---------- ----------- ---------- ----------- Surety and fidelity bonds: License and permit . . . . . . $ 28,003 33.3% $ 27,796 33.3% $ 26,757 34.5% Judicial and fiduciary . . . . 12,379 14.7 12,715 15.2 12,428 16.0 Fidelity . . . . . . . . . . . 13,786 16.4 13,061 15.7 12,306 15.9 Public official . . . . . . . . 6,731 8.0 7,422 8.9 6,776 8.7 Notary public . . . . . . . . . 7,922 9.4 8,718 10.4 8,117 10.5 Contract . . . . . . . . . . . 9,623 11.5 8,382 10.0 6,352 8.2 Other . . . . . . . . . . . . . 1,421 1.7 1,343 1.6 1,093 1.4 ----------- -------- ---------- --------- ---------- --------- 79,865 95.0 79,437 95.1 73,829 95.2 E&O policies . . . . . . . . . . 4,186 5.0 4,031 4.9 3,764 4.8 ----------- -------- ---------- -------- ---------- -------- $ 84,051 100.0% $ 83,468 100.0% $ 77,593 100.0% =========== ======== ========== ======== ========== ======== Premiums by company: Western Surety . . . . . . . . $ 69,738 83.0% $ 70,598 85.0% $ 67,333 86.9% Universal Surety . . . . . . . 14,313 17.0 12,870 15.0 10,260 13.1 ----------- -------- ---------- -------- ---------- -------- $ 84,051 100.0% $ 83,468 100.0% $ 77,593 100.0% =========== ======== ========== ======== ========== ========
-6- 7
NET EARNED PREMIUMS ------------------------------------------------------------------------------- % of % of % of 1994 Total 1993 Total 1992 Total ----------- ----------- ---------- ----------- ---------- ----------- Surety and fidelity bonds: License and permit . . . . . . $ 27,692 33.4% $ 26,941 34.2% $ 26,117 35.3% Judicial and fiduciary . . . . 12,476 15.1 12,603 16.0 12,274 16.6 Fidelity . . . . . . . . . . . 13,402 16.2 12,618 16.0 11,892 16.0 Public official . . . . . . . . 7,017 8.5 7,059 9.0 6,797 9.2 Notary public . . . . . . . . . 7,561 9.1 6,949 8.8 6,523 8.8 Contract . . . . . . . . . . . 9,331 11.3 7,720 9.8 5,831 7.9 Other . . . . . . . . . . . . . 1,426 1.7 1,218 1.5 1,056 1.4 ----------- -------- ---------- -------- ---------- -------- 78,905 95.3 75,108 95.3 70,490 95.2 E&O policies . . . . . . . . . . 3,917 4.7 3,733 4.7 3,547 4.8 ----------- -------- ---------- -------- ---------- -------- $ 82,822 100.0% $ 78,841 100.0% $ 74,037 100.0% =========== ======== ========== ======== ========== ======== Premiums by company: Western Surety . . . . . . . . $ 69,212 83.6% $ 67,941 86.2% $ 65,540 88.5% Universal Surety . . . . . . . 13,610 16.4 10,900 13.8 8,497 11.5 ----------- -------- ---------- -------- ---------- -------- $ 82,822 100.0% $ 78,841 100.0% $ 74,037 100.0% =========== ======== ========== ======== ========== ========
BONDS AND POLICIES IN FORCE ------------------------------------------------------------------------------- % of % of % of 1994 Total 1993 Total 1992 Total ----------- ----------- ---------- ----------- ---------- ----------- Surety and fidelity bonds: License and permit . . . . . . 460 29.4% 460 30.5% 436 30.7% Judicial and fiduciary . . . . 64 4.1 67 4.4 67 4.7 Fidelity . . . . . . . . . . . 88 5.6 86 5.7 84 5.9 Public official . . . . . . . . 64 4.1 63 4.2 62 4.4 Notary public . . . . . . . . . 762 48.6 717 47.5 663 46.7 Contract . . . . . . . . . . . 6 0.4 5 0.3 5 0.3 Other . . . . . . . . . . . . . 11 0.7 12 0.8 11 0.8 ----------- -------- ---------- -------- ---------- -------- 1,455 92.9 1,410 93.4 1,328 93.5 E&O policies . . . . . . . . . . 112 7.1 100 6.6 93 6.5 ----------- -------- ---------- -------- ---------- -------- 1,567 100.0% 1,510 100.0% 1,421 100.0% =========== ======== ========== ======== ========== ======== Bonds/policies in force by company: Western Surety . . . . . . . . 1,389 88.6% 1,367 90.5% 1,323 93.1% Universal Surety . . . . . . . 178 11.4 143 9.5 98 6.9 ----------- -------- ---------- -------- ---------- -------- 1,567 100.0% 1,510 100.0% 1,421 100.0% =========== ======== ========== ======== ========== ======== Average bond/policy limit: Western Surety . . . . . . . . $ 9,470 $ 9,186 $ 8,937 =========== ========== ========== Universal Surety . . . . . . . $ 5,330 $ 5,281 $ 5,647 =========== ========== ==========
MARKETING Western Surety enjoys broad national distribution of its products, which are marketed through approximately 37,000 of the approximately 45,000 independent property and casualty insurance agencies in the United States. These independent agencies are paid an average commission of approximately 30% of a miscellaneous bond's premium. Western Surety also employs approximately 60 full-time salaried marketing representatives whose principal duties are to continually service their producer network on a local basis. Since miscellaneous fidelity and surety bonds typically account for a small portion of an independent agency's revenues and are generally applied for under rush circumstances, Western Surety emphasizes one-day response service, easy-to-use forms and an extensive array of miscellaneous bond products. In addition, independent agents are provided pre-executed bond forms and powers of attorney that allow them to issue many standard bonds in their offices. -7- 8 Western Surety's marketing strategy is concentrated on increasing its share of the miscellaneous bond market. In addition, Western Surety devotes considerable time and effort educating legislators as to the need for and value of miscellaneous bonds and challenging attempts to repeal certain bonding requirements. Universal Surety markets its products through approximately 1,000 independent property and casualty insurance agencies through its headquarters in Houston, Texas and branch offices in Austin, Dallas, Kansas City and San Antonio. Universal Surety emphasizes innovative, flexible underwriting, product specialization and distinctive agent service backed by highly qualified, experienced employees. Universal Surety's preacquisition results have been exceptional as gross written premiums grew from $5.1 million in 1990 to $15.3 million in 1994, while maintaining a combined ratio below 80%. In addition, according to 1993 SAA statistics, Universal Surety ranked number one in volume of bonds written in Texas and number three in terms of direct written premiums. Of Universal Surety's gross written premiums in 1994, 68% related to contract bonds, including 12% that qualified for the SBA guarantee. The remaining 32% related to noncontract bonds, including 11% for notary public bonds. Universal Surety has concentrated its marketing efforts in expanding its share of the small contract bond market. Contract bonds underwritten by Universal Surety are primarily contractor performance and payment bonds in amounts under $3.0 million. Universal Surety underwrites principally standard accounts and some specialty accounts for which it will utilize supplemental collateral arrangements and excess rates or SBA guarantees for contractors not generally considered standard risks. The Company intends to utilize Western Surety's existing diverse agency relationships to expand the geographic and agency distribution of Universal Surety's contract surety business. The Company has initially targeted marketing activities towards Western Surety agents in 13 southern states, including Texas. Western Surety will generally cede 100% of each such contract surety bond written on Western paper to Universal Surety pursuant to a Surety Bond Quota Reinsurance Agreement. In 1994, these activities were not material. In addition, Western Surety is gradually expanding its product line by offering Insurance Agents & Brokers E&O Insurance directly to a majority of its vast agency force. Western Surety cedes 90% of each policy to a reinsurer pursuant to a treaty reinsurance arrangement. In 1994, these activities were not material. UNDERWRITING Western Surety and Universal Surety target various products in the surety and fidelity bond market which are characterized by relatively low-risk exposure and small bond amounts. Its underwriting criteria, including the extent of bonding authority granted to independent agents, vary depending on the class of business and the type of bond. For example, relatively little underwriting information is required of certain low-exposure risks such as notary bonds. Other bonds, such as fiduciary or probate bonds, are subjected to greater individual risk scrutiny, including verification of the credit history and financial resources of an applicant. Contract bonds underwritten by Universal Surety, which have higher bond amounts and inherent risk, are subject to stringent financial analysis and credit review. Both companies grant authority to independent agents to issue certain low-risk bonds subject to underwriting guidelines. COMPETITION The surety and fidelity market is highly competitive. The largest market shares are held by large diversified insurance companies; however, the single largest writer nationally in 1993, according to the SAA, controlled only 6% of the $2.7 billion market. The small fidelity and noncontract surety or miscellaneous segment of this market is competitive on the basis of service, price, and commissions paid to producers. No single competitor has a significant market position in the broad geographic range and lines of business in which Western Surety conducts its operations. Certain of Western Surety's existing and potential competitors are larger and have greater financial and other resources than Western Surety. The Company believes that Western Surety's principal competitive strengths include its expertise in writing miscellaneous bonds, distribution network of independent agencies, timely customer response and service, and admitted status in every state and the District of Columbia. -8- 9 The market in which Universal Surety competes, primarily small contract bonds, has seen additional competition as both large and small insurance companies are competing and expanding in this area. Certain of Universal Surety's existing and potential competitors are larger and have greater financial resources than Universal Surety. Universal Surety believes that its principal competitive strengths include its underwriting expertise in both contract and miscellaneous bonds, its distinctive service and its strong relationship with its agents. EXCESS AND SURPLUS LINES OPERATIONS For regulatory purposes, the commercial property and casualty insurance market is essentially divided into three segments: the admitted or licensed market, commonly referred to as the "standard" market; the alternate risk mechanism market, which includes captive insurance companies, risk retention groups and risk purchasing groups; and, the E&S market. The largest provider group is the licensed or admitted insurers. The alternate risk market may operate on an admitted or E&S basis. The E&S segment was created to provide a source of insurance to those insureds who are unable to purchase coverage in the standard market. Admitted insurers are subject to extensive state regulation of rates, policy forms and operational conduct, are required to participate in assigned risk pools and must pay premium taxes and other state assessments. These companies, however, exert a dominant influence over pricing in the commercial market. By contrast, E&S insurers are subject to comparatively less state regulation, affording them more pricing and form flexibility and lower operating expenses. E&S insurers may only insure those risks which the standard market cannot or chooses not to insure. The commercial property and casualty insurance market is highly cyclical and intensely competitive as to price and terms. The size and composition of the E&S market historically have fluctuated with industry cycles. The cycles have been characterized by conditions known as hard markets and soft markets. Hard markets have been characterized by varying periods of relatively higher premiums and more restrictive coverages. As more insurers have been attracted to those conditions, competition has intensified. Over time, this has resulted in depressed premiums, broader coverages and underwriting losses in the industry, which are referred to as soft markets, and have been characterized by an oversupply of underwriting capacity. E&S insurers are generally more vulnerable to these cycles, which is reflected by their volatile writings, since E&S insurers typically only underwrite classes of risks which standard market insurers cannot or choose not to insure. The commercial property and casualty insurance market has been operating under soft market conditions since 1987 and there can be no assurance as to the timing or extent of hard market conditions returning to the property and casualty insurance industry. PRODUCTS AND POLICIES The following tables set forth for each of United Capitol's principal lines of business, gross written premiums, net written premiums and net earned premiums in 1994, 1993 and 1992 (dollars in thousands):
GROSS WRITTEN PREMIUMS ------------------------------------------------------------------------------- % of % of % of 1994 Total 1993 Total 1992 Total ----------- ----------- ---------- ----------- ---------- ----------- General liability: Product liability . . . . . . . $ 6,797 25.2% $ 7,992 27.8% $ 7,558 27.9% D&O . . . . . . . . . . . . . . 5,582 20.6 714 2.5 -- -- Asbestos abatement . . . . . . 4,633 17.1 7,481 26.1 9,579 35.4 Other general liability . . . . 6,033 22.3 8,207 28.6 6,695 24.7 ----------- --------- ---------- -------- ---------- -------- 23,045 85.2 24,394 85.0 23,832 88.0 Property . . . . . . . . . . . . 3,912 14.5 4,117 14.3 2,647 9.8 Surety . . . . . . . . . . . . . 75 .3 200 .7 587 2.2 ----------- --------- ---------- --------- ---------- -------- $ 27,032 100.0% $ 28,711 100.0% $ 27,066 100.0% =========== ========= ========== ========= ========== =========
-9- 10
NET WRITTEN PREMIUMS ------------------------------------------------------------------------------- % of % of % of 1994 Total 1993 Total 1992 Total ----------- ----------- ---------- ----------- ---------- ----------- General liability: Product liability . . . . . . . $ 4,361 25.6% $ 4,905 27.7% $ 4,642 26.3% D&O . . . . . . . . . . . . . . 3,298 19.3 498 2.8 -- -- Asbestos abatement . . . . . . 3,358 19.7 5,994 33.9 7,882 44.7 Other general liability . . . . 5,100 29.9 5,439 30.7 4,383 24.8 ----------- -------- ---------- -------- ---------- -------- 16,117 94.5 16,836 95.1 16,907 95.8 Property . . . . . . . . . . . . 670 3.9 515 2.9 333 1.9 Surety . . . . . . . . . . . . . 264 1.6 357 2.0 400 2.3 ----------- -------- ---------- -------- ---------- -------- $ 17,051 100.0% $ 17,708 100.0% $ 17,640 100.0% =========== ======== ========== ======== ========== ========
NET EARNED PREMIUMS ------------------------------------------------------------------------------- % of % of % of 1994 Total 1993 Total 1992 Total ----------- ----------- ---------- ----------- ---------- ----------- General liability: Product liability . . . . . . . $ 5,138 26.7% $ 5,087 28.1% $ 4,757 29.5% D&O . . . . . . . . . . . . . . 2,045 9.2 12 0.1 -- -- Asbestos abatement . . . . . . 4,786 24.9 6,844 37.9 7,170 44.4 Other general liability . . . . 6,419 33.4 5,374 29.7 3,438 21.2 ----------- -------- ---------- -------- ---------- -------- 18,388 94.2 17,317 95.8 15,365 95.1 Property . . . . . . . . . . . . 547 2.8 420 2.3 350 2.2 Surety . . . . . . . . . . . . . 291 3.0 351 1.9 433 2.7 ----------- -------- ---------- -------- ---------- -------- $ 19,226 100.0% $ 18,088 100.0% $ 16,148 100.0% =========== ======== ========== ======== ========== ========
PRODUCT LIABILITY AND OTHER PRIMARY GENERAL LIABILITY United Capitol provides primary general liability insurance, including product liability coverage, on both a claims-made and an occurrence basis to hazardous, unique or unusual classes of commercial insureds that require specialized underwriting. These policies provide coverage to the insured against third-party claims of bodily injury or property damage arising from negligent acts of the insured. Except as discussed below, claims for bodily injury or property damage caused by exposure to asbestos are excluded from product liability and other primary general liability policies sold by United Capitol. Many of United Capitol's general liability policies specifically provide product liability coverage for liabilities arising from the manufacture and/or distribution of goods by an insured. Classes of insureds include manufacturers and distributors of industrial machinery, equipment and chemicals, sporting goods, toys and trailers; bridge building, pile driving and other artisan contractors; operators of carnivals, circuses, water and amusement parks; and fireworks exhibitors. Most of United Capitol's non-asbestos primary general liability policies have been issued on the occurrence form (63% in 1994, 66% in 1993 and 71% in 1992); however, classes considered to be particularly susceptible to late reporting ("long tail" classes) are generally written on a claims-made form. Examples of these classes include pharmaceuticals and chemicals manufacturers and distributors, and hazardous waste remediation contractors. In 1992, United Capitol commenced offering pollution liability coverage, on a claims-made only basis, to contractors involved in the remediation of preexisting pollution. United Capitol does not provide pollution coverage to those parties who are likely to create or be the source of pollution. United Capitol's gross limit of liability for this coverage is generally $1.0 million, but higher limits are available through the use of reinsurance. Total gross written premiums for this coverage were $0.5 million, $0.6 million and $0.2 million in 1994, 1993 and 1992, respectively. For the primary general liability insurance line of business, United Capitol generally offers gross limits of liability of approximately $1.0 million to $3.0 million. United Capitol's average gross annual premium per policy -10- 11 in 1994, 1993 and 1992 was approximately $116,000, $98,000 and $105,000, respectively, and the average gross limits of liability were $2.0 million, $1.8 million and $1.8 million, respectively. D&O AND MISCELLANEOUS PROFESSIONAL LIABILITY In December 1993, United Capitol commenced writing specialty D&O and miscellaneous professional liability insurance on a claims-made basis through Fischer. D&O insurance is designed to protect directors and officers from liabilities arising while acting in their official capacities and typically covers both liabilities of the officer or director and reimbursement of a corporation that has lawfully agreed to indemnify their officers or directors. Miscellaneous professional liability insurance, also known as E&O, covers claims by third parties who allege damage as a result of negligent actions by insured professionals. The gross limit of liability for these policies is generally $1.0 million, though gross limits up to $5.0 million are available through the use of reinsurance. The average gross annual premium per policy for these classes of business was $11,000 in 1994 and $9,000 in 1993. United Capitol targets businesses with hard-to-place D&O risks such as new companies, research and development companies, and companies with past bankruptcies as well as not-for-profit businesses. Types of entities considered for professional liability coverage by United Capitol include insurance agents, real estate brokers, title agents, and collection agents and certain legal professionals. Fischer, to a lesser degree, also places certain D&O and E&O insurance with insurers other than United Capitol and receives commissions for such services. This business placed with other insurers was not material to the Company. ASBESTOS ABATEMENT United Capitol provides general liability insurance for asbestos abatement contractors, as well as professional liability insurance for architects, engineers and others in their capacity as asbestos abatement or environmental consultants. Asbestos abatement generally involves removal or containment of asbestos and asbestos-containing materials from buildings and other structures. United Capitol's asbestos abatement policy forms exclude coverage for employees of an insured and others required to be in the area during the asbestos abatement process. United Capitol generally provides gross limits of liability of $1.0 million to $3.0 million to asbestos abatement contractors and professional liability coverage to asbestos abatement and environmental consultants. Higher gross limits can be provided through the use of reinsurance. In 1994, 1993 and 1992, the average gross annual premium per policy for this class of business was approximately $76,000, $76,000 and $67,000, respectively. The average gross limit of liability was $2.8 million in 1994, $2.5 million in 1993 and $2.0 million in 1992. From 1986 through 1990, substantially all of United Capitol's general liability policies for asbestos abatement contractors and environmental consultants were written on a claims-made basis. Because of highly favorable loss experience with the product, and in response to changing market conditions as more insurers have entered the market, United Capitol commenced writing these policies on an occurrence basis in late 1990. In 1994, 1993 and 1992, asbestos abatement general liability policies written on an occurrence basis increased to approximately 79%, 69% and 60% of the total, respectively. Since 1989, United Capitol has experienced a significant decline in asbestos abatement-related insurance premiums in absolute terms as well as relative to its total business because of intense competition for this product. Management anticipates a continuing decline in this business. PROPERTY, SURETY AND OTHER BUSINESS United Capitol writes commercial property and inland marine insurance, generally offering up to $5.0 million of gross limits per location or per policy. The average gross annual premium per policy was $18,000 in 1994, $25,000 in 1993 and $23,000 in 1992. In 1993, United Capitol's agency subsidiary, United Capitol Managers, Inc. ("Managers"), entered into an agreement under which it acts as commercial property underwriting manager for Westport Insurance Corporation ("Westport"), a member company of the Employers Reinsurance Group. Westport is rated A++ (Superior) by A.M. Best and is an admitted insurer in the majority of jurisdictions. Managers earns a commission for business underwritten on behalf of Westport and United Capitol assumes up to $500,000 net per risk on business produced by Managers. In 1994, Managers produced $4.3 million of gross premiums for Westport of which $0.3 million was retroceded to United Capitol. -11- 12 United Capitol also writes a small amount of surety bonds for asbestos abatement and hazardous waste remediation contractors. POLICY FORMS United Capitol uses both claims-made and occurrence forms for its liability lines of business, both of which are generally more restrictive than standard industry policy forms. Since inception, approximately 90% of United Capitol's claims-made and occurrence liability policies have provided for an aggregate limit for all claims in a policy year. Further, all liability policies issued since early 1987 have provided for an aggregate limit for all claims in a policy year. In approximately 98% of United Capitol's liability policies, defense costs and other loss adjustment expenses are either included within the policy limits or subject to a dollar cap. Virtually all of United Capitol's liability policies are written subject to a self-insured retention or deductible. These underwriting standards and percentages have remained essentially unchanged since 1986. Except as described above, United Capitol's liability policies exclude coverage for the insured's liability for claims related to pollution. United Capitol's liability policies generally exclude coverage for the insured's liability for punitive or exemplary damages. For its property and surety lines of business, United Capitol generally uses standard industry policy forms which it may modify in some respects. MARKETING United Capitol principally markets its insurance through approximately 250 wholesale and retail insurance brokerage firms throughout the country whose employees are specially licensed by insurance regulatory authorities as E&S insurance brokers. These brokers submit risk proposals to United Capitol for its review and underwriting analysis. No brokers have the authority to bind United Capitol and United Capitol does not delegate underwriting or claims management authority to nonaffiliated managing general agents or other independent agents or brokers. Due to the specialized nature of United Capitol's business, policy writings tend to be concentrated among a small group of brokerage firms committed to United Capitol's products. For the years ended December 31, 1994, 1993 and 1992, United Capitol's top ten brokerage firms generated approximately 42%, 49% and 45%, respectively, of gross written premiums in those periods. In 1994, 1993 and 1992, United Capitol's top brokerage firm produced 12%, 14% and 12%, respectively, of its gross written premiums. UNDERWRITING All underwriting and pricing decisions are made by United Capitol or its subsidiaries' employees and reviewed by senior management. Given the hazardous, unique or unusual nature of the risks United Capitol insures, its underwriters carefully analyze the risks associated with each application for insurance. United Capitol's underwriters evaluate the prior loss history, the inherent risk characteristics and the financial condition of the applicant where appropriate. For asbestos abatement contractors, the underwriting process also includes evaluation of the contractor's qualifications, experience and operating procedures. For all liability coverages, and particularly when determining whether liability coverage will be offered on an occurrence form, United Capitol's underwriting analysis includes evaluation of the likely "tail" period between an insured occurrence and the time a claim is likely to be made. COMPETITION The excess and surplus lines market is significantly affected by conditions in the commercial property and casualty market, which are highly cyclical and intensely competitive as to price and terms. Many of United Capitol's existing or potential competitors are larger, have considerably greater financial and other resources, have greater experience in the insurance industry, have longer relationships with their brokers and insureds and offer a broader line of insurance products than United Capitol. United Capitol competes with other excess and surplus lines insurers, other forms of insurance organizations such as risk retention groups and other alternative risk mechanisms. United Capitol also competes with admitted insurers since a risk may not be offered to an excess and surplus lines insurer if an admitted insurer is willing to insure the risk. The property and casualty industry is particularly competitive with respect to price and terms, and United Capitol will compete on that basis only when there remains reasonable expectation of underwriting profits. United Capitol believes its competitive strengths are its underwriting discipline, quality service and effective claims administration. -12- 13 REINSURANCE The Company's insurance subsidiaries, in the ordinary course of business, cede reinsurance to other insurance companies to limit their exposure to loss and to provide greater diversification of risk. The reinsurance coverages and terms are tailored to the specific risk characteristics of the underlying product line. Reinsurance contracts do not relieve the Company of its primary obligations to claimants. A contingent liability exists with respect to reinsurance ceded to the extent that any reinsurer is unable to meet the obligations assumed under the reinsurance agreements. Capsure places reinsurance with other carriers only after careful review of the nature of the contract and a thorough assessment of the reinsurers' credit quality and claim settlement performance. At December 31, 1994, Capsure's largest reinsurance receivable, including prepaid reinsurance premiums of $1.3 million and estimated ceded incurred but not reported ("IBNR") losses of $12.0 million, was approximately $18.9 million with Generali - U.S. Branch. Generali - U.S. Branch is rated A (Excellent), XV by A.M. Best. No other receivable from a single reinsurer exceeded 10% of total reinsurance receivables. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES The liability for unpaid losses and loss adjustment expenses ("LAE") is based on estimates of (a) the ultimate settlement value of reported claims, (b) IBNR claims, (c) future expenses to be incurred in the settlement of claims and (d) claim recoveries. These estimates are determined based on Company and industry loss experience as well as consideration of current trends and conditions. The liability for unpaid losses and LAE is an accounting estimate and, similar to other accounting estimates, there is the potential that actual future loss payments will differ from the initial estimate. The methods of determining such estimates and the resulting estimated liability are continually reviewed and updated. Changes in the estimated liability are reflected in operating income in the year in which such changes are determined. Each of Capsure's insurance subsidiaries employs prudent reserving approaches in establishing the estimated liability for unpaid loss and LAE due to the inherent difficulty and variability in the estimation process. In addition, Capsure utilizes independent actuarial firms of national standing to conduct periodic reviews of claim procedures and loss reserving practices, and annually obtains actuarial certification as to the reasonableness of actuarial assumptions used and the sufficiency of year-end reserves for each of its principal insurance subsidiaries. A table is included in both Management's Discussion and Analysis and Note 7 to the Consolidated Financial Statements which presents a reconciliation of beginning and ending consolidated loss reserve balances for the three years ended December 31, 1994. Such tables highlight the impact of favorable revisions to the estimated liability established in prior years. A reconciliation of the consolidated loss reserves reported in accordance with generally accepted accounting principles ("GAAP"), and the reserves reported to state insurance regulatory authorities in accordance with statutory accounting principles ("SAP") follows (dollars in thousands):
Years Ended December 31, --------------------------------------- 1994 1993 1992 ---------- ---------- ---------- (Restated) Reserves at end of year, GAAP basis . . . . . . . . . . . . . . . . . . $ 149,041 $ 135,825 $ 128,122 Estimated salvage and subrogation recoverable, not anticipated under SAP . . . . . . . . . . . . . . . . . . . . . 6,881 6,465 6,479 Estimated reinsurance recoverable netted against gross reserves for SAP . . . . . . . . . . . . . . . . . . . . . . . (38,606) (33,829) (30,977) ---------- ---------- ---------- Reserves at end of year, SAP basis . . . . . . . . . . . . . . . . . . $ 117,316 $ 108,461 $ 103,624 ========== ========== ==========
The following table presents the development under GAAP of combined balance sheet reserves for 1985 through 1994, including periods prior to Capsure's ownership. The top line of the table shows the combined reserves at the balance sheet date for each of the indicated periods. The amount of the reserves represents the estimated amount of losses and LAE arising in all prior years that are unpaid at the balance sheet date, including IBNR reserves. The upper portion of the table shows the reestimated amount of the previously recorded reserves based on experience as of the end of each succeeding year. The estimates change as more information becomes known about the frequency and severity of claims -13- 14 for individual periods. The cumulative redundancy (deficiency) represents the aggregate change in the estimates over all prior years. It should be noted that the table presents a "run off" of balance sheet reserves rather than accident or policy year loss development. Therefore, each amount in the table includes the effects of changes in reserves for all prior years (dollars in thousands):
AS OF DECEMBER 31, ------------------------------------------------------- 1994 1993 1992 1991 1990 -------- -------- -------- -------- -------- Reserves for unpaid losses and LAE . . . . . . $149,041 $138,347 $130,435 $130,596 $124,708 Reserves re-estimated as of: One year later . . . . . -- 122,657 113,941 120,481 126,544 Two years later . . . . . -- -- 100,088 103,560 115,759 Three years later . . . . -- -- -- 89,984 101,381 Four years later . . . . -- -- -- -- 90,377 Five years later . . . . -- -- -- -- -- Six years later . . . . . -- -- -- -- -- Seven years later . . . . -- -- -- -- -- Eight years later . . . . -- -- -- -- -- Nine years later . . . . . -- -- -- -- -- Cumulative redundancy (deficiency) . . . . . . . $ -- $ 15,690 $ 30,347 $ 40,612 $ 34,331 ======== ======= ======== ======== ======== Cumulative redundancy (deficiency) as a percentage of original estimate . . . -- 11.3% 23.3% 31.1% 27.5% ======== ======= ======== ======== ======== Cumulative amount of liability paid through: One year later . . . . . $ -- $ 19,084 $ 16,201 $ 21,280 $ 20,982 Two years later . . . . . -- -- 30,370 34,650 37,279 Three years later . . . . -- -- -- 44,610 47,676 Four years later . . . . -- -- -- -- 55,701 Five years later . . . . -- -- -- -- -- Six years later . . . . . -- -- -- -- -- Seven years later . . . . -- -- -- -- -- Eight years later . . . . -- -- -- -- -- Nine years later . . . . . -- -- -- -- -- AS OF DECEMBER 31, ------------------------------------------------ 1989 1988 1987 1986 1985 -------- ------- ------- ------- ------- Reserves for unpaid losses and LAE . . . . . . $116,565 $83,733 $63,537 $22,483 $14,906 Reserves re-estimated as of: One year later . . . . . 114,911 89,453 54,856 19,796 17,184 Two years later . . . . . 117,260 89,513 55,991 19,697 16,152 Three years later . . . . 107,322 89,728 54,011 18,352 15,950 Four years later . . . . 97,016 81,957 54,329 18,230 14,958 Five years later . . . . 89,067 75,375 47,991 17,072 15,362 Six years later . . . . . -- 70,944 46,629 16,825 14,813 Seven years later . . . . -- -- 43,991 17,057 15,181 Eight years later . . . . -- -- -- 16,742 16,092 Nine years later . . . . . -- -- -- -- 15,629 Cumulative redundancy (deficiency) . . . . . . . $ 27,498 $12,789 $19,546 $ 5,741 $ (723) ======== ======= ======= ======= ======= Cumulative redundancy (deficiency) as a percentag of original estimate . . . 23.6% 15.3% 30.8% 25.5% (4.9)% ======== ======= ======= ======= ======= Cumulative amount of liability paid through: One year later . . . . . $ 19,737 $15,787 $10,398 $ 5,379 $ 5,800 Two years later . . . . . 35,736 25,446 18,079 9,487 8,831 Three years later . . . . 48,580 37,387 23,232 11,916 10,905 Four years later . . . . 56,648 44,973 27,772 12,872 12,507 Five years later . . . . 63,911 49,070 32,905 13,687 12,983 Six years later . . . . . -- 55,183 34,281 15,129 13,479 Seven years later . . . . -- -- 36,841 15,406 14,750 Eight years later . . . . -- -- -- 15,874 14,898 Nine years later . . . . . -- -- -- -- 15,293
REGULATION Capsure's insurance subsidiaries are subject to varying degrees of regulation and supervision in the jurisdictions in which they transact business under statutes which delegate regulatory, supervisory and administrative powers to state insurance regulators. In general, an insurer's state of domicile has principal responsibility for such regulation which is designed generally to protect policyholders rather than investors and relates to matters such as the standards of solvency which must be maintained; the licensing of insurers and their agents; the examination of the affairs of insurance companies, including periodic financial and market conduct examinations; the filing of annual and other reports, prepared on a statutory basis, on the financial condition of insurers or for other purposes; establishment and maintenance of reserves for unearned premiums and losses; and requirements regarding numerous other matters. Licensed or admitted insurers generally must file with the insurance regulators of such states, or have filed on its behalf, the premium rates and bond and policy forms used within each state. In some states, approval of such rates and forms must be received from the insurance regulators in advance of their use. Western Surety is domiciled in South Dakota and licensed in all other states and the District of Columbia. Universal Surety is domiciled in Texas and licensed in 15 other states. United Capitol is domiciled in Wisconsin, licensed in Arizona and approved, or not disapproved, as a nonadmitted insurer in all other states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands. Nonadmitted insurers are generally permitted to operate with a greater degree of freedom from various regulations. In the future, it is likely that more extensive regulatory requirements or restrictions may be imposed upon nonadmitted insurers, which may increase operating costs associated with compliance. Insurance regulations generally also require registration and periodic disclosure of certain information concerning ownership, financial condition, capital structure, general business operations and any material transactions or agreements by or among affiliates. Such regulation also typically restricts the ability of any one person to acquire 10% or more, -14- 15 either directly or indirectly, of a company's stock without prior approval of the applicable insurance regulatory authority. In addition, dividends and other distributions to stockholders generally may be paid only out of unreserved and unrestricted statutory earned surplus. Such distributions may be subject to prior regulatory approval, including a review of the implication on Risk-Based Capital requirements. A discussion of Risk-Based Capital requirements for property/casualty insurance companies is included in both Management's Discussion and Analysis and Note 10 to the Consolidated Financial Statements. Without prior regulatory approval in 1995, Capsure's insurance subsidiaries may pay stockholder dividends of $19.3 million in the aggregate. In 1994, 1993 and 1992, Capsure received $21.0 million (including $5.0 million of dividends requiring prior approval), $11.8 million, and $29.0 million (including $15.1 million of dividends requiring prior approval), respectively, in dividends from its insurance subsidiaries. Capsure's insurance subsidiaries are subject to periodic financial and market conduct examinations. These examinations are generally performed by the domiciliary state insurance regulatory authorities. The South Dakota Department of Commerce and Regulation - Division of Insurance conducted its last triennial examination of Western Surety as of December 31, 1991. This examination covered both financial and market conduct procedures. The Texas Department of Insurance conducted its triennial examination of Universal Surety as of September 30, 1992. This examination included both financial and market conduct procedures. The Insurance Department of the State of Wisconsin conducted a financial examination of United Capitol as of December 31, 1992. There were no significant issues noted which required corrective action by any of Capsure's insurance companies. Certain states in which Capsure conducts its business require insurers to join a guaranty association. Guaranty associations provide protection to policyholders of insurers licensed in such states against the insolvency of those insurers. In order to provide the associations with funds to pay certain claims under policies issued by insolvent insurers, the guaranty associations charge members assessments based on the amount of direct premiums written in that state. To date, such assessments have not been material to Capsure's results of operations. Western Surety, United Capitol and Universal Surety each qualifies as an acceptable surety for federal and other public works project bonds pursuant to U.S. Department of Treasury regulations. The underwriting limitations of Western Surety, Universal Surety and United Capitol, based on each insurer's statutory surplus, are currently $3.5 million, $0.6 million and $6.7 million, respectively. Management believes that, going forward, regulation of its business will increase rather than decrease both on a federal and state level, thereby increasing the costs associated with compliance. INVESTMENTS Insurance company investment practices must comply with insurance laws and regulations and must also comply with certain covenants under Capsure's $135 million revolving credit facility. Generally, insurance laws and regulations prescribe the nature and quality of and set limits on the various types of investments which may be made by Capsure's insurance companies. Capsure's insurance companies invest funds provided by operations predominantly in high-quality, taxable, fixed income securities. Management believes that its investment strategy is conservative, with preservation of capital being the foremost objective. Its investment strategy is also influenced by the terms of the insurance coverages written, its expectations as to the timing of claim payments, debt service requirements, and tax considerations, in particular the existence of the Company's net operating tax loss carryforwards ("NOLs"), as described below. A separate investment committee of the Board of Directors of each insurance company establishes investment policy and oversees the management of each portfolio. A professional independent investment adviser is engaged to assist in the management of each company's investment portfolio pursuant to established investment committee guidelines. The insurance companies pay an advisory fee based on the net asset value of the assets under management. -15- 16 NET OPERATING TAX LOSS CARRYFORWARDS In July 1986, the Company emerged from voluntary bankruptcy proceedings under Chapter 11 of the United States Bankruptcy Code. Prior to its emergence, the Company was primarily involved in oil and gas exploration and development and providing supplies to the oil and gas industry. Due to a significant downturn in the oil and gas industry in the early 1980s, the Company generated significant losses and was unable to meet its obligations, resulting in its voluntary bankruptcy filing. Upon the emergence from bankruptcy, the Company had oil and gas interests and approximately $300 million in NOLs. Approximately $226 million of these NOLs are available at December 31, 1994 to reduce the Company's future federal taxable income. EMPLOYEES As of December 31, 1994, the Company employed approximately 600 persons. Since its emergence from bankruptcy in 1986, the Company has not experienced any work stoppages and believes its relations with its employees are good. The Company's current operations are in newly acquired businesses unrelated to its pre-1986 oil and gas operations. -16- 17 ITEM 2. PROPERTIES The Company subleases its executive offices for an annual rent of approximately $0.1 million from Equity Group Investments, Inc. ("EGI"), a company affiliated with certain directors, officers, and stockholders of the Company. The executive offices are located at Two North Riverside Plaza, Chicago, Illinois 60606. Western Surety leases office space for its executive offices at 101 South Phillips Avenue, Sioux Falls, South Dakota 57102, under a lease expiring in 2002. Western Surety's office space, consisting of approximately 81,600 square feet, is leased from a partnership in which Western Surety owns a 50% interest. The annual rent, which is subject to annual adjustments, was $1.5 million as of December 31, 1994. Western Surety also leases a 14,760 square foot branch office in Dallas, Texas. Annual rent for the branch office was $0.2 million and the lease expires in 1996. United Capitol leases office space for its executive offices at 1400 Lake Hearn Drive, Atlanta, Georgia 30319, under a lease terminating June 30, 1997 with an annual rent of $0.2 million. Universal Surety leases office space for its executive offices at 950 Echo Lane, Suite 250, Houston, Texas 77478, under a lease terminating October 31, 1997 with an annual rent of $0.1 million. Universal Surety also leases space for branch offices in Austin, Dallas and San Antonio, Texas and Overland Park, Kansas for an additional annual rent of approximately $0.1 million. ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries are parties to numerous 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. -17- 18 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock ("Common Stock") trades on the New York Stock Exchange under the symbol CSH. Prior to June 16, 1993, the stock traded on the over-the-counter market through NASDAQ under the symbol NUCO. Such over-the-counter market quotations reflected inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. On March 24, 1995, the last reported sale price for the Common Stock was $12.63 per share. The following table shows the range of high and low sales prices for shares of the Common Stock as reported on the New York Stock Exchange (or as reported on NASDAQ for the periods presented prior to June 16, 1993) for each calendar quarter from the first quarter of 1993 through the fourth quarter of 1994:
High Low ----- ----- 1994 4th Quarter . . . . . . . . . . . . . . . . . . . . . . . . . $14.75 $12.13 3rd Quarter . . . . . . . . . . . . . . . . . . . . . . . . . 15.38 12.25 2nd Quarter . . . . . . . . . . . . . . . . . . . . . . . . . 16.00 12.88 1st Quarter . . . . . . . . . . . . . . . . . . . . . . . . . 15.25 13.00 1993 4th Quarter . . . . . . . . . . . . . . . . . . . . . . . . . 17.25 12.75 3rd Quarter . . . . . . . . . . . . . . . . . . . . . . . . . 19.38 14.75 2nd Quarter . . . . . . . . . . . . . . . . . . . . . . . . . 15.38 13.25 1st Quarter . . . . . . . . . . . . . . . . . . . . . . . . . 15.63 12.25
The number of stockholders of record of Common Stock on March 24, 1995 was approximately 2,400. The Company has not paid dividends on its Common Stock and does not anticipate declaring any dividends on its Common Stock in the near future. The Company's intention is to utilize its available cash to fund acquisitions to meet its growth objectives. 18 19 ITEM 6. SELECTED FINANCIAL DATA The following financial information has been derived from the audited Consolidated Financial Statements and notes thereto which appear elsewhere in this or previously issued Annual Reports on Form 10-K and should be read in conjunction with such financial statements and related notes thereto. The Company acquired United Capitol in February 1990, Western Surety in August 1992 and Universal Surety in September 1994. The inclusion of the results of United Capitol, Western Surety and Universal Surety from their respective dates of acquisition affects the comparability of financial information. Such results are not necessarily indicative of future results. Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standard ("SFAS") No. 115. In 1993, the Company adopted SFAS No. 109 and No. 113 and has restated prior years' financial information. For a more detailed description of these transactions and their effects on the Company's financial data, see the audited Consolidated Financial Statements and related notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations appearing in this or previously issued Annual Reports on Form 10-K. The following information for the Company is as of and for the years ended December 31, 1994, 1993, 1992, 1991 and 1990 (amounts in thousands, except per share data):
Years Ended December 31, ----------------------------------------------------------------- 1994 1993 1992 1991 1990 ---------- ---------- ---------- --------- ---------- (Restated) (Restated) (Restated) Total revenues . . . . . . . . . . . . . . . . $ 112,662 $ 108,445 $ 59,519 $ 34,890 $ 39,034 ========== ========== ========== ========= ========== Gross written premiums . . . . . . . . . . . . $ 102,356 $ 100,775 $ 50,105 $ 23,144 $ 24,292 ========== ========== ========== ========= ========== Net written premiums . . . . . . . . . . . . . $ 90,578 $ 88,306 $ 40,310 $ 15,729 $ 17,571 ========== ========== ========== ========= ========== Net earned premiums . . . . . . . . . . . . . . $ 92,481 $ 86,029 $ 41,249 $ 15,826 $ 20,720 ========== ========== ========== ========= ========== Underwriting income . . . . . . . . . . . . . . $ 15,233 $ 15,224 $ 9,932 $ 2,484 $ 3,265 Net investment income . . . . . . . . . . . . 19,129 19,815 15,504 13,823 11,318 Net investment gains . . . . . . . . . . . . 945 2,071 380 1,119 257 Interest expense . . . . . . . . . . . . . . . (4,726) (6,280) (4,838) (4,998) (5,951) Write-off of unamortized deferred loan fees . . (1,556) -- -- -- -- Amortization of goodwill and intangibles . . . (3,365) (3,407) (1,592) (852) (2,035) Other (expenses) income . . . . . . . . . . . . (1,881) (1,905) (1,914) (868) 1,946 ---------- ---------- ---------- --------- ---------- Income before income taxes . . . . . . . . . . 23,779 25,518 17,472 10,708 8,800 Income taxes . . . . . . . . . . . . . . . . . 9,401 9,234 6,777 3,500 3,527 ---------- ---------- ---------- --------- ---------- Net income . . . . . . . . . . . . . . . . . . $ 14,378 $ 16,284 $ 10,695 $ 7,208 $ 5,273 ========== ========== ========== ========= ========== Weighted average common shares outstanding . . 15,160 15,036 12,214 10,606 10,420 ========== ========== ========== ========= ========== Earnings per common share . . . . . . . . . . . $ .95 $ 1.08 $ .88 $ .79 $ .62 ========== ========== ========== ========= ========== Book value per share . . . . . . . . . . . . . $ 14.61 $ 13.80 $ 12.25 $ 7.68 $ 6.25 ========== ========== ========== ========= ========== Loss ratio . . . . . . . . . . . . . . . . . . 25.2% 23.2% 25.8% 58.5% 59.3% Expense ratio . . . . . . . . . . . . . . . . . 58.3% 59.1% 50.1% 25.8% 24.9% ---------- ---------- ---------- --------- ---------- Combined ratio . . . . . . . . . . . . . . . . 83.5% 82.3% 75.9% 84.3% 84.2% ========== ========== ========== ========= ========== Invested assets and cash . . . . . . . . . . . $ 305,898 $ 317,077 $ 297,974 $ 163,027 $ 160,603 Intangible assets and goodwill, net of amortization . . . . . . . . . . . . . . . 102,130 85,566 94,006 22,842 23,694 Total assets . . . . . . . . . . . . . . . . . 553,370 530,075 507,574 226,536 217,583 Insurance reserves . . . . . . . . . . . . . . 225,671 205,188 194,357 112,745 108,085 Long-term debt . . . . . . . . . . . . . . . . 71,000 85,214 103,214 46,352 53,352 Total liabilities . . . . . . . . . . . . . . . 328,505 322,450 323,653 169,404 171,713 Stockholders' equity . . . . . . . . . . . . . 224,865 207,625 183,921 57,132 45,870
19 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following is a discussion and analysis of Capsure Holdings Corp. and its subsidiaries' ("Capsure" or the "Company") operating results, financial condition, liquidity and capital resources. This discussion should be read in conjunction with the consolidated financial statements and related notes thereto, which contain additional information regarding the Company's operating results and financial condition. On July 31, 1986, the Company emerged from voluntary bankruptcy proceedings under Chapter 11 of the United States Bankruptcy Code. As a result of operating losses from oil and gas operations prior to the Company's bankruptcy, the Company emerged from bankruptcy with approximately $300 million in net operating tax loss carryforwards ("NOLs"). Approximately $226 million of these NOLs are available at December 31, 1994 to reduce the Company's future federal taxable income. The Company believes that an analysis of results of operation and financial condition should include an analysis of the Company's ability to reduce its income tax payments through the utilization of NOLs. The Company's operations have been focused in the property and casualty insurance business since 1990. Capsure's principal property and casualty insurance entities are Western Surety Company ("Western Surety"), acquired in August 1992, United Capitol Insurance Company ("United Capitol"), acquired in February 1990, and Universal Surety of America ("Universal Surety"), acquired on September 22, 1994. Since 1987, soft market conditions characterized by intense competition on rate and contract terms have prevailed in the property and casualty insurance industry. The industry continues to be relatively well-capitalized and underleveraged on an operating basis which exerts continued pressure on rates and terms. Although the industry has sustained unprecedented losses from catastrophes in 1992 through 1994, as well as the adverse impact of rising interest rates in 1994, there has not been a meaningful improvement in market conditions. Due to the nature of its business, these market conditions have had little impact on Western Surety; however, United Capitol has been significantly affected by prevailing market conditions. United Capitol has responded to these difficult market conditions by maintaining a disciplined underwriting approach and electing to decline business that may result in unacceptable or inadequately compensated risk. Management believes prevailing market conditions are likely to persist for the near and possibly long-term. Capsure will continue to focus its resources in lines of business where it has or can acquire the requisite underwriting and business processing experience and for which consistent long-term underwriting profits can reasonably be expected. The September 22, 1994 acquisition of Universal Surety, as described below, is an example of this philosophy. Western Surety specializes in writing small fidelity and noncontract surety bonds, referred to as "miscellaneous" bonds, and errors and omissions ("E&O") liability insurance and is licensed to write fidelity, surety and casualty insurance in all 50 states and the District of Columbia. Western Surety is rated A+ (Superior) by A.M. Best Company, Inc. ("A.M. Best"). Bonds underwritten by Western Surety are relatively low-risk, low-premium products where prompt service, easy-to-use forms and availability of an extensive array of bond products are emphasized. One of the largest writers of miscellaneous bonds in the United States, Western Surety has experienced overall growth in gross written premiums since 1990 in spite of the soft market. This growth is attributable to its product specialization, underwriting expertise and broad distribution network as well as to legislatively mandated bond limit increases, and to bonding requirements legislated by various states and municipalities. Substantially all of Western Surety's bonds are mandated by various state statutes and local ordinances. Such factors have largely insulated Western Surety from the effects of prevailing market conditions in the broader commercial property and casualty insurance industry. Management believes, with respect to Western Surety's products, that the Company's results of operations will not be significantly affected by new miscellaneous bond requirements or by the repeal of any existing legislated bonding requirements. Universal Surety specializes in the underwriting of small contract and miscellaneous surety bonds. Universal Surety is rated A (Excellent) by A.M. Best and is licensed in 16 southern states with most of its business generated in Texas (75% of 1994 gross written premiums). Contract bonds underwritten by Universal Surety are primarily contractor performance and payment bonds in amounts under $3.0 million for which underwriting expertise and distinctive service to agents are emphasized. Universal Surety underwrites primarily standard accounts and some specialty accounts for 20 21 which it will utilize supplemental collateral arrangements and excess rates for contractors not qualified for standard surety rates. Universal Surety also reduces its exposure through participation in the Small Business Administration ("SBA") Surety Bond Guarantee Program. Under this program, the SBA will generally reimburse Universal Surety for 80% of losses and loss adjustment expenses incurred on any SBA guaranteed bond in exchange for 20% of the premium. Contract bonds are more affected by prevailing market and general economic conditions than noncontract bonds. Universal Surety's preacquisition financial results have been exceptional. Gross written premiums have grown from $5.1 million for the year ended December 31, 1990 to $15.3 million for the twelve months (including results prior to acquisition) ended December 31, 1994. A weighted average combined ratio below 80.0% was maintained over this same period. These results compare favorably to national contract surety bond insurers. Universal Surety's overall growth in gross written premiums and underwriting income during this period was attributable to its product specialization, underwriting expertise and the strong economy in its geographic region. Such growth was also characterized by measured expansion restricted by its ability to attract qualified underwriting and claims personnel and maintain distinctive service to its agents. The planned expansion of Universal Surety's small contract surety products through Western Surety's broad distribution network will be similarly controlled. However, there can be no assurance that Universal Surety's preacquisition results will be indicative of future operating results under the ownership and management of Capsure. United Capitol writes specialty property and casualty insurance primarily as an excess and surplus lines insurer. United Capitol is rated A (Excellent) by A.M. Best. United Capitol provides principally general liability insurance, including directors' and officers' liability ("D&O"), product liability and other liability coverages, to businesses which have hazardous, unique or unusual risks. Policies underwritten by United Capitol are relatively high-risk, high-premium products which require individual risk underwriting and pricing expertise. United Capitol has experienced significant declines in gross written premiums as it has adhered to its strategy of strict underwriting discipline and has declined to write what it believes to be underpriced business. RESULTS OF OPERATIONS The components of income for each of the past three years are summarized as follows (dollars in thousands):
Years Ended December 31, -------------------------------------------- 1994 1993 1992 ----------- ----------- ------------ Underwriting income . . . . . . . . . . . . . . . . $ 15,233 $ 15,224 $ 9,932 Net investment income . . . . . . . . . . . . . . . 19,129 19,815 15,504 Net investment gains . . . . . . . . . . . . . . . . 945 2,071 380 Interest expense . . . . . . . . . . . . . . . . . . (4,726) (6,280) (4,838) Write-off of unamortized deferred loan fees . . . . (1,556) -- -- Amortization of goodwill and intangibles . . . . . . (3,365) (3,407) (1,592) Other expenses . . . . . . . . . . . . . . . . . . . (1,881) (1,905) (1,914) ------------ ----------- ------------ Income before income taxes . . . . . . . . . . . . . 23,779 25,518 17,472 Income taxes . . . . . . . . . . . . . . . . . . . . 9,401 9,234 6,777 ------------ ----------- ------------ Net income . . . . . . . . . . . . . . . . . $ 14,378 $ 16,284 $ 10,695 ============ =========== ============
21 22 INSURANCE UNDERWRITING Underwriting results for the past three years are summarized in the following table (dollars in thousands):
Surety and Fidelity Excess and Surplus Lines Consolidated ------------------------------ ----------------------------- -------------------------------------- 1994 1993 1992 1994 1993 1992 1994 1993 1992 --------- --------- --------- --------- --------- --------- ------------ ----------- -------- Gross written premiums.. $ 75,324 $ 72,064 $ 23,039 $ 27,032 $ 28,711 $ 27,066 $ 102,356 $ 100,775 $ 50,105 ========= ======== ========= ======== ======== ========== ============ =========== ======== Net written premiums.... $ 73,527 $ 70,598 $ 22,670 $ 17,051 $ 17,708 $ 17,640 $ 90,578 $ 88,306 $ 40,310 ========== ========= ========= ======== ======== ========== ============ =========== ======== Net earned premiums..... $ 73,255 $ 67,941 $ 25,101 $ 19,226 $ 18,088 $ 16,148 $ 92,481 $ 86,029 $ 41,249 ---------- --------- --------- -------- -------- ---------- ------------ ---------- -------- Net losses and loss adjustment..... 11,592 11,367 3,651 11,752 8,590 7,010 23,344 19,957 10,661 Underwriting expenses... 49,583 46,933 17,346 4,321 3,915 3,310 53,904 50,848 20,656 ---------- --------- --------- -------- -------- ---------- ------------ ---------- -------- Total losses and expenses............. 61,175 58,300 20,997 16,073 12,505 10,320 77,248 70,805 31,317 ---------- --------- --------- -------- -------- ---------- ------------ ---------- -------- Underwriting income..... $ 12,080 $ 9,641 $ 4,104 $ 3,153 $ 5,583 $ 5,828 $ 15,233 $ 15,224 $ 9,932 ========== ========= ========= ======== ======== ========== ============ ========== ======== Loss ratio ............. 15.8% 16.7% 14.6% 61.1% 47.5% 43.4% 25.2% 23.2% 25.8% Expense ratio........... 67.7% 69.1% 69.1% 22.5% 21.6% 20.5% 58.3% 59.1% 50.1% ---------- --------- --------- -------- -------- ---------- ------------ ---------- -------- Combined ratio.......... 83.5% 85.8% 83.7% 83.6% 69.1% 63.9% 83.5% 82.3% 75.9% ========== ========= ========= ======== ======== ========== ============ ========== ========
Surety and fidelity represents the combined results of Western Surety, since its acquisition in August 1992, and Universal Surety, since its September 22, 1994 acquisition. Surety and fidelity are the principal lines of business of Western Surety and Universal Surety. Excess and surplus lines represents the results of United Capitol. United Capitol's principal lines of business are other liability, product liability and commercial property primarily written on an excess and surplus lines basis. Gross written premiums increased $1.6 million for the year ended December 31, 1994. Western Surety experienced a 1.1% decrease in gross written premiums, mainly due to a decline in public official bond premiums as compared to 1993. This decline, which was expected, was caused by the cyclical nature of these bonds. Writings for this product typically increase every other year, following the November elections. Universal Surety contributed $4.0 million of gross written premiums since its acquisition in September 1994. United Capitol's gross written premiums decreased 5.8%, or $1.7 million in 1994. Significant declines in the asbestos abatement and other primary casualty business were partially offset by the addition of $5.7 million in gross written premiums of D&O business produced by the Company's Fischer Underwriting Group, Incorporated ("Fischer") which was acquired in November 1993 by a subsidiary of United Capitol. United Capitol's premium volume, particularly in the increasingly competitive asbestos abatement line, continued to be significantly affected by prolonged soft market conditions. Net earned premiums increased $6.5 million for the year ended December 31, 1994. Western Surety's net earned premiums increased 1.9% in 1994 compared to 1993. Universal Surety contributed net earned premiums of $4.0 million in 1994. United Capitol's net earned premiums increased 6.3%, or $1.1 million in 1994, primarily as a result of the recognition of $2.5 million of contingent reinsurance premiums related to an excess of loss reinsurance treaty. Excluding the recognition of the contingent premiums, net earned premiums decreased 7.5% at United Capitol. Gross written premiums increased $50.7 million for the year ended December 31, 1993, principally due to the inclusion of Western Surety results for a full year. United Capitol's gross written premiums increased $1.6 million, or 6.1%, primarily due to increases in the property and non-asbestos general liability insurance lines of business combined with the addition of D&O insurance more than offsetting the decline in the asbestos abatement liability business. Net earned premiums increased $44.8 million for the year ended December 31, 1993, primarily due to the inclusion of a full year of operating results of Western Surety. United Capitol's net earned premiums increased 12.0%, or $1.9 million in 1993, reflecting the increase in net written premiums in prior years. Underwriting income for the year ended December 31, 1994 was virtually unchanged as compared to the prior year despite increased net earned premiums. The consolidated combined ratio increased to 83.5% in 1994 from 82.3% in 1993. The consolidated loss ratio increased to 25.2% in 1994 from 23.2% in 1993, reflecting less favorable development of prior years' loss reserves at United Capitol than was experienced in 1993. United Capitol's loss ratio increased to 61.1% in 1994 from 47.5% in 1993. Excluding the effects of favorable development, United Capitol would have reported loss ratios of 98.3% and 110.3% in 1994 and 1993, respectively. The surety and fidelity loss ratio decreased to 15.8% in 1994 from 16.7% in 1993, primarily due to favorable development of prior years' loss reserves and increased salvage recoveries at Western Surety. 22 23 The consolidated expense ratio decreased to 58.3% in 1994, compared to 59.1% in 1993. The surety and fidelity expense ratio decreased to 67.7% in 1994 from 69.1% in 1993. Net commissions, brokerage and other underwriting expenses incurred at Western Surety were effectively controlled during 1994, offsetting increased costs associated with enhancing Western Surety's computer systems. United Capitol's expense ratio increased to 22.5% in 1994 compared to 21.6% in 1993. Underwriting income for the year ended December 31, 1993 increased $5.3 million as compared to the prior year, principally due to the inclusion of Western Surety results for a full year. The consolidated combined ratio increased to 82.3% in 1993 from 75.9% in 1992. The consolidated loss ratio decreased to 23.2% in 1993 from 25.8% in 1992, largely due to the inclusion of Western Surety for a full year partially offset by increased losses at United Capitol. The surety and fidelity loss ratio increased to 16.7% in 1993 from 14.6% in 1992, mainly due to increased losses on certain motor vehicle dealer bonds. United Capitol's loss ratio increased to 47.5% in 1993 from 43.4% in 1992, reflecting the impact of competitive market conditions. Excluding the effects of favorable development, United Capitol would have reported loss ratios of 110.3% and 86.2% in 1993 and 1992, respectively. The consolidated expense ratio increased to 59.1% in 1993 from 50.1% in 1992, reflecting the inclusion of full year results of operations for Western Surety. The surety and fidelity expense ratio was 69.1% in both 1993 and 1992. United Capitol's expense ratio increased slightly to 21.6% in 1993 from 20.5% in 1992. INVESTMENT INCOME Net investment income for the years ended December 31, 1994, 1993 and 1992 was $19.1 million, $19.8 million and $15.5 million, respectively. Investment results for each year were negatively impacted by declining interest rates through the end of 1993. The $4.3 million increase in net investment income in 1993 over 1992 reflects the inclusion of a full year of Western Surety's investing activity which more than offset the impact of declining investment yields. The average pretax yields of the portfolio for the years ended December 31, 1994, 1993 and 1992 were 6.5%, 6.8% and 7.6%, respectively. Capsure's insurance companies invest funds provided by operations predominantly in high-quality, short-duration, taxable fixed income securities. Beginning in 1994, the Investment Committees of the Board of Directors of the Company and its insurance subsidiaries have approved the investment of up to $26 million in the aggregate by the insurance subsidiaries and at the parent company level in publicly traded nonaffiliated real estate investment trust ("REIT") equity securities. At December 31, 1994, the carrying value of the Company's REIT portfolio was approximately $24.3 million. The preservation of capital and utilization of the Company's available NOLs are Capsure's principal investment objectives. ANALYSIS OF OTHER OPERATIONS Net investment gains were $0.9 million, $2.1 million and $0.4 million for the years ended December 31, 1994, 1993 and 1992, respectively. Net investment gains of $1.9 million in 1994 and $3.1 million in 1993 resulted from the sale of equity securities in the investment portfolio at the parent company level which more than offset net investment losses of $0.4 million and $1.0 million, respectively, from the insurance operations. There were no parent company level net investment gains recognized in 1992. Included in 1994 net investment gains were $0.5 million of net unrealized investment losses on the trading securities portfolio held at the parent company level. The net investment losses from the insurance operations in 1993 were primarily due to a $2.5 million write-down to fair value of two interest-only securities reflecting lower future expected cash flows of these securities as a result of an accelerated level of mortgage prepayments, partially offset by $1.5 million of net investment gains from the sale of other securities. Amortization expense was $3.4 million for the years ended December 31, 1994 and 1993 and $1.6 million in 1992. Amortization expense in 1994, 1993 and 1992 included $1.3 million, $1.8 million and $0.6 million, respectively, of amortization of intangible assets and $2.1 million, $1.6 million and $1.0 million, respectively, of amortization of excess cost over net assets acquired related to the acquisitions of Western Surety, Universal Surety, United Capitol and Fischer. Excess cost over net assets acquired is amortized substantially over 40 years. Other intangible assets are amortized over periods ranging from three to 20 years. Interest expense decreased 24.7%, or $1.6 million for the year ended December 31, 1994, reflecting the effect of reduced debt. The Company's average debt outstanding for the twelve months ended December 31, 1994 was approximately $74.0 million compared to $96.0 million in 1993. In connection with the early retirement of the Company's bank term loans, the Company incurred a $1.6 million write-off of unamortized deferred loan fees in the year ended December 31, 1994. Interest expense increased 29.8%, or $1.4 million for the year ended December 31, 1993. The increase was attributable to increased borrowings in connection with the acquisition of Western Surety which more than offset the effects of lower average interest rates. INCOME TAXES Income taxes were $9.4 million, $9.2 million and $6.8 million for the years ended December 31, 1994, 1993 and 1992, respectively. The effective income tax rates were 39.5%, 36.2% and 38.8%, respectively. The increase in the 1994 effective tax rate over prior years was attributable to an increased level of nondeductible goodwill amortization in connection with the acquisitions of Universal Surety and Fischer as well as certain delayed provisions of the Revenue Reconciliation Act of 1993. The Company's income tax expense does not approximate 23 24 actual taxes paid, primarily due to the utilization of the Company's NOLs. Actual income taxes paid were $0.6 million for the years ended December 31, 1994 and 1993, respectively, and $0.7 million for the year ended December 31, 1992. LIQUIDITY AND CAPITAL RESOURCES The Company's insurance subsidiaries are highly liquid. The insurance operations derive liquidity from net premium collections, reinsurance recoveries and investment earnings and use these funds to pay claims and operating expenses. The operations of an insurance company generally result in cash being collected from customers in the form of premiums in advance of cash outlays for claims. Each insurance company invests its collected premiums, generating investment income, until such time cash is needed to pay claims and associated expenses. The Company believes 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 anticipated income tax sharing payments of its insurance operations. Management believes the duration of each insurance subsidiary's portfolio is properly matched with the expected duration of its liabilities. At December 31, 1994, the carrying value of the Company's invested assets of the insurance operations was comprised of $246.6 million of fixed maturities (at fair value), $20.6 million of equity securities, $17.5 million of short-term investments, $4.1 million of other investments and $3.8 million of cash. At December 31, 1993, the carrying value of the Company's invested assets of the insurance operations was comprised of $229.5 million of fixed maturities (at amortized cost), $48.4 million of short-term investments, $5.5 million of other investments and $2.2 million of cash and $0.8 million of equity securities. 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 and pay operating expenses. At December 31, 1994, the carrying value of the Company's invested assets of the non-insurance operations, principally at the parent company level, was comprised of $7.6 million of equity securities, $4.6 million of short-term investments, $0.8 million of other investments and $0.3 million of cash. At December 31, 1993, the carrying value of the Company's non-insurance operations invested assets, principally at the parent company level, was comprised of $20.8 million of short-term investments, $8.7 million of equity securities and $1.1 million of cash. The Company's consolidated net cash flow provided by operating activities was $29.3 million, $32.1 million and $18.7 million for the years ended December 31, 1994, 1993 and 1992, respectively. Consolidated operating cash flow (pretax income excluding the write-off of deferred loan fees, net investment gains and amortization of goodwill and intangibles) for the year ended December 31, 1994, was $27.8 million as compared to $26.9 million in 1993 and $18.7 million in 1992. On March 29, 1994, the Company formed a direct, wholly owned subsidiary, Capsure Financial Group, Inc. ("CFG"), to which Capsure contributed substantially all its assets and liabilities. Concurrently, CFG entered into a senior reducing revolving credit agreement with a syndicate of banks for $135 million (the "Credit Facility"). At closing, $68 million of funds drawn under the Credit Facility, together with a portion of the Company's cash, were used to repay $84.6 million of previously existing bank term debt. Paydowns of $25 million and borrowings of $28 million for the acquisition of Universal Surety have occurred since then. The remaining availability under the Credit Facility of $64 million may be used to finance future acquisitions and for general corporate purposes. Principal and interest payments required under the Credit Facility are funded principally by dividend and intercompany tax sharing payments received from Capsure's insurance subsidiaries. Capsure's insurance subsidiaries are subject to regulation and supervision by the various state insurance regulatory authorities in which they conduct business, including regulations with respect to the payment of dividends. Without prior regulatory approval in 1995, Capsure's insurance subsidiaries may pay stockholder dividends of $19.3 million in the aggregate. In 1994, 1993 and 1992 Capsure received $21.0 million (including $5.0 million of dividends requiring prior approval), $11.8 million, and $29.0 million (including $15.1 million of dividends requiring prior approval), respectively, in dividends from its insurance subsidiaries. Intercompany tax sharing agreements between Capsure and its subsidiaries provide that income taxes shall be allocated based upon separate return calculations in accordance with the Internal Revenue Code of 1986, as amended. Intercompany tax payments are remitted at such times as estimated tax payments would be required to be made to the Internal Revenue Service. Capsure received tax sharing payments from its subsidiaries of $12.3 million, $13.0 million and $9.0 million in 1994, 1993 and 1992, respectively. On September 22, 1994, Capsure, through its wholly owned subsidiary, CFG, acquired all of the outstanding common stock of Universal Surety Holding Corp. ("USHC"). USHC is the holding company of Universal Surety. Capsure paid $28 million in cash and $4 million in Capsure stock for USHC, pursuant to a Stock Purchase Agreement dated as of July 26, 1994. The cash portion of the purchase price was financed with borrowings under Capsure's $135 million Credit Facility. 24 25 The Company continues to pursue acquisitions of financial services businesses with a particular focus on the insurance industry. Although the emphasis is on financial services and insurance, the Company may consider other investments that would further enhance the Company's value. FINANCIAL CONDITION A significant factor affecting the Company's financial condition is the Company's policy with respect to investing insurance-related funds. The Company's policy is to invest a substantial portion of such funds in high-quality, short-duration mortgage pass-through instruments, collateralized mortgage obligations ("CMOs") and other asset-backed securities. CMOs differ from traditional fixed maturities in that they may expose the investor to yield variability and even principal risk due to such factors as high mortgage prepayment rates and defaults and delinquencies in the underlying asset pool. Management believes it has reduced prepayment variability by investing only in short tranches and by owning a substantial amount of planned amortization class ("PAC") tranches which are structured largely to insulate the investor from prepayment risk. A PAC tranche is structured to amortize in a predictable manner and, therefore, the risk of prepayment of the underlying collateral is shifted to other tranches, whose owners are willing to accept such risk. Further, management believes it has minimized credit risk primarily by purchasing only securities rated A or better on the date of acquisition and which are collateralized or guaranteed by U.S. Government agencies or have substantial credit enhancement in the form of financial guarantees, mortgage insurance, letters of credit, over- collateralization, subordinated structures and excess servicing spreads. Management monitors the investment portfolio of the insurance subsidiaries and the current rating of each security owned on a monthly basis. Beginning in 1994, the Investment Committees of the Board of Directors of the Company and its insurance subsidiaries have approved the investment of up to $26 million in the aggregate by the insurance subsidiaries and at the parent company level in publicly traded nonaffiliated REIT equity securities. At December 31, 1994, the carrying value of the Company's REIT portfolio was approximately $24.3 million. The following table sets forth the composition by ratings assigned by The Standard & Poors Corporation ("S&P") or Moody's Investor Services, Inc. ("Moody's") of the fixed income portfolio of the Company as of December 31, 1994 (dollars in thousands):
Amortized Cost Percent ----------- ------- Credit Rating ------------- AAA/Aaa . . . . . . . . . . . . . . . . . . . $ 227,751 87.5% AA/Aa . . . . . . . . . . . . . . . . . . . . 9,291 3.6 A/A . . . . . . . . . . . . . . . . . . . . . 18,666 7.2 BBB/Baa or lower . . . . . . . . . . . . . . . 4,514 1.7 Not rated . . . . . . . . . . . . . . . . . . 74 -- ------------ ------- Total . . . . . . . . . . . . . . . . . $ 260,296 100.0% ============ =======
Another critical factor affecting the Company's financial condition is the Company's policies with respect to loss and loss adjustment expense reserves. Each of Capsure's insurance subsidiaries employs prudent reserving approaches in establishing the estimated liability for unpaid loss and loss adjustment expenses due to the inherent difficulty and variability in the estimation process. The liability for unpaid losses and loss adjustment expenses is based on estimates of (a) the ultimate settlement value of reported claims, (b) incurred but not reported ("IBNR") claims, (c) future expenses to be incurred in the settlement of claims and (d) claim recoveries. The liability for unpaid losses and loss adjustment expenses is an accounting estimate and, similar to other accounting estimates, there is the potential that actual future loss payments will differ from the initial estimate. The methods of determining such estimates and the resulting estimated liability are continually reviewed and updated. Changes in the estimated liability are reflected in operating income in the year in which such changes are determined. The following table presents selected loss and loss adjustment expense information (gross of reinsurance) and highlights the impact of revisions to the estimated liability established in prior years (dollars in thousands):
1994 1993 1992 ----------- ----------- ------------ Gross balance at January 1 . . . . . . . . . . . . . $ 135,825 $ 128,122 $ 101,542 Balance at date of acquisition . . . . . . . . . . . 2,738 -- 28,516 Incurred related to: Current year . . . . . . . . . . . . . . . . . . . . 46,206 41,398 24,428 Prior years . . . . . . . . . . . . . . . . . . . . (14,522) (14,991) (9,862) ----------- ----------- ------------ Total incurred . . . . . . . . . . . . . . . . . . . 31,684 26,407 14,566 ----------- ----------- ------------ Paid related to: Current year . . . . . . . . . . . . . . . . . . . . 3,003 2,266 1,665 Prior years . . . . . . . . . . . . . . . . . . . . 18,203 16,438 14,837 ----------- ----------- ------------ Total paid . . . . . . . . . . . . . . . . . . . . . 21,206 18,704 16,502 ----------- ----------- ------------ Gross balance at December 31 . . . . . . . . . . . . $ 149,041 $ 135,825 $ 128,122 =========== =========== ============
25 26 As a result of favorable claim settlements and changes in estimates of insured events in prior years, the provision for losses and loss adjustment expenses decreased by $14.5 million ($8.3 million, net of reinsurance) in 1994, $15.0 million ($11.3 million, net of reinsurance) in 1993 and $9.9 million ($7.5 million, net of reinsurance) in 1992. The National Association of Insurance Commissioners ("NAIC") has promulgated Risk-Based Capital ("RBC") requirements for property/casualty insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks such as asset quality, asset and liability matching, loss reserve adequacy, and other business factors. The RBC information will be used by state insurance regulators as an early warning tool to identify, for the purpose of initiating regulatory action, insurance companies that potentially are inadequately capitalized. In addition, the formula defines new minimum capital standards that will supplement the current system of fixed minimum capital and surplus requirements on a state-by-state basis. Regulatory compliance is determined by a ratio (the "Ratio") of the enterprise's regulatory total adjusted capital, as defined by the NAIC, to its authorized control level RBC, as defined by the NAIC. Generally, a Ratio in excess of 200% of authorized control level RBC requires no corrective actions on the behalf of the company or regulators. As of December 31, 1994, each of Capsure's insurance subsidiaries had a Ratio that was substantially in excess of the minimum RBC requirements. Capsure's insurance subsidiaries require capital to support premium writings. In accordance with industry and regulatory guidelines, the net written premiums to surplus ratio of a property and casualty insurer should not exceed 3 to 1 (the terms of the Credit Facility limit this ratio further to 2.75 to 1 for Western Surety and Universal Surety and 2 to 1 for United Capitol). On December 31, 1994, Western Surety's statutory surplus was $37.1 million and its net written premiums to surplus ratio was 2 to 1. On December 31, 1994, Universal Surety's statutory surplus was $7.6 million and its net written premiums to surplus ratio was 1.9 to 1. On December 31, 1994, United Capitol's statutory surplus was $61.8 million and its net written premiums to surplus ratio was 0.3 to 1. The Company believes that each insurance company's statutory surplus is sufficient to support its current and anticipated premium levels. The Internal Revenue Service has not examined the Company's tax returns for the years in which the Company reported net operating losses. Under Section 382 of the Internal Revenue Code, certain restrictions on the utilization of NOLs will apply if there is an ownership change of a corporation entitled to use such carryovers. The Company believes that there is currently no restriction on the ability of the Company to utilize its NOLs. It is possible that future transactions involving the common stock or rights to acquire such stock could cause an ownership change of the Company resulting in restrictions of the Company's ability to utilize the NOLs during all taxable periods after the date of such ownership change. The Company has adopted provisions in its Certificate of Incorporation designed to facilitate the Company's ability to preserve and utilize its NOLs. ENVIRONMENTAL LIABILITIES The Company was engaged in oil and gas production, exploration and development until mid-1993. In connection with the sale of substantially all of the Company's oil and gas properties, the buyers assumed all material environmental liabilities. United Capitol, in the ordinary course of business, chooses to underwrite accounts which have hazardous, unique or unusual risk characteristics and applies a strict and specialized underwriting discipline to such risks. Since United Capitol's organization in 1986, its liability policies have included an absolute pollution coverage exclusion (except for policies offering pollution liability coverage to contractors involved in the remediation of preexisting pollution). In addition, except as discussed below, United Capitol's product liability and other primary general liability policies contain exclusions, which management believes are enforceable, for coverage of claims for bodily injury or property damage caused by exposure to asbestos. United Capitol provides coverage to asbestos abatement contractors against third parties who have alleged bodily injury or property damage as a result of exposure to asbestos. Employees of the insured contractor and others required to be in the abatement area are not intended to be covered by United Capitol's policies and management believes such coverage exclusions are enforceable. Through the date hereof, there have been no valid claims against United Capitol's asbestos abatement liability policies alleging bodily injury arising from exposure to asbestos. Management believes that none of the other insurance products offered by Capsure's insurance subsidiaries creates any potential material environmental exposure. Management believes that Capsure is adequately reserved for risks associated with environmental liabilities although there can be no assurance that legal or other developments will not increase the Company's exposure to environmental liabilities. IMPACT OF ADOPTING STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS ("SFAS") As discussed in Note 2 to the consolidated financial statements, the Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" effective January 1, 1994 and SFAS No. 109, "Accounting for Income Taxes" and SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-duration and Long-duration Contracts" effective January 1, 1993. 26 27 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page ---- FINANCIAL: Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Consolidated Balance Sheets as of December 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Consolidated Statements of Income for the Years Ended December 31, 1994, 1993 and 1992 (Restated) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1994, 1993 and 1992 (Restated) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1993 and 1992 (Restated) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 FINANCIAL STATEMENT SCHEDULES: Schedule I -- Summary of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Schedule III -- Condensed Financial Information of Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Schedule V -- Supplemental Insurance Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Schedule VI -- Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Schedule VIII -- Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Schedule X -- Supplemental Information Concerning Property - Casualty Insurance Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
All other schedules and historical information are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto. 27 28 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 28 29 PART III ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT, EXECUTIVE COMPENSATION, SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company will file a definitive proxy statement with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 (the "Proxy Statement") relating to the Company's Annual Meeting of Stockholders to be held on May 24, 1995, not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. Information required by Items 10 through 13 will appear in the Proxy Statement and is incorporated herein by reference. 29 30 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Page ---- (a)(1) Financial: Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Consolidated Balance Sheets as of December 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Consolidated Statements of Income for the Years Ended December 31, 1994, 1993 and 1992 (Restated) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1994, 1993 and 1992 (Restated) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1993 and 1992 (Restated) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 (a)(2) Financial Statement Schedules: Schedule I -- Summary of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Schedule III -- Condensed Financial Information of Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Schedule V -- Supplemental Insurance Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Schedule VI -- Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Schedule VIII - Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Schedule X -- Supplemental Information Concerning Property - Casualty Insurance Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
All other schedules and historical information are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto. (a)(3) Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 (b) Reports on Form 8-K Report on Form 8-K dated October 6, 1994, announcing the acquisition of Universal Surety Holding Corp. including its subsidiary, Universal Surety of America, by Capsure Financial Group, Inc., a wholly owned subsidiary of Capsure Holdings Corp. Report on Form 8-K/A dated October 17, 1994, submitting financial statements of Universal Surety Holding Corp. and Subsidiaries including Audited Consolidated Financial Statements as of December 31, 1993 and 1992 and Unaudited Interim Condensed Consolidated Financial Statements as of June 30, 1994. Report on Form 8-K/A-1 dated November 10, 1994, submitting financial statements of Capsure Holdings Corp. and Subsidiaries including Unaudited Pro Forma Condensed Consolidated Statements of Income for the Year Ended December 31, 1993 and Six Months Ended June 30, 1994, Balance Sheet as of June 30, 1994 and the Notes thereto.
30 31 REPORT OF INDEPENDENT ACCOUNTANTS We have audited the accompanying consolidated financial statements and financial statement schedules of Capsure Holdings Corp. and Subsidiaries listed in the index on page 27 of this Form 10-K. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Capsure Holdings Corp. and Subsidiaries as of December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relations to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. As discussed in Note 2 to the Consolidated Financial Statements, the Company has changed its methods of accounting for investments in 1994, and income taxes and reinsurance in 1993. COOPERS & LYBRAND L.L.P. Chicago, Illinois February 24, 1995 31 32 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
December 31, --------------------------- 1994 1993 ----------- ------------ ASSETS Invested assets and cash: Fixed maturities: At fair value (amortized cost: $249,328) . . . . . . . . . . . . . . . . . . . . $ 235,625 $ -- At amortized cost (fair value: 1994 - $10,326; 1993 - $234,675) . . . . . . . . . 10,968 229,501 Equity securities, at fair value (cost: 1994 - $29,774; 1993 - $7,426) . . . . . . . . 28,205 9,533 Short-term investments, at cost which approximates fair value . . . . . . . . . . . . 22,079 69,215 Other investments, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,890 5,548 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,131 3,280 ----------- ------------ 305,898 317,077 Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,150 18,421 Reinsurance receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,582 34,780 Intangible assets, net of amortization . . . . . . . . . . . . . . . . . . . . . . . . . 18,031 21,907 Excess cost over net assets acquired, net of amortization . . . . . . . . . . . . . . . . 84,099 63,659 Deferred income taxes, net of valuation allowance . . . . . . . . . . . . . . . . . . . . 54,205 48,350 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,405 25,881 ----------- ------------ $ 553,370 $ 530,075 =========== ============ LIABILITIES Reserves: Unpaid losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . . . $ 149,041 $ 135,825 Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,630 69,363 ----------- ------------ 225,671 205,188 Reinsurance payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,373 6,139 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71,000 85,214 Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,461 25,909 ----------- ------------ Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 328,505 322,450 ----------- ------------ Commitments and contingencies STOCKHOLDERS' EQUITY Preferred stock, par value $.01 per share, 5,000,000 shares authorized; none issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- Common stock, par value $.05 per share, 20,000,000 shares authorized; 15,407,815 shares issued at December 31, 1994; 15,055,231 shares issued at December 31, 1993 . . . . . . . . . . . . . . . . . . . . 770 753 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179,250 165,257 Retained earnings from August 1, 1986 (date of reorganization) . . . . . . . . . . . . . 54,756 40,378 Unrealized (loss) gain on securities, net of deferred income taxes . . . . . . . . . . . (9,830) 1,318 Treasury stock, at cost (13,666 shares in 1994 and 1993) . . . . . . . . . . . . . . . . (81) (81) ----------- ----------- Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . 224,865 207,625 ----------- ------------ $ 553,370 $ 530,075 =========== ============
The accompanying notes are an integral part of these financial statements. -32- 33 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended December 31, ----------------------------------------- 1994 1993 1992 ----------- ----------- ----------- (Restated) Revenues: Net earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . $ 92,481 $ 86,029 $ 41,249 Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . 19,129 19,815 15,504 Net investment gains . . . . . . . . . . . . . . . . . . . . . . . . . . 945 2,071 380 Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 530 2,386 ----------- ----------- ----------- 112,662 108,445 59,519 ----------- ----------- ----------- Expenses: Net losses and loss adjustment expenses . . . . . . . . . . . . . . . . 23,344 19,957 10,661 Net commissions, brokerage and other underwriting . . . . . . . . . . . 53,904 50,848 20,656 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,726 6,280 4,838 Write-off of unamortized deferred loan fees . . . . . . . . . . . . . . 1,556 -- -- Amortization of goodwill and intangibles . . . . . . . . . . . . . . . . 3,365 3,407 1,592 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,988 2,435 4,300 ----------- ----------- ----------- 88,883 82,927 42,047 ----------- ----------- ----------- Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . 23,779 25,518 17,472 Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,401 9,234 6,777 ----------- ----------- ----------- Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,378 $ 16,284 $ 10,695 =========== =========== =========== Weighted average common and common equivalent shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,160 15,036 11,733 =========== =========== =========== Weighted average common and common equivalent shares outstanding - assuming full dilution . . . . . . . . . . . . . . . . . . 15,160 15,036 12,214 =========== =========== =========== Earnings per common and common equivalent share . . . . . . . . . . . . . . $ .95 $ 1.08 $ .91 =========== =========== =========== Earnings per common share - assuming full dilution . . . . . . . . . . . . $ .95 $ 1.08 $ .88 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. -33- 34 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Years Ended December 31, ------------------------------------------- 1994 1993 1992 ------------- ------------ ------------ (Restated) Common Stock: Balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . $ 753 $ 753 $ 374 Common stock issued . . . . . . . . . . . . . . . . . . . . . . . . 15 -- 176 Common stock issued through exercise of warrants and options . . . 2 -- 203 ------------- ------------ ------------- Balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . $ 770 $ 753 $ 753 ============= ============ ============= Additional Paid-In Capital: Balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . $ 165,257 $ 159,263 $ 43,543 Common stock issued . . . . . . . . . . . . . . . . . . . . . . . . 3,985 -- 29,638 Common stock issued through exercise of warrants and options . . . 8 47 26,750 Repurchase of outstanding warrants . . . . . . . . . . . . . . . . -- (42) -- Recognition of deferred tax asset, net of valuation allowance . . . 10,000 6,000 60,160 Deferred issuance and offering costs . . . . . . . . . . . . . . . -- (11) (828) ------------- ------------ ------------- Balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . $ 179,250 $ 165,257 $ 159,263 ============= ============ ============= Retained Earnings: Balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . $ 40,378 $ 24,094 $ 13,399 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,378 16,284 10,695 ------------- ------------ ------------- Balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . $ 54,756 $ 40,378 $ 24,094 ============= ============ ============= Unrealized (Loss) Gain on Securities, Net of Deferred Income Taxes: Balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . $ 1,318 $ 32 $ 51 Impact of adopting SFAS No. 115 . . . . . . . . . . . . . . . . . . 3,203 -- -- Change for the year . . . . . . . . . . . . . . . . . . . . . . . . (14,351) 1,286 (19) ------------ ------------ ------------- Balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . $ (9,830) $ 1,318 $ 32 ============= ============ ============= Treasury Stock: Balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . $ (81) $ (221) $ (235) Common stock reissued through exercise of warrants and options . . -- 140 14 ------------- ------------ ------------- Balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . $ (81) $ (81) $ (221) ============= ============ =============
Common Stock ------------------------------ Issued In Treasury ------------- ------------ Shares: Balance, January 1, 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,480,338 (39,751) Common stock issued through exercise of warrants and options . . . . . . . . . . 4,056,064 -- Common stock issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,407,719 -- Common stock issued in connection with Surewest Financial Corp. acquisition . . . 111,110 -- Common stock reissued from treasury through exercise of warrants and options . . -- 2,250 ------------- ------------- Balance, December 31, 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,055,231 (37,501) Common stock reissued from treasury through exercise of warrants and options . . -- 23,835 ------------- ------------- Balance, December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,055,231 (13,666) Common stock issued through exercise of warrants and options . . . . . . . . . . 45,481 -- Common stock issued in connection with Universal Surety Holding Corp. acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . 307,103 -- ------------- ------------- Balance, December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,407,815 (13,666) ============= =============
The accompanying notes are an integral part of these financial statements. -34- 35 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
Years Ended December 31, ----------------------------------------- 1994 1993 1992 ----------- ----------- ------------ OPERATING ACTIVITIES: (Restated) Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,378 $ 16,284 $ 10,695 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 4,617 4,476 2,009 Accretion of bond discount, net . . . . . . . . . . . . . . . . . . . . . (3,933) (3,024) (1,785) Net investment gains . . . . . . . . . . . . . . . . . . . . . . . . . . (945) (2,071) (380) Gain on sale of oil and gas assets, net . . . . . . . . . . . . . . . . . -- (258) (243) Changes in: Reserve for unpaid losses and loss adjustment expenses . . . . . . . . . 10,477 7,703 (2,439) Reserve for unearned premiums . . . . . . . . . . . . . . . . . . . . . . (1,160) 3,128 484 Deferred income taxes, net . . . . . . . . . . . . . . . . . . . . . . . 3,412 9,184 9,800 Other assets and liabilities . . . . . . . . . . . . . . . . . . . . . . 2,438 (3,309) 561 ----------- ----------- ------------ Net cash provided by operating activities . . . . . . . . . . . . . . . . . . 29,284 32,113 18,702 ----------- ----------- ------------ INVESTING ACTIVITIES: Securities available-for-sale: Purchases - fixed maturities . . . . . . . . . . . . . . . . . . . . . . (92,342) (181,486) (124,215) Sales - fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . 43,762 17,503 44,265 Maturities - fixed maturities . . . . . . . . . . . . . . . . . . . . . . 35,020 126,781 61,197 Purchases - equity securities . . . . . . . . . . . . . . . . . . . . . . (28,350) (534) (10,673) Sales - equity securities . . . . . . . . . . . . . . . . . . . . . . . . 8,091 3,310 18,168 Securities held-to-maturity: Purchases - fixed maturities . . . . . . . . . . . . . . . . . . . . . . (1,110) -- -- Change in short-term investments . . . . . . . . . . . . . . . . . . . . . 47,881 24,533 (5,282) Acquisitions, net of cash acquired . . . . . . . . . . . . . . . . . . . . (26,175) (1,375) (115,828) Proceeds from sale of other invested assets . . . . . . . . . . . . . . . 1,733 1,159 5,017 Capital expenditures, net . . . . . . . . . . . . . . . . . . . . . . . . (1,679) (2,802) (766) ---------- ---------- ----------- Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . (13,169) (12,911) (128,117) ---------- ---------- ----------- FINANCING ACTIVITIES: Proceeds from long-term debt . . . . . . . . . . . . . . . . . . . . . . . 96,000 -- 65,000 Principal payments on long-term debt . . . . . . . . . . . . . . . . . . . (110,214) (18,000) (8,138) Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . -- -- 29,814 Exercise of warrants and options . . . . . . . . . . . . . . . . . . . . . 10 47 26,953 Repurchase of outstanding warrants . . . . . . . . . . . . . . . . . . . . -- (42) -- Issuance of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . -- 140 14 Debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,060) -- (1,724) Stock issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (11) (828) ----------- ----------- ------------ Net cash (used in) provided by financing activities . . . . . . . . . . . . . (15,264) (17,866) 111,091 ---------- ---------- ------------ Increase in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 851 1,336 1,676 Cash at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . 3,280 1,944 268 ----------- ----------- ------------ Cash at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,131 $ 3,280 $ 1,944 =========== =========== ============ Supplemental Disclosure of Cash Flow Information: Cash paid during the year for: Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,121 $ 5,761 $ 4,403 Income taxes, net of refunds . . . . . . . . . . . . . . . . . . . . . . $ 642 $ 597 $ 687 Supplemental Disclosure of Non-Cash Investing and Financing Activities: Common stock issued in connection with acquisitions . . . . . . . . . . . $ 4,000 $ -- $ 1,000
The accompanying notes are an integral part of these financial statements. -35- 36 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Capsure Holdings Corp. and all significant majority-owned subsidiaries ("Capsure" or the "Company"). Capsure is engaged principally in the property and casualty insurance business. The Company's principal insurance operating entities are Western Surety Company ("Western Surety"), United Capitol Insurance Company ("United Capitol") and Universal Surety of America ("Universal Surety"). All significant intercompany accounts and transactions have been eliminated in consolidation. BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles. 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 the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain balances in the prior years' financial statements have been reclassified to conform to current presentation. INVESTMENTS Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company has the ability to hold all debt securities to maturity. However, the Company may dispose of securities prior to their scheduled maturity due to changes in interest rates, prepayments, tax and credit considerations, liquidity or regulatory capital requirements, or other similar factors. As a result, the Company considers substantially all of its debt (bonds and redeemable preferred stocks) and equity securities as available-for-sale. Certain equity securities at the parent company level that are held principally for the purpose of selling them in the near term are considered trading securities. Certain debt securities, principally deposited with state insurance regulatory authorities, are considered held to maturity since the Company has both the positive intent and ability to hold these securities to maturity. The accounting policies for each category are as follows: Available-for-Sale Securities -- These securities are reported at fair value, with unrealized gains and losses, net of deferred income taxes, reported as a separate component of stockholders' equity until realized. Cash flows from purchases, sales and maturities are reported gross in the investing activities section of the cash flow statement. Trading Securities -- These securities are reported on the balance sheet at fair value, with any unrealized gains and losses included in earnings. Cash flows from purchases, sales and maturities are included in the operating activities section of the cash flow statement. Held-to-Maturity Securities -- These securities are reported at amortized cost on the balance sheet. Cash flows from purchases, sales and maturities are reported gross in the investing activities section of the cash flow statement. Previously, all debt securities were carried at amortized cost and all equity securities reported at fair value, with unrealized gains and losses, net of deferred income taxes, reflected in stockholders' equity. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in investment income. For mortgage-backed and certain asset-backed securities, Capsure recognizes income using a constant effective yield based on estimated cash flows including anticipated prepayments. Significant variances in actual cash flows from expected cash flows are accounted for prospectively. Any related adjustment is reflected in investment income. Investment gains or losses are determined using the specific -36- 37 identification method. Investments with an other than temporary decline in value are written down to fair value, resulting in losses that are included in investment gains and losses. Short-term investments are carried at amortized cost which approximates fair value. DEFERRED POLICY ACQUISITION COSTS Policy acquisition costs, consisting of commissions and other underwriting expenses which vary with, and are directly related to, the production of business, net of reinsurance commission income, are deferred and amortized to income as the related premiums are earned. Deferred policy acquisition costs are subject to a limitation representing the excess of anticipated net earned premiums over anticipated losses, loss adjustment expenses and maintenance costs. The ultimate recoverability of policy acquisition costs is determined without regard to investment income. EXCESS COST OVER NET ASSETS ACQUIRED AND INTANGIBLE ASSETS The excess cost over the fair value of the net assets acquired is amortized substantially over 40 years. Other intangible assets are amortized over periods ranging from three to 20 years, a substantial portion of which is amortized over three years. Other intangible assets primarily relate to the estimated value of the acquired insurance in force and the producing agency force as of the acquisition date. Excess cost over net assets acquired is reported net of accumulated amortization of $5.4 million and $3.4 million at December 31, 1994 and 1993, respectively. Intangible assets are reported net of accumulated amortization of $23.3 million and $19.5 million at December 31, 1994 and 1993, respectively. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES The liability for unpaid losses and loss adjustment expenses is based on estimates of (a) the ultimate settlement value of reported claims, (b) incurred but not reported ("IBNR") claims, (c) future expenses to be incurred in the settlement of claims and (d) claim recoveries. These estimates are determined based on Company and industry loss experience as well as consideration of current trends and conditions. The liability for unpaid losses and loss adjustment expenses is an accounting estimate and, similar to other accounting estimates, there is the potential that actual future loss payments will differ from the initial estimate. The methods of determining such estimates and the resulting estimated liability are continually reviewed and updated. Changes in the estimated liability are reflected in operating income in the year in which such changes are determined. INSURANCE PREMIUMS Insurance premiums are recognized as revenue ratably over the terms of the related policies. Unearned premiums represent the portion of premiums written applicable to the unexpired terms of policies in force calculated on a daily pro rata basis. Premium revenues are reported net of amounts ceded to reinsurers. REINSURANCE Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy and are reported as reinsurance receivable rather than netted against the liability for unpaid losses and loss adjustment expenses. Losses and loss adjustment expenses incurred are reported net of estimated recoveries under reinsurance contracts. INCOME TAXES The provision for income taxes includes deferred taxes resulting from temporary differences between the financial reporting and tax bases of assets and liabilities, using the asset and liability method required by SFAS No. 109, "Accounting for Income Taxes." Under the asset and liability method, deferred income taxes are established for the future tax effects of temporary differences between the tax and financial reporting bases of assets and liabilities using currently enacted tax rates. Such temporary differences primarily relate to net operating loss carryforwards ("NOLs"), loss reserve discounting, deferred policy acquisition costs and intangible assets. The measurement of deferred tax assets is subject to a valuation allowance based upon the expectation of future realization. Under SFAS No. 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period of enactment. -37- 38 REORGANIZATION PROCEEDINGS On July 31, 1986, the Company emerged from voluntary bankruptcy proceedings under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code"). After the requisite acceptances were obtained and the Bankruptcy Court determined that the Second Amended Joint Plan of Reorganization, as amended (the "Plan of Reorganization"), satisfied applicable requirements of the Bankruptcy Code, the Bankruptcy Court confirmed the Plan of Reorganization on December 20, 1985, and the Plan of Reorganization was consummated on July 31, 1986 (the "Reorganization Date"). The Company emerged from bankruptcy with approximately $300 million of NOLs resulting from oil and gas operations prior to the reorganization. In accordance with accounting principles applicable to reorganizations, the net assets of the Company were adjusted to fair value, the accumulated deficit in retained earnings at the date of reorganization was eliminated and the excess of the fair values of the net assets over the stated value of outstanding capital stock was assigned to additional paid-in capital. In the 1992 financial statements as restated under SFAS No. 109, the Company established a deferred tax asset, net of a valuation allowance, with a corresponding credit to additional paid-in capital equal to the amount of available NOLs for which future realization is expected. Tax benefits resulting from the future utilization of such NOLs will reduce the net deferred tax asset established in accordance with SFAS No. 109. EARNINGS PER SHARE Earnings per share of common and common equivalent shares outstanding are computed using the treasury stock method. Weighted average shares outstanding including additive common equivalent shares (assuming full dilution) for 1994, 1993 and 1992 were 15.2 million, 15.0 million and 12.2 million, respectively. 2. ADOPTION OF NEW ACCOUNTING STANDARDS INVESTMENTS Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Although Capsure has the ability to hold all debt securities to maturity, the Company may dispose of securities prior to their scheduled maturity. Accordingly, the Company has classified substantially all of its debt and equity securities as securities available-for-sale. These securities are reported at fair value, with unrealized gains and losses, net of deferred income taxes, reported as a separate component of stockholders' equity until realized. In addition, certain equity securities at the parent company level were classified as trading securities in accordance with SFAS No. 115. Previously all debt securities were considered held-to-maturity and carried at amortized cost, and all equity securities were reported at fair value, with unrealized gains and losses, net of deferred income taxes, reflected in stockholders' equity. At January 1, 1994, net unrealized gains on investments which were classified as securities available-for-sale were approximately $7.0 million ($4.6 million, net of deferred income taxes). Approximately $4.9 million of the $7.0 million net unrealized gains on available-for-sale securities related to fixed maturities which were carried at amortized cost at December 31, 1993. At January 1, 1994, unrealized gains and losses on the trading securities were not material to the Company's results of operations. INCOME TAXES Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires the asset and liability method of accounting for income taxes rather than the deferred method, as specified by Accounting Principles Board ("APB") No. 11. The adoption of SFAS No. 109 permitted the Company to recognize as a deferred tax asset the benefits of certain NOLs that were previously prohibited under APB No. 11. Under the new standard, deferred tax assets are valued based upon the expectation of future realization on a "more likely than not" basis. Upon adoption of SFAS No. 109, the Company restated its 1992 financial statements. As of January 1, 1992, a deferred tax asset of $60.2 million, net of a valuation allowance of $45.2 million, with a corresponding credit to additional paid-in capital was recorded related to available NOLs for which future realization is expected. Such restatement did not have a material effect on the Company's 1992 results of operations. -38- 39 In addition, the adoption of SFAS No. 109 also resulted in: (i) certain assets and liabilities previously recorded net of tax in connection with purchase accounting to be recorded on a gross basis, resulting in increases in the balance of certain assets and liabilities with a corresponding increase in deferred tax assets and liabilities; (ii) an increase in certain revenues and expenses (primarily the amortization of intangible assets) which were previously recorded net of tax; and (iii) a more normalized effective tax rate, reflecting the tax-effecting of certain revenues and expenses which had previously been shown net of tax. REINSURANCE Effective January 1, 1993, the Company adopted SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-duration and Long-duration Contracts" and restated its prior years' balance sheets in accordance with SFAS No. 113. SFAS No. 113 requires reinsurance receivables on paid and unpaid losses and loss adjustment expenses and prepaid reinsurance premiums to be reported as assets rather than netted against the corresponding liability for such items on the balance sheet. 3. ACQUISITIONS On September 22, 1994, Capsure, through its wholly owned subsidiary, Capsure Financial Group, Inc. ("CFG"), acquired all of the outstanding common stock of Universal Surety Holding Corp. ("USHC"). USHC is the holding company of Universal Surety. Universal Surety specializes in the underwriting of small contract and miscellaneous surety bonds and is licensed to write fidelity, surety and casualty insurance in 16 states. Capsure paid $28 million in cash and $4 million in Capsure common stock for USHC, pursuant to a Stock Purchase Agreement dated as of July 26, 1994. The cash portion of the purchase price was financed with borrowings under Capsure's $135 million revolving credit facility. On August 14, 1992, Capsure acquired all of the outstanding common stock of Surewest Financial Corp. ("Surewest"). Surewest is the holding company for Western Surety. Western Surety specializes in writing small fidelity and noncontract surety bonds and is licensed to write fidelity, surety and casualty insurance in all 50 states and the District of Columbia. The aggregate purchase price for the stock of Surewest was approximately $103.5 million, consisting of $99 million in cash and $1 million in Capsure common stock, plus $3.5 million of acquisition costs and $14.4 million of additional capital contributed to pay down Surewest's existing indebtedness. Funding for the acquisition was derived in part from a $65.0 million bank term loan. The remaining funds were derived from available cash of the Company obtained principally through the offering of 3.4 million shares of Capsure common stock, dividends paid by United Capitol and through the exercise of warrants. Each acquisition has been accounted for as a purchase and, accordingly, the acquired assets and liabilities have been recorded at their estimated fair values. The operating results of USHC are included in the consolidated statements of income and cash flows from the September 22, 1994 acquisition date. The operating results of Surewest are included in the consolidated statements of income and cash flows from the August 14, 1992 acquisition date. The excess of the purchase price over the fair value of net assets acquired is recorded as excess cost over net assets acquired in the consolidated balance sheets. The USHC Stock Purchase Agreement provides for a contingent payment to certain of the selling shareholders. Such payment shall be in cash or an equivalent amount of Capsure common stock, at the Company's option, in the year 2000, equal to twenty percent of the excess of the after-tax fair market value of Universal Surety at December 31, 1999, over an assumed fifteen percent return, compounded annually, on Capsure's invested capital. The contingent consideration, if any, shall be allocated to excess cost over net assets acquired when the additional consideration is payable and amortized prospectively over its remaining useful life. The following table of unaudited pro forma information has been prepared as if the acquisition of USHC had been consummated on January 1, 1993 and the acquisition of Surewest had been consummated on January 1, 1991, at the same purchase price, with adjustments to the consolidated results of operations for the effects of the acquisition in the same manner as subsequent to the acquisition. Such adjustments include: (i) decreased net investment income and realized investment gains at USHC and Surewest; (ii) decreased corporate investment income; (iii) decreased operating -39- 40 expenses at USHC and Surewest; and (iv) increased interest and amortization expense. In management's opinion, the pro forma financial information is not indicative of consolidated results of operations that may have occurred had the acquisitions taken place on January 1 of each respective year, or of future results of operations of the combined companies under the ownership and operation of Capsure. In the following table, the dollars are in thousands, except per share amounts:
Pro Forma (Unaudited) for the Years Ended December 31, ----------------------------------------------------- 1994 1993 1992 ------------ ------------- ------------ Revenues . . . . . . . . . . . . . . . . . . . . $ 122,967 $ 120,141 $ 107,054 Net income . . . . . . . . . . . . . . . . . . . $ 15,086 $ 17,339 $ 15,153 Net income per common share . . . . . . . . . . $ .98 $ 1.13 $ .99
On November 10, 1993, the Company acquired all of the outstanding common stock of Fischer Underwriting Group, Incorporated ("Fischer") for an aggregate purchase price of $3.5 million. Fischer is a managing general agency engaged in producing and underwriting specialty directors' and officers' and miscellaneous professional liability insurance. The acquisition of Fischer was not material to the Company's financial condition or results of operations for the year ended December 31, 1993 and, therefore, is not included in the 1993 and 1992 pro forma financial information above. 4. INVESTMENTS The cost and estimated fair values of investments in debt and equity securities as of December 31, 1994 were as follows (dollars in thousands):
Amortized Gross Gross Estimated Cost Unrealized Unrealized Fair or Cost Gains Losses Value ----------- ---------- ------------ ----------- Available-For-Sale Securities - ----------------------------- Fixed maturities: U.S. Treasury securities and obligations of U.S. Government corporations and agencies: U.S. Treasury notes . . . . . . . . . . . . . . . $ 1,990 $ -- $ (10) $ 1,980 Collateralized mortgage obligations . . . . . . . 116,408 7 (8,572) 107,843 Mortgage pass-through securities . . . . . . . . . 44,832 62 (2,168) 42,726 Debt securities of foreign governments . . . . . . . . 5 -- -- 5 Obligations of states and political subdivisions . . . 16,019 6 (424) 15,601 Corporate bonds . . . . . . . . . . . . . . . . . . . . 1,865 25 (88) 1,802 Non-agency collateralized mortgage obligations . . . . 6,159 -- (159) 6,000 Asset-backed securities: Second mortgages/home equity loans . . . . . . . . 37,927 38 (969) 36,996 Credit card receivables . . . . . . . . . . . . . 4,000 44 -- 4,044 Automobile loans . . . . . . . . . . . . . . . . . 8,020 25 (1,058) 6,987 Other underlying assets . . . . . . . . . . . . . 12,103 -- (462) 11,641 ----------- ---------- ----------- ----------- Total fixed maturities . . . . . . . . . . . . 249,328 207 (13,910) 235,625 Equity securities . . . . . . . . . . . . . . . . . . . 27,476 208 (1,403) 26,281 ----------- ---------- ----------- ----------- Total available-for-sale securities . . . . . . $ 276,804 $ 415 $ (15,313) $ 261,906 =========== ========== =========== =========== Held-To-Maturity Securities - --------------------------- Fixed maturities - U.S. Government treasury securities . . . . . . . . . . . . . . . . . . . . . $ 10,968 $ 19 $ (661) $ 10,326 =========== ========== =========== =========== Trading Securities - ------------------ Equity securities . . . . . . . . . . . . . . . . . . . $ 2,298 $ 59 $ (433) $ 1,924 =========== ========== =========== ===========
-40- 41 The cost and estimated fair values of investments in debt and equity securities as of December 31, 1993 were as follows (dollars in thousands):
Amortized Gross Gross Estimated Cost Unrealized Unrealized Fair or Cost Gains Losses Value ----------- ---------- ------------ ----------- Fixed maturities: U.S. Treasury securities and obligations of U.S. Government corporations and agencies: U.S. Treasury notes . . . . . . . . . . . . . . . $ 9,310 $ 247 $ (1) $ 9,556 Collateralized mortgage obligations . . . . . . . 95,086 1,353 (195) 96,244 Mortgage pass-through securities . . . . . . . . . 52,881 1,881 (3) 54,759 Debt securities of foreign governments . . . . . . . . 5 -- -- 5 Obligations of states and political subdivisions . . . 9,601 41 (39) 9,603 Non-agency collateralized mortgage obligations . . . . 3,798 58 -- 3,856 Asset-backed securities: Second mortgages/home equity loans . . . . . . . . 36,234 1,148 (31) 37,351 Credit card receivables . . . . . . . . . . . . . 7,020 389 -- 7,409 Automobile loans . . . . . . . . . . . . . . . . . 6,242 120 -- 6,362 Other underlying assets . . . . . . . . . . . . . 9,324 220 (14) 9,530 ----------- ---------- ----------- ----------- Total fixed maturities . . . . . . . . . . . . 229,501 5,457 (283) 234,675 Equity securities . . . . . . . . . . . . . . . . . . . 7,426 2,416 (309) 9,533 ----------- ---------- ----------- ----------- Total debt and equity securities . . . . . . . $ 236,927 $ 7,873 $ (592) $ 244,208 =========== ========== =========== ===========
As of December 31, 1994, 99% of the Company's debt securities were considered investment grade by The Standard & Poors Corporation or Moody's Investor Services, Inc., and 91% were rated at least AA by those agencies. In addition, the Company's investments in debt securities did not contain any significant geographic or industry concentration of credit risk. The U.S. Treasury notes and mortgage pass-through securities are backed by the full faith and credit of the U.S. Government. The U.S. Government collateralized mortgage obligations consist of securities collateralized by first mortgages issued by the Federal National Mortgage Association, and the Federal Home Loan Mortgage Corporation, or guaranteed by the Government National Mortgage Association. The Company's insurance subsidiaries, as required by state law, deposit certain securities with state insurance regulatory authorities. At December 31, 1994, fixed maturities on deposit had an aggregate carrying value of $11.0 million. During 1994, the Company shifted a portion of its available-for-sale portfolio to equity securities, principally higher yielding nonaffiliated real estate investment trusts ("REITs"). At December 31, 1994, the carrying value of the Company's REIT portfolio was $24.3 million. Short-term investments are comprised of U.S. Treasury notes, maturing corporate notes, money market and mutual funds, and investment grade commercial paper equivalents. -41- 42 The amortized cost and estimated fair value of debt securities at December 31, 1994, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (dollars in thousands):
Estimated Amortized Fair Cost Value ------------ ------------ Available-For-Sale Securities - ----------------------------- Due within one year . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,890 $ 2,887 Due after one year but within five years . . . . . . . . . . . . . . . 11,326 11,060 Due after five years but within ten years . . . . . . . . . . . . . . . 1,343 1,298 Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . 4,320 4,143 ------------ ------------ 19,879 19,388 Mortgage pass-through securities, collateralized mortgage obligations and asset-backed securities . . . . . . . . . . 229,449 216,237 ------------ ------------ $ 249,328 $ 235,625 ============ ============ Held-To-Maturity Securities - --------------------------- Due within one year . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,212 $ 4,231 Due after one year but within five years . . . . . . . . . . . . . . . 746 727 Due after five years but within ten years . . . . . . . . . . . . . . . 6,010 5,368 ------------ ------------ $ 10,968 $ 10,326 ============ ============
Major categories of net investment income and net investment gains were as follows (dollars in thousands):
1994 1993 1992 ---------- ---------- ---------- Investment income: Fixed maturities . . . . . . . . . . . . . . $ 16,405 $ 16,282 $ 13,346 Equity securities . . . . . . . . . . . . . 915 143 185 Short-term investments . . . . . . . . . . . 1,722 2,820 2,058 Other . . . . . . . . . . . . . . . . . . . 532 990 218 ---------- ---------- ---------- Total investment income . . . . . . . . . . 19,574 20,235 15,807 Investment expenses . . . . . . . . . . . . . . 445 420 303 ---------- ---------- ---------- Net investment income . . . . . . . . . . . . . $ 19,129 $ 19,815 $ 15,504 ========== ========== ========== Gross investment gains: Fixed maturities . . . . . . . . . . . . . . $ 88 $ 1,821 $ 1,015 Equity securities . . . . . . . . . . . . . 3,762 3,430 -- Unrealized gains on trading securities . . . 59 -- -- Gross investment losses: Fixed maturities . . . . . . . . . . . . . . (625) (2,911) (635) Equity securities . . . . . . . . . . . . . (1,802) (269) -- Unrealized losses on trading securities . . (433) -- -- Other . . . . . . . . . . . . . . . . . . . (104) -- -- ---------- ---------- ---------- Net investment gains . . . . . . . . . . . . . . $ 945 $ 2,071 $ 380 ========== ========== ==========
-42- 43 Net unrealized gain (loss) on securities included in stockholders' equity for December 31, 1994 and 1993 was as follows (dollars in thousands):
1994 1993 -------------------------------------- ------------------------------------- Gains Losses Net Gains Losses Net ----------- ----------- ----------- ----------- ----------- ----------- Fixed maturities . . . . . . . . . . . $ 207 $ (13,910) $ (13,703) $ -- $ -- $ -- Equity securities . . . . . . . . . . . 208 (1,403) (1,195) 2,416 (309) 2,107 Other . . . . . . . . . . . . . . . . . -- (225) (225) -- (79) (79) ----------- ----------- ----------- ----------- ----------- ----------- $ 415 $ (15,538) (15,123) $ 2,416 $ (388) 2,028 =========== =========== =========== =========== Deferred income taxes . . . . . . . . . 5,293 (710) ----------- ----------- Net unrealized gain (loss) on securities $ (9,830) $ 1,318 =========== ===========
At December 31, 1994 and 1993, the carrying value of debt securities on non-accrual status was $1.9 million and $2.6 million, respectively, related to two interest-only U.S. Government collateralized mortgage obligations. The gross realized investment losses on fixed maturities in 1993 were primarily due to a $2.5 million write-down to fair value on these two interest-only securities, reflecting lower future expected cash flows of these securities as a result of an accelerated level of mortgage prepayments. A majority of the realized investment gains and losses on equity securities resulted from sales of securities held at the parent company level. For 1994, investment activity for the equity trading portfolio held at the parent company level included gross realized investment gains of $1.5 million and gross realized investment losses of $1.0 million. 5. DEFERRED POLICY ACQUISITION COSTS Policy acquisition costs deferred and the related amortization charged to income were as follows (dollars in thousands):
1994 1993 1992 ---------- ---------- ----------- (Restated) Balance, beginning of year . . . . . . . . . . . . . . $ 18,421 $ 9,428 $ 948 Balance at date of acquisition . . . . . . . . . . . . 4,369 -- -- Costs deferred during year . . . . . . . . . . . . . . 31,750 30,157 10,635 Amortization during year . . . . . . . . . . . . . . . (29,390) (21,164) (2,155) ---------- ---------- ----------- Balance, end of year . . . . . . . . . . . . . . . . . $ 25,150 $ 18,421 $ 9,428 ========== ========== ===========
6. REINSURANCE The Company's insurance subsidiaries, in the ordinary course of business, cede reinsurance to other insurance companies to limit their exposure to loss and to provide greater diversification of risk. Reinsurance contracts do not relieve the Company of its primary obligations to claimants. A contingent liability exists with respect to reinsurance ceded to the extent that any reinsurer is unable to meet the obligations assumed under the reinsurance agreements. The Company evaluates the financial condition of its reinsurers, establishes allowances for uncollectible amounts and monitors concentrations of credit risk. At December 31, 1994, Capsure's largest reinsurance receivable, including prepaid reinsurance premiums of $1.3 million and estimated ceded IBNR of $12.0 million, was approximately $18.9 million with Generali - U.S. Branch. Generali - U.S. Branch is rated A (Excellent), XV by A.M. Best Company, Inc. No other receivable from a single reinsurer exceeded 10% of total reinsurance receivables. -43- 44 The effect of reinsurance on premiums written and earned for the years ended December 31, 1994, 1993 and 1992 was as follows (dollars in thousands):
1994 1993 1992 -------------------------- -------------------------- --------------------------- Written Earned Written Earned Written Earned ---------- ----------- ---------- ----------- ---------- ----------- Direct . . . . . . $ 102,062 $ 103,346 $ 100,355 $ 97,359 $ 50,008 $ 50,015 Assumed . . . . . . 294 668 420 639 97 39 Ceded . . . . . . . (11,778) (11,533) (12,469) (11,969) (9,795) (8,805) ---------- ----------- ---------- ----------- ----------- ----------- Net premiums . . . $ 90,578 $ 92,481 $ 88,306 $ 86,029 $ 40,310 $ 41,249 ========== =========== ========== =========== ========== ===========
The effect of reinsurance on losses and loss adjustment expenses incurred for the years ended December 31, 1994, 1993 and 1992 was as follows (dollars in thousands):
1994 1993 1992 ----------- ----------- ----------- Gross losses and loss adjustment expenses . . . . . . $ 31,684 $ 26,407 $ 14,566 Reinsurance recoveries . . . . . . . . . . . . . . . . (8,340) (6,450) (3,905) ----------- ----------- ----------- Net losses and loss adjustment expenses . . . . . . . $ 23,344 $ 19,957 $ 10,661 =========== =========== ===========
7. LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES Activity in the liability for unpaid losses and loss adjustment expenses was as follows (dollars in thousands):
1994 1993 1992 ------------ ------------ ------------ Gross balance at January 1 . . . . . . . . . . . . . . . . $ 135,825 $ 128,122 $ 101,542 Balance at date of acquisition . . . . . . . . . . . . . . 2,738 -- 28,516 Incurred related to: Current year . . . . . . . . . . . . . . . . . . . . . . . 46,206 41,398 24,428 Prior years . . . . . . . . . . . . . . . . . . . . . . . . (14,522) (14,991) (9,862) ------------ ------------ ------------ Total incurred . . . . . . . . . . . . . . . . . . . . . . 31,684 26,407 14,566 ------------ ------------ ------------ Paid related to: Current year . . . . . . . . . . . . . . . . . . . . . . . 3,003 2,266 1,665 Prior years . . . . . . . . . . . . . . . . . . . . . . . . 18,203 16,438 14,837 ------------ ------------ ------------ Total paid . . . . . . . . . . . . . . . . . . . . . . . . 21,206 18,704 16,502 ------------ ------------ ------------ Gross balance at December 31 . . . . . . . . . . . . . . . $ 149,041 $ 135,825 $ 128,122 ============ ============ ============
As a result of favorable claim settlements and changes in estimates of insured events in prior years, the provision for losses and loss adjustment expenses decreased by $14.5 million ($8.3 million, net of reinsurance) in 1994, $15.0 million ($11.3 million, net of reinsurance) in 1993 and $9.9 million ($7.5 million, net of reinsurance) in 1992. 8. FAIR VALUE OF FINANCIAL INSTRUMENTS The following table summarizes disclosure of fair value information of financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values may be based on estimates using present value or other valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rates and estimates of future cash flows. Accordingly, the estimates presented herein are subjective in nature and are not necessarily indicative of the amounts that Capsure could realize in a current market exchange. This information excludes certain financial instruments and all nonfinancial instruments such as insurance contracts from fair value disclosure. Thus, the following fair value amounts cannot be aggregated to determine the underlying economic value of Capsure. -44- 45 The carrying amounts and estimated fair values of financial instruments for the years ended December 31, 1994 and 1993 were as follows (dollars in thousands):
1994 1993 ------------------------------ ------------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ----------- ---------- ----------- ---------- Fixed maturities . . . . . . . . . . . . $ 246,593 $ 245,951 $ 229,501 $ 234,675 Equity securities . . . . . . . . . . . . 28,205 28,205 9,533 9,533 Short-term investments . . . . . . . . . 22,079 22,079 69,215 69,215 Other investments . . . . . . . . . . . . 4,890 4,890 5,548 5,548 Cash . . . . . . . . . . . . . . . . . . 4,131 4,131 3,280 3,280 Long-term debt . . . . . . . . . . . . . 71,000 71,000 85,214 85,214
The following methods and assumptions were used by Capsure in estimating fair values of financial instruments: Investment Securities -- The estimated fair values for debt securities (including redeemable preferred stock) are based upon quoted market prices, where available. For debt securities not actively traded, the estimated fair values are determined using values obtained from independent pricing services or, in the case of private placements, by discounting expected future cash flows using a current market rate applicable to the yield, credit quality and maturity of the investments. The estimated fair values for equity securities are based on quoted market prices. Cash, Short-Term Investments and Other Investments -- The carrying amount for these instruments approximates their estimated fair value. Long-Term Debt -- The estimated fair value of Capsure's long-term debt is based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. 9. LONG-TERM DEBT On March 29, 1994, the Company formed a direct, wholly owned subsidiary, CFG, to which Capsure contributed substantially all its assets and liabilities. Concurrently, CFG entered into a senior reducing revolving credit agreement with a syndicate of banks for $135 million (the "Credit Facility"). The common stock of substantially all of Capsure's subsidiaries and substantially all assets of Capsure's non-insurance operations have been pledged under the Credit Facility. As of December 31, 1994, $71 million was outstanding under the Credit Facility. The remaining availability under the Credit Facility may be used to finance future acquisitions and for general corporate purposes. The interest rate on borrowings under the Credit Facility may be fixed, at the Company's option, for a period of one to six months and is based on a margin over either the London Interbank Offered Rate ("LIBOR") or the greatest of the agent bank's prime rate, certificate of deposit rate plus 1.0% and the Federal Funds Effective Rate plus 0.5%. The margin varies based on a leverage ratio and ranges from 0.75% to 1.75% on LIBOR borrowings and 0.0% to 0.75% on non-LIBOR borrowings. The Credit Facility provides for a commitment fee on the unused availability which also varies based on leverage. At December 31, 1994, the weighted average interest rate on outstanding borrowings was 7.125% and the applicable commitment fee was 0.375%. The Credit Facility limits the Company with respect to the incurrence of additional indebtedness and the payment of dividends, imposes certain restrictions on investments and requires the maintenance of certain financial ratios and levels of Risk-Based Capital ("RBC"). As of December 31, 1994, the Company was in compliance with all material restrictions or covenants contained in the Credit Facility agreement. The use of the Credit Facility for acquisition purposes is subject to certain conditions with respect to the business and historical financial results of the target company, the maintenance of certain financial ratios on a prospective and pro forma basis, and the structure of the acquisition transaction. -45- 46 Total borrowings available under the Credit Facility reduce semi-annually commencing March 31, 1996 by the following amounts (dollars in thousands): March 31, 1996 $ 12,500 September 30, 1996 12,500 March 31, 1997 12,500 September 30, 1997 12,500 March 31, 1998 15,000 September 30, 1998 15,000 March 31, 1999 17,500 September 30, 1999 17,500 March 31, 2000 20,000 ------------ $ 135,000 ============
Principal and interest payments required under the Credit Facility are funded principally by dividend and intercompany tax sharing payments received from Capsure's insurance subsidiaries. 10. STATUTORY FINANCIAL DATA Capsure's insurance subsidiaries file annual financial statements prepared in accordance with statutory accounting practices prescribed or permitted by applicable insurance regulatory authorities. Prescribed statutory accounting practices include state laws, regulations and general administrative rules, as well as guidance provided in a variety of publications of the National Association of Insurance Commissioners ("NAIC"). Permitted statutory accounting practices encompass all accounting practices that are not prescribed. Such practices may differ from state to state, may differ from company to company within a state, and may change in the future. The permitted statutory accounting practices of Capsure's insurance subsidiaries did not have a material effect on reported statutory surplus. The principal differences between statutory financial statements and financial statements prepared in accordance with generally accepted accounting principles are that statutory financial statements do not reflect deferred policy acquisition costs and deferred income taxes and debt securities are generally carried at amortized cost in statutory financial statements. The NAIC has promulgated RBC requirements for property/casualty insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks such as asset quality, asset and liability matching, loss reserve adequacy, and other business factors. The RBC information will be used by state insurance regulators as an early warning tool to identify, for the purpose of initiating regulatory action, insurance companies that potentially are inadequately capitalized. In addition, the formula defines new minimum capital standards that will supplement the current system of fixed minimum capital and surplus requirements on a state-by-state basis. Regulatory compliance is determined by a ratio (the "Ratio") of the enterprise's regulatory total adjusted capital, as defined by the NAIC, to its authorized control level RBC, as defined by the NAIC. Generally, a Ratio in excess of 200% of authorized control level RBC requires no corrective actions on the behalf of the company or regulators. As of December 31, 1994, each of Capsure's insurance subsidiaries had a Ratio that was substantially in excess of the minimum RBC requirements. Capsure's insurance subsidiaries are subject to regulation and supervision by the various state insurance regulatory authorities in which they conduct business. Such regulation is generally designed to protect policyholders and includes such matters as maintenance of minimum statutory surplus and restrictions on the payments of dividends. Generally, statutory surplus of each insurance subsidiary in excess of statutorily prescribed minimum is available for transfer to the parent company. However, such distributions as dividends may be subject to prior regulatory approval, including a review of the implication on RBC. Without prior regulatory approval in 1995, Capsure's insurance subsidiaries may pay stockholder dividends of $19.3 million in the aggregate. In 1994, 1993 and 1992, Capsure received $21.0 million (including $5.0 million of dividends requiring prior approval), $11.8 million, and $29.0 million (including $15.1 million of dividends requiring prior approval), respectively, in dividends from its insurance subsidiaries. -46- 47 Combined statutory surplus and net income for insurance operations, including preacquisition results, as reported to regulatory authorities were as follows (dollars in thousands):
1994 1993 1992 ----------- ----------- ------------ Statutory surplus . . . . . . . . . . . . $ 109,750 $ 104,343 $ 94,080 Statutory net income . . . . . . . . . . . $ 23,796 $ 19,308 $ 23,934
11. INCOME TAXES The components of deferred income taxes as of December 31, 1994 and 1993 were as follows (dollars in thousands):
1994 1993 ------------- ------------- Deferred tax assets: Net operating losses . . . . . . . . . . . . . . . . . . . . . . . . $ 79,100 $ 86,500 Loss and loss adjustment expense reserves . . . . . . . . . . . . . 7,913 7,606 Unearned premium reserves . . . . . . . . . . . . . . . . . . . . . 5,302 4,856 Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 3,755 3,750 Unrealized loss on securities . . . . . . . . . . . . . . . . . . . 5,293 -- Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,537 3,984 ------------- ------------- Total gross deferred tax assets . . . . . . . . . . . . . . . . 102,900 106,696 Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . 30,800 40.800 ------------- ------------- Deferred tax asset, net of valuation allowance . . . . . . . . . . . . . 72,100 65,896 ------------- ------------- Deferred tax liabilities: Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . 6,278 7,625 Deferred policy acquisition costs . . . . . . . . . . . . . . . . . 8,803 6,447 Unrealized gain on securities . . . . . . . . . . . . . . . . . . . -- 710 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,814 2,764 ------------- ------------- Total deferred tax liabilities . . . . . . . . . . . . . . . . 17,895 17,546 ------------- ------------- Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . $ 54,205 $ 48,350 ============= =============
Capsure and its subsidiaries file a consolidated federal income tax return. As of December 31, 1994, based upon the Company's consolidated federal income tax returns, approximately $226.0 million of consolidated NOLs were available to offset future taxable income of the Company and its subsidiaries. The majority of such carryforwards expire in 1997, 1998 and 1999. Although realization is not assured, management believes that it is more likely than not that Capsure will generate sufficient taxable income to utilize at least $48.3 million of tax benefits from its available NOLs at December 31, 1994. Such estimate is based upon the earnings history of each of its insurance subsidiaries and projections of future taxable income. The reduction in the valuation allowance for deferred tax assets of $10.0 million in 1994 related primarily to the September 22, 1994, acquisition of Universal Surety and projections of future taxable income of this newly acquired entity. The income tax provisions consisted of the following (dollars in thousands):
1994 1993 1992 --------- --------- --------- (Restated) Federal deferred . . . . . . $ 8,820 $ 8,696 $ 6,457 Federal current . . . . . . . 305 338 208 State . . . . . . . . . . . . 276 200 112 --------- --------- ---------- Total income tax expense . . $ 9,401 $ 9,234 $ 6,777 ========= ========= ==========
-47- 48 Reconciliations from the federal statutory tax rate to the effective tax rate are as follows:
1994 1993 1992 --------- --------- -------- Federal statutory rate . . . . . . . . . . . . . . . . . . . . . . 35.0% 35.0% 34.0% Excess of cost over net assets acquired and other purchase accounting adjustments . . . . . . . . . . . . . . . . 3.0 2.2 2.0 State income and environmental tax, net of federal income tax benefit . . . . . . . . . . . . . . . . . . . . . . . .8 .6 .9 Tax exempt interest . . . . . . . . . . . . . . . . . . . . . . . . (.3) (.2) (.8) Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0 (1.4) 2.7 --------- --------- --------- Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . 39.5% 36.2% 38.8% ========= ========= =========
Intercompany tax sharing agreements between Capsure and its subsidiaries provide that income taxes shall be allocated based upon separate return calculations in accordance with the Internal Revenue Code of 1986, as amended (the "Code"). Intercompany tax payments are remitted at such times as estimated tax payments would be required to be made to the Internal Revenue Service. Capsure received tax sharing payments from its subsidiaries of $12.3 million, $13.0 million and $9.0 million in 1994, 1993 and 1992, respectively. The Internal Revenue Service has not examined the Company's tax returns for the years in which the Company reported net operating losses. Under Section 382 of the Code, certain restrictions on the utilization of NOLs will apply if there is an ownership change of a corporation entitled to use such carryovers. The Company believes that there is currently no restriction on the ability of the Company to utilize its NOLs. It is possible that future transactions involving the Company's common stock or rights to acquire such stock could cause an ownership change of the Company resulting in restrictions of the Company's ability to utilize the NOLs during all taxable periods after the date of such ownership change. The Company has adopted provisions in its Certificate of Incorporation designed to facilitate the Company's ability to preserve and utilize its NOLs. 12. COMMITMENTS AND CONTINGENCIES On November 8, 1988, California voters enacted Proposition 103, an initiative which required a rollback in insurance rates for products written or renewed after November 8, 1988, and provided that rate changes must thereafter be submitted for approval to the Department of Insurance prior to implementation. While the proposition had the most significant impact on automobile insurance, its provisions were written broadly and may also apply to other property and casualty insurance, including surety bonds. The applicability of Proposition 103 to surety bonds has been litigated in the California courts and is currently under review by the California Supreme Court. Management believes that an unfavorable resolution of this matter would not have a material adverse impact on the Company's results of operations or financial position. The Company was engaged in oil and gas production, exploration and development until mid-1993. In connection with the sale of substantially all of the Company's oil and gas properties, the buyers assumed all material environmental liabilities. United Capitol, in the ordinary course of business, chooses to underwrite accounts which have hazardous, unique or unusual risk characteristics and applies a strict and specialized underwriting discipline to such risks. Since United Capitol's organization in 1986, its liability policies have included an absolute pollution coverage exclusion (except for policies offering pollution liability coverage to contractors involved in the remediation of preexisting pollution). In addition, except as discussed below, United Capitol's product liability and other general liability policies contain exclusions, which management believes are enforceable, for coverage of claims for bodily injury or property damage caused by exposure to asbestos. United Capitol provides coverage to asbestos abatement contractors against third parties who have alleged bodily injury or property damage as a result of exposure to asbestos. Employees of the insured contractor and others required to be in the abatement area are not intended to be covered by United Capitol's policies and management believes such coverage exclusions are enforceable. Through the date hereof, there have been no valid claims against United Capitol's -48- 49 asbestos abatement liability policies alleging bodily injury arising from exposure to asbestos. Management believes that none of the other insurance products offered by Capsure's insurance subsidiaries creates any potential material environmental exposure. Management believes that Capsure is adequately reserved for risks associated with environmental liabilities although there can be no assurance that legal or other developments will not increase the Company's exposure to environmental liabilities. Capsure and its subsidiaries are subject to litigation in the ordinary course of business. In the opinion of management, the outcome of such litigation will not have a material effect on the results of operations or financial position of Capsure. 13. WARRANTS In January 1989, the Company distributed warrants to purchase shares of its common stock to its stockholders of record on January 9, 1989, whereby for each share of common stock held on such date, one Series A Warrant, one Series B Warrant and one Series C Warrant ("ABC Warrants") were distributed. Each Series A Warrant, each Series B Warrant and each two Series C Warrants entitled the holder to purchase one share of the Company's common stock. In the aggregate, 9,825,378 ABC Warrants were distributed to purchase 8,187,815 shares of the Company's common stock. The original exercise price per share of common stock, issuable upon exercise of any ABC Warrant, was $5.50 per share. The Company utilized substantially all of the proceeds received from the exercise of ABC Warrants in 1992 to purchase the capital stock of Surewest. The Company also issued 8,580 warrants to directors of the Company to purchase a like number of shares of common stock for $5.60 per share ("Other Warrants"). In conjunction with the financing of the 1990 acquisition of United Capitol, the Company issued 44,444 warrants to a bank to purchase a like number of shares of Common Stock at $0.05 per share ("Bank Warrants"). All warrants had stated exercise and expiration periods. As of December 31, 1994, there were no warrants of any series outstanding. Warrant activity for the years ended December 31, 1994, 1993 and 1992 was as follows (dollars in thousands):
Number of Warrants Exercised Proceeds ---------- ---------- 1994 ---- Bank Warrants . . . . . . . . . . . . . 44,444 $ 2 =========== =========== 1993 ---- Other Warrants . . . . . . . . . . . . . 2,860 $ 16 =========== =========== 1992 ---- Series B Warrants . . . . . . . . . . . 2,500,323 $ 17,126 Series C Warrants . . . . . . . . . . . 1,555,741 9,823 ----------- ---------- 4,056,064 $ 26,949 =========== ==========
14. STOCK OPTIONS The Company has reserved 1,500,000 shares of its common stock for issuance to directors, officers, key employees and consultants of the Company through incentive stock options, nonqualified stock options and stock appreciation rights to be granted under the Company's 1990 Stock Option Plan (the "Plan"). On March 2, 1994, the Board of Directors of the Company approved an amendment to the Plan to increase by 500,000 the aggregate number of shares available for which options may be granted under the Plan to 1,500,000 shares. This amendment was approved by the stockholders at the Annual Meeting held on May 19, 1994. The Plan is administered by the Compensation Committee (the "Committee"), consisting of certain members of the Board of Directors. The option price is determined by the Committee, but cannot be less than the fair market value of the common stock of the Company at the date of grant for incentive stock options, and cannot be less than the par value of the common stock of the Company for non-qualified stock options. -49- 50 The Plan provides for the granting of incentive options as defined under the Code. Under the Plan, all nonqualified stock options and incentive stock options expire ten years after the date of grant. All options in 1993 and 1994 were granted at an option price equal to fair market value at the date of grant. In 1992, all options were granted at an option price equal to fair market value, except for 2,500 nonqualified stock options which were granted at $8.50. Stock option activity for the three years ended December 31, 1994 was as follows:
Shares Subject Average Option to Option Price Per Share ----------- -------------------- Balance at January 1, 1992 . . . . . . . . . . . . . . . 547,500 $ 6.75 to $ 8.50 Options granted . . . . . . . . . . . . . . . . . . . 168,500 $ 8.50 to $ 9.75 Options cancelled . . . . . . . . . . . . . . . . . . (2,250) $ 6.75 Options exercised . . . . . . . . . . . . . . . . . . . (2,750) $ 6.75 --------- ------------------- Balance at December 31, 1992 . . . . . . . . . . . . . . 711,000 $ 6.75 to $ 9.75 Options granted . . . . . . . . . . . . . . . . . . . 222,500 $ 12.25 to $ 14.88 Options cancelled . . . . . . . . . . . . . . . . . . (6,750) $ 12.25 to $ 13.50 Options exercised . . . . . . . . . . . . . . . . . . (20,975) $ 6.75 to $ 9.75 --------- ------------------- Balance at December 31, 1993 . . . . . . . . . . . . . . 905,775 $ 6.75 to $ 14.88 Options granted . . . . . . . . . . . . . . . . . . 295,250 $ 12.88 to $ 14.75 Options cancelled . . . . . . . . . . . . . . . . . (1,876) $ 12.25 Options exercised . . . . . . . . . . . . . . . . . (1,037) $ 6.75 to $ 12.25 --------- ------------------- Balance at December 31, 1994 . . . . . . . . . . . . . . 1,198,112 $ 6.75 to $ 14.88 ========== ===================
As of December 31, 1994, 858,973 shares were exercisable under the Plan. The number of shares available for granting of options under the Plan were 277,126 and 67,500 at December 31, 1994 and 1993, respectively. 15. RELATED PARTY TRANSACTIONS Equity Group Investments, Inc. ("EGI"), a company affiliated with certain directors, officers and stockholders of the Company; other affiliated entities; and individuals affiliated with certain directors and officers of the Company perform or provide services to the Company and its subsidiaries. These services relate to acquisition consulting, financial planning, legal and tax advice, and investor relations, as well as leasing office space and providing certain computer equipment, operations and maintenance services to the Company. Related party agreements are generally for a term of one year and are approved by the independent members of the Board of Directors. The Company's corporate office space is leased pursuant to a facilities sharing agreement with EGI. The Company paid rent, administrative services, and office facility services to EGI or its affiliates of $0.1 million in 1994, 1993 and 1992. The Company paid $0.2 million in 1994 and 1993 and $0.1 million in 1992 for financial planning, tax, accounting, investor relations and computer support and maintenance to EGI or its affiliates. The Company paid $0.2 million, $0.1 million and $0.4 million in fees for legal services to a law firm affiliated with EGI in 1994, 1993 and 1992, respectively. The Company received reimbursement from affiliates of EGI for financial management services provided by employees of the Company amounting to $0.1 million in 1994 and 1993 and $0.2 million in 1992. 16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of the unaudited results of operations for the years ended December 31, 1994 and 1993. The Company acquired Universal Surety in September 1994 and the consolidated results of operations shown below include the operating results of Universal Surety from the date of acquisition, which affects the comparability of the financial information (dollars in thousands, except per share data): -50- 51
First Second Third Fourth Quarter Quarter Quarter Quarter ------------ ------------ ---------- ---------- 1994 - ---- Revenues . . . . . . . . . . . . . . . . . . . . $ 27,167 $ 27,809 $ 27,176 $ 30,510 ============ ============ =========== =========== Income before income taxes . . . . . . . . . . . $ 4,607 $ 6,872 $ 5,903 $ 6,397 Income taxes . . . . . . . . . . . . . . . . . . 1,778 2,774 2,191 2,658 ------------ ------------ ----------- ----------- Net income . . . . . . . . . . . . . . . . . . . $ 2,829 $ 4,098 $ 3,712 $ 3,739 ============ ============ =========== =========== Earnings per common and common equivalent share . . . . . . . . . . . . . . $ .19 $ .27 $ .25 $ .24 ============ ============ =========== =========== 1993 - ---- Revenues . . . . . . . . . . . . . . . . . . . . $ 26,540 $ 27,419 $ 27,761 $ 26,725 ============ ============ =========== =========== Income before income taxes . . . . . . . . . . . $ 5,531 $ 6,311 $ 7,756 $ 5,920 Income taxes . . . . . . . . . . . . . . . . . . 2,117 2,263 3,126 1,728 ------------ ------------ ----------- ----------- Net income . . . . . . . . . . . . . . . . . . . $ 3,414 $ 4,048 $ 4,630 $ 4,192 ============ ============ =========== =========== Earnings per common and common equivalent share . . . . . . . . . . . . . . $ .22 $ .27 $ .29 $ .30 ============ ============ =========== ===========
-51- 52 SCHEDULE I CAPSURE HOLDINGS CORP. AND SUBSIDIARIES SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES AS OF DECEMBER 31, 1994 (AMOUNTS IN THOUSANDS)
Fair Carrying Cost Value Value ----------- ----------- ----------- FIXED MATURITIES: Bonds: U.S. government and government agencies and authorities . . . . . . $ 163,230 $ 152,549 $ 152,549 Foreign governments . . . . . . . . . . . . . . . . . . . . . . . . 5 5 5 All other corporate bonds . . . . . . . . . . . . . . . . . . . . . 97,061 93,397 94,039 ----------- ----------- ----------- Total fixed maturities. . . . . . . . . . . . . . . . . . . . . . . 260,296 245,951 246,593 ----------- ----------- ----------- EQUITY SECURITIES: Common stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,683 27,173 27,173 Non-redeemable preferred stocks . . . . . . . . . . . . . . . . . . . . 1,091 1,032 1,032 ----------- ----------- ----------- Total equity securities . . . . . . . . . . . . . . . . . . . . . . 29,774 28,205 28,205 ----------- ----------- ----------- Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . 22,079 22,079 Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,123 4,890 ----------- ----------- Total investments . . . . . . . . . . . . . . . . . . . . . . . . . $ 317,272 $ 301,767 =========== ===========
-52- 53 SCHEDULE III CAPSURE HOLDINGS CORP. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY) BALANCE SHEETS (AMOUNTS IN THOUSANDS)
December 31, ------------------------------ 1994 1993 ----------- ----------- ASSETS Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ -- $ 481 Short-term investments, at cost which approximates fair value . . . . . . . . . -- 5,451 Equity securities, at fair value (cost: $6,453) . . . . . . . . . . . . . . . -- 8,703 Investment in and advances to Capsure Financial Group, Inc. . . . . . . . . . . 170,772 -- Investment in and advances to SI Acquisition Corp. . . . . . . . . . . . . . . -- 71,009 Investment in and advances to NI Acquisition Corp. . . . . . . . . . . . . . . -- 60,429 Investment in and advances to Pin Oak Petroleum, Inc. . . . . . . . . . . . . . -- 8,569 Deferred income taxes, net of valuation allowance . . . . . . . . . . . . . . . 55,616 56,833 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 257 ----------- ----------- $ 226,388 $ 211,732 =========== =========== LIABILITIES Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,523 $ 4,107 ----------- ----------- STOCKHOLDERS' EQUITY Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 770 753 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . 179,250 165,257 Retained earnings from August 1, 1986 (date of reorganization) . . . . . . . . 54,756 40,378 Unrealized (loss) gain on securities, net of deferred income taxes . . . . . . (9,830) 1,318 Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . (81) (81) ----------- ---------- Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . 224,865 207,625 ----------- ----------- $ 226,388 $ 211,732 =========== ===========
See Notes to Condensed Financial Information and Notes to Consolidated Financial Statements -53- 54 SCHEDULE III CAPSURE HOLDINGS CORP. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY) - (CONTINUED) STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS)
Years Ended December 31, ------------------------------------------- 1994 1993 1992 --------- --------- ---------- (Restated) Revenues: Net investment income . . . . . . . . . . . . . . . . . . . $ 17 $ 1,897 $ 1,705 Net investment gains . . . . . . . . . . . . . . . . . . . . 444 3,103 -- Other income . . . . . . . . . . . . . . . . . . . . . . . . -- 10 40 --------- --------- ---------- 461 5,010 1,745 Expenses: Corporate expense . . . . . . . . . . . . . . . . . . . . . 355 2,251 2,011 --------- --------- ---------- Income (loss) from operations before income taxes and equity in net income of subsidiaries . . . . . . . . . . 106 2,759 (266) Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 37 690 (90) --------- --------- -------- Income (loss) before equity in net income of subsidiaries . . . . . . . . . . . . . . . . . . . . . . 69 2,069 (176) Cash dividends from subsidiaries . . . . . . . . . . . . . . . . -- 1,500 10,000 Equity in net income of subsidiaries, less cash dividends . . . . 14,309 12,715 871 --------- --------- ---------- Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,378 $ 16,284 $ 10,695 ========= ========= ==========
See Notes to Condensed Financial Information and Notes to Consolidated Financial Statements -54- 55 SCHEDULE III CAPSURE HOLDINGS CORP. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY) - (CONTINUED) STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
Years Ended December 31, -------------------------------------- 1994 1993 1992 --------- --------- ---------- (Restated) OPERATING ACTIVITIES: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,378 $ 16,284 $ 10,695 Adjustments to reconcile net income to net cash provided by operating activities: Depletion, depreciation, and amortization . . . . . . . . . . . . . . -- 3 3 Equity in net income of subsidiaries, less cash dividends . . . . . . (14,309) (12,715) (871) Net investment gains. . . . . . . . . . . . . . . . . . . . . . . . . (444) (3,103) -- Changes in: Other assets and liabilities. . . . . . . . . . . . . . . . . . . . . 3,623 680 (2,796) -------- -------- -------- Net cash provided by operating activities. . . . . . . . . . . . . . . . . . . 3,248 1,149 7,031 -------- -------- -------- INVESTING ACTIVITIES: Available-for-sale equity securities purchased . . . . . . . . . . . . . . . (209) (30,512) (3,885) Available-for-sale equity securities sold. . . . . . . . . . . . . . . . . . -- 31,048 -- Change in short-term investments . . . . . . . . . . . . . . . . . . . . . . 5,451 2,846 (7,492) Change in investments in and advances to subsidiaries. . . . . . . . . . . . (8,981) (4,389) (51,537) Capital expenditures, net. . . . . . . . . . . . . . . . . . . . . . . . . . -- (13) -- -------- -------- -------- Net cash used in investing activities. . . . . . . . . . . . . . . . . . . . . (3,739) (1,020) (62,914) -------- -------- -------- FINANCING ACTIVITIES: Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- 29,814 Exercise of warrants and options . . . . . . . . . . . . . . . . . . . . . . 10 47 26,953 Repurchase of outstanding warrants . . . . . . . . . . . . . . . . . . . . . -- (42) -- Issuance of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . -- 140 14 Stock issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (11) (828) -------- --------- -------- Net cash provided by financing activities. . . . . . . . . . . . . . . . . . . 10 134 55,953 -------- --------- -------- Increase (decrease) in cash. . . . . . . . . . . . . . . . . . . . . . . . . . (481) 263 70 Cash at beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . 481 218 148 -------- --------- -------- Cash at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ -- $ 481 $ 218 ======== ========= ========
See Notes to Condensed Financial Information and Notes to Consolidated Financial Statements -55- 56 SCHEDULE III CAPSURE HOLDINGS CORP. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY) - (CONTINUED) NOTES TO CONDENSED FINANCIAL INFORMATION 1. BASIS OF PRESENTATION The condensed financial information of the parent company includes the accounts of Capsure Holdings Corp. ("Capsure"). On March 29, 1994, Capsure formed Capsure Financial Group, Inc., a direct wholly owned subsidiary, to which Capsure contributed substantially all its assets and liabilities, including its investments in SI Acquisition Corp., NI Acquisition Corp. and Pin Oak Petroleum, Inc. -56- 57 SCHEDULE V CAPSURE HOLDINGS CORP. AND SUBSIDIARIES SUPPLEMENTAL INSURANCE INFORMATION AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (AMOUNTS IN THOUSANDS)
Property and Casualty Insurance -------------------------------------------- 1994 1993 1992 ----------- ----------- ----------- (Restated) Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . $ 25,150 $ 18,421 $ 9,428 =========== =========== =========== Future policy benefits, losses, claims and loss expenses . . . . . . . $ 149,041 $ 135,825 $ 128,122 =========== =========== =========== Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 76,630 $ 69,363 $ 66,235 =========== =========== =========== Other policy claims and benefits payable . . . . . . . . . . . . . . . $ -- $ -- $ -- =========== =========== =========== Net premium revenue . . . . . . . . . . . . . . . . . . . . . . . . . . $ 92,481 $ 86,029 $ 41,249 =========== =========== =========== Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,597 $ 18,753 $ 14,636 =========== =========== =========== Benefits, claims, losses and settlement expenses . . . . . . . . . . . $ 23,344 $ 19,957 $ 10,661 =========== =========== =========== Amortization of deferred policy acquisition costs . . . . . . . . . . . $ 29,390 $ 21,164 $ 2,155 =========== =========== =========== Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . $ 24,514 $ 29,684 $ 18,501 =========== =========== =========== Net premiums written . . . . . . . . . . . . . . . . . . . . . . . . . $ 90,578 $ 88,306 $ 40,310 =========== =========== ===========
-57- 58 SCHEDULE VI CAPSURE HOLDINGS CORP. AND SUBSIDIARIES REINSURANCE FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (AMOUNTS IN THOUSANDS)
Percentage Ceded to Assumed of Amount Gross Other from Other Net Assumed Amount Companies Companies Amount To Net ------------ ----------- ---------- ------------ ------------ 1994 - ---- Premiums: Property and casualty insurance . . . $ 103,346 $ 11,533 $ 668 $ 92,481 0.7% ------------ ------------ ----------- ------------ ------------ Total premiums. . . . . . . . . . . $ 103,346 $ 11,533 $ 668 $ 92,481 0.7% ============ ============ =========== ============ ============ 1993 - ---- Premiums: Property and casualty insurance . . . $ 97,359 $ 11,969 $ 639 $ 86,029 0.7% ------------ ------------ ----------- ------------ ------------ Total premiums. . . . . . . . . . . $ 97,359 $ 11,969 $ 639 $ 86,029 0.7% ============ ============ =========== ============ ============ 1992 - ---- Premiums: Property and casualty insurance . . . $ 50,015 $ 8,805 $ 39 $ 41,249 0.1% ------------ ------------ ----------- ------------ ------------ Total premiums. . . . . . . . . . . $ 50,015 $ 8,805 $ 39 $ 41,249 0.1% ============ ============ =========== ============ ============
-58- 59 SCHEDULE VIII CAPSURE HOLDINGS CORP. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (AMOUNTS IN THOUSANDS)
Additions ------------------------- Balance at Charged to Charged to Balance Beginning of Costs and Other at End of Period Expenses Accounts Deductions(1) Period ---------- ---------- ---------- ------------- ---------- Year ended December 31, 1994 Allowance for possible losses on premiums receivable(2). . . . . . . . $ 1,276 $ 190 $ -- $ 568 $ 898 ========== ========== ========== ========== ========== Allowance for possible losses on reinsurance recoverable . . . . . . . $ 2 $ 3 $ -- $ -- $ 5 ========== ========== ========== ========== ========== Year ended December 31, 1993 Allowance for possible losses on premiums receivable . . . . . . . . . $ 951 $ 690 $ -- $ 417 $ 1,224 ========== ========== ========== ========== ========== Allowance for possible losses on reinsurance recoverable . . . . . . . $ -- $ 2 $ -- $ -- $ 2 ========== ========== ========== ========== ========== Year ended December 31, 1992 Allowance for possible losses on premiums receivable . . . . . . . . . $ 937 $ 372 $ -- $ 358 $ 951 ========== ========== ========== ========== ========== Allowance for possible losses on reinsurance recoverable . . . . . . . $ -- $ -- $ -- $ -- $ -- ========== ========== ========== ========== ==========
- --------------- (1) Accounts charged against allowance. (2) Includes balance at acquisition date of Universal Surety of $52. -59- 60 SCHEDULE X CAPSURE HOLDINGS CORP. AND SUBSIDIARIES SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (AMOUNTS IN THOUSANDS)
1994 1993 1992 ------------ ------------ ------------ (Restated) Deferred policy acquisition costs . . . . . . . . . . . . . . . . . $ 25,150 $ 18,421 $ 9,428 ============ ============ ============ Reserves for unpaid claims and claim adjustment expenses . . . . . $ 149,041 $ 135,825 $ 128,122 ============ ============ ============ Discount (if any) deducted . . . . . . . . . . . . . . . . . . . . $ -- $ -- $ -- ============ ============ ============ Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . $ 76,630 $ 69,363 $ 66,235 ============ ============ ============ Net earned premiums . . . . . . . . . . . . . . . . . . . . . . . . $ 92,481 $ 86,029 $ 41,249 ============ ============ ============ Net investment income . . . . . . . . . . . . . . . . . . . . . . . $ 18,597 $ 18,753 $ 14,636 ============ ============ ============ Net claims and claim adjustment expenses incurred related to: Current year . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,688 $ 31,250 $ 18,141 ============ ============ ============ Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . $ (8,344) $ (11,293) $ (7,480) ============ ============ ============ Amortization of deferred policy acquisition costs . . . . . . . . . $ 29,390 $ 21,164 $ 2,155 ============ ============ ============ Paid claims and claim adjustment expenses . . . . . . . . . . . . . $ 16,719 $ 15,455 $ 13,215 ============ ============ ============ Net premiums written . . . . . . . . . . . . . . . . . . . . . . . $ 90,578 $ 88,306 $ 40,310 ============ ============ ============
-60- 61 (A)(3) EXHIBITS Exhibit Number Description 2 Not applicable. 3(i) The Certificate of Incorporation of Nucorp, Inc. dated May 6, 1988 together with the Certificate of Merger of Nucorp Energy, Inc. with and into Nucorp, Inc. dated August 12, 1988 (filed on August 15, 1988 as Exhibit 3.1 to Nucorp, Inc.'s Quarterly Report on Form 10-Q for the Period March 31, 1988 through June 30, 1988, and incorporated herein by reference). 3(ii) Bylaws of Nucorp, Inc. (filed on August 15, 1988 as Exhibit 3.2 to Nucorp, Inc.'s Quarterly Report on Form 10-Q for the Period March 31, 1988 through June 30, 1988, and incorporated herein by reference). 4 Specimen of Capsure Holdings Corp. Common Stock Certificate. 9 Not applicable. 10(1) Employment Agreement dated as of February 20, 1990 among Nucorp, Inc., United Capitol Holding Company, United Capitol Insurance Company, Equity Holdings and Bruce A. Esselborn (filed on August 2, 1990 as Exhibit 10.7 to Post-Effective Amendment No. 1 to Nucorp, Inc.'s Registration Statement on Form S-1, and incorporated herein by reference). 10(2) Employment Agreement dated as of February 20, 1990 among Nucorp, Inc., United Capitol Holding Company, United Capitol Insurance Company and Mary Jane Robertson (filed on July 16, 1992 as Exhibit 10(iii)(A)(2) to Amendment No. 1 to Nucorp, Inc.'s Registration Statement on Form S-2, and incorporated herein by reference). 10(3) Employment Agreement dated as of February 20, 1990 among Nucorp, Inc., United Capitol Holding Company, United Capitol Insurance Company and Steven S. Zeitman (filed on July 16, 1992 as Exhibit 10(iii)(A)(3) to Amendment No. 1 to Nucorp, Inc.'s Registration Statement on Form S-2, and incorporated herein by reference). 10(4) Employment Agreement dated as of February 20, 1995 by and between Capsure Holdings Corp., a Delaware corporation, and Bruce A. Esselborn, an individual. 10(5) Employment Agreement dated as of February 20, 1995 by and among Capsure Holdings Corp., a Delaware corporation, United Capitol Insurance Company, a Wisconsin corporation, and Mary Jane Robertson, an individual. 10(6) Employment Agreement dated as of February 20, 1995 by and between Capsure Holdings Corp., a Delaware corporation, and Steven S. Zeitman, an individual. 10(7) Executive Employment Agreement dated as of August 14, 1992 by and among Nucorp, Inc., a Delaware corporation, Surewest Financial Corp., a South Dakota corporation, SI Acquisition Corp., a Texas corporation, Western Surety Company, a South Dakota corporation, Equity Holdings, an Illinois partnership, and Dan L. Kirby. 10(8) Executive Employment Agreement dated as of August 14, 1992 by and among Nucorp, Inc., a Delaware corporation, SI Acquisition Corp., a Texas corporation, Surewest Financial Corp., a South Dakota corporation, Western Surety Company, a South Dakota corporation, Equity Holdings, an Illinois partnership, and Joe P. Kirby. -61- 62 Exhibit Number Description 10(9) Purchase Agreement dated as of December 21, 1989 among Nucorp, Inc. and Bruce A. Esselborn (filed on August 2, 1990 as Exhibit 10.8 to Post-Effective Amendment No. 1 to Nucorp's Registration Statement on Form S-1, and incorporated herein by reference). 10(10) Purchase Agreement dated as of December 22, 1989 among Nucorp, Inc. and CIP Limited Partnership (filed on September 26, 1990 as Exhibit 10.10 to Amendment No. 1 to Nucorp's Registration Statement on Form S-1, and incorporated herein by reference). 10(11) Common Stock Purchase Warrant dated as of February 20, 1990, of Nucorp, Inc. to Continental Bank N.A. (filed on March 2, 1993 as Exhibit 28(e) to Nucorp, Inc.'s Registration Statement on Form S-3, and incorporated herein by reference). 10(12) Registration Agreement dated as of February 20, 1990, between Nucorp, Inc. and Continental Bank N.A. (filed on March 2, 1993 as Exhibit 28(f) to Nucorp, Inc.'s Registration Statement on Form S-3, and incorporated herein by reference). 10(13) Purchase Agreement dated as of March 25, 1992 among Nucorp, Inc., SI Acquisition Corp. and Surewest Financial Corp. (filed on March 27, 1992, as Exhibit 2 on Form 8-K, and incorporated herein by reference). 10(14) Stock Purchase Agreement between Nucorp, Inc.; SI Acquisition Corp.; Surewest Financial Corp.; Joe P. Kirby; Dan L. Kirby; Kevin T. Kirby; Steven T. Kirby; First Bank of South Dakota, N.A., as Trustee of the Dan L. Kirby Trust; First Bank of South Dakota, N.A., as Trustee of the Kevin T. Kirby Trust; Norwest Bank South Dakota, N.A., as Trustee of the Joe P. Kirby Trust; and Norwest Bank South Dakota, N.A., as Trustee of the Steven T. Kirby Trust, dated March 25, 1992 and schedules thereto (filed on March 25, 1992 as Exhibit 2 on Nucorp, Inc.'s Form 8-K, and incorporated herein by reference). 10(15) Credit Agreement dated August 14, 1992, among SI Acquisition Corp., and Continental Bank N.A. (filed on March 2, 1993 as Exhibit 28(c) to Nucorp, Inc.'s Registration Statement on Form S-3, and incorporated herein by reference). 10(16) Compensation Agreement dated August 14, 1992 among SI Acquisition Corp. and Continental Bank N.A. (filed on March 26, 1993 as Exhibit 10.15 on Nucorp, Inc.'s Form 10-K, and incorporated herein by reference). 10(17) Credit Agreement dated as of March 29, 1994 among Capsure Financial Group, Inc., Capsure Holdings Corp., the Lenders named therein and Chemical Bank, as Administrative Agent. 10(18) Stock Purchase Agreement among John Knox, Jr., Universal Surety Holding Corp., Capsure Financial Group, Inc. and Capsure Holdings Corp. dated July 26, 1994 (filed on October 6, 1994 as Exhibit 2 to Capsure Holdings Corp. Current Report on Form 8-K, and incorporated herein by reference). 10(19) 1990 Stock Option Plan of Nucorp, Inc. (filed on April 19, 1990 as Exhibit A to Nucorp, Inc.'s Proxy Statement for the Annual Meeting of Shareholders on May 9, 1990, and incorporated herein by reference). 10(20) First Amendment to the Nucorp, Inc. 1990 Stock Option Plan (filed on April 27, 1992 as part of Nucorp, Inc.'s Proxy Statement for the Annual Meeting of Shareholders on June 9, 1992, and incorporated herein by reference). 10(21) Managing General Agency Agreement between Western Surety Company and United Capitol Managers, Inc. (filed on March 2, 1993 as Exhibit 28(a) to Nucorp, Inc.'s Registration Statement on Form S-3, and incorporated herein by reference). -62- 63 Exhibit Number Description 10(22) Surety Bond Quota Share Reinsurance Agreement between Western Surety Company and United Capitol Insurance Company (filed on March 2, 1993 as Exhibit 28(b) to Nucorp, Inc.'s Registration Statement on Form S-3, and incorporated herein by reference). 10(23) Contract Surety Bond Reinsurance Agreement dated as of September 22, 1994 between Western Surety Company, a South Dakota corporation, and Universal Surety of America, a Texas corporation. 10(24) Co-Employee Agreement dated as of September 22, 1994 between Western Surety Company and Universal Surety of America. 11 Earnings per share computation. 12 Not applicable. 13 Not applicable. 16 Not applicable. 18 Not applicable. 21 Subsidiaries of the Registrant. 22 Not applicable. 23 Consent of Coopers & Lybrand dated March 29, 1995. 24(1) Power of Attorney for Herbert A. Denton dated March 27, 1995. 24(2) Power of Attorney for Bradbury Dyer, III dated March 17, 1995. 24(3) Power of Attorney for Talton R. Embry dated March 17, 1995. 24(4) Power of Attorney for Dan L. Kirby dated March 21, 1995. 24(5) Power of Attorney for Joe P. Kirby dated March 22, 1995. 24(6) Power of Attorney for L.G. Schafran dated March 20, 1995. 27 Financial Data Schedule. 28 Information from reports furnished to state insurance regulatory authorities - Schedule P from 1994 Combined Annual Statement of Capsure Holdings Corp. -63- 64 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CAPSURE HOLDINGS CORP. /s/ Bruce A. Esselborn Bruce A. Esselborn President (Principal Executive Officer) /s/ Mary Jane Robertson Mary Jane Robertson Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ John S. Heneghan John S. Heneghan Controller (Principal Accounting Officer) Dated: March 29, 1995 (CONTINUED) -64- 65 CAPSURE HOLDINGS CORP. - SIGNATURES - (CONTINUED) Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Title March 21, 1995 Chairman of the Board and /s/ Samuel Zell Chief Executive Officer -------------------------------------- Samuel Zell March 15, 1995 Director /s/ Rod F. Dammeyer -------------------------------------- Rod F. Dammeyer March 28, 1995 Director * Herbert A. Denton -------------------------------------- * Herbert A. Denton March 28, 1995 Director * Bradbury Dyer, III -------------------------------------- * Bradbury Dyer, III March 28, 1995 Director * Talton R. Embry -------------------------------------- * Talton R. Embry March 8, 1995 Director /s/ Bruce A. Esselborn -------------------------------------- Bruce A. Esselborn March 28, 1995 Director * Dan L. Kirby -------------------------------------- * Dan L. Kirby March 28, 1995 Director * Joe P. Kirby -------------------------------------- * Joe P. Kirby March 20, 1995 Director /s/ Donald W. Phillips -------------------------------------- Donald W. Phillips March 28, 1995 Director and /s/ Sheli Z. Rosenberg *Attorney-in-Fact -------------------------------------- Sheli Z. Rosenberg March 28, 1995 Director * L.G. Schafran -------------------------------------- * L.G. Schafran March 15, 1995 Director /s/ Richard Weingarten -------------------------------------- Richard Weingarten
-65- 66 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES EXHIBIT INDEX
Exhibit Page Number Description No. 4 Specimen of Capsure Holdings Corp. Common Stock Certificate . . . . . . . . . . . . . . . . . . . . . . . . . 10(4) Employment Agreement dated as of February 20, 1995 by and between Capsure Holdings Corp., a Delaware corporation, and Bruce A. Esselborn, an individual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10(5) Employment Agreement dated as of February 20, 1995 by and among Capsure Holdings Corp., a Delaware corporation, United Capitol Insurance Company, a Wisconsin corporation, and Mary Jane Robertson, an individual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10(6) Employment Agreement dated as of February 20, 1995 by and between Capsure Holdings Corp., a Delaware corporation, and Steven S. Zeitman, an individual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10(7) Executive Employment Agreement dated as of August 14, 1992 by and among Nucorp, Inc., a Delaware corporation, Surewest Financial Corp., a South Dakota corporation, SI Acquisition Corp., a Texas corporation, Western Surety Company, a South Dakota corporation, Equity Holdings, an Illinois partnership, and Dan L. Kirby . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10(8) Executive Employment Agreement dated as of August 14, 1992 by and among Nucorp, Inc., a Delaware corporation, SI Acquisition Corp., a Texas corporation, Surewest Financial Corp., a South Dakota corporation, Western Surety Company, a South Dakota corporation, Equity Holdings, an Illinois partnership, and Joe P. Kirby . . . . . . . . . . . . . . . . . . . . . . . . . 10(17) Credit Agreement dated as of March 29, 1994 among Capsure Financial Group, Inc., Capsure Holdings Corp., the Lenders named therein and Chemical Bank, as Administrative Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10(23) Contract Surety Bond Reinsurance Agreement dated as of September 22, 1994 between Western Surety Company, a South Dakota corporation, and Universal Surety of America, a Texas corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10(24) Co-Employee Agreement dated as of September 22, 1994 between Western Surety Company and Universal Surety of America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Earnings per share computation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Subsidiaries of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Consent of Coopers & Lybrand dated March 29, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24(1) Power of Attorney for Herbert A. Denton dated March 27, 1995 . . . . . . . . . . . . . . . . . . . . . . . . 24(2) Power of Attorney for Bradbury Dyer, III dated March 17, 1995 . . . . . . . . . . . . . . . . . . . . . . . . 24(3) Power of Attorney for Talton R. Embry dated March 17, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . 24(4) Power of Attorney for Dan L. Kirby dated March 21, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . 24(5) Power of Attorney for Joe P. Kirby dated March 22, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . 24(6) Power of Attorney for L.G. Schafran dated March 20, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . .
-66- 67 EXHIBIT INDEX (CONTINUED)
Exhibit Page Number Description No. 27 Financial Data Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Information from reports furnished to state insurance regulatory authorities - Schedule P from 1994 Combined Annual Statement of Capsure Holdings Corp. . . . . . . . . . . . . . . . . .
-67- EX-4 2 STOCK CERTIFICATE 1 EXHIBIT 4 COMMON STOCK COMMON STOCK SHARES THIS CERTIFICATE IS TRANSFERABLE IN THE CITIES OF BOSTON OR NEW YORK CUSIP 140673 10 4 INCORPORATED UNDER THE LAWS SEE REVERSE FOR CERTAIN DEFINITIONS OF THE STATE OF DELAWARE AND RESTRICTIONS CAPSURE HOLDINGS CORP. THIS CERTIFIES THAT IS THE OWNER OF FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, $.05 PAR VALUE, OF Capsure Holdings Corp. transferable on the books of the Corporation in person or by duly authorized Attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar. Witness the seal of the Corporation and the signatures of its duly authorized officers. Dated: COUNTERSIGNED AND REGISTERED: THE FIRST NATIONAL BANK OF BOSTON TRANSFER AGENT AND REGISTRAR BY [SIG] [SIG] AUTHORIZED OFFICER SECRETARY PRESIDENT EX-10.(4) 3 EMPLOYMENT AGREEMENT 1 EXHIBIT 10(4) EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT entered into as of the 20th day of February, 1995, by and between Capsure Holdings Corp. ("Capsure"), a Delaware corporation, and Bruce A. Esselborn (the "Employee"), an individual. W I T N E S S E T H: WHEREAS, Capsure or various of its current subsidiaries have employed the Employee since April 1, 1986 pursuant to Employment Agreements dated March 11, 1986 and February 20, 1990 (the "Prior Agreements"); and WHEREAS, Capsure wishes to continue to employ the Employee for the period provided in this Employment Agreement (the "New Agreement") and the Employee is willing to continue to serve in the employ of Capsure and of any direct or indirect subsidiary of it (collectively the "Companies"); NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants herein contained, the parties agree as follows: Article One: Prior Agreements Capsure and the Employee mutually agree that the Prior Agreements have terminated in accordance with their terms. Article Two: Employment A. Capsure will continue to employ the Employee for the period (the "Employment Period") commencing on February 20, 1995 and ending February 19, 1997. The Employee accepts such employment and agrees to serve in the capacities set forth in this New Agreement and to perform such services of a chief executive officer nature commensurate with his position and offices and agrees diligently and competently to devote his entire business time and attention to such services, excepting disabilities, illness, vacation, paid holidays given by the Companies, and reasonable activities having a charitable, educational or other public interest purpose. B. (1) During the Employment Period, the Employee shall serve as President of Capsure, and Chairman of the Board of Directors, President, and Chief Executive Officer of United Capitol Holding Company ("UCHC") and United Capitol Insurance Company ("UCIC"). In that capacity, the Employee shall perform such duties as are commensurate with such office and as are consistent with past practice. 1 2 C. During the Employment Period, the Employee's office shall be customary to his position and shall be located in the principal executive offices of UCHC and UCIC, which shall be located in northern DeKalb County, Georgia. In connection with his employment by Capsure, the Employee shall not be required to relocate or transfer his principal residence from its present location in northern DeKalb County, Georgia, and the Employee shall not be required to perform services which would make the continuance of either his normal homelife or his principal residence in its existing location unreasonably difficult or inconvenient for him. A violation of any of these conditions shall be construed as an attempt by Capsure to terminate the Employee's service without cause. Article Three: Compensation During the Employment Period A. The Companies will make available to the Employee, to the extent he satisfies the eligibility requirements thereof and to the extent permitted by law, any fringe or employee benefit program introduced generally to senior corporate officers. These benefits include, but are not limited to, pension, profit sharing, stock purchase, stock option, stock appreciation, savings, deferred compensation, bonus, life insurance, disability insurance, health insurance, major medical and hospitalization insurance, and other plans and policies authorized now or in the future which in any event shall provide benefits to the Employee at a level that, in the aggregate, are not significantly less than those currently in effect with respect to the Employee. B. During the Employment Period, Capsure shall pay to the Employee and the Employee shall accept for his services a minimum annual aggregate salary of $387,500, payable in accordance with the Companies' customary payroll policy as in effect from time to time. At Capsure's option, the salary described herein may be paid through one of the Companies. The Companies reserve the right at any time and from time to time to increase the minimum annual salary of the Employee and shall review at least each year such minimum annual salary in relationship to the goals and performance of the Companies and prevailing competitive conditions. To the extent that the Employee's minimum annual salary is increased, the new amount will become known as his new minimum annual salary and such new minimum annual salary shall not thereafter be reduced. The minimum or new minimum annual salary due the Employee excludes any bonus or any other employee benefit or perquisite to which the Employee is entitled and, when adjusting the Employee's salary, the Board of Directors or any other body or group of persons responsible for setting the Employee's salary shall not take into consideration any bonuses, employee benefits or perquisites due the Employee. C. The Employee shall be entitled to, but not obligated to take, the number of paid vacation days in each calendar year determined by the Companies from time to time for its senior executive officers, but not less than four weeks in any calendar year. The Employee shall also be entitled to all paid holidays given by the Companies to its senior executive officers. D. The Companies' obligation to pay the Employee the minimum annual salary 2 3 during the Employment Period may be extinguished only upon a termination of the Employee's employment pursuant to the provisions of Articles Eight and Nine. E. The Employee shall be entitled to an annual bonus, which shall range from 0 to $200,000. The amount of such bonus shall be determined and paid in February of each year, and the amount of such bonus shall be mutually agreed upon between the Employee and the Compensation Committee of Capsure. F. In addition to any other benefits provided to the Employee, the Companies shall provide the Employee with the following during the term of this New Agreement: (i) continuance of use on an exclusive basis of the luxury automobile currently assigned to the Employee, and all related insurance, operating and maintenance expenses. The Employee has the right to continue this arrangement as long as he desires, however, the Employee agrees that if and when he relinquishes this right, the Companies are no longer obligated to furnish this benefit. In consideration of the Employee relinquishing this right, the Companies will increase the Employee's minimum or new minimum annual salary in an amount approximating the annual dollar equivalent for the Employee to obtain a similar benefit on his own; (ii) the right to first class air travel and first class hotel accommodations; (iii) all reasonable club dues and membership fees for clubs and other similar organizations which are important to the conduct of the business of the Companies and which he uses for business purposes; (iv) reasonable consultations with financial and tax advisors or counselors; (v) legal expenses in connection with the negotiation of this New Agreement; and (vi) an annual physical examination. H. In addition to any other benefits to be provided to the Employee by the Companies, the Companies shall pay the premiums on a term life insurance policy of the Employee's choice, insuring the life of the Employee in the face amount of not less than two million ($2,000,000.00) dollars during the term of this New Agreement, unless the Employee's employment is terminated pursuant to the provisions of Articles Eight and Nine, in which event the obligation hereunder shall immediately terminate. The Employee shall be the owner of the policy and shall have the right to designate the beneficiary thereunder and upon termination of his employment, he shall retain all rights to said policy. This policy shall be in addition to any group life policy provided by the Companies to the Employee. I. The Companies shall reimburse the Employee for all out-of-pocket expenses 3 4 incurred by him in connection with the performance of his duties hereunder, including professional activities, upon the presentation of appropriate documentation therefore in accordance with the then customary procedures of the Companies. Article Four: Deleted. Article Five: Deleted. Article Six: Deleted. Article Seven: Notice of Breach Capsure and the Employee agree that, prior to the termination of the Employment Period by reason of any breach of any provisions of this New Agreement, the injured party will give the party or parties in breach written notice specifying such breach and permitting the party in breach to cure such breach within the period of thirty (30) days after receipt of such notice. Article Eight: Inability to Perform If, during the Employment Period, the Employee shall be unable to substantially perform the duties required of him pursuant to his employment due to any disability preventing him from performing such services for a period of six (6) cumulative months in a twelve consecutive month period, Capsure shall have the right to terminate the Employee's employment pursuant to this New Agreement on thirty (30) day's written notice, at the end of which time the Employee's employment shall be terminated. As used in this New Agreement, the term "disability" shall mean the substantial inability of the Employee to perform his essential duties under this New Agreement as determined by an independent physician selected by Capsure with the approval of the Employee. Any disability of less than six consecutive months duration shall not be cause for interruption, suspension or withholding of the salary due the Employee by Capsure. Article Nine: Termination This New Agreement: (i) may be terminated at any time by mutual agreement between the Employee and Capsure; (ii) shall terminate immediately upon the death of the Employee, but the Employee's estate shall be entitled to receive the salary due the Employee for a period of six (6) months following the day the death of the Employee occurred. As a condition for the aforesaid payments, Capsure shall have the right to require submission of proof of the Employee's death; 4 5 (iii) may be terminated due to the disability of the Employee pursuant to Article Eight; (iv) may be terminated upon a good faith determination by a majority vote of the Board members of Capsure that the termination of this New Agreement is necessary by reason of a determination by the insurance department of any state having jurisdiction over Capsure or any subsidiary or affiliate, that the Employee must be removed or disqualified from acting as an officer of Capsure or any of its company subsidiaries; or (v) may be terminated by the Capsure at any time for "cause" upon the giving of thirty (30) days prior written notice to the Employee, setting forth the basis of such termination. For the purpose of this New Agreement, the term "cause" shall be limited to: (a) the willful engaging of the Employee in conduct materially injurious to the Companies; (b) continued and willful inattention and neglect by the Employee of the material duties to be performed by him, which inattention and neglect is not the result of illness or disability by the Employee and which inattention and neglect, after compliance with the provisions of Article Seven hereof, does not cease within thirty (30) days after written notice thereof specifying the details of such conduct is given to the Employee; and (c) the conviction of the Employee of a felony under state or federal law, unless in any such case the Employee performed such act in good faith and in a manner Capsure reasonably believed to be in or not opposed to the best interests of the Companies. Article Ten: Effective Termination A. The Employee's obligation to render services hereunder may be terminated by the Employee without any reduction of the amounts payable to him hereunder if the Employee's circumstances of employment shall have changed (as hereinafter defined). In such event the Employee shall specify by written notice to Capsure the event relied on for such termination, and if such event shall not have been cured within 30 days thereafter, the Employee's employment hereunder shall be deemed terminated. In the event of any termination by the Employee pursuant to this Article Ten, or in the event Capsure shall terminate the Employee's employment, this New Agreement or the Employment Period, other than pursuant to Articles Eight or Nine, the Employee shall continue to be entitled to receive all payments and other benefits provided for in this New Agreement. B. The Employee's "circumstances of employment shall have changed" shall mean 5 6 and include any of the following: (i) notice by Capsure to the Employee of termination of his employment, this New Agreement or the Employment Period for any reason whatsoever, other than pursuant to Articles Eight or Nine; (ii) reduction in the minimum annual salary then being paid to the Employee by Capsure, or reduction in his minimum or new minimum annual salary, or withdrawal from him of substantial fringe benefits (including participation in current or future stock option or stock appreciation plans) available to other senior corporate officers of the Companies; (iii) a change in the Employee's place of employment without his written consent, other than to UCIC's or UCHC's executive offices at a location in northern DeKalb County, Georgia, or requirements or demands of the Employee to perform services which would make the continuance of his principal residence and home life in DeKalb County, Georgia unreasonably difficult or inconvenient for him; or (iv) other substantial, material and adverse changes in the Employee's conditions of employment imposed on him by the Companies or any material breach by Capsure of the provisions of this New Agreement, after compliance with the provisions of Article Seven hereof. Article Eleven: Indemnification Capsure will indemnify the Employee (and his legal representatives or other successors) to the fullest extent permitted by the laws of their respective states of their existing certificates of incorporation and by-laws, and the Employee shall be entitled to the protection of any insurance policies the Companies may elect to maintain generally for the benefit of their directors and officers, against all costs, charges and expenses whatsoever incurred or sustained by the Employee or his legal representatives in connection with any action, suit or proceeding to which he (or his legal representatives or other successors) may be made a party by reason of his being or having been a director or officer of any of the Companies. If the existing certificates of incorporation and by-laws of the Companies do not provide for indemnity of the Employee to the fullest extent permitted by the laws of their respective states of domicile, Capsure will use its diligent best efforts to cause the amendment of such certificates of incorporation and/or by-laws so as to provide maximum indemnification. Article Twelve: Certain Additional Payments: No Duty to Mitigate The parties agree that the Employee shall not be under any duty to mitigate damages under this New Agreement. In furtherance thereof, it is expressly agreed that if the Employee's 6 7 employment is terminated pursuant to this New Agreement in a manner which results in the Employee being entitled to additional payments or benefits hereunder, such additional payments or benefits shall not be reduced by all or any portion of any payments or benefits received from parties other than the Companies. Article Thirteen: Non-Solicitation A. The Employee shall not at any time during the period of his employment by the Companies or within five years after termination of his employment by the Companies (regardless of the reason for termination), directly or indirectly, solicit any employee of the Companies to leave its employ or join the employ of another, then or at a later time, or solicit the employment of, or permit any business of which he is an owner, partner, substantial shareholder or principal executive to solicit the employment of, any person who was employed by the Companies, within one year prior to the time of such solicitation. B. The Employee acknowledges that the provisions of this Article are reasonable and necessary for the protection of the Companies, and that the Companies will be materially damaged if such covenants are not specifically enforced. Accordingly, the Employee agrees that the Companies will be entitled to injunctive relief for the purpose of restraining the Employee from violating such covenants in addition to any other relief to which the Companies may be entitled under this New Agreement. Article Fourteen: Jurisdiction and Venue The parties hereby irrevocably consent to the personal jurisdiction of and the propriety of venue in the courts of the State of Georgia and of any federal court located in such state in connection with any action or proceeding arising out of or relating to this New Agreement, any document or instrument delivered pursuant to, in connection with, or simultaneously with this New Agreement, or a breach of this New Agreement or any such document or instrument. Article Fifteen: Law This New Agreement shall be governed by and construed in accordance with the laws of the State of Georgia. Article Sixteen: Notices All notices hereunder shall be in writing and shall be, (1) sent by registered or certified mail, return receipt requested, or (2) served by personal service. If intended for Capsure, such notice shall be addressed to it, attention of its Chairman of the Board at Capsure's most current 7 8 address for its executive offices, or at such other address of which Capsure shall have given notice to the Employee in the manner herein provided; and if intended for the Employee, shall be addressed to him at ____________________ _______________________________________________________________________ __________________________________________, or at such other address of which the Employee shall have given notice to Capsure in the manner herein provided. Personal service of notices may be substituted for mailing provided a written receipt of such service is provided by the recipient party. For purposes of this section, notice shall be deemed received upon actual receipt. Article Seventeen: Entire Agreement This New Agreement constitutes the entire understanding among the parties with respect to the matters referred to herein and no waiver or modification to the terms hereof shall be valid unless in writing signed by the party to be charged and only to the extent therein set forth. All prior and contemporaneous agreements and understandings between the parties with respect to the subject matter of this New Agreement are superseded by this New Agreement. Article Eighteen: Counterparts This New Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and each of which shall be deemed an original. Article Nineteen: Severability If any provision in this New Agreement is invalid, illegal or unenforceable, the balance of this New Agreement shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances. Article Twenty: Binding Effect This New Agreement shall be binding upon and shall inure to the benefit of the parties hereto and any successor of Capsure whether by merger, liquidation, sale of assets, reorganization or otherwise and to the heirs, administrators and personal representative of the Employee, excepting, however, the elective rights of the Employee pursuant to Article Ten. Article Twenty-One: Withholding The Companies shall be entitled to withhold from amounts payable to the Employee hereunder such amounts as may be required by applicable law. 8 9 Article Twenty-Two: Assignment Neither this New Agreement nor any of the rights, interests or obligations hereunder shall be assigned by either of the parties hereto, other than in accordance with the provisions hereof, without the prior written consent of the other party. Article Twenty-Three: Effect of Waiver The waiver by either party of a breach of any provisions of this New Agreement shall not operate as or be construed as a waiver of any subsequent breach thereof. Article Twenty-Four: Headings The headings contained in this New Agreement are inserted for convenience only and do not constitute a part of this New Agreement. IN WITNESS WHEREOF, the parties have executed this New Agreement effective February 20, 1995. "Capsure" "The Employee" Capsure Holdings Corp. Bruce A. Esselborn By: Arthur A. Greenberg By: Bruce A. Esselborn - ------------------------------- ---------------------- Its: Vice President Bruce A. Esselborn 9 EX-10.(5) 4 EMPLOYMENT AGREEMENT 1 EXHIBIT 10(5) EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT entered into as of the 20th day of February, 1995 by and between Capsure Holdings Corp. ("Capsure"), a Delaware corporation, United Capitol Insurance Company, a Wisconsin corporation, and Mary Jane Robertson (the "Employee"), an individual. W I T N E S S E T H: WHEREAS, Capsure or various of its current subsidiaries have employed the Employee since July 14, 1986, and since February 20, 1990, pursuant to an Employment Agreement dated as of February 20, 1990 (the "Prior Agreement"); WHEREAS, Capsure wishes to continue to employ the Employee for the period provided in this Employment Agreement (the "Agreement") and the Employee is willing to continue to serve in the employ of Capsure and of any direct or indirect subsidiary of it (collectively the "Companies"); NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants herein contained, the parties agree as follows: Article One: Employment A. Capsure will continue to employ the Employee for the period (the "Employment Period") commencing on February 20, 1995 and ending February 19, 1997. The Employee accepts such employment and agrees to serve in the capacities set forth in this Agreement and to perform such services of a senior vice president nature commensurate with her position and offices and agrees diligently and competently to devote her entire business time and attention to such services, excepting disabilities, illness, vacation, paid holidays given by the Companies, and reasonable activities having a charitable, educational or other public interest purpose. B. During the Employment Period, the Employee shall serve as Senior Vice President and Chief Financial Officer of Capsure, and Executive Vice President and Chief Financial Officer of United Capitol Holding Company ("UCHC") and United Capitol Insurance Company ("UCIC"). In that capacity the Employee shall perform such duties as are commensurate with such office and as are consistent with past practice. C. In connection with her employment, the Employee shall not be required to relocate or transfer her principal residence from its present location in Atlanta, Georgia, and the Employee shall not be required to perform services which would make the continuance of either her normal homelife or her principal residence in its existing location unreasonably difficult or 2 inconvenient for her. A violation of any of these conditions shall be construed as an attempt by Capsure to terminate the Employee's service without cause. D. Capsure and the Employee mutually agree that the Prior Agreement has expired in accordance with its terms. Article Two: Compensation During the Employment Period A. The Companies will make available to the Employee, to the extent she satisfies the eligibility requirements thereof and to the extent permitted by law, any fringe or employee benefit program introduced generally to senior corporate officers. These benefits include, but are not limited to, pension, profit sharing, stock purchase, stock option, stock appreciation, savings deferred compensation, bonus, life insurance, disability insurance, health insurance, major medical and hospitalization insurance, and other plans and policies authorized now or in the future which in any event shall provide benefits to the Employee at a level that, in the aggregate, are not significantly less than those currently in effect with respect to the Employee. B. During the Employment Period, Capsure shall pay to the Employee and the Employee shall accept for her services a minimum annual aggregate salary of $225,000, payable in accordance with the Companies' customary payroll policy as in effect from time to time. At Capsure's option, the salary described herein may be paid through one of the Companies. The Companies reserve the right at any time and from time to time to increase the minimum annual salary of the Employee and shall review at least each year such minimum annual salary in relationship to the goals and performance of the Companies and prevailing competitive conditions. To the extent that the Employee's minimum annual salary is increased, the new amount will become known as her new minimum annual salary and such new minimum annual salary shall not thereafter be reduced. The minimum or new minimum annual salary due the Employee excludes any bonus or any other employee benefit or perquisite to which the Employee is entitled and, when adjusting the Employee's salary, the Board of Directors or any other body or group of persons responsible for setting the Employee's salary shall not take into consideration any bonuses, employee benefits or perquisites due the Employee. C. The Employee shall be entitled to, but not obligated to take, the number of paid vacation days in each calendar year determined by the Companies from time to time for its senior executive officers, but not less than three weeks in any calendar year. At the Employee's fifth anniversary with Capsure, the Employee shall then be entitled to four weeks vacation in that calendar year and each ensuing year. The Employee shall also be entitled to all paid holidays given by the Companies to its senior executive officers. 2 3 D. The Companies' obligation to pay the Employee the minimum annual salary during the Employment Period may be extinguished only upon a termination of the Employee's employment pursuant to the provisions of Articles Five and Six. E. The Employee shall be entitled to an annual bonus. The amount of such bonus shall be determined and paid in December of each year, and the amount of such bonus shall be determined by the Chief Executive Officer of Capsure, but subject to the final approval of the Compensation Committee of Capsure. F. The Companies shall reimburse the Employee for all out-of-pocket expenses incurred by her in connection with the performance of her duties hereunder, including professional activities, upon the presentation of appropriate documentation therefore in accordance with the then customary procedures of the Companies. Article Three: Deleted. Article Four: Notice of Breach Capsure and the Employee agree that, prior to the termination of the Employment Period by reason of any breach of any provisions of this Agreement, the injured party will give the party or parties in breach written notice specifying such breach and permitting the party in breach to cure such breach within the period of thirty (30) days after receipt of such notice. Article Five: Inability to Perform If, during the Employment Period, the Employee shall be unable to substantially perform the duties required of her pursuant to her employment due to any disability preventing her from performing such services for a period of six (6) cumulative months in a twelve consecutive month period, Capsure shall have the right to terminate the Employee's employment pursuant to this Agreement on thirty (30) days written notice, at the end of which time the Employee's employment shall be terminated. As used in this Agreement, the term "disability" shall mean the substantial inability of the Employee to perform her essential duties under this Agreement as determined by an independent physician selected by Capsure with the approval of the Employee. Any disability of less than six consecutive months duration shall not be cause for interruption, suspension or withholding of the salary due the Employee by Capsure. Article Six: Termination This New Agreement: (i) may be terminated at any time by mutual agreement between the Employee and Capsure; 3 4 (ii) shall terminate immediately upon the death of the Employee, but the Employee's estate shall be entitled to receive the salary due the Employee for a period of three (3) months following the day the death of the Employee occurred. As a condition for the aforesaid payments, Capsure shall have the right to require submission of proof of the Employee's death; (iii) may be terminated due to the disability of the Employee pursuant to Article Five; (iv) may be terminated upon a good faith determination by a majority vote of the Board members of Capsure that the termination of this Agreement is necessary by reason of a determination by any insurance department of a state having jurisdiction over Capsure or any subsidiary or affiliate, that the Employee must be removed or disqualified from acting as an officer of Capsure or any of its subsidiaries; or (v) may be terminated by Capsure at any time for "cause" upon the giving of thirty (30) days prior written notice to the Employee, setting forth the basis of such termination. For the purpose of this Agreement, the term "cause" shall be limited to: (a) the willful engaging of the Employee in conduct materially injurious to the Companies; (b) continued and willful inattention and neglect by the Employee of the material duties to be performed by her, which inattention and neglect is not the result of illness or disability by the Employee and which inattention and neglect, after compliance with the provisions of Article Four hereof, does not cease within thirty (30) days after written notice thereof specifying the details of such conduct is given to the Employee; and (c) the conviction of the Employee of a felony under state or federal law, unless in any such case the Employee performed such act in good faith and in a manner Capsure reasonably believed to be in or not opposed to the best interests of the Companies. Article Seven: Effective Termination A. The Employee's obligation to render services hereunder may be terminated by the Employee without any reduction of the amounts payable to her hereunder if the Employee's circumstances of employment shall have changed (as hereinafter defined). In such event the Employee shall specify by written notice to Capsure the event relied on for such termination, and if such event shall not have been cured within 30 days thereafter, the Employee's employment hereunder shall be deemed terminated. In the event of any termination by the 4 5 Employee pursuant to this Article Seven, or in the event Capsure shall terminate the Employee's employment, this Agreement or the Employment Period, other than pursuant to Articles Five or Six, the Employee shall continue to be entitled to receive all payments and other benefits provided for in this Agreement. B. The Employee's "circumstances of employment shall have changed" shall mean and include any of the following: (i) notice by Capsure to the Employee of termination of her employment, this Agreement or the Employment Period for any reason whatsoever, other than pursuant to Articles Five or Six; (ii) reduction in the minimum annual salary then being paid to the Employee by Capsure, or reduction in her minimum or new minimum annual salary, or withdrawal from her of substantial fringe benefits (including participation in current or future stock option or stock appreciation plans) available to other senior corporate officers of the Companies: (iii) a change in the Employee's place of employment without her written consent, other than to UCHC's or UCIC's executive offices at a location in Atlanta, Georgia, or requirements or demands of the Employee to perform services which would make the continuance of her principal; residence and home life in Atlanta, Georgia unreasonably difficult or inconvenient for her; or (iv) other substantial, material and adverse changes in the Employee's conditions of employment imposed on her by the Companies or any material breach by Capsure of the provisions of this Agreement, after compliance with the provisions of Article Seven hereof. Article Eight: Indemnification Capsure will indemnify the Employee (and her legal representatives or other successors) to the fullest extent permitted by the laws of their respective states of their existing certificates of incorporation and by-laws, and the Employee shall be entitled to the protection of any insurance policies the Companies may elect to maintain generally for the benefit of their directors and officers, against all costs, charges and expenses whatsoever incurred or sustained by the Employee or her legal representatives in connection with any action, suit or proceeding to which he (or her legal representatives or other successors) may be made a party by reason of her being or having been a director or officer of any of the Companies. If the existing certificates of incorporation and by-laws of the Companies do not provide for indemnity of the Employee to the fullest extent permitted by the laws of their respective states of domicile, the Companies will use their diligent best efforts to cause the amendment of such certificates of incorporation and/or by-laws so as to provide maximum indemnification. 5 6 Article Nine: Duty to Mitigate Notwithstanding anything above to the contrary, after the termination of Employee's employment hereunder to the extent Employee is otherwise employed, any amounts received in consideration thereof shall be used to reduce amounts payable hereunder on a dollar for dollar basis. Article Ten: Non-Solicitation A. The Employee shall not at any time during the period of her employment by the Companies or within five years after termination of her employment by the Companies (regardless of the reason for termination), directly or indirectly, solicit any employee of the Companies to leave its employ or join the employ of another, then or at a later time, or solicit the employment of, or permit any business of which he is an owner, partner, substantial shareholder or principal executive to solicit the employment of, any person who was employed by the Companies, within one year prior to the time of such solicitation. B. The Employee acknowledges that the provisions of this Article are reasonable and necessary for the protection of the Companies, and that the Companies will be materially damaged if such covenants are not specifically enforced. Accordingly, the Employee agrees that the Companies will be entitled to injunctive relief for the purpose of restraining the Employee from violating such covenants in addition to any other relief to which the Companies may be entitled under this Agreement. Article Eleven: Jurisdiction and Venue The parties hereby irrevocably consent to the personal jurisdiction of and the propriety of venue in the courts of the State of Georgia and of any federal court located in such state in connection with any action or proceeding arising out of or relating to this Agreement, any document or instrument delivered pursuant to, in connection with, or simultaneously with this Agreement, or a breach of this Agreement or any such document or instrument. Article Twelve: Law This New Agreement shall be governed by and construed in accordance with the laws of the State of Georgia. Article Thirteen: Notices All notices hereunder shall be in writing and shall be, (1) sent by registered or certified mail, return receipt requested, or (2) served by personal service. If intended for Capsure, such notices shall be addressed to it, attention of its Chairman of the Board at Capsure's most 6 7 current address for its executive offices, or at such other address of which Capsure shall have given notice to the Employee in the manner herein provided; and if intended for the Employee, shall be addressed to her at 60 Standish Avenue NW, Atlanta, GA 30309, or such other address of which the Employee shall have given notice to Capsure in the manner herein provided. Personal service of notices may be substituted for mailing provided a written receipt of such service is provided by the recipient party. For purposes of this section, notice shall be deemed received upon actual receipt. Article Fourteen: Entire Agreement This Agreement constitutes the entire understanding among the parties with respect to the matters referred to herein and no waiver or modification to the terms hereof shall be valid unless in writing signed by the party to be charged and only to the extent therein set forth. All prior and contemporaneous agreements and understandings between the parties with respect to the subject matter of this Agreement are superseded by this New Agreement. Article Fifteen: Counterparts This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and each of which shall be deemed an original. Article Sixteen: Severability If any provision in this Agreement is invalid, illegal or unenforceable, the balance of this Agreement shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances. Article Seventeen: Binding Effect This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and any successor of Capsure whether by merger, liquidation, sale of assets, reorganization or otherwise and to the heirs, administrators and personal representative of the Employee excepting, however, the elective rights of the Employee pursuant to Article Seven. Article Eighteen: Withholding The Companies shall be entitled to withhold from amounts payable to the Employee hereunder such amounts as may be required by applicable law. Article Nineteen: Assignment Neither this Agreement nor any of the rights, interests or obligations hereunder shall be 7 8 assigned by either of the parties hereto, other than in accordance with the provisions hereof, without the prior written consent of the other party. Article Twenty: Effect of Waiver The waiver by either party of a breach of any provisions of this Agreement shall not operate as or be construed as a waiver of any subsequent breach thereof. Article Twenty-One: Headings The headings contained in this Agreement are inserted for convenience only and do not constitute a part of this Agreement. IN WITNESS WHEREOF, the parties have executed this New Agreement effective February 20, 1995. "Capsure" "The Employee" Capsure Holdings Corp. Mary Jane Robertson By: /s/ Arthur A. Greenberg By: Mary Jane Robertson - ----------------------------- ---------------------------- Its: Vice President Mary Jane Robertson 8 EX-10.(6) 5 EMPLOYMENT AGREEMENT 1 EXHIBIT 10(6) EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT entered into as of the 20th day of February, 1995 by and between Capsure Holdings Corp. ("Capsure"), a Delaware corporation, and Steven S. Zeitman (the "Employee"), an individual. W I T N E S S E T H: WHEREAS, Capsure or various of its current subsidiaries have employed the Employee since July 14, 1986, and since February 20, 1990, pursuant to an Employment Agreement dated as of February 20, 1990 (the "Prior Agreement"); WHEREAS, Capsure wishes to continue to employ the Employee for the period provided in this Employment Agreement (the "Agreement") and the Employee is willing to continue to serve in the employ of Capsure and of any direct or indirect subsidiary of it (collectively the "Companies"); NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants herein contained, the parties agree as follows: Article One: Employment A. Capsure will continue to employ the Employee for the period (the "Employment Period") commencing on February 20, 1995 and ending February 19, 1997. The Employee accepts such employment and agrees to serve in the capacities set forth in this Agreement and to perform such services of an executive vice president nature commensurate with his position and offices and agrees diligently and competently to devote his entire business time and attention to such services, excepting disabilities, illness, vacation, paid holidays given by the Companies, and reasonable activities having a charitable, educational or other public interest purpose. B. During the Employment Period, the Employee shall serve as Executive Vice President of United Capitol Holding Company ("UCHC") and United Capitol Insurance Company ("UCIC"). In that capacity the Employee shall have such duties and responsibilities as may be assigned to him by the President and Chief Executive Officer of UCHC and UCIC, commensurate with the position of Executive Vice President. It is contemplated that the Employee's primary responsibility shall be to maintain and to further develop efficient underwriting operations for the UCHC and UCIC. C. In connection with his employment, the Employee shall not be required to relocate or transfer his principal residence from its present location in Marietta, Georgia, and the Employee shall not be required to perform services which would make the continuance of either 2 his normal homelife or his principal residence in its existing location unreasonably difficult or inconvenient for him. A violation of any of these conditions shall be construed as an attempt by Capsure to terminate the Employee's service without cause. D. Capsure and the Employee mutually agree that the Prior Agreement has expired in accordance with its terms. Article Two: Compensation During the Employment Period A. The Companies will make available to the Employee, to the extent he satisfies the eligibility requirements thereof and to the extent permitted by law, any fringe or employee benefit program introduced generally to senior corporate officers. These benefits include, but are not limited to, pension, profit sharing, stock purchase, stock option, stock appreciation, savings deferred compensation, bonus, life insurance, disability insurance, health insurance, major medical and hospitalization insurance, and other plans and policies authorized now or in the future which in any event shall provide benefits to the Employee at a level that, in the aggregate, are not significantly less than those currently in effect with respect to the Employee. B. During the Employment Period, Capsure shall pay to the Employee and the Employee shall accept for his services a minimum annual aggregate salary of $167,000, payable in accordance with the Companies' customary payroll policy as in effect from time to time. At Capsure's option, the salary described herein may be paid through one of the Companies. The Companies reserve the right at any time and from time to time to increase the minimum annual salary of the Employee and shall review at least each year such minimum annual salary in relationship to the goals and performance of the Companies and prevailing competitive conditions. To the extent that the Employee's minimum annual salary is increased, the new amount will become known as his new minimum annual salary and such new minimum annual salary shall not thereafter be reduced. The minimum or new minimum annual salary due the Employee excludes any bonus or any other employee benefit or perquisite to which the Employee is entitled and, when adjusting the Employee's salary, the Board of Directors or any other body or group of persons responsible for setting the Employee's salary shall not take into consideration any bonuses, employee benefits or perquisites due the Employee. C. The Employee shall be entitled to, but not obligated to take, the number of paid vacation days in each calendar year determined by the Companies from time to time for its senior executive officers, but not less than three weeks in any calendar year. At the Employee's fifth anniversary with UCIC, the Employee shall then be entitled to four weeks vacation in that calendar year and each ensuing year. The Employee shall also be entitled to all paid holidays given by the Companies to its senior executive officers. 2 3 D. The Companies' obligation to pay the Employee the minimum annual salary during the Employment Period may be extinguished only upon a termination of the Employee's employment pursuant to the provisions of Articles Five and Six. E. The Employee shall be entitled to an annual bonus. The amount of such bonus shall be determined and paid in December of each year, and the amount of such bonus shall be determined by the Chief Executive Officer of Capsure, but subject to the final approval of the Compensation Committee of Capsure. F. The Companies shall reimburse the Employee for all out-of-pocket expenses incurred by him in connection with the performance of his duties hereunder, including professional activities, upon the presentation of appropriate documentation therefore in accordance with the then customary procedures of the Companies. Article Three: Deleted Article Four: Notice of Breach Capsure and the Employee agree that, prior to the termination of the Employment Period by reason of any breach of any provisions of this Agreement, the injured party will give the party or parties in breach written notice specifying such breach and permitting the party in breach to cure such breach within the period of thirty (30) days after receipt of such notice. Article Five: Inability to Perform If, during the Employment Period, the Employee shall be unable to substantially perform the duties required of him pursuant to his employment due to any disability preventing him from performing such services for a period of six (6) cumulative months in a twelve consecutive month period, Capsure shall have the right to terminate the Employee's employment pursuant to this Agreement on thirty (30) days written notice, at the end of which time the Employee's employment shall be terminated. As used in this Agreement, the term "disability" shall mean the substantial inability of the Employee to perform his essential duties under this Agreement as determined by an independent physician selected by Capsure with the approval of the Employee. Any disability of less than six consecutive months duration shall not be cause for interruption, suspension or withholding of the salary due the Employee by Capsure. Article Six: Termination This New Agreement: (i) may be terminated at any time by mutual agreement between the Employee and Capsure; 3 4 (ii) shall terminate immediately upon the death of the Employee, but the Employee's estate shall be entitled to receive the salary due the Employee for a period of three (3) months following the day the death of the Employee occurred. As a condition for the aforesaid payments, Capsure shall have the right to require submission of proof of the Employee's death; (iii) may be terminated due to the disability of the Employee pursuant to Article Five; (iv) may be terminated upon a good faith determination by a majority vote of the Board members of Capsure that the termination of this Agreement is necessary by reason of a determination by any insurance department of a state having jurisdiction over Capsure or any subsidiary or affiliate, that the Employee must be removed or disqualified from acting as an officer of Capsure or any of its subsidiaries; or (v) may be terminated by Capsure at any time for "cause" upon the giving of thirty (30) days prior written notice to the Employee, setting forth the basis of such termination. For the purpose of this Agreement, the term "cause" shall be limited to: (a) the willful engaging of the Employee in conduct materially injurious to the Companies; (b) continued and willful inattention and neglect by the Employee of the material duties to be performed by him, which inattention and neglect is not the result of illness or disability by the Employee and which inattention and neglect, after compliance with the provisions of Article Four hereof, does not cease within thirty (30) days after written notice thereof specifying the details of such conduct is given to the Employee; and (c) the conviction of the Employee of a felony under state or federal law, unless in any such case the Employee performed such act in good faith and in a manner Capsure reasonably believed to be in or not opposed to the best interests of the Companies. Article Seven: Effective Termination A. The Employee's obligation to render services hereunder may be terminated by the Employee without any reduction of the amounts payable to him hereunder if the Employee's circumstances of employment shall have changed (as hereinafter defined). In such event the Employee shall specify by written notice to Capsure the event relied on for such termination, and if such event shall not have been cured within 30 days thereafter, the Employee's employment hereunder shall be deemed terminated. In the event of any termination by the Employee pursuant to this Article Seven, or in the event Capsure shall terminate the Employee's 4 5 employment, this Agreement or the Employment Period, other than pursuant to Articles Five or Six, the Employee shall continue to be entitled to receive all payments and other benefits provided for in this Agreement. B. The Employee's "circumstances of employment shall have changed" shall mean and include any of the following: (i) notice by Capsure to the Employee of termination of his employment, this Agreement or the Employment Period for any reason whatsoever, other than pursuant to Articles Five or Six; (ii) reduction in the minimum annual salary then being paid to the Employee by Capsure, or reduction in his minimum or new minimum annual salary, or withdrawal from him of substantial fringe benefits (including participation in current or future stock option or stock appreciation plans) available to other senior corporate officers of the Companies: (iii) a change in the Employee's place of employment without his written consent, other than to UCIC's or UCHC's executive offices at a location in Atlanta, Georgia, or requirements or demands of the Employee to perform services which would make the continuance of his principal; residence and home life in Marietta, Georgia unreasonably difficult or inconvenient for him; or (iv) other substantial, material and adverse changes in the Employee's conditions of employment imposed on him by the Companies or any material breach by Capsure of the provisions of this Agreement, after compliance with the provisions of Article Seven hereof. Article Eight: Indemnification Capsure will indemnify the Employee (and his legal representatives or other successors) to the fullest extent permitted by the laws of their respective states of their existing certificates of incorporation and by-laws, and the Employee shall be entitled to the protection of any insurance policies the Companies may elect to maintain generally for the benefit of their directors and officers, against all costs, charges and expenses whatsoever incurred or sustained by the Employee or his legal representatives in connection with any action, suit or proceeding to which he (or his legal representatives or other successors) may be made a party by reason of his being or having been a director or officer of any of the Companies. If the existing certificates of incorporation and by-laws of the Companies do not provide for indemnity of the Employee to the fullest extent permitted by the laws of their respective states of domicile, the Companies will use their diligent best efforts to cause the amendment of such certificates of incorporation and/or by-laws so as to provide maximum indemnification. Article Nine: Duty to Mitigate 5 6 Notwithstanding anything above to the contrary, after the termination of Employee's employment hereunder to the extent Employee is otherwise employed, any amounts received in consideration thereof shall be used to reduce amounts payable hereunder on a dollar for dollar basis. Article Ten: Non-Solicitation A. The Employee shall not at any time during the period of his employment by the Companies or within five years after termination of his employment by the Companies (regardless of the reason for termination), directly or indirectly, solicit any employee of the Companies to leave its employ or join the employ of another, then or at a later time, or solicit the employment of, or permit any business of which he is an owner, partner, substantial shareholder or principal executive to solicit the employment of, any person who was employed by the Companies, within one year prior to the time of such solicitation. B. The Employee acknowledges that the provisions of this Article are reasonable and necessary for the protection of the Companies, and that the Companies will be materially damaged if such covenants are not specifically enforced. Accordingly, the Employee agrees that the Companies will be entitled to injunctive relief for the purpose of restraining the Employee from violating such covenants in addition to any other relief to which the Companies may be entitled under this Agreement. Article Eleven: Jurisdiction and Venue The parties hereby irrevocably consent to the personal jurisdiction of and the propriety of venue in the courts of the State of Georgia and of any federal court located in such state in connection with any action or proceeding arising out of or relating to this Agreement, any document or instrument delivered pursuant to, in connection with, or simultaneously with this Agreement, or a breach of this Agreement or any such document or instrument. Article Twelve: Law This New Agreement shall be governed by and construed in accordance with the laws of the State of Georgia. Article Thirteen: Notices All notices hereunder shall be in writing and shall be, (1) sent by registered or certified mail, return receipt requested, or (2) served by personal service. If intended for Capsure, such notices shall be addressed to it, attention of its Chairman of the Board at Capsure's most current address for its executive offices, or at such other address of which Capsure shall have given notice to the Employee in the manner herein provided; and if intended for the Employee, shall be addressed to him at 1783 Charles Lake Dr., Masisha, GA. 6 7 30068, or such other address of which the Employee shall have given notice to Capsure in the manner herein provided. Personal service of notices may be substituted for mailing provided a written receipt of such service is provided by the recipient party. For purposes of this section, notice shall be deemed received upon actual receipt. Article Fourteen: Entire Agreement This Agreement constitutes the entire understanding among the parties with respect to the matters referred to herein and no waiver or modification to the terms hereof shall be valid unless in writing signed by the party to be charged and only to the extent therein set forth. All prior and contemporaneous agreements and understandings between the parties with respect to the subject matter of this Agreement are superseded by this New Agreement. Article Fifteen: Counterparts This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and each of which shall be deemed an original. Article Sixteen: Severability If any provision in this Agreement is invalid, illegal or unenforceable, the balance of this Agreement shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances. Article Seventeen: Binding Effect This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and any successor of Capsure whether by merger, liquidation, sale of assets, reorganization or otherwise and to the heirs, administrators and personal representative of the Employee excepting, however, the elective rights of the Employee pursuant to Article Seven. Article Eighteen: Withholding The Companies shall be entitled to withhold from amounts payable to the Employee hereunder such amounts as may be required by applicable law. Article Nineteen: Assignment Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by either of the parties hereto, other than in accordance with the provisions hereof, without the prior written consent of the other party. 7 8 Article Twenty: Effect of Waiver The waiver by either party of a breach of any provisions of this Agreement shall not operate as or be construed as a waiver of any subsequent breach thereof. Article Twenty-One: Headings The headings contained in this Agreement are inserted for convenience only and do not constitute a part of this Agreement. IN WITNESS WHEREOF, the parties have executed this New Agreement effective February 20, 1995. "Capsure" "The Employee" Capsure Holdings Corp. Steven S. Zeitman By: Arthur A. Greenberg By: Stevan S. Zeitman -------------------------- ------------------------------- Its: Vice-President Steven S. Zeitman 8 EX-10.(7) 6 EXECUTIVE EMPLOYMENT AGREEMENT 1 EXHIBIT 10(7) EXECUTIVE EMPLOYMENT AGREEMENT THIS EXECUTIVE EMPLOYMENT AGREEMENT ("Agreement") is entered into as of the 14th day of August, 1992 by and among NUCORP, INC., a Delaware corporation ("NUC"), SUREWEST FINANCIAL CORP., a South Dakota corporation ("SFC"), SI ACQUISITION CORP., a Texas corporation ("SI"), WESTERN SURETY COMPANY, a South Dakota corporation ("WSC"), EQUITY HOLDINGS ("EH"), an Illinois partnership, and DAN L. KIRBY (the "Executive"). W I T N E S S E T H: WHEREAS, the Executive has been employed as the Senior Vice President and General Counsel of WSC since 1974 and has been a member of its Board of Directors since 1972, and a member of its Executive Committee since its inception in 1982, and has also been an officer and Director of, and has performed services for, SFC which owns 100% of the shares of stock of WSC, and serves as a member of the Board of Directors of each subsidiary of WSC. The Executive's employment by WSC was confirmed in an Employment Agreement dated January 1, 1992 (the "Prior Agreement"); and WHEREAS, on or about the date hereof, through a merger transaction, NUC acquired 100% of the shares of SFC and in connection thereof, SI, NUC, SFC and WSC desire that SFC and WSC continue to employ the Executive for the period provided in this Agreement and the Executive is willing to continue to serve in the employ of both SFC and WSC and of any direct or indirect subsidiary of either of them (sometimes each a "Company" or collectively called "Companies") on the terms and conditions hereinafter set forth. 2 NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants herein contained, the parties agree as follows: ARTICLE I: CANCELLATION OF THE PRIOR AGREEMENT. WSC and the Executive mutually agree to terminate the Prior Agreement effective and concurrent with the effective date of this Agreement. In addition, all other employment agreements or arrangements existing between the Executive, SFC and WSC, whether oral or in writing, shall be deemed terminated concurrent with the effective date of this Agreement. ARTICLE II: EMPLOYMENT. A. Direction. SFC and WSC will continue to employ the Executive for a three (3) year period (the "Employment Period") commencing on August 14, 1992 and ending August 14, 1995 ("Expiration Date") unless such employment shall have been sooner terminated, as hereinafter set forth. The Executive accepts such employment and agrees to serve in the capacity set forth in this Agreement and to perform such services of a Senior Vice President and General Counsel commensurate with his position and offices and agrees diligently and competently to devote the necessary business time and attention to such services (subject to the provisions of Article II, Section C below) excepting during disabilities, illness, vacation and paid holidays given by the Companies. B. Positions and Duties. During the Employment Period, the Executive shall continue to serve as Senior Vice President, Secretary and General Counsel of each of the Companies and as Co-Chairman of its Board of Directors ("Board") with Joe P. Kirby. In such capacity, and subject to the direction, approval and control of the Boards of the Companies, the Executive shall continue to perform the duties for the Companies that he has previously performed as set forth below. 2 3 1. Basic Duties - In general, the Executive shall continue to perform the duties previously performed by him for the Companies and continue to expend such of his working time for philanthropic, political, civic, and promotional activities as is commensurate with the past practices of the Executive and the Companies. In this connection the Executive's responsibilities, duties and powers shall include, but are not necessarily limited to: (a) Supervising, monitoring and directing all legal activities of the Companies; (b) Providing legal direction to all areas of corporate activities for each of the Companies; (c) Monitoring and directing each of the Companies' lobbying activities; (d) Supervising outside legal counsel; (e) Maintaining current knowledge of developments in the insurance industry; (f) Representing the Companies periodically at select industry gatherings (e.g. NAIS, SAA and NASBP) and in Company and community activities. In this connection, in consultation with Joe P. Kirby, the Companies' President, the Executive will supervise and determine the Companies' contributions in the name of the Companies to Sioux Falls and South Dakota local charities and related causes in accordance with the past practice of the Companies and shall regularly report such contribution activities to the Board of Directors of the Companies; and (g) Cooperating and assisting with the duties and powers set forth in the Executive Employment Agreement among Joe P. Kirby and 3 4 the Companies of even date herewith and to assume primary responsibility for said duties and powers in the event Joe P. Kirby is no longer employed by the Companies. 2. Committees. Should an Executive Committee of either SFC and/or WSC be formed, the Executive shall serve as Co-Chairman of the Executive Committee with Joe P. Kirby. The Executive shall have the right, but not the obligation, to serve as a member of all other SFC or WSC Committees with management or oversight responsibilities for the Companies. 3. Directorships; Voting. (a) Each of NUC, SFC, and WSC agree that, so long as the Executive is employed under this New Agreement, all voting rights held, directly or indirectly, by them, their nominees or assignees, shall all be voted in favor of the Executive to be nominated to the respective Boards of SFC and WSC (and any subsidiaries of either), to be elected to such Boards at each meeting of their respective stockholders at which the class of Directors to which the Executive is assigned is to be elected, and further, to favorably vote the respective shares towards the election of the Executive or Joe P. Kirby to serve as Chairman of the Boards and Chairman of the Executive Committees, if any, of the Boards of SFC and WSC. (b) NUC and the Executive agree that the Board of Directors of the Companies shall consist of at least seven (7) members each to have the same individuals for both Companies. NUC shall have the right to nominate and elect five (5) of the seven (7) Directors for both Companies and the Executive shall have the right to be a Director of 4 5 both Companies; another Director shall be Joe P. Kirby. NUC agrees to vote all its shares of SFC in favor of the election of the Executive to the SFC Board and SFC agrees to vote all its shares of WSC in favor of the election of the Executive to the WSC Board, and the Executive agrees to vote favorably for each of the NUC nominees. (c) It is further agreed that all NUC, SFC or WSC shares, directly or indirectly, owned or controlled by EH or principals of EH or their respective affiliates (of which EH has control) shall vote in favor of the Executive in accordance with Article II, Sections B.3(a) and (b) above. (d) Notwithstanding the foregoing provisions of this Article II, Section B.3, it shall not be considered a breach of this Agreement by any party if (1) the Executive is removed as a Director of either SFC, WSC or NUC, if applicable, as a result of the determination by the Director of Insurance of South Dakota (or by any other Insurance Department having jurisdiction over the Companies or any subsidiary or affiliate) that the Executive must be removed or disqualified from acting as a director of the Companies or NUC or (2) if the Executive is terminated for "cause" as defined in Article VII, Section E. below. C. Location of Services; Continuing Activities. 1. Location of Services. During the Employment Period, the Executive's office shall be customary to a position and shall be located in the principal Executive offices of SFC and WSC, both of which shall be located in Sioux Falls, South Dakota. In connection with his employment by 5 6 the Companies, the Executive shall not be required to directly or indirectly relocate or transfer his principal residence from Sioux Falls, South Dakota. 2. Continuing Activities. NUC and the Companies acknowledge that the Executive will continue to expend such employment and working time in such civic, political, philanthropic, recreational, social and promotional activities as is commensurate with the past practice between the Executive and the Companies ("Continuing Activities"). The Executive shall continue to devote such time to his duties hereunder, other than Continuing Activities, as he now devotes to such duties and as is commensurate with the past practice between the Executive and the Companies. ARTICLE III: COMPENSATION AND OTHER BENEFITS DURING THE EMPLOYMENT PERIOD. A. Basic Salary; Annual Review. During the Employment Period, the Company shall pay to the Executive, and the Executive shall accept for his services, a minimum basic annual aggregate salary of Two Hundred Fifty Thousand Dollars ($250,000) ("Basic Salary") payable in accordance with the Company's customary payroll policy in effect from time to time. The Company, through its Board of Directors, reserves the right at any time, from time to time, to increase the Basic Salary and agrees that it shall annually confer with the Executive in good faith and review the Basic Salary to be paid to the Executive for the then fiscal year and yearly thereafter with a view to increasing (but not decreasing) the Basic Salary based upon the performance of the Executive in relationship to the goals and performance of the Companies and prevailing business and competitive conditions. To the extent that the Executive's Basic Salary is increased, the new amount will become known as such New Basic Salary and shall not thereafter be reduced. 6 7 The Basic Salary and New Basic Salary to the Executive exclude any bonus or other employee benefits or perquisites to which the Executive is entitled and, when adjusting the Executive's salary, the Board or any other body or group of persons responsible for setting the Executive's salary shall not take into consideration the value of any bonuses, Incentive Bonus Compensation, employee benefits or other perquisites to the Executive. The Companies' obligation to pay the Executive the Basic Salary or any New Basic Salary during the Employment Period may be extinguished only upon a termination of the Executive's employment pursuant and subject to the provisions of Articles VI and VII below. B. Incentive Bonus Compensation. In addition to Basic Salary or New Basic Salary, the Company agrees to pay to the Executive an amount determined pursuant to the following formula based upon the Premiums Earned for each of fiscal year of the Companies while this Agreement is in effect, or in the event this Agreement is terminated prior to the end of any fiscal year, an amount determined pursuant to the following formula based upon the Premiums Earned for such year multiplied by a fraction, the numerator of which is the number of days during such fiscal year in which this Agreement was in force and effect and the denominator of which is 365 ("Incentive Bonus Compensation"), as follows: If Premiums Earned are equal to or exceed $50,000,000, the Incentive Bonus Compensation shall be two and one half percent (2 1/2%) of total Premiums Earned in excess of $50,000,000 provided that Incentive Bonus Compensation payable hereunder shall not exceed the total amount of Two Hundred Fifty Thousand Dollars ($250,000) or prorata portion thereof in any fiscal year unless otherwise increased by the Board of Directors of the applicable Company or Companies. As used herein "Premiums Earned" shall have the meaning given those terms in the Company's (WSC) Statutory Financial Statements ("Financial Statements") audited by the firm of Independent Certified Public Accountants then regularly 7 8 employed by the Company consistent with the accounting principals used in preparing such Financial Statements of the Company for the year ended December 31, 1991 plus the premiums earned by any corporation or other entity controlled by, or under direct or indirect common control of NUC ("Affiliate(s)") or the Companies from the sale of the types of insurance policies, bonds or other insurance products for which any Company received premium payments in the fiscal year ending December 31, 1991. The Company shall furnish to the Executive the Financial Statements for each fiscal year of the Company and each Affiliate during which this Agreement is in effect (in whole or in part) within 120 days following the end of each such fiscal year. Any Incentive Bonus Compensation for each fiscal year of the Company shall be determined in the last month of the fiscal year (December) and paid to the Executive in a lump sum as the Board of Directors determines, but no later than the thirtieth (30th) day after the close of the fiscal year. C. Vacations, Etc. The Executive shall be entitled to paid annual vacation time commensurate with the past practices of the Executive and the Companies. The Executive shall also be entitled to all paid holidays and sick days given or allowed by the Companies to its senior executive officers. D. Perquisites and Other Fringe Benefits. In addition to any and all other benefits, vacation, Basic Salary, New Basic Salary, and Incentive Bonus Compensation provided to the Executive hereunder, in accordance with the past practices between the Executive and the Companies the Companies shall continue to provide the Executive with such additional benefits and perquisites previously provided to him by the Companies (including, without limitation, participation in any fringe or 8 9 employee benefit program provided generally to senior executive officers of the Companies, or otherwise presently provided to the Executive, and medical, life and disability insurance, first class travel and accommodations, sick pay plans, and payment or reimbursement for monthly membership dues and other expenses in the furtherance of the Company's business). E. General Expenses. The Companies shall reimburse the Executive for all out-of-pocket expenses incurred by him in connection with the performance of his duties hereunder upon the presentation of appropriate documentation therefor in accordance with the past practice between the Companies and the Executive. ARTICLE IV: STOCK OPTIONS. NUC, in accordance with the terms and provisions of the Nucorp, Inc. 1990 Stock Option Plan (the "1990 Plan") which is incorporated by reference herein, hereby grants to the Executive options to purchase 50,000 shares of NUC common stock under the terms of the Non-qualified Stock Option Plan referred to in the 1990 Plan at a base price equal to the lower of (a) the average trading price of NUC common stock on the date hereof, and (b) the average trading price of NUC common stock for the 17-week immediately following the date hereof. The stock option period shall be for a period of ten (10) years and may be exercisable in whole or in part from time to time on or before the tenth (10th) anniversary of the effective date of the stock option. NUC, at its sole expense, agrees to register, in accordance with the Securities Act of 1933, as amended (the "Act"), or any similar Federal statute and any applicable states securities laws, all shares subject to the 1990 plan within two years of the effective date of the 1990 plan. NUC further agrees that should it cause to register any of its shares for any 9 10 reason whatsoever during this two-year period, NUC, in a simultaneous manner, will also register shares subject to the 1990 plan. ARTICLE V: NOTICE OF BREACH. The Companies and the Executive agree that, prior to the termination of the Employment Period by reason of "cause" (as hereinafter defined) or any breach of any provisions of this Agreement, the injured party will give the other party or parties written notice ("Notified Party") specifying such breach or cause and permitting the Notified Party to cure such breach or cause within the period of thirty (30) days after receipt of such notice. ARTICLE VI: INABILITY TO PERFORM (DISABILITY). If, during the Employment Period, the Executive shall be unable to substantially perform the duties required of him pursuant to his employment due to any disability preventing him from performing such services for a period of six (6) cumulative months in a twelve consecutive month period, the Companies shall have the right to terminate the Executive's employment pursuant to this Agreement on thirty (30) days' advance written notice, at the end of which time the Executive's employment shall be terminated. As used in this Agreement, the term "disability" shall mean the substantial inability of the Executive to perform his duties as described under this Agreement as determined by an independent physician selected by the Companies with the approval of the Executive. Any disability of less than six cumulative months duration shall not be cause for interruption, suspension or withholding of the salary or other remuneration or benefits due the Executive by the Companies. Until the employment of the Executive is actually terminated, the Executive shall be entitled to receive his Basic Salary or New Basic Salary and any 10 11 other remuneration and benefits as provided for herein including, but not limited to, a prorated portion of his Incentive Bonus Compensation, if any. ARTICLE VII: TERMINATION. This Agreement: A. may be terminated at any time by mutual agreement between the Executive and the Companies; B. shall terminate immediately upon the death of the Executive, provided however, notwithstanding any provision to the contrary in this Agreement, the Executive's estate shall be entitled to receive the prorated portion of his Incentive Bonus Compensation, if any, and the Basic Salary or New Basic Salary due the Executive for a period of six (6) months following the date the death of the Executive occurred; C. may be terminated by either the Companies or the Executive due to the disability of the Executive pursuant to Article VI hereof; D. may be terminated upon a good faith determination by a majority vote of the Board of SFC or WSC that the termination of this Agreement is necessary by reason of a final determination by the Director of Insurance of the State of South Dakota (or by any other insurance department having jurisdiction over SFC or WSC or any subsidiary or affiliate) that the Executive must be removed or disqualified from acting as an officer of SFC or WSC; or E. may be terminated by the Companies at any time for "cause determined by a majority vote of the Boards of SFC or WSC upon the giving of notice to the Executive in accordance with Article V of this Agreement setting forth the basis of such termination. For the purposes of this Agreement, the term "cause" shall be limited to: 11 12 (a) the engaging of the Executive in conduct materially injurious to the Companies unless the Executive engaged in such conduct (i) in good faith and reasonably believed such conduct to be in or not opposed to the best interests of the Company(s) or (ii) at the request or direction of the Board of Directors of the Company(s); (b) continued and wilful inattention and neglect by the Executive of the material duties to be performed by him, (other than by reason of illness or engaging in activities otherwise permitted or required under this Agreement) and which inattention and neglect, after compliance with the provisions of Article V hereof, does not cease within thirty (30) days after written notice thereof specifying the details of such conduct is given to the Executive; and (c) the conviction of the Executive of a felony under state or federal law. Notwithstanding the foregoing, no termination of this Agreement shall diminish or effect in any way NUC's obligation to repurchase and/or register shares of common stock (and any other securities of the Companies received with respect thereto) pursuant to Article IV hereof. ARTICLE VIII: EFFECTIVE OR DEEMED TERMINATION. A. Termination by Executive for Good Reason. The Executive's obligation to render services hereunder may be terminated by the Executive if the Executive's "circumstances of employment shall have changed" (as hereinafter defined), such termination to be known also as "termination for good reason". In such event the Executive shall specify by written notice to NUC and/or the Companies the event or reason relied on for such termination, and if such event or reason shall not have 12 13 been cured within 30 days thereafter, the Executive's employment hereunder shall be deemed terminated ("Effective Termination Date"). B. The Executive's "circumstances of employment shall have changed" shall mean and include, but shall not necessarily be limited to, any of the following: 1. Notice by the Board of Directors of the Companies to the Executive of termination of his employment, this Agreement or the Employment Period for any reason whatsoever, other than pursuant to Articles VI or VII; 2. failure of NUC and/or the Companies to nominate and vote for the Executive and his designee in the positions all as provided in Article II, Section B above; 3. reduction in the Basic Salary or New Basic Salary then being paid to the Executive by the Companies, or withdrawal from him of fringe benefits or perquisites (including participation in current or future stock option or stock appreciation plans) provided to him under this Agreement or otherwise available to other senior corporate officers of the Companies; 4. a change in the Executive's place of employment without written consent as above described in Article II, Section C.1 above, or requirements or demands of the Executive to perform services which would make the continuance of his principal residence and home life in Sioux Falls, South Dakota unreasonably difficult or inconvenient for him, and/or which would materially restrict or reduce the Executive's participation in Continuing Activities; 5. (i) termination or discharge of a material number of employees. (5% of the employees located in the Sioux Falls, S.C. office of the Companies 13 14 in any calendar year) of the Companies if (a) the positions of such terminated or discharged employees are to be filled by persons who are employed by any of NUC, EH or any of their affiliates, or (b) such terminations are due to the relocation of the employees' positions outside of the Sioux Falls, South Dakota area, or (c) such terminations are not in connection with a general reduction of the number of employees of WSC or SFC due to a significant economic downturn in the Business of WSC and SFC; or (ii) the relocation of a significant portion of the operations of the Business of the Companies which are currently conducted in Sioux Falls, South Dakota to another location, provided, however, the foregoing shall not be deemed to prevent the termination of an employee for cause due to such employee's lack of performance; 6. a material increase in the time the Executive is required to spend in travel for the Companies which requires overnight stays away from Sioux Falls, South Dakota, other than quarterly meetings of the Board of Directors of NUC; 7. failure of the Companies to make charitable donations of at least $200,000 in each year of the term hereof to donees with offices, facilities or programs located in South Dakota in accordance with the past practice of the Companies; and 8. other material and adverse changes in the Executive's conditions of employment imposed on him by NUC or the Companies or any material breach by the Companies of the provisions of the Agreement, after compliance with the provisions of Article V hereof. 14 15 C. Obligations on Termination. In the event Executive's employment under this Agreement terminates on or before 1994, for any reason other than "cause", death, or the passing of the applicable Expiration Date, the Executive shall be entitled to receive all payments and other benefits provided to him under this Agreement (including, without limitation, Basic or New Basic Salary and Incentive Bonus Compensation and amounts pursuant to Article VI) for a period equal to the remaining term of the Agreement up to 1994. Executive shall also be entitled to remove from his personal office all computer equipment, all personal computer files not essential to the business, all other personal files, books, memorabilia related to Company/Kirby family history, and all other personal items. ARTICLE IX: INDEMNIFICATION. Each of NUC, SFC and WSC will indemnify, defend and hold harmless the Executive (and his personal or legal representatives or other successors) to the fullest extent permitted by the laws of their respective states and their existing certificates of incorporation and by-laws, and the Executive shall be entitled to the protection of all insurance policies which NUC and the Companies may acquire and maintain generally for the benefit of their directors and officers, against all costs, charges and expenses (including, but not limited to, attorneys' fees and other legal expenses) whatsoever incurred or sustained by the Executive or the personal or legal representatives in connection with any action, suit or proceeding to which he (or personal or legal representatives or other successors) may be made a party by reason of his being or having been a director, employee or officer of NUC, SFC or WSC and their respective subsidiaries and affiliates. If the existing certificates of incorporation and by-laws of NUC and the Companies do not provide for indemnity 15 16 of the Executive to the fullest extent, permitted by the laws of their respective states of domicile, NUC and the Companies will use their Diligent best efforts to amend such certificates of incorporation and/or by-laws so as to provide maximum indemnification. ARTICLE X: NO DUTY TO MITIGATE/NO REDUCTIONS. A. The parties agree that the Executive shall not be under any duty to mitigate damages under this Agreement and such defense shall not be interposed in any legal proceedings among the parties. In furtherance thereof, it is expressly agreed that if the Executive's employment is terminated pursuant to this Agreement in a manner which results in the Executive being entitled to additional payments or benefits hereunder, such additional payments or benefits shall not be reduced by any amounts or benefits he could have earned or by any payments or benefits actually earned or received from parties other than the Companies. ARTICLE XI: JURISDICTION AND VENUE. Without limitation of the arbitration rights specified in Article XXII below, the parties hereby irrevocably consent to the personal jurisdiction of and the propriety of venue of arbitrators and in the courts located in the City of Chicago, State of Illinois and of any federal court located in Chicago in connection with any permitted action or proceeding arising out of or relating to this Agreement, any document or instrument delivered pursuant to, in connection with, or simultaneously with this Agreement, or a breach of this Agreement or any such document or instrument. 16 17 ARTICLE XII: LAW. Subject to and without limitation of the provisions of Articles XI and XXII hereof, this Agreement shall be governed by and construed in accordance with the conflicts laws of the State of Illinois. ARTICLE XIII: NOTICES. All notices hereunder shall be in writing and shall be either (A) sent by registered or certified mail, return receipt requested, or (B) overnight delivery or courier, or (C) by "Fax", telex, telecopier or other telecommunication device capable of creating a legible written record (and promptly confirmed in writing), or (D) served by personal service. If intended for NUC or the Companies, such notices shall be addressed to such party, attention of its Chairman of the Board at either NUC's or the Companies' most current address for their respective executive offices, or at such other address of which NUC or the Companies shall have given notice to the Executive in the manner herein provided with a copy to: Sheli Z. Rosenberg, Rosenberg & Liebentritt P.C., 2 North Riverside Plaza, Chicago, Illinois; and if intended for the Executive, shall be addressed him at 2021 Austin Drive, Sioux Falls, South Dakota 57105, with a copy to L. Robins and J. Marks, Rudnick & Wolfe, 203 North LaSalle Street, Chicago, Illinois, or at such other address of which the Executive shall have given notice to NUC or the Companies in the manner herein provided. Personal service of notices may be substituted for mailing provided a written acknowledgement of such service is provided by the recipient. For purposes of this Article XIII, notice shall be deemed received upon actual receipt. ARTICLE XIV: ENTIRE AGREEMENT. This Agreement constitutes the entire understanding among the parties with respect to the matters referred to herein and no waiver or modification to the 17 18 terms hereof shall be valid unless in writing signed by the party to be charged and only to the extent therein set forth. All prior and contemporaneous agreements and understandings between the parties with respect to the subject matter of this Agreement are superseded by this Agreement, unless otherwise provided in any separate writing signed by the parties hereto. ARTICLE XV: COUNTERPARTS. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and each of which shall be deemed an original. ARTICLE XVI: SEVERABILITY. If any provision in this Agreement is invalid, illegal or unenforceable, the balance of this Agreement shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances. ARTICLE XVII: BINDING EFFECT. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and any successor to NUC or the Companies whether by merger, liquidation, sale of assets, reorganization or otherwise and to the heirs, and personal or legal representative(s) of the Executive. ARTICLE XVIII: WITHHOLDING. NUC and the Companies shall be entitled to withhold from amounts payable to the Executive hereunder such amount as may be required by applicable law. ARTICLE XIX: ASSIGNMENT. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by either of the parties hereto, other than in 18 19 accordance with the provisions hereof, without the prior written consent of the other applicable parties. ARTICLE XX: EFFECT OF WAIVER. The waiver of either party of a breach of any provision of this Agreement shall not operate as or be construed as a waiver of any subsequent breach thereof. ARTICLE XXI: HEADINGS. The headings contained in this Agreement are inserted for convenience only and do not constitute a part of this Agreement. ARTICLE XXII: ARBITRATION. If any dispute, claim or controversy shall arise between the parties hereto as to any issue whatsoever, other than the determination of disability, the same shall be referred to and settled by the following "arbitration" procedure which may be requested upon the application of any interested party: It is agreed the arbitration hearings, if any, shall be held solely in Chicago, Illinois, and any such dispute, claim or controversy shall be referred to and settled by such arbitration in accordance with the Commercial Arbitration Rules ("Rules") of the American Arbitration Association ("AAA") then in effect (which Rules are incorporated herein by reference as through set forth at length herein) and any decision or order or finding rendered by the arbitrator or arbitrators ("arbitrators") appointed in accordance with such Rules shall be final and conclusive upon the parties hereto and judgment upon the award, finding or decision rendered may be entered in the Court of the forum, state or federal, having jurisdiction, as provided in Article XI above. It is expressly agreed between the parties hereto that whether or not the Rules of the AAA shall provide for a discovery procedure, such discovery procedure is hereby granted and permitted in the said arbitration proceedings and the parties may apply to the 19 20 arbitrators for the enforcement of any form of discovery which would be permitted by the laws of the State of Illinois and their award or decision in respect of such discovery shall be final and binding. The arbitrators, if they deem that the matter requires it, are authorized to award to the party whose contention is sustained such sums as they or a majority of them shall deem proper to compensate it or him for the time and expense incident to the proceedings and, if the arbitration was demanded without reasonable cause, then they may also award damages for delay, if any. The arbitrators shall determine their own reasonable compensation in accordance with such AAA Rules, and, unless otherwise provided by agreement, shall assess the cost and charges of the proceedings equally to both parties unless the arbitrators shall find an issue raised by either party was unreasonable or frivolous and that therefore the costs of the arbitration or any portion thereof shall be borne by the said party. 20 21 IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the day and year first above written. NUCORP., INC. a Delaware corporation ___________________________ By: Arthur A. Greenberg Witness ------------------------------------------ Its Senior Vice President ("NUC") SUREWEST FINANCIAL CORP., a South Dakota corporation ___________________________ By: Joe P. Kirby Witness ------------------------------------------ Its _____ President ("SFC") WESTERN SURETY COMPANY, a South Dakota corporation ___________________________ By: Joe P. Kirby Witness ------------------------------------------ Its _____ President ("WSC") EQUITY HOLDINGS, an Illinois partnership ___________________________ By: Arthur A. Greenberg, Trustee Witness ------------------------------------------ A duly authorized Partner or other representative solely as to the obligations under Article II B3 ("EH") ___________________________ Dan L. Kirby Witness ------------------------------------------------ DAN L. KIRBY (the "Executive") SI ACQUISITION CORP., a Texas corporation ___________________________ By: Arthur A. Greenberg Witness ------------------------------------------ Its Senior Vice President 21 EX-10.(8) 7 EXECUTIVE EMPLOYMENT AGREEMENT 1 EXHIBIT 10(8) EXECUTIVE EMPLOYMENT AGREEMENT THIS EXECUTIVE EMPLOYMENT AGREEMENT ("Agreement") is entered into as of the 14th day of August, 1992 by and among NUCORP, INC., a Delaware corporation ("NUC"), SI ACQUISITION CORP., a Texas corporation ("SI"), SUREWEST FINANCIAL CORP., a South Dakota corporation ("SFC"), WESTERN SURETY COMPANY, a South Dakota corporation ("WSC"), EQUITY HOLDINGS ("EHI"), an Illinois partnership, and JOE P. KIRBY (the "Executive"). W I T N E S S E T H: WHEREAS, the Executive has been employed as the President and Chief Executive Officer of WSC since 1979 and has been a member of its Board of Directors since 1972, and a member of its Executive Committee since its inception in 1982, and has also been an officer and Director of, and has performed services for, SFC which owns 100% of the shares of stock of WSC, and serves as a member of the Board of Directors of each subsidiary of WSC. The Executive's employment by WSC was confirmed in an Employment Agreement dated January 1, 1992 (the "Prior Agreement"); and WHEREAS, on or about the date hereof, through a merger transaction, NUC acquired 100% of the shares of SFC and in connection thereof, SI, NUC, SFC and WSC desire that SFC and WSC continue to employ the Executive for the period provided in this Agreement and the Executive is willing to continue to serve in the employ of both SFC and WSC and of any direct or indirect subsidiary of either of them (sometimes each a "Company" or collectively called "Companies") on the terms and conditions hereinafter set forth. 2 NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants herein contained, the parties agree as follows: ARTICLE I: CANCELLATION OF THE PRIOR AGREEMENT. WSC and the Executive mutually agree to terminate the Prior Agreement effective and concurrent with the effective date of this Agreement. In addition, all other employment agreements or arrangements existing between the Executive, SFC and WSC, whether oral or in writing, shall be deemed terminated concurrent with the effective date of this Agreement. ARTICLE II: EMPLOYMENT. A. Direction. SFC and WSC will continue to employ the Executive for a three (3) year period (the "Employment Period") commencing on August 14, 1992, and ending August 14, 1995 ("Expiration Date") unless such employment shall have been sooner terminated, as hereinafter set forth. The Executive accepts such employment and agrees to serve in the capacity set forth in this Agreement and to perform such services of a Chief Executive Officer commensurate with his position and offices and agrees diligently and competently to devote the necessary business time and attention to such services (subject to the provisions of Article II, Section C below) excepting during disabilities, illness, vacation and paid holidays given by the Companies. B. Positions and Duties. During the Employment Period, the Executive shall continue to serve as President and Chief Executive Officer of each of the Companies and as Co-Chairman of its Board of Directors ("Board") with Dan L. Kirby. In such capacity, subject to the direction, approval and control of the Boards of the Companies, the Executive shall be in complete charge of all the operations and management of both SFC and WSC and any of their direct or 2 3 indirect subsidiaries and shall have full authority and responsibility, for setting strategic direction, formulating policies and administering the Companies in all respects. 1. Basic Duties - In general, the Executive shall continue to perform the duties previously performed by him for the Companies and continue to expend such of his working time for philanthropic, political, civic, and promotional activities as is commensurate with the past practices of the Executive and the Companies. In this connection, the Executive's responsibilities, duties and powers shall include, but are not-necessarily limited to: (a) Developing and establishing strategic plans and policies; (b) Maintaining an effective organization for the Companies and in this connection, he shall approve the hiring and termination of (i) employees who report directly to the Chief Operating Officer of WSC and (ii) the top twenty officers of the Companies except as otherwise directed by the Board of Directors. (c) Participating in the operational planning process for the Companies; (d) Maintaining the underwriting and marketing philosophies of the Companies; (e) Maintaining current knowledge of developments in the miscellaneous fidelity and surety bond industry and, with Dan L. Kirby, liaison with reinsurers; and (f) Representing the Companies periodically at select industry gatherings (e.g. NAIS, SAA and NASBP) and in Company and community activities. In this connection, in consultation with Dan L. Kirby, the 3 4 Companies' Senior Vice-President, the Executive will supervise and determine the Companies' contributions in the name of the Company to Sioux Falls and South Dakota local charities and related causes in accordance with the past practice of the Companies and shall regularly report such contribution activity to the Board of the Directors of the Companies. 2. Committees. Should an Executive Committee of either SFC and/or WSC be formed, the Executive shall serve as Co-Chairman of the Executive Committee with Dan L. Kirby. The Executive shall have the right, but not the obligation, to serve as a member of all other SFC or WSC Committees with management or oversight responsibilities for the Companies. 3. Directorships; Voting. (a) Each of NUC, SFC, and WSC agree that, so long as the Executive is employed under this New Agreement, all voting rights held, directly or indirectly, by them, their nominees or assignees, shall all be voted in favor of the Executive to be nominated to the respective Boards of SFC and WSC (and any subsidiaries of either), to be elected to such Boards at each meeting of their respective stockholders at which the class of Directors to which the Executive is assigned is to be elected, and further, to favorably vote the respective shares towards the election of the Executive to serve as Chairman of the Boards and Chairman of the Executive Committees, if any, of the Boards of SFC and WSC. (b) NUC and the Executive agree that the Board of Directors of the Companies shall consist of at least seven (7) members each to 4 5 have the same individuals for both Companies. NUC shall have the right to nominate and elect five (5) of the seven (7) Directors for both Companies and the Executive shall have the right to be a Director of both Companies; another Director shall be Dan L. Kirby. NUC agrees to vote all its shares of SFC in favor of the election of the Executive to the SFC Board and SFC agrees to vote all its shares of WSC in favor of the election of the Executive to the WSC Board, and the Executive agrees to vote favorably for each of the NUC nominees. (c) It is further-agreed that all NUC, SFC or WSC shares, directly or indirectly, owned or controlled by EH or principals of EH or their respective affiliates (of which EH has control) shall vote in favor of the Executive in accordance with Article II, Sections B.3(a) and (b) above. (d) Notwithstanding the foregoing provisions of this Article II, Section B.3, it shall not be considered a breach of this Agreement by any party if (1) the Executive is removed as a Director of either SFC, WSC or NUC, if applicable, as a result of the determination by the Director of Insurance of South Dakota (or by any other Insurance Department having jurisdiction over the Companies or any subsidiary or affiliate) that the Executive must be removed or disqualified from acting as a director of the Companies or NUC or (2) if the Executive is terminated for "cause" as defined in Article VII, Section E. below. C. Location of Services; Continuing Activities. 1. Location of Services. During the Employment Period, the Executive's office shall be customary to his position and shall be located in 5 6 the principal Executive offices of SFC and WSC, both of which shall be located in Sioux Falls, South Dakota. In connection with his employment by the Companies, the Executive shall not be required to directly or indirectly relocate or transfer his principal residence from Sioux Falls, South Dakota. 2. Continuing Activities. NUC and the Companies acknowledge that the Executive will continue to expend such employment and working time in such civic, political, philanthropic, recreational, social and promotional activities as is commensurate with the past practice between the Executive and the Companies ("Continuing Activities"). The Executive shall continue to devote such time to duties hereunder, other than Continuing Activities, as he now devotes to such duties and as is commensurate with the past practice between the Executive and the Companies. ARTICLE III: COMPENSATION AND OTHER BENEFITS DURING THE EMPLOYMENT PERIOD. A. Basic Salary; Annual Review. During the Employment Period, the Company shall pay to the Executive, and the Executive shall accept for his services, a minimum basic annual aggregate salary of Two Hundred Fifty Thousand Dollars ($250,000) ("Basic Salary") payable in accordance with the Company's customary payroll policy in effect from time to time. The Company, through its Board of Directors, reserves the right at any time, from time to time, to increase the Basic Salary and agrees that it shall annually confer with the Executive in good faith and review the Basic Salary to be paid to the Executive for the then fiscal year and yearly thereafter with a view to increasing (but not decreasing) the Basic Salary based upon the performance of the Executive in relationship to the goals and performance of the Companies and prevailing business and competitive conditions. 6 7 To the extent that the Executive's Basic Salary is increased, the new amount will become known as such New Basic Salary and shall not thereafter be reduced. The Basic Salary and New Basic Salary to the Executive exclude any bonus or other employee benefits or perquisites to which the Executive is entitled and, when adjusting the Executive's salary, the Board or any other body or group of persons responsible for setting the Executive's salary shall not take into consideration the value of any bonuses, Incentive Bonus Compensation, employee benefits or other perquisites to the Executive. The Companies' obligation to pay the Executive the Basic Salary or any New Basic Salary during the Employment Period may be extinguished only upon a termination of the Executive's employment pursuant and subject to the provisions of Articles VI and VII below. B. Incentive Bonus Compensation. In addition to Basic Salary or New Basic Salary, the Company agrees to pay to the Executive an amount determined pursuant to the following formula based upon the Premiums Earned for each of fiscal year of the Companies while this Agreement is in effect, or in the event this Agreement is terminated prior to the end of any fiscal year, an amount determined pursuant to the following formula based upon the Premiums Earned for such year multiplied by a fraction, the numerator of which is the number of days during such fiscal year in which this Agreement was in force and effect and the denominator of which is 365 ("Incentive Bonus Compensation"), as follows: If Premiums Earned are equal to or exceed $50,000,000, the Incentive Bonus Compensation shall be two and one half percent (2 1/2%) of total Premiums Earned in excess of $50,000,000 provided that Incentive Bonus Compensation payable hereunder shall not exceed the total amount of Two Hundred Fifty Thousand Dollars ($250,000) or pro-rata portion thereof in any fiscal year unless otherwise increased by the Board of Directors of the applicable Company or Companies. 7 8 As used herein "Premiums Earned" shall have the meaning given those terms in the Company's (WSC) Statutory Financial Statements ("Financial Statements") audited by the firm of Independent Certified Public Accountants then regularly employed by the Company consistent with the accounting principals used in preparing such Financial Statements of the Company for the year ended December 31, 1991 plus the premiums earned by any corporation or other entity controlled by, or under direct or indirect common control of NUC ("Affiliate(s)") or the Companies from the sale of the types of insurance policies, bonds or other insurance products for which any Company received premium payments in the fiscal year ending December 31, 1991. The Company shall furnish to the Executive the Financial Statements for each fiscal year of the Company and each Affiliate during which this Agreement is in effect (in whole or in part) within 120 days following the end of each such fiscal year. Any Incentive Bonus Compensation for each fiscal year of the Company shall be determined in the last month of the fiscal year (December) and paid to the Executive in a lump sum as the Board of Directors determine but no later than the thirtieth (30th) day after the close of the fiscal year. C. Vacations, Etc. The Executive shall be entitled to paid annual vacation time commensurate with the past practices of the Executive and the Companies. The Executive shall also be entitled to be paid holidays and sick days given or allowed by the Companies to its senior executive officers. D. Perquisites and Other Fringe Benefits. In addition to any and all other benefits, vacation, Basic Salary, New Basic Salary, and Incentive Bonus Compensation provided to the Executive hereunder, in accordance with the past practices between 8 9 the Executive and the Companies the Companies shall continue to provide the Executive with such additional benefits and perquisites previously provided to him by the Companies (including, without limitation, participation in any fringe or employee benefit program provided generally to senior executive officers of the Companies, or otherwise presently provided to the Executive, and medical, life and disability insurance, first class travel and accommodations, sick pay plans, and payment or reimbursement for monthly membership dues and other expenses in furtherance of the Company's business). E. General Expenses. The Companies shall reimburse the Executive for all out-of-pocket expenses incurred by him in connection with the performance of his duties hereunder upon the presentation of appropriate documentation therefor in accordance with the past practice between the Companies and the Executive. ARTICLE IV: STOCK OPTIONS. NUC, in accordance with the terms and provisions of the Nucorp, Inc. 1990 Stock Option Plan (the "1990 Plan") which is incorporated by reference herein, hereby grants to the Executive options to purchase 50,000 shares of NUC common stock under the terms of the Non-qualified Stock Option Plan referred to in the 1990 Plan at a base price equal to the lower of (a) the average trading price of NUC common stock on the date hereof, and (b) the average trading price of NUC common stock for the 17-week immediately following the date hereof. The stock option period shall be for a period of ten (10) years and may be exercisable in whole or in part from time to time on or before the tenth (10th) anniversary of the effective date of the stock option. NUC, at its sole expense, agrees to register, in accordance with the Securities Act of 1933, as amended (the "Act"), or any similar Federal statute and any applicable states securities laws, all 9 10 shares subject to the 1990 plan within two years of the effective date of the 1990 plan. NUC further agrees that should it cause to register any of its shares for any reason whatsoever during this two-year period, NUC, in a simultaneous manner, will also register shares subject to the 1990 plan. ARTICLE V: NOTICE OF BREACH. The Companies and the Executive agree that, prior to the termination of the Employment Period by reason of "cause" (as hereinafter defined) or any breach of any provisions of the Agreement, the injured party will give the other party or parties written notice ("Notified Party") specifying such breach or cause and permitting the Notified Party to cure such breach or cause within the period of thirty (30) days after receipt of such notice. ARTICLE VI: INABILITY TO PERFORM (DISABILITY). If, during the Employment Period, the Executive shall be unable to substantially perform the duties required of him pursuant to his employment due to any disability preventing him from performing such services for a period of six (6) cumulative months in a twelve consecutive month period, the Companies shall have the right to terminate the Executive's employment pursuant to this Agreement on thirty (30) days' advance written notice, at the end of which time the Executive's employment shall be terminated. As used in this Agreement, the term "disability" shall mean the substantial inability of the Executive to perform his duties as described under this Agreement as determined by an independent physician selected by the Companies with the approval of the Executive. Any disability of less than six cumulative months duration shall not be cause for interruption, suspension or withholding of the salary or other remuneration or benefits due the Executive by the Companies. Until the employment of the Executive is actually terminated, the 10 11 Executive shall be entitled to receive his Basic Salary or New Basic Salary and any other remuneration and benefits as provided for herein including, but not limited to, a prorated portion of Incentive Bonus Compensation, if any. ARTICLE VII: TERMINATION. This Agreement: A. may be terminated at any time by mutual agreement between the Executive and the Companies; B. shall terminate immediately upon the death of the Executive, provided however, notwithstanding any provision to the contrary in this Agreement, the Executive's estate shall be entitled to receive the prorated portion of Incentive Bonus Compensation, if any, and the Basic Salary or New Basic Salary due the Executive for a period of six (6) months following the date the death of the Executive occurred; C. may be terminated by either the Companies or the Executive due to the disability of the Executive pursuant to Article VI hereof; D. may be terminated upon a good faith determination by a majority vote of the Board of SFC or WSC that the termination of this Agreement is necessary by reason of a final determination by the Director of Insurance of the State of South Dakota (or by any other insurance department having jurisdiction over SFC or WSC or any subsidiary or affiliate) that the Executive must be removed or disqualified from acting as an officer of SFC or WSC; or E. may be terminated by the Companies at any time for "cause" determined by a majority vote of the Boards of SFC or WSC upon the giving of notice to the Executive in accordance with Article V of this Agreement setting 11 12 forth the basis of such termination. For the purposes of this Agreement, the term "cause" shall be limited to: (a) the engaging of the Executive in conduct materially injurious to the Companies unless the Executive engaged in such conduct (i) in good faith and reasonably believed such conduct to be in or not opposed to the best interests of the Company(s) or (ii) at the request or direction of the Board of Directors of the Company(s); (b) continued and wilful inattention and neglect by the Executive of the material duties to be performed by him, (other than by reason of illness or engaging in activities otherwise permitted or required under this Agreement) and which inattention and neglect, after compliance with the provisions of Article V hereof, does not cease within thirty (30) days after written notice thereof specifying the details of such conduct is given to the Executive; and (c) the conviction of the Executive of a felony under state or federal law. Notwithstanding the foregoing, no termination of this Agreement shall diminish or effect in any way NUC's obligation to repurchase and/or register shares of common stock (and any other securities of the Companies received with respect thereto) pursuant to Article IV hereof. ARTICLE VIII: EFFECTIVE OR DEEMED TERMINATION. A. Termination by Executive for Good Reason. The Executive's obligation to render services hereunder may be terminated by the Executive if the Executive's "circumstances of employment shall have changed" (as hereinafter defined), such termination to be known also as "termination for good reason". In such event the 12 13 Executive shall specify by written notice to NUC and/or the Companies the event or reason relied on for such termination, and if such event or reason shall not have been cured within 30 days thereafter, the Executive's employment hereunder shall be deemed terminated ("Effective Termination Date"). B. The Executive's "circumstances of employment shall have changed" shall mean and include, but shall not necessarily be limited to, any of the following: 1. Notice by the Board of the Directors of the Companies to the Executive of termination of his employment, this Agreement or the Employment Period for any reason whatsoever, other than pursuant to Articles VI or VII; 2. failure of NUC and/or the Companies to nominate and vote for the Executive and his designee in the positions all as provided in Article 11, Section B above; 3. reduction in the Basic Salary or New Basic Salary then being paid to the Executive by the Companies, or withdrawal from him of fringe benefits or perquisites (including participation in current or future stock option or stock appreciation plans) provided to him under this Agreement or otherwise available to other senior corporate officers of the Companies; 4. a change in the Executive's place of employment without his written consent as above described in Article II, Section C.1 above, or requirements or demands of the Executive to perform services which would make the continuance of his principal residence and home life in Sioux Falls, South Dakota unreasonably difficult or inconvenient for him, and/or which would materially restrict or reduce the Executive's participation in Continuing Activities; 13 14 5. the termination or discharge of a material number of employees (5% of the employees located in the Sioux Falls, S.D. office of the Companies in any calendar year) of the Companies if (a) the positions of such terminated or discharged employees are to be filled by persons who are employed by any of NUC, EH or any of their affiliates, or (b) such terminations are due to the relocation of the employees' positions outside of the Sioux Falls, South Dakota area, or (c) such terminations are not in connection with a general reduction of the number of employees of WSC or SFC due to a significant economic downturn in the Business of WSC and SFC; or (ii) the relocation of a significant portion of the operations of the Business of the Companies which are currently conducted in Sioux Falls, South Dakota to any other location, provided, however, the foregoing shall not be deemed to prevent the termination of an employee for cause due to such employee's lack of performance; 6. a material increase in the time the Executive is required to spend in travel for the Companies which requires overnight stays away from Sioux Falls, South Dakota, other than quarterly meetings of the Board of Directors of NUC; 7. failure of the Companies to make charitable donations of at least $200,000 in each year of the term hereof to donees with offices, facilities or programs located in South Dakota in accordance with the past practice of the Companies; and 8. other material and adverse changes in the Executive's conditions of employment imposed on him by NUC or the Companies or any material breach by the Companies of the provisions of this Agreement, after compliance with the provisions of Article V hereof. 14 15 Obligations on Termination. In the event Executive's employment under this Agreement terminates on or before , 1994, for any reason other than "cause", death or the passing of the applicable Expiration Date, the Executive shall be entitled to receive all payments and other benefits provided to him under this Agreement (including, without limitation, Basic or New Basic Salary and Incentive Bonus Compensation and amounts pursuant to Article VI) for a period equal to the remaining term of the Agreement up to , 1994. Executive shall also be entitled to remove from personal office all computer equipment, all personal computer files not essential to the business, all other personal files, books, memorabilia related to Company/Kirby family history, and all other personal items. ARTICLE IX: INDEMNIFICATION. Each of NUC, SFC and WSC will indemnify, defend and hold harmless the Executive (and his personal or legal representatives or other successors) to the fullest extent permitted by the laws of their respective states and their existing certificates of incorporation and by-laws, and the Executive shall be entitled to the protection of all insurance policies which NUC and the Companies may acquire and maintain generally for the benefit of their directors and officers, against all costs, charges and expenses (including, but not limited to, attorneys' fees and other legal expenses) whatsoever incurred or sustained by the Executive or his personal or legal representatives in connection with any action, suit or proceeding to which he (or his personal or legal representatives or other successors) may be made a party by reason of his being or having been a director, employee or officer of NUC, SFC or WSC and their respective subsidiaries and affiliates. If the existing certificates of incorporation and by-laws of NUC and the Companies do not provide for indemnity 15 16 of the Executive to the fullest extent permitted by the laws of their respective states of domicile, NUC and the Companies will use their diligent best efforts to amend such certificates of incorporation and/or by-laws so as to provide maximum indemnification. ARTICLE X: NO DUTY TO MITIGATE/NO REDUCTIONS. A. The parties agree that the Executive shall not be under any duty to mitigate damages under this Agreement and such defense shall not be interposed in any legal proceedings among the parties. In furtherance thereof, it is expressly agreed that if the Executive's employment is terminated pursuant to this Agreement in a manner which results in the Executive being entitled to additional payments or benefits hereunder, such additional payments or benefits shall not be reduced by any amounts or benefits he could have earned or by any payments or benefits actually earned or received from parties other than the Companies. ARTICLE XI: JURISDICTION AND VENUE. Without limitation of the arbitration rights specified in Article XXII below, the parties hereby irrevocably consent to the personal jurisdiction of and the propriety of venue of arbitrators and in the courts located in the City of Chicago, State of Illinois and of any federal court located in Chicago in connection with any permitted action or proceeding arising out of or relating to this Agreement, any document or instrument delivered pursuant to, in connection with, or simultaneously with this Agreement, or a breach of this Agreement or any such document or instrument. 16 17 ARTICLE XII: LAW. Subject to and without limitation of the provisions of Articles XI and XXII hereof, this Agreement shall be governed by and construed in accordance with the conflict laws of the State of Illinois ARTICLE XIII: NOTICES. All notices hereunder shall be in writing and shall be either (A) sent by registered or certified mail, return receipt requested, or (B) overnight delivery or courier, or (C) by "Fax", telex, telecopier or other telecommunication device capable of creating a legible written record (and promptly confirmed in writing), or (D) served by personal service. If intended for NUC or the Companies, such notices shall be addressed to such party, attention of its Chairman of the Board at either NUC's or the Companies' most current address for their respective executive offices, or at such other address of which NUC or the Companies shall have given notice to the Executive in the manner herein provided with a copy to Sheli Z. Rosenberg, Rosenberg & Liebentritt, P.C., 2 North Riverside Plaza, Chicago, Illinois; and if intended for the Executive, shall be addressed him at 2021 Austin Drive, Sioux Falls, South Dakota 57105 with a copy to Rudnick & Wolfe, 203 North LaSalle Street, Chicago, Illinois, Attention: J. Marks and L. Robins, or at such other address of which the Executive shall have given notice to NUC or the Companies in the manner herein provided. Personal service of notices may be substituted for mailing provided a written acknowledgement of such service is provided by the recipient. For purposes of this Article XIII, notice shall be deemed received upon actual receipt. 17 18 ARTICLE XIV: ENTIRE AGREEMENT. This Agreement constitutes the entire understanding among the parties with respect to the matters referred to herein and no waiver or modification to the terms hereof shall be valid unless in writing signed by the party to be charged and only to the extent therein set forth. All prior and contemporaneous agreements and understandings between the parties with respect to the subject matter of this Agreement are superseded by this Agreement, unless otherwise provided in any separate writing signed by the parties hereto. ARTICLE XV: COUNTERPARTS. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and each of which shall be deemed an original. ARTICLE XVI: SEVERABILITY. If any provision in this Agreement is invalid, illegal or unenforceable, the balance of this Agreement shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances. ARTICLE XVII: BINDING EFFECT. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and any successor to NUC or the Companies whether by merger, liquidation, sale of assets, reorganization or otherwise and to the heirs, and personal or legal representatives of the Executive. ARTICLE XVIII: WITHHOLDING. NUC and the Companies shall be entitled to withhold from amounts payable to the Executive hereunder such amount as may be required by applicable law. 18 19 ARTICLE XIX: ASSIGNMENT. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by either of the parties hereto, other than in accordance with the provisions hereof, without the prior written consent of the other applicable parties. ARTICLE XX: EFFECT OF WAIVER. The waiver of either party of a breach of any provision of this Agreement shall not operate as or be construed as a waiver of any subsequent breach thereof. ARTICLE XXI: HEADINGS. The headings contained in this Agreement are inserted for convenience only and do not constitute a part of this Agreement. ARTICLE XXII: ARBITRATION. If any dispute, claim or controversy shall arise between the parties hereto as to any issue whatsoever, other than the determination of disability, the same shall be referred to and settled by the following "arbitration" procedure which may be requested upon the application of any interested party: It is agreed the arbitration hearings, if any, shall be held solely in Chicago, Illinois, and any such dispute, claim or controversy shall be referred to and settled by such arbitration in accordance with the Commercial Arbitration Rules ("Rules") of the American Arbitration Association ("AAA") then in effect (which Rules are incorporated herein by reference as through set forth at length herein) and any decision or order or finding rendered by the arbitrator or arbitrators ("arbitrators") appointed in accordance with such Rules shall be final and conclusive upon the parties hereto and judgment upon the award, finding or decision rendered may be entered in the Court of the forum, state or federal, having jurisdiction, as provided In Article XI above. It is expressly 19 20 agreed between the parties hereto that whether or not the Rules of the AAA shall provide for a discovery procedure, such discovery procedure is hereby granted and permitted in the said arbitration proceedings and the parties may apply to the arbitrators for the enforcement of any form of discovery which would be permitted by the laws of the State of Illinois and their award or decision in respect of such discovery shall be final and binding. The arbitrators, if they deem that the matter requires it, are authorized to award to the party whose contention is sustained such sums as they or a majority of them shall deem proper to compensate it or him for the time and expense incident to the proceedings and, if the arbitration was demanded without reasonable cause, then they may also award damages for delay, if any. The arbitrators shall determine their own reasonable compensation in accordance with such AAA Rules, and, unless otherwise provided by agreement, shall assess the cost and charges of the proceedings equally to both parties unless the arbitrators shall find an issue raised by either party was unreasonable or frivolous and that therefore the costs of the arbitration or any portion thereof shall be borne by the said party. 20 21 IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the day and year first above written. NUCORP, INC., a Delaware corporation By: Arthur A. Greenberg - --------------------------- ---------------------------------- Witness Its Vice President ("NUC") SUREWEST FINANCIAL CORP., a South Dakota corporation By: Dan L. Kirby - --------------------------- ----------------------------------- Witness Its Vice President ("SFC") WESTERN SURETY COMPANY, a South Dakota corporation By: Dan L. Kirby - --------------------------- ----------------------------------- Witness Its Vice President ("WSC") EQUITY HOLDINGS, an Illinois partner- ship By: Arthur A. Greenberg, Trustee - --------------------------- ----------------------------------- Witness A duly authorized Partner or other representative solely as to the obligations under Article II B3 ("EH") JOE P. KIRBY - --------------------------- -------------------------------------- Witness JOE P. KIRBY (the "Executive") SI ACQUISITION CORP., a Texas corporation By: Arthur A. Greenberg - --------------------------- ---------------------------------- Witness Its Vice President 21 EX-10.(17) 8 CREDIT AGREEMENT 1 EXHIBIT 10(17) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CREDIT AGREEMENT Dated as of March 29, 1994, Among CAPSURE FINANCIAL GROUP, INC., CAPSURE HOLDINGS CORP., THE LENDERS NAMED HEREIN and CHEMICAL BANK, as Administrative Agent - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
Page I. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1.01. Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1.02. Terms Generally . . . . . . . . . . . . . . . . . . . . . . . 18 II. THE CREDITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 2.01. Commitments . . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 2.02. Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 SECTION 2.03. Notice of Borrowings . . . . . . . . . . . . . . . . . . . . . 20 SECTION 2.04. Notes; Repayment of Loans . . . . . . . . . . . . . . . . . . 20 SECTION 2.05. Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 2.06. Interest on Loans . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 2.07. Default Interest . . . . . . . . . . . . . . . . . . . . . . . 21 SECTION 2.08. Alternate Rate of Interest . . . . . . . . . . . . . . . . . . 22 SECTION 2.09. Termination and Reduction of Commitments . . . . . . . . . . . . . . . . . . . . 22 SECTION 2.10. Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . 23 SECTION 2.11. Reserve Requirements; Change in Circumstances . . . . . . . . . . . . . . . . . . . 23 SECTION 2.12. Change in Legality . . . . . . . . . . . . . . . . . . . . . . 24 SECTION 2.13. Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . 25 SECTION 2.14. Pro Rata Treatment . . . . . . . . . . . . . . . . . . . . . . 25 SECTION 2.15. Sharing of Setoffs . . . . . . . . . . . . . . . . . . . . . . 26 SECTION 2.16. Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 SECTION 2.17. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 III. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . 29 SECTION 3.01. Organization; Powers . . . . . . . . . . . . . . . . . . . . . 29 SECTION 3.02. Authorization . . . . . . . . . . . . . . . . . . . . . . . . 29 SECTION 3.03. Enforceability . . . . . . . . . . . . . . . . . . . . . . . . 29 SECTION 3.04. Governmental Approvals . . . . . . . . . . . . . . . . . . . . 29 SECTION 3.05. Financial Statements . . . . . . . . . . . . . . . . . . . . . 30 SECTION 3.06. No Material Adverse Change . . . . . . . . . . . . . . . . . . 30 SECTION 3.07. Title to Properties; Possession Under Leases . . . . . . . . . . . . . . . . . . . . . . 30 SECTION 3.08. Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . 30 SECTION 3.09. Litigation; Compliance with Laws . . . . . . . . . . . . . . . 30 SECTION 3.10. Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . 31 SECTION 3.11. Federal Reserve Regulations . . . . . . . . . . . . . . . . . 31
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Page ---- SECTION 3.12. Investment Company Act; Public Utility Holding Company Act . . . . . . . . . . . . . . . . 31 SECTION 3.13. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . 31 SECTION 3.14. Tax Returns . . . . . . . . . . . . . . . . . . . . . . . . . 31 SECTION 3.15. No Material Misstatements . . . . . . . . . . . . . . . . . . 31 SECTION 3.16. Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . 32 SECTION 3.17. Environmental and Safety Matters . . . . . . . . . . . . . . . 32 SECTION 3.18. Security Documents . . . . . . . . . . . . . . . . . . . . . . 32 SECTION 3.19. Absence of Certain Restrictions . . . . . . . . . . . . . . . 33 SECTION 3.20. Reinsurance Agreements . . . . . . . . . . . . . . . . . . . . 33 SECTION 3.21. Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 IV. CONDITIONS OF LENDING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 SECTION 4.01. All Credit Events . . . . . . . . . . . . . . . . . . . . . . 34 SECTION 4.02. First Credit Event . . . . . . . . . . . . . . . . . . . . . . 34 V. AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 SECTION 5.01. Existence; Businesses and Properties . . . . . . . . . . . . . 37 SECTION 5.02. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 37 SECTION 5.03. Obligations and Taxes . . . . . . . . . . . . . . . . . . . . 38 SECTION 5.04. Financial Statements, Reports, etc. . . . . . . . . . . . . . 38 SECTION 5.05. Litigation and Other Notices . . . . . . . . . . . . . . . . . 40 SECTION 5.06. Employee Benefits . . . . . . . . . . . . . . . . . . . . . . 40 SECTION 5.07. Maintaining Records; Access to Properties and Inspections . . . . . . . . . . . . 41 SECTION 5.08. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . 41 SECTION 5.09. Further Assurances . . . . . . . . . . . . . . . . . . . . . . 41 SECTION 5.10. Environmental and Safety Laws . . . . . . . . . . . . . . . . 42 SECTION 5.11. Risk-Based Capital . . . . . . . . . . . . . . . . . . . . . . 43 SECTION 5.12. Insurance Regulatory Information System . . . . . . . . . . . 43 SECTION 5.13. Investment Ratios . . . . . . . . . . . . . . . . . . . . . . 43 SECTION 5.14. Deposit and Investment Accounts . . . . . . . . . . . . . . . 43 SECTION 5.15. Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . 43 VI. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 SECTION 6.01. Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . 44 SECTION 6.02. Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 SECTION 6.03. Sale and Leaseback Transactions . . . . . . . . . . . . . . . 45 SECTION 6.04. Investments, Loans and Advances . . . . . . . . . . . . . . . 45 SECTION 6.05. Mergers, Consolidations and Acquisitions . . . . . . . . . . . 46 SECTION 6.06. Dividends and Distributions . . . . . . . . . . . . . . . . . 48 SECTION 6.07. Transactions with Affiliates . . . . . . . . . . . . . . . . . 48 SECTION 6.08. Nature of Business . . . . . . . . . . . . . . . . . . . . . . 48
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Page ---- SECTION 6.09. Net Operating Losses . . . . . . . . . . . . . . . . . . . . . 48 SECTION 6.10. Debt Payments . . . . . . . . . . . . . . . . . . . . . . . . 48 SECTION 6.11. Limitation on Surplus Relief Reinsurance Agreements . . . . . . . . . . . . . . . . . . . . 49 SECTION 6.12 Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . 49 SECTION 6.13. Total Debt to Adjusted Capital Ratio . . . . . . . . . . . . . 49 SECTION 6.14. Fixed Charge Coverage Ratio . . . . . . . . . . . . . . . . . 49 SECTION 6.15. Total Debt to Total Cash Flow Sources Ratio . . . . . . . . . . . . . . . . . . . . . . 49 SECTION 6.16. Operating Leverage Ratio . . . . . . . . . . . . . . . . . . . 50 SECTION 6.17. Amendment of Certain Documents . . . . . . . . . . . . . . . . 50 VII. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 VIII. GUARANTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 IX. THE ADMINISTRATIVE AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 X. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 SECTION 10.01. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 SECTION 10.02. Survival of Agreement . . . . . . . . . . . . . . . . . . . . 59 SECTION 10.03. Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . 60 SECTION 10.04. Successors and Assigns . . . . . . . . . . . . . . . . . . . . 60 SECTION 10.05. Expenses; Indemnity . . . . . . . . . . . . . . . . . . . . . 62 SECTION 10.06. Right of Setoff . . . . . . . . . . . . . . . . . . . . . . . 63 SECTION 10.07. Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . 63 SECTION 10.08. Waivers; Amendment . . . . . . . . . . . . . . . . . . . . . . 63 SECTION 10.09. Interest Rate Limitation . . . . . . . . . . . . . . . . . . . 64 SECTION 10.10. Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . 64 SECTION 10.11. Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . . 64 SECTION 10.12. Severability . . . . . . . . . . . . . . . . . . . . . . . . . 65 SECTION 10.13. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . 65 SECTION 10.14. Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 SECTION 10.15. Jurisdiction; Consent to Service of Process . . . . . . . . . . . . . . . . . . . . . . 65
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Exhibits -------- Exhibit A Form of Note Exhibit B Assignment and Acceptance Exhibit C Administrative Questionnaire Exhibit D Form of Opinion of Rosenberg & Liebentritt Exhibit E Form of Indemnity, Subrogation and Contribution Agreement Exhibit F Form of Pledge Agreement Exhibit G Form of Security Agreement Exhibit H Form of Pledgeholder Agreement Exhibit I Form of Guarantee Agreement Exhibit J Form of Mortgage
Schedules - --------- Schedule 1.01(a) Rightholder Schedule 2.01 Lenders and Commitments Schedule 3.08 Subsidiaries Schedule 3.17 Environmental and Safety Matters Schedule 3.18(b) UCC Filing Offices Schedule 3.20 Reinsurance Agreements Schedule 4.02(g) Stocks to be Pledged Schedule 6.01 Indebtedness Schedule 6.02 Liens
6 CREDIT AGREEMENT dated as of March 29, 1994, among CAPSURE FINANCIAL GROUP, INC., an Oklahoma corporation (the "Borrower"), CAPSURE HOLDINGS CORP., a Delaware corporation ("Capsure"), the financial institutions listed on Schedule 2.01 (the "Lenders") and CHEMICAL BANK, a New York banking corporation ("Chemical Bank"), as agent for the Lenders (in such capacity, the "Administrative Agent"). The Borrower has requested the Lenders to extend credit in order to enable the Borrower, on the terms and subject to the conditions set forth in this Agreement, to borrow on a revolving basis, at any time and from time to time prior to the Maturity Date (such term and each other capitalized term used but not defined in this introductory statement having the meanings assigned to such terms in Section 1.01), an aggregate principal amount at any time outstanding not to exceed $135,000,000 less the amount of any reductions in Commitments pursuant to Section 2.09. The proceeds of such borrowings are to be used (a) in an aggregate amount not to exceed $86,000,000, to refinance all indebtedness outstanding under the Existing Credit Facilities, (b) for general corporate purposes in the ordinary course of business of the Borrower and the Subsidiaries, including funding the working capital requirements of the Borrower and the Subsidiaries, whether now owned or hereafter existing (such working capital requirements to include investment activities to the extent permitted by Section 6.04 and dividend payments to the extent permitted by Section 6.06), (c) to finance all or part of the purchase price to be paid in connection with any Permitted Acquisition and (d) to make capital contributions to any Subsidiary to the extent permitted hereunder. The Lenders are willing to extend such credit to the Borrower on the terms and subject to the conditions set forth in this Agreement. Accordingly, the Borrower, Capsure, the Lenders and the Administrative Agent agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. Defined Terms. As used in this Agreement, the following terms shall have the meanings specified below: "ABR Borrowing" shall mean a Borrowing comprised of ABR Loans. "ABR Loan" shall mean any Loan bearing interest at a rate determined by reference to the Alternate Base Rate in accordance with the provisions of Article II. "Adjusted Capital" shall mean, at any time, the sum of (a) Total Debt at such time and (b) the difference between (i) Stockholders' Equity at such time and (ii) the aggregate amount of deferred tax assets relating to the Available Net Operating Losses at such time, net of any valuation allowance, determined in accordance with GAAP, of Capsure and its subsidiaries on a consolidated basis at such time. "Administrative Questionnaire" shall mean an Administrative Questionnaire in the form of Exhibit C. 7 2 "Affiliate" shall mean, when used with respect to a specified person, another person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the person specified. "Alternate Base Rate" shall mean, for any day, a rate per annum (rounded upwards, if necessary, to the next 1/100 of 1%) equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Base CD Rate in effect on such day plus 1% and (c) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. For purposes hereof, the term "Prime Rate" shall mean the rate of interest per annum publicly announced from time to time by the Administrative Agent as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective on the date such change is publicly announced as being effective. The term "Base CD Rate" shall mean the sum of (a) the product of (i) the Three-Month Secondary CD Rate and (ii) Statutory Bank Reserves and (b) the Assessment Rate. The term "Three-Month Secondary CD Rate" shall mean, for any day, the secondary market rate for three-month certificates of deposit reported as being in effect on such day (or, if such day shall not be a Business Day, the next preceding Business Day) by the Board through the public information telephone line of the Federal Reserve Bank of New York (which rate will, under the current practices of the Board, be published in Federal Reserve Statistical Release H.15(519) during the week following such day), or, if such rate shall not be so reported on such day or such next preceding Business Day, the average of the secondary market quotations for three-month certificates of deposit of major money center banks in New York City received at approximately 10:00 a.m., New York City time, on such day (or, if such day shall not be a Business Day, on the next preceding Business Day) by the Administrative Agent from three New York City negotiable certificate of deposit dealers of recognized standing selected by it. If for any reason the Administrative Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Base CD Rate or the Federal Funds Effective Rate or both for any reason, including the inability or failure of the Administrative Agent to obtain sufficient quotations in accordance with the terms thereof, the Alternate Base Rate shall be determined without regard to clause (b) or (c), or both, of the first sentence of this definition, as appropriate, until the circumstances giving rise to such inability no longer exist. Any change in the Alternate Base Rate due to a change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective Rate shall be effective on the effective date of such change in the Prime Rate, the Three-Month Secondary CD Rate or the Federal Funds Effective Rate, respectively. "Annual Statement" shall mean, with respect to any Insurance Subsidiary, the Annual Statement of such Insurance Subsidiary required to be filed with the Applicable Insurance Regulatory Authority in accordance with state law, including any exhibits, schedules, certificates or actuarial opinions filed or delivered therewith. "Applicable Commitment Fee Percentage" shall mean, for any date, the applicable percentage set forth below based on the ratio of Total Debt to Total Cash Flow Sources as of the last day of the Borrower's fiscal quarter most recently ended as of such date:
Ratio Commitment Fee Below 1.25 to 1.00 0.250% At least 1.25 to 1.00 but below 4.00 to 1.00 0.375% At least 4.00 to 1.00 0.500%
8 3 For purposes of the foregoing, the Applicable Commitment Fee Percentage at any time shall be determined by reference to the ratio of Total Debt to Total Cash Flow Sources as of the last day of the Borrower's fiscal quarter most recently ended as of such date and any change in the Applicable Commitment Fee Percentage shall become effective for all purposes on and after the date of delivery to the Administrative Agent of the certificate described in Section 5.04(c) relating to such fiscal quarter; provided, however, that if the proceeds of any Borrowing are used to finance a Permitted Acquisition and the ratio of Total Debt to Total Cash Flow Sources after giving effect to such Permitted Acquisition would result in a change in the Applicable Commitment Fee Percentage, such change shall become effective for all purposes simultaneously with such Borrowing. Notwithstanding the foregoing, at any time during which the Borrower has failed to deliver the certificate described in Section 5.04(c) with respect to a fiscal quarter in accordance with the provisions thereof, the ratio of Total Debt to Total Cash Flow Sources shall be deemed, solely for the purposes of this definition, to be 4.00 to 1.00 until such time as the Borrower shall deliver such certificate in accordance with the provisions of Section 5.04(c). "Applicable Insurance Regulatory Authority" shall mean, with respect to any Insurance Subsidiary, the insurance commission or similar Governmental Authority located in the state in which such Insurance Subsidiary is domiciled and any Federal insurance Governmental Authority and any successor to any of the foregoing. "Applicable Margin" shall mean, for any date, with respect to the Loans comprising any Eurodollar Borrowing or ABR Borrowing, as the case may be, the applicable spread set forth below based on the ratio of Total Debt to Total Cash Flow Sources as of the last day of the Borrower's fiscal quarter most recently ended as of such date:
Ratio Eurodollar Loan Spread ABR Loan Spread Below 1.25 to 1.00 0.750% None At least 1.25 to 1.00 but below 2.25 to 1.00 1.000% None At least 2.25 to 1.00 but below 3.25 to 1.00 1.125% 0.125% At least 3.25 to 1.00 but below 3.75 to 1.00 1.250% 0.250% At least 3.75 to 1.00 but below 4.00 to 1.00 1.375% 0.375% At least 4.00 to 1.00 1.750% 0.750%
For purposes of the foregoing, the Applicable Margin at any time shall be determined by reference to the ratio of Total Debt to Total Cash Flow Sources as of the last day of the Borrower's fiscal quarter most recently ended as of such date and any change in the Applicable Margin shall become effective upon the delivery to the Administrative Agent of the certificate described in Section 5.04(c) relating to such fiscal quarter and shall apply (a) to ABR Loans outstanding on such delivery date or made on or after such delivery date and (b) to Eurodollar Loans made on or after such delivery date; provided, however, that, if the proceeds of any Borrowing are used to finance a Permitted Acquisition and the ratio of Total Debt to Total Cash Flow Sources after giving effect to such Permitted Acquisition would result in a change in the Applicable Margin, such change shall become effective for all purposes simultaneously with such Borrowing and shall apply (a) to ABR Loans outstanding on such date or made on or after such date and (b) to Eurodollar Loans made on or after such date. Notwithstanding the foregoing, at any time during 9 4 which the Borrower has failed to deliver the certificate described in Section 5.04(c) with respect to a fiscal quarter in accordance with the provisions thereof, the ratio of Total Debt to Total Cash Flow Sources shall be deemed, solely for the purposes of this definition, to be 4.00 to 1.00 until such time as the Borrower shall deliver such certificate in accordance with the provisions of Section 5.04(c). "Arlington" shall mean Arlington Leasing Co., a Nevada corporation. "Assessment Rate" shall mean for any date the annual rate (rounded upwards, if necessary, to the next 1/100 of 1%) most recently estimated by the Administrative Agent as the then-current net annual assessment rate that will be employed in determining amounts payable by the Administrative Agent to the Federal Deposit Insurance Corporation (or any successor) for insurance by such Corporation (or such successor) of time deposits made in dollars at the Administrative Agent's domestic offices. "Assignment and Acceptance" shall mean an assignment and acceptance entered into by a Lender and an assignee, and accepted by the Administrative Agent, in the form of Exhibit B or such other form as shall be approved by the Administrative Agent and as shall be reasonably satisfactory to the parties to such assignment and acceptance. "Available Net Operating Losses" shall mean, for any date in any taxable year, the net operating loss carryforwards to such taxable year for Federal income tax purposes of Capsure and its subsidiaries that are not subject to the limitations of Section 382 of the Code, Treasury Regulation Section 1.1502 - 21(c), Treasury Regulation Section 1.1502 - 21(d) or any similar limitation. "Board" shall mean the Board of Governors of the Federal Reserve System of the United States. "Borrower Tax Sharing Agreement" shall mean each Tax Sharing Agreement as in effect on the date hereof between the Borrower and any of its direct subsidiaries. "Borrowing" shall mean a group of Loans of a single Type made by the Lenders on a single date and as to which a single Interest Period is in effect. "Business Day" shall mean any day (other than a Saturday, Sunday or legal holiday in the State of New York) on which banks are open for business in New York City; provided, however, that, when used in connection with a Eurodollar Loan, the term "Business Day" shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market. "Capital Lease Obligations" of any person shall mean the obligations of such person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such person under GAAP and, for the purposes of this Agreement, the amount of such obligations at any time shall be the capitalized amount thereof at such time determined in accordance with GAAP. "Cash Equivalents" shall mean: (a) United States Government Securities maturing within 90 days from the date of acquisition thereof; 10 5 (b) investments in commercial paper maturing within 90 days from the date of acquisition thereof and having, at such date of acquisition, a rating of A1 or higher from Standard & Poor's or a rating of P1 or higher from Moody's; (c) investments in certificates of deposit, banker's acceptances and time deposits (including Eurodollar time deposits) maturing within 90 days from the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, any domestic office of any commercial bank of recognized standing organized under the laws of the United States of America or any state thereof that has a combined capital and surplus and undivided profits of not less than $250,000,000 and the deposits of which are rated (or the senior debt securities of the holding company of such commercial bank are rated) A- or better by Standard & Poor's or A3 or better by Moody's or carrying an equivalent rating by another nationally recognized rating agency if neither of the two named rating agencies shall rate such commercial bank (or the holding company of such commercial bank); (d) other investment instruments approved in writing by the Required Lenders and offered by financial institutions that have a combined capital and surplus and undivided profits of not less than $250,000,000; and (e) investments in repurchase agreements, dollar rolls, money market preferred and collateralized short term puts, in each case maturing within 90 days from the date of acquisition thereof and having, at such date of acquisition, a rating of A1 or higher from Standard & Poor's or a rating of P1 or higher from Moody's. A "Change in Control" shall be deemed to have occurred if (a) the Zell Entities, collectively, shall cease to own in the aggregate, directly, beneficially and of record, shares representing at least 20% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of Capsure, provided that such 20% shall be reduced by dilution suffered by such persons on a pro rata basis with all other shareholders of Capsure as a result of any issuance by Capsure for fair value after the Closing Date of any capital stock representing ordinary voting power (i) to a seller as consideration for a Permitted Acquisition or (ii) in a public offering, the entire net proceeds (after underwriting discount and expenses incurred in connection with such offering) of which are (A) paid to a seller as consideration for a Permitted Acquisition or (B) contributed as capital to the Borrower; (b) Capsure shall cease to own and control directly, of record and beneficially, 100% of each class of outstanding capital stock of the Borrower free and clear of all Liens (other than any Liens under the Security Documents); or (c) the Borrower shall issue any class of capital stock (or security convertible into any of its capital stock) that is not pledged to the Collateral Agent for the ratable benefit of the Secured Parties. "Closing Date" shall mean the date of the first Credit Event hereunder. "Code" shall mean the Internal Revenue Code of 1986, as the same may be amended from time to time and any successor statute thereto. "Collateral" shall mean all the "Collateral" as such term is defined in any Security Document. "Collateral Agent" shall mean Chemical Bank, as Collateral Agent under the Security Documents, or any successor thereto. 11 6 "Commitment" shall mean, with respect to each Lender, the commitment of such Lender to make Loans hereunder as set forth on Schedule 2.01, as the same may be reduced from time to time pursuant to Section 2.09. "Commitment Fee" shall have the meaning assigned to such term in Section 2.05(a). "Control" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a person, whether through the ownership of voting securities, by contract or otherwise, and the terms "Controlling" and "Controlled" shall have meanings correlative thereto. "Credit Event" shall have the meaning assigned to such term in Article IV. "Default" shall mean any event or condition that upon notice, lapse of time or both would constitute an Event of Default. "dollars" or "$" shall mean lawful money of the United States of America. "EBIDA" shall mean, with respect to any person for any period, the sum of (a) Net Income of such person for such period, (b) Interest Expense deducted in determining such Net Income and (c) depreciation, amortization and other noncash charges deducted in determining such Net Income. "Environmental and Safety Laws" shall mean any and all applicable current and future treaties, laws, regulations, requirements, binding determinations, orders, decrees, judgments, injunctions, permits, approvals, authorizations, licenses, permissions, notices or binding agreements issued, promulgated or entered by any Governmental Authority, relating to the environment, to employee health or safety as it pertains to the use or handling of, or exposure to, Hazardous Substances, to preservation or reclamation of natural resources or to the management, release or threatened release of contaminants or noxious odors, including the Hazardous Materials Transportation Act, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 ("CERCLA"), the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act of 1976 and the Hazardous and Solid Waste Amendments of 1984, the Federal Water Pollution Control Act, as amended by the Clean Water Act of 1977, the Clean Air Act of 1970 (to the extent it pertains to the use or handling of, or exposure to, Hazardous Substances), as amended, the Toxic Substances Control Act of 1976, the Occupational Safety and Health Act of 1970, as amended, the Emergency Planning and Community Right-to-Know Act of 1986, the Safe Drinking Water Act of 1974, as amended, and any similar or implementing state law and all amendments or regulations promulgated thereunder. "Environmental Claim" shall mean any written notice of any Governmental Authority alleging liability for damage to the environment or by any person alleging liability for personal injury (including sickness, disease or death), in either case resulting from or based upon (a) the presence or release (including intentional and unintentional, negligent and nonnegligent, sudden or nonsudden, accidental or nonaccidental leaks or spills) of any Hazardous Substance at, in or from the property of any person, whether or not owned or leased by such person, or (b) any other circumstances forming the basis of any violation, or alleged violation, of any Environmental and Safety Law; provided, that the term "Environmental Claim" shall not include any allegation of liability on the part of any Insurance Subsidiary for any of the foregoing under any bond or policy issued by such Insurance Subsidiary. 12 7 "Equity Contribution" shall mean the contribution by Capsure to the Borrower of (a) all the capital stock of, and intercompany indebtedness owing to Capsure by, each subsidiary of Capsure in existence on the date hereof and any other interest Capsure may hold with respect to any such subsidiary or such subsidiary's assets, (b) all marketable securities held by Capsure on the date hereof and (c) all cash held by Capsure on the date hereof (other than $250,000 (net of fees and expenses incurred in connection with the Transactions) to be retained by Capsure for the payment of reasonable and customary accounting, legal and other administrative expenses in the ordinary course of Capsure's business). "Equity Holdings" shall mean Equity Holdings, an Illinois partnership. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as the same may be amended from time to time. "ERISA Affiliate" shall mean any trade or business (whether or not incorporated) that is, together with Capsure and/or the Borrower, treated as a single employer under Section 414 of the Code. "Eurodollar Borrowing" shall mean a Borrowing comprised of Eurodollar Loans. "Eurodollar Loan" shall mean any Loan bearing interest at a rate determined by reference to the LIBO Rate in accordance with the provisions of Article II. "Event of Default" shall have the meaning assigned to such term in Article VII. "Excess Cash Flow" shall mean, for any period, the difference between (a) Total Cash Flow Sources for such period (determined without giving effect to (i) clauses (a)(ii), (b)(ii) and (c)(ii) of the definition of the term "Total Cash Flow Sources" and (ii) any gain resulting from the sale of any assets by any Subsidiary other than any realized gain from the sale of Invested Assets by the Borrower or any Subsidiary (other than any Insurance Subsidiary)) and (b) Total Cash Flow Uses for such period minus the aggregate amount of reductions in the Commitments required under Section 2.09(b) and Section 2.09(c) during such period, but only to the extent that such reductions (i) have been included in Total Cash Flow Uses for such period and (ii) did not result in a required payment or prepayment under Section 2.10(b). "Excluded Dividends" shall mean (a) dividends, distributions or other cash payments from the Borrower or any of its subsidiaries to Capsure, in an amount not to exceed (i) $2,500,000 in the aggregate in each calendar year from 1994 through 1997 and (ii) $3,000,000 in the aggregate in each calendar year from 1998 through 2000, in each case solely to enable Capsure to pay reasonable and customary accounting, legal and other administrative expenses (to the extent such expenses have not been reimbursed by the Borrower or any subsidiary of the Borrower or Capsure) in the ordinary course of Capsure's business, (b) dividends, distributions or other cash payments from the Borrower or any of its subsidiaries to Capsure to the extent required under the Tax Sharing Agreements and (c) in addition to dividends, distributions or other cash payments permitted under clauses (a) and (b) above, dividends, distributions or other cash payments from the Borrower or any of its subsidiaries to Capsure in an amount not to exceed $30,000,000 in the aggregate since the Closing Date. "Excluded Investments" shall have the meaning assigned to such term in Section 6.04(f). "Existing Credit Facilities" shall mean (a) the Credit Agreement dated August 14, 1992, among SI Acquisition Corp., the lenders named therein and Continental Bank, N.A., as agent for such lenders, 13 8 and (b) the Credit Agreement dated February 20, 1990, among NI Acquisition Corp., the lenders named therein and Continental Bank, N.A., as agent for such lenders. "Extraordinary Dividend" shall mean any dividend paid or payable by any Insurance Subsidiary that is not an Ordinary Dividend at the time of payment thereof. "Federal Funds Effective Rate" shall mean, for any day, the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for the day of such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "Fee Letter" shall mean the Fee Letter dated February 16, 1994, between Capsure and the Administrative Agent. "Fees" shall mean the Commitment Fees, the Participation Fees and all other amounts required to be paid to the Administrative Agent and/or the Lenders pursuant to Section 2.05. "Financial Officer" of any corporation shall mean the chief financial officer, principal accounting officer, Treasurer or Controller of such corporation. "Fixed Charge Coverage Ratio" shall mean, for any period, the ratio of (a) the sum of (i) Total Cash Flow Sources for such period and (ii) an amount equal to the lesser of (A) $10,000,000 or (B) the aggregate amount of cash and Cash Equivalents held by the Borrower and the Subsidiaries (other than any Insurance Subsidiary and any subsidiary of any Insurance Subsidiary) on the last day of such period minus, in the case of each of clause (A) and clause (B), the aggregate principal amount, without duplication, of loans and advances to the Borrower and the Subsidiaries (other than any Insurance Subsidiary and any subsidiary of any Insurance Subsidiary) from Capsure, any Insurance Subsidiary or any subsidiary of any Insurance Subsidiary outstanding on the last day of such period (provided that, for purposes of this definition, the amount under this clause (ii) shall not be less than zero) to (b) Total Cash Flow Uses for such period. "Funded Indebtedness" shall mean, for Capsure and its subsidiaries at any time, the aggregate amount of Indebtedness consisting of obligations for borrowed money and Capital Lease Obligations of Capsure and its subsidiaries at such time. "GAAP" shall mean generally accepted accounting principles applied on a consistent basis. "Governmental Authority" shall mean any Federal, state, local or foreign court or governmental agency, authority, instrumentality or regulatory body. "Guarantee" of or by any person shall mean any obligation, contingent or otherwise, of such person guaranteeing or having the economic effect of guaranteeing any Indebtedness of any other person (the "primary obligor") in any manner, whether directly or indirectly, and including any obligation of such person, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such Indebtedness, (b) to purchase property, securities or services for the purpose of 14 9 assuring the owner of such Indebtedness of the payment of such Indebtedness or (c) to maintain working capital, equity capital or other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness; provided, however, that the term "Guarantee" shall not include (i) endorsements for collection or deposit, or (ii) surety bonds issued by any Insurance Subsidiary in either case in the ordinary course of business. "Guarantee Agreement" shall mean the Guarantee Agreement, substantially in the form of Exhibit I, among the Subsidiary Guarantors, any person that shall become a party thereto pursuant to Section 5.09 and the Collateral Agent. "Guarantor" shall mean Capsure and each Subsidiary Guarantor. "Hazardous Substances" shall mean any toxic, radioactive, caustic or otherwise hazardous substance, material or waste, including petroleum, its derivatives, by-products and other hydrocarbons, including polychlorinated biphenyls ("PCBs"), asbestos or asbestos-containing material, and any substance, waste or material regulated under Environmental and Safety Laws. "Indebtedness" of any person shall mean, without duplication, (a) all obligations of such person for borrowed money or with respect to deposits or advances of any kind, (b) all obligations of such person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such person upon which interest charges are customarily paid, (d) all obligations of such person under conditional sale or other title retention agreements relating to property or assets purchased by such person, (e) all obligations of such person issued or assumed as the deferred purchase price of property or services, (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such person, whether or not the obligations secured thereby have been assumed, (g) all Guarantees by such person of Indebtedness of others, (h) all Capital Lease Obligations of such person, (i) all obligations of such person in respect of interest rate protection agreements, foreign currency exchange agreements or other interest or exchange rate hedging arrangements and (j) all obligations of such person as an account party in respect of letters of credit and bankers' acceptances. The Indebtedness of any person shall include the Indebtedness of any partnership in which such person is a general partner. "Indemnity, Subrogation and Contribution Agreement" shall mean the Indemnity, Subrogation and Contribution Agreement, substantially in the form of Exhibit E, among the Subsidiary Guarantors, any person that shall become a party thereto pursuant to Section 5.09 and the Borrower. "Insurance Business" shall mean one or more aspects of the business of selling, issuing, underwriting, reinsuring, producing, administering, managing or servicing property and casualty insurance and activities incidental thereto. "Insurance Liabilities" shall mean (a) with respect to any Insurance Subsidiary at any time, the amount set forth on line 21 of the Liabilities, Surplus and Other Funds Statement in the Annual Statement of such Insurance Subsidiary or line 22 of the Liabilities, Surplus and Other Funds Statement in the Quarterly Statement of such Insurance Subsidiary, in each case most recently delivered to the Administrative Agent and the Lenders pursuant to Section 5.04 (or, in the case of any Insurance Subsidiary acquired after the date hereof that has not yet delivered any such statement to the Administrative Agent, in the Annual Statement or Quarterly Statement of such Insurance Subsidiary most recently filed with the Applicable Insurance Regulatory Authority) or, if any such statement shall be modified, the equivalent item 15 10 on any applicable successor form and (b) with respect to any other Subsidiary engaged in the Insurance Business at such time, the total liabilities (other than Funded Indebtedness and amounts available to be borrowed under credit facilities the proceeds of which are to be used for working capital purposes of such Subsidiary) of such Subsidiary that would properly be classified as liabilities at such time, determined in accordance with GAAP. "Insurance Regulatory Information System" shall mean the Insurance Regulatory Information System promulgated by the NAIC, or any successor system promulgated by the NAIC. "Insurance Subsidiaries" shall mean Western Surety, United Capitol, Surety Bonding Company of America and any other Subsidiary, whether now owned or hereafter acquired, that is regulated, in accordance with applicable state law or any Federal law, as an insurer by an insurance commission or similar Governmental Authority located in the state in which such Subsidiary is domiciled or by any Federal insurance Governmental Authority. "Interest Expense" shall mean, with respect to any person for any period, the interest expense of such person for such period, as shown on the unconsolidated statement of earnings of such person for such period, determined in accordance with GAAP. "Interest Payment Date" shall mean, with respect to any Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Eurodollar Borrowing with an Interest Period of more than three months' duration, each day that would have been an Interest Payment Date had successive Interest Periods of three months' duration been applicable to such Borrowing, and, in addition, the date of any refinancing or conversion of such Borrowing with or to a Borrowing of a different Type. "Interest Period" shall mean (a) as to any Eurodollar Borrowing, the period commencing on the date of such Borrowing or on the last day of the immediately preceding Interest Period applicable to such Borrowing, as the case may be, and ending on the numerically corresponding day (or, if there is no numerically corresponding day, on the last day) in the calendar month that is 1, 2, 3 or 6 months thereafter, as the Borrower may elect, and (b) as to any ABR Borrowing, the period commencing on the date of such Borrowing or on the last day of the immediately preceding Interest Period applicable to such Borrowing, as the case may be, and ending on the earliest of (i) the next succeeding March 31, June 30, September 30 or December 31, (ii) the Maturity Date and (iii) the date such Borrowing is prepaid in accordance with Section 2.10; provided, however, that if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless, in the case of a Eurodollar Borrowing only, such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day. "Invested Assets" of any person shall mean (a) in the case of any Insurance Subsidiary, the amount set forth on line 8A under Subtotals, Cash and Invested Assets in the Assets Statement in the Annual Statement or Quarterly Statement of the Insurance Subsidiary most recently delivered to the Administrative Agent and the Lenders pursuant to Section 5.04 (or, in the case of any Insurance Subsidiary acquired after the date hereof that has not yet delivered any such statement to the Administrative Agent, in the Annual Statement or Quarterly Statement of such Insurance Subsidiary most recently filed with the Applicable Insurance Regulatory Authority) or, if any such statement shall be modified, the equivalent item on any applicable successor form or (b) in the case of any other person, assets of such person of the type described in clause (a) above. 16 11 "Investment-Grade Security" shall mean any of the following: (a) any United States Government Security, (b) any Invested Asset that is rated NAIC 1 or NAIC 2 by the NAIC, (c) any Invested Asset that is rated BBB- or higher by Standard & Poor's or Baa3 or higher by Moody's and (d) any Invested Asset that is rated BBB- or higher by Duff & Phelps Credit Rating Co. or by Fitch Investors Service, Inc., provided that any Invested Asset specified in this clause (d) shall cease to be an Investment-Grade Security if such Invested Asset shall not receive a rating of NAIC 1 or NAIC 2 from the NAIC on or before the day that is 90 days following the date of issuance of such Invested Asset. "LIBO Rate" shall mean, with respect to any Eurodollar Borrowing for any Interest Period, the interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the product of (a) the rate at which dollar deposits approximately equal in principal amount to the Administrative Agent's portion of such Eurodollar Borrowing and for a maturity comparable to such Interest Period are offered to the principal London office of the Administrative Agent in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period and (b) Statutory Bank Reserves. "Lien" shall mean, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, encumbrance, charge or security interest in or on such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities. "Loans" shall mean the revolving loans made by the Lenders to the Borrower pursuant to Section 2.01. Each Loan shall be a Eurodollar Loan or an ABR Loan. "Loan Documents" shall mean this Agreement, the Notes, the Security Documents, the Guarantee Agreement, the Indemnity, Subrogation and Contribution Agreement and the Fee Letter. "Long Tail Insurance Line of Business" shall mean any line of business in respect of which the NAIC requires, at the time of determination, computation of an excess statutory reserve of the type set forth on page 93 of the Annual Statement of any Insurance Subsidiary for the year ended December 31, 1993, or, if such statement shall be modified, the equivalent item on any applicable successor form. "Margin Stock" shall have the meaning given such term under Regulation U. "Material Adverse Effect" shall mean (a) a materially adverse effect on the business, assets, operations, prospects or condition, financial or otherwise, of Capsure and its subsidiaries, taken as a whole, or (b) a material impairment of the ability of Capsure, the Borrower or any of the Subsidiaries to perform any of its material obligations under any Loan Document to which it is or will be a party or under any of its other Indebtedness. "Maturity Date" shall mean March 31, 2000. "Moody's" shall mean Moody's Investors Service, Inc. "Mortgage" shall mean each Mortgage, Security Agreement and Assignment of Leases and Rents, substantially in the form of Exhibit J hereto, entered into after the date hereof between the Borrower or any person that shall become a party thereto pursuant to Section 5.09 and the Collateral Agent. 17 12 "Multiemployer Plan" shall mean a multiemployer plan as defined in Section 4001(a)(3) of ERISA to which Capsure, the Borrower or any ERISA Affiliate (other than one considered an ERISA Affiliate only pursuant to subsection (m) or (o) of Section 414 of the Code) is making or accruing or has within any of the preceding five plan years made or accrued an obligation to contribute. "NAIC" shall mean the National Association of Insurance Commissioners or any association or Governmental Authority succeeding to any or all of the functions of the National Association of Insurance Commissioners. "NAIC 1" shall mean the rating NAIC 1 of the NAIC. "NAIC 2" shall mean the rating NAIC 2 of the NAIC. "Net Income" shall mean with respect to any person for any period, the aggregate net income (or net deficit) of such person for such period computed in accordance with GAAP, provided that the term "Net Income" shall exclude all extraordinary items determined in accordance with GAAP. "Net Written Premiums" shall mean, with respect to any Insurance Subsidiary for any period of four consecutive fiscal quarters, the amount set forth on line 1 of Exhibit 3 to the Reconciliation of Ledger Assets in the Annual Statement and/or Quarterly Statement of such Insurance Subsidiary relating to such period or, if any such statement shall be modified, the equivalent item on any applicable successor form. "Note" shall mean a promissory note of the Borrower, substantially in the form of Exhibit A, evidencing Loans. "Obligations" shall mean all obligations defined as "Obligations" in the Guarantee Agreement and the Security Documents. "Operating Leverage Ratio" shall mean the ratio, with respect to any Insurance Subsidiary, of (a) Net Written Premiums of such Insurance Subsidiary for the period of four consecutive fiscal quarters preceding the date of any determination to (b) Surplus of such Insurance Subsidiary at such date. "Ordinary Dividends" shall mean, with respect to any Insurance Subsidiary, the maximum amount of dividends that such Insurance Subsidiary may pay during any period of four consecutive fiscal quarters without seeking regulatory approval under applicable regulations in effect during such period. "Participation Fee" shall have the meaning given to such term in Section 2.05(c). "PBGC" shall mean the Pension Benefit Guaranty Corporation referred to and defined in ERISA. "Perfection Certificate" shall mean the Perfection Certificate, substantially in the form of Annex 2 to the Security Agreement, prepared by Capsure and the Borrower. "Permitted Acquisition" shall have the meaning assigned to such term in Section 6.05(c)(ii). 18 13 "Permitted Investments" shall mean: (a) United States Government Securities maturing within 360 days from the date of acquisition thereof; (b) investments in commercial paper maturing within 270 days from the date of acquisition thereof and having, at such date of acquisition, a rating of A1 or higher from Standard & Poor's or a rating of P1 or higher from Moody's; (c) investments in certificates of deposit, banker's acceptances and time deposits (including Eurodollar time deposits) maturing within 360 days from the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, any domestic office of any commercial bank of recognized standing organized under the laws of the United States of America or any state thereof that has a combined capital and surplus and undivided profits of not less than $250,000,000 and the deposits of which are rated (or the senior debt securities of the holding company of such commercial bank are rated) A- or better by Standard & Poor's or A3 by Moody's or carrying an equivalent rating by another nationally recognized rating agency if neither of the two named rating agencies shall rate such commercial bank (or the holding company of such commercial bank); (d) other investment instruments approved in writing by the Required Lenders and offered by financial institutions that have a combined capital and surplus and undivided profits of not less than $250,000,000; and (e) other Investment Grade Securities maturing within three years from the date of acquisition thereof. "person" shall mean any natural person, corporation, business trust, joint venture, association, company, limited liability company, partnership or government, or any agency or political subdivision thereof. "Plan" shall mean any employee pension benefit plan (other than a Multiemployer Plan) that is subject to the provisions of Title IV of ERISA or Section 412 of the Code and is maintained for current or former employees, or any beneficiary thereof, of Capsure, the Borrower or any ERISA Affiliate. "Pledge Agreement" shall mean the Pledge Agreement, substantially in the form of Exhibit F, among Capsure, the Borrower, each Subsidiary Guarantor, certain other Subsidiaries, any person that shall become a party thereto pursuant to Section 5.09 and the Collateral Agent. "Pledgeholder Agreement" shall mean each Pledgeholder Agreement, substantially in the form of Exhibit H hereto, between the Borrower or any person that shall become a party thereto pursuant to Section 5.09, any Pledgeholder named therein and the Collateral Agent. "Quarterly Statement" shall mean, with respect to any Insurance Subsidiary, the Quarterly Statement of such Insurance Subsidiary required to be filed with the Applicable Insurance Regulatory Authority in accordance with state law, including any exhibits, schedules, certificates or actuarial opinions filed or delivered therewith. 19 14 "Register" shall have the meaning given such term in Section 10.04(d). "Regulation G" shall mean Regulation G of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Regulation U" shall mean Regulation U of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Regulation X" shall mean Regulation X of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Reinsurance Agreements" shall mean all agreements, contracts, treaties, certificates and other arrangements whereby an insurance company agrees to transfer or cede to another insurer all or part of the liability assumed by such insurance company under a policy or policies of insurance reinsured by such insurance company, provided that, for purposes of Section 3.20 and Section 5.04(j) only, the term "Reinsurance Agreements" shall not include individual facultative reinsurance agreements or arrangements. "Reportable Event" shall mean any reportable event as defined in Section 4043(b) of ERISA or the regulations issued thereunder with respect to a Plan (other than a Plan maintained by an ERISA Affiliate that is considered an ERISA Affiliate only pursuant to subsection (m) or (o) of Section 414 of the Code). "Required Lenders" shall mean, at any time, Lenders holding Loans representing at least a majority of the aggregate principal amount of the Loans outstanding or, if no Loans are outstanding, Lenders having Commitments representing at least a majority of the aggregate Commitments. "Responsible Officer" of any corporation shall mean any executive officer or Financial Officer of such corporation and any other officer or similar official thereof responsible for the administration of the obligations of such corporation in respect of this Agreement. "Right" shall mean the potential right (as in effect on the date hereof) of the Rightholder to purchase shares of convertible preferred stock of United Capitol Holding Company, upon the terms and conditions in effect on the date hereof. "Rightholder" shall mean the person or persons set forth on Schedule 1.01(a). "Risk-Based Capital" shall mean, with respect to the Insurance Subsidiaries at any time, the Risk-Based Capital (as defined by the NAIC at such time and as computed in accordance with SAP) of the Insurance Subsidiaries (consolidated in accordance with SAP) at such time. "SAP" shall mean, with respect to any Insurance Subsidiary, the accounting procedures prescribed or permitted by the Applicable Insurance Regulatory Authority applied on a basis consistent with those that are indicated in Section 1.02. "Secured Parties" shall have the meaning assigned to such term in the Security Agreement. 20 15 "Security Agreement" shall mean the Security Agreement, substantially in the form of Exhibit G, among Capsure, the Borrower, each Subsidiary Guarantor, any person that shall become a party thereto pursuant to Section 5.09 and the Collateral Agent. "Security Documents" shall mean the Pledge Agreement, the Security Agreement, each Mortgage, each Pledgeholder Agreement and each of the security agreements and other instruments and documents executed and delivered pursuant to any of the foregoing or pursuant to Section 5.09. "Short Tail Insurance Line of Business" shall mean any line of business in the Insurance Business that is not, at the time of determination, a Long Tail Insurance Line of Business. "Standard & Poor's" shall mean Standard and Poor's Corporation. "Statement of Actuarial Opinion" shall mean, with respect to any Insurance Subsidiary, the Statement of Actuarial Opinion required to be filed with the Applicable Insurance Regulatory Authority in accordance with state law or, if such Applicable Insurance Regulatory Authority shall no longer require such a statement, information equivalent to that required to be included in the Statement of Actuarial Opinion that was filed immediately prior to the time such statement was no longer required. "Statutory Bank Reserves" shall mean a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board and any other banking authority to which the Administrative Agent is subject (a) with respect to the Base CD Rate (as such term is used in the definition of "Alternate Base Rate"), for new negotiable nonpersonal time deposits in dollars of over $100,000 with maturities approximately equal to three months and (b) with respect to the LIBO Rate, for Eurocurrency Liabilities (as defined in Regulation D of the Board). Such reserve percentages shall include those imposed pursuant to such Regulation D. Eurodollar Loans shall be deemed to constitute Eurocurrency Liabilities and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets which may be available from time to time to any Lender under such Regulation D. Statutory Bank Reserves shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "Statutory Surplus" or "Surplus" shall mean, with respect to any Insurance Subsidiary at any time, the amount set forth on line 25 of the Liabilities, Surplus and Other Funds Statement in the Annual Statement of such Insurance Subsidiary or line 26 of the Liabilities, Surplus and Other Funds Statement in the Quarterly Statement of such Insurance Subsidiary, in each case most recently delivered to the Administrative Agent and the Lenders pursuant to Section 5.04 (or, in the case of any Insurance Subsidiary acquired after the date hereof that has not yet delivered any such statement to the Administrative Agent, in the Annual Statement or Quarterly Statement of such Insurance Subsidiary most recently filed with the Applicable Insurance Regulatory Authority) or, if such statement shall be modified, the equivalent item on any applicable successor form. "Stockholders' Equity" shall mean, at any date, for Capsure and its subsidiaries on a consolidated basis, stockholders equity at such date, determined in accordance with GAAP and after giving effect to all adjustments required thereby. "subsidiary" shall mean, with respect to any person (herein referred to as the "parent"), any corporation, partnership, association or other business entity (a) of which securities or other ownership 21 16 interests representing more than 50% of the equity or more than 50% of the ordinary voting power or more than 50% of the general partnership interests are, at the time any determination is being made, owned, controlled or held, or (b) that is, at the time any determination is made, otherwise Controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. "Subsidiary" shall mean any subsidiary of the Borrower. "Subsidiary Guarantor" shall mean SI Acquisition Corp., NI Acquisition Corp., Surewest Financial Corp. and United Capitol Holding Company, Troy Fain Insurance, Inc., Pin Oak Petroleum Inc., Capsure Agency Holding Corp., APGO Drilling & Production Services, Capital Dredge & Dock Corp., Cogburn Pump & Supply Co., Condor Pipe, Incorporated, Crowder Tank, Inc., Del-Tex, Inc., Eagle Upsetters, Inc., Jim Williams & Associates, Inc., Martin Pipe Co., Inc., Nucorp Compressor, Inc., Nucorp Management Company, Nucorp Properties, Inc., SMCI Incorporated, Superior Allied Products, Inc., Sweetwater Pump & Supply, Inc., Taylor Rig and Equipment Company and Wildcat Supply, Inc., and each person that shall become a Subsidiary Guarantor pursuant to Section 5.09. "Surplus Relief Reinsurance Agreement" shall mean any agreement whereby any Insurance Subsidiary either assumes or cedes business under a Reinsurance Agreement that would be considered a "financing-type" reinsurance agreement and is entered into solely for the purpose of impacting or affecting the income statement of such Insurance Subsidiary. "Tax Sharing Agreement" shall mean each Tax Sharing Agreement (including each Borrower Tax Sharing Agreement) as in effect on the date hereof between (a) Capsure and the Borrower, (b) the Borrower and any of its subsidiaries or (c) any subsidiary of the Borrower and any other subsidiary of the Borrower. "Total Cash Flow Sources" shall mean, at any measurement date, for the period of four consecutive fiscal quarters preceding such measurement date (the "Reference Period"), the sum, without duplication, of (a)(i) in the case of Western Surety, United Capitol and, for any measurement date occurring after the completion of three consecutive fiscal quarters immediately following the fiscal quarter during which the acquisition thereof is consummated in accordance with Section 6.05, any Insurance Subsidiary (other than any Insurance Subsidiary that is a subsidiary of any other Insurance Subsidiary) hereafter acquired, (A) the capacity to pay Ordinary Dividends (calculated as if the measurement date is the end of a calendar year and determined by reference to the regulations governing the payment of dividends by insurance companies to insurance holding companies promulgated by the Applicable Insurance Regulatory Authority as in effect from time to time) of such persons during the Reference Period or (B) if such Ordinary Dividends have not been paid during the Reference Period, the aggregate amount of dividends actually paid during the Reference Period by such persons or (ii) for purposes of determining compliance with Section 6.05 (c)(ii)(H), and for any measurement date occurring prior to the completion of three consecutive fiscal quarters immediately following the fiscal quarter during which the acquisition thereof is consummated in accordance with Section 6.05 (but occurring after the date on which such acquisition is consummated), the capacity to pay Ordinary Dividends (calculated as if the measurement date is the end of a calendar year and determined by reference to the regulations governing the payment of dividends by insurance companies to insurance holding companies promulgated by the Applicable Insurance Regulatory Authority as in effect from time to time) during the Reference Period of any Insurance Subsidiary hereafter acquired, calculated as if such Subsidiary had been a Subsidiary as of the first day of the Reference Period, (b)(i) EBIDA during the Reference Period of all Subsidiaries (other than Insurance Subsidiaries and subsidiaries of Insurance Subsidiaries) now owned and, for any measurement date occurring after the completion of three consecutive fiscal quarters immediately following the fiscal quarter 22 17 during which the acquisition thereof is consummated in accordance with Section 6.05, any Subsidiary (other than Insurance Subsidiaries and subsidiaries of Insurance Subsidiaries) hereafter acquired and (ii) for purposes of determining compliance with Section 6.05(c)(ii)(H), and for any measurement date occurring prior to the completion of three consecutive fiscal quarters immediately following the fiscal quarter during which the acquisition thereof is consummated in accordance with Section 6.05 (but occurring after the date on which such acquisition is consummated), EBIDA during the Reference Period of any Subsidiary (other than Insurance Subsidiaries and subsidiaries of Insurance Subsidiaries) hereafter acquired, calculated as if such Subsidiary had been a Subsidiary as of the first day of the Reference Period, (c)(i) in the case of any direct subsidiary of the Borrower existing on the date hereof and, for any measurement date occurring after the completion of three consecutive fiscal quarters immediately following the fiscal quarter during which the acquisition thereof is consummated in accordance with Section 6.05, any other direct subsidiary of the Borrower hereafter acquired, the net payments (determined without giving effect to the tax benefit resulting from the payment of interest under the Existing Credit Facilities) required to be made to the Borrower during the Reference Period under the Borrower Tax Sharing Agreements by such persons and (ii) for purposes of determining compliance with Section 6.05 (c)(ii)(H), and for any measurement date occurring prior to the completion of three consecutive fiscal quarters immediately following the fiscal quarter during which the acquisition thereof is consummated in accordance with Section 6.05 (but occurring after the date on which such acquisition is consummated), the net payments that would have been required to have been made to the Borrower under the Borrower Tax Sharing Agreements during the Reference Period by any direct subsidiary of the Borrower hereafter acquired, assuming such Subsidiary had been a Subsidiary as of the first day of the Reference Period, and (d) cash received by the Borrower during the Reference Period (or, for any Reference Period that includes one or more of the four consecutive fiscal quarters ended March 31, 1994, by Capsure during any of such fiscal quarters included in such Reference Period) as a result of income from management fees earned and income (determined in accordance with GAAP) from Invested Assets of the Borrower or Capsure, as applicable. The term "Total Cash Flow Sources" shall in all cases exclude the aggregate amount of Extraordinary Dividends and extraordinary distributions or other payments received by the Borrower during the applicable Reference Period. "Total Cash Flow Uses" shall mean, for any period of four consecutive fiscal quarters, the sum, without duplication, of (a) the aggregate amount of Commitment reductions required under Section 2.09(b) and Section 2.09(c) during such period to the extent that the amount of Commitments outstanding after any such reduction is less than the greatest amount of Loans that has been outstanding at any time since the Closing Date before giving effect to such reduction, (b) the aggregate amount of Indebtedness required to be repaid by Capsure and its subsidiaries during such period, (c) Interest Expense of Capsure and its subsidiaries during such period, (d) the aggregate amount of taxes paid by the Borrower or Capsure during such period, (e) the aggregate amount of dividends, distributions or other payments made by the Borrower to Capsure during such period (excluding dividends, distributions or other payments, made pursuant to Section 6.06(b)(iv), in an aggregate amount of up to $20,000,000 since the Closing Date, so long as the Borrower has cash and Cash Equivalents equal to the amount of any such excluded dividend, distribution or other payment immediately prior to the payment thereof) and (f) any other expenses of the Borrower and the Subsidiaries during such period and any other uses of cash by Capsure (excluding expenses of Capsure for which dividends have been paid to Capsure under Section 6.06(b)(ii) to the extent such dividends have been included under clause (e) of this definition) and its subsidiaries (other than Insurance Subsidiaries) during such period (including dividends or other distributions in respect of the capital stock of Capsure and its subsidiaries), in each case to the extent not otherwise included in EBIDA during such period of such Subsidiaries (other than Insurance Subsidiaries). "Total Debt" shall mean, at any time, the aggregate amount of Funded Indebtedness at such time. 23 18 "Transactions" shall have the meaning assigned to such term in Section 3.02. "Transferee" shall have the meaning assigned to such term in Section 2.17. "Type", when used in respect of any Loan or Borrowing, shall refer to the Rate by reference to which interest on such Loan or on the Loans comprising such Borrowing is determined. For purposes hereof, the term "Rate" shall include the LIBO Rate and the Alternate Base Rate. "United States Government Securities" shall mean direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America, any agency thereof, the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, the Government National Mortgage Association, the Student Loan Market Association, the Federal Home Loan Bank or the Federal Farm Credit Bank. "Western Surety" shall mean Western Surety Company, a South Dakota corporation. "Withdrawal Liability" shall mean liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. "United Capitol" shall mean United Capitol Insurance Company, a Wisconsin corporation. "Zell Entities" shall mean (a) each of Equity Holdings and Arlington so long as Samuel Zell, Ann Lurie and the persons specified in clauses (b) and (c) of this definition, collectively, (i) shall Control each such entity and (ii) shall own, directly and indirectly, beneficially and of record, at least 51% of the aggregate ordinary voting power represented by the issued and outstanding capital stock or general partnership interests of each such entity, (b) trusts created for the benefit of Samuel Zell, Ann Lurie or their respective immediate family members and (c) any other person Controlled by Samuel Zell or the trusts specified in clause (b) of this definition. SECTION 1.02. Terms Generally. The definitions in Section 1.01 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". All references herein to Articles, Sections, Exhibits and Schedules shall be deemed references to Articles and Sections of, and Exhibits and Schedules to, this Agreement unless the context shall otherwise require. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP or, to the extent such terms apply to an Insurance Subsidiary, SAP, in each case as in effect from time to time; provided, however, that for purposes of determining compliance with any covenant set forth in Article VI, such terms shall be construed in accordance with GAAP or SAP (and the NAIC and the Insurance Regulatory Information System), as applicable, as in effect on the date of this Agreement applied on a basis consistent with the application used in preparing Capsure's audited financial statements referred to in Section 3.05 or the Insurance Subsidiaries' financial statements filed with their respective Applicable Insurance Regulatory Authorities, as the case may be. 24 19 ARTICLE II THE CREDITS SECTION 2.01. Commitments. Upon the terms and subject to the conditions and relying upon the representations and warranties herein set forth, each Lender agrees, severally and not jointly, to make Loans to the Borrower, at any time and from time to time on or after the Closing Date and until the earlier of the Maturity Date and the termination of the Commitment of such Lender in accordance with the terms hereof, in an aggregate principal amount at any time outstanding not to exceed (after giving effect to all Loans repaid) an amount equal to the Commitment set forth opposite such Lender's name on Schedule 2.01, as such Commitment may be reduced from time to time pursuant to Section 2.09. Within the limits set forth in the preceding sentence, the Borrower may borrow, pay or prepay and reborrow Loans on or after the Closing Date and prior to the Maturity Date, upon the terms and subject to the conditions and limitations set forth herein. SECTION 2.02. Loans. (a) Each Loan shall be made as part of a Borrowing consisting of Loans made by the Lenders ratably in accordance with their respective Commitments; provided, however, that the failure of any Lender to make any Loan shall not in itself relieve any other Lender of its obligation to lend hereunder (it being understood, however, that no Lender shall be responsible for the failure of any other Lender to make any Loan required to be made by such other Lender). The Loans comprising each Borrowing shall be in an aggregate principal amount that is an integral multiple of $1,000,000 and not less than $1,000,000 (or, if less, an aggregate principal amount equal to the remaining balance of the Commitments). (b) Each Borrowing shall be comprised entirely of ABR Loans or Eurodollar Loans, as the Borrower may request pursuant to Section 2.03. Each Lender may at its option fulfill its Commitment with respect to any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan, provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement and the applicable Note. Borrowings of more than one Type may be outstanding at the same time; provided, however, that the Borrower shall not be entitled to request any Borrowing that, if made, would result in an aggregate of more than three separate Eurodollar Loans of any Lender being outstanding hereunder at any one time. For purposes of the foregoing, Loans having different Interest Periods, regardless of whether they commence on the same date, shall be considered separate Loans. (c) Subject to paragraph (e) below, each Lender shall make a Loan in the amount of its pro rata portion, as determined under Section 2.14, of each Borrowing hereunder on the proposed date thereof by wire transfer of immediately available funds to the Administrative Agent in New York, New York, not later than 12:00 noon, New York City time, and the Administrative Agent shall by 3:00 p.m., New York City time, credit the amounts so received to the general deposit account of the Borrower with the Administrative Agent or, if a Borrowing shall not occur on such date because any condition precedent herein specified shall not have been met, return the amounts so received to the respective Lenders. Unless the Administrative Agent shall have received notice from a Lender prior to any Borrowing that such Lender will not make available to the Administrative Agent such Lender's portion of such Borrowing, the Administrative Agent may assume that such Lender has made such portion available to the Administrative Agent on the date of such Borrowing in accordance with this paragraph (c) and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Lender shall not have made such portion available to the Administrative Agent, such Lender and the Borrower severally agree to repay to the Administrative Agent 25 20 forthwith on demand such corresponding amount together with interest thereon, for each day from and including the date such amount is made available to the Borrower to but excluding the date such amount is repaid to the Administrative Agent, at (i) in the case of the Borrower, the interest rate applicable at the time to the Loans comprising such Borrowing and (ii) in the case of such Lender, the Federal Funds Effective Rate. If such Lender shall repay to the Administrative Agent such corresponding amount, such amount shall constitute such Lender's Loan as part of such Borrowing for purposes of this Agreement. (d) Notwithstanding any other provision of this Agreement, the Borrower shall not be entitled to request any Borrowing if the Interest Period requested with respect thereto would end after the Maturity Date. (e) The Borrower may refinance all or any part of any Borrowing with a Borrowing of the same or a different Type, subject to the conditions and limitations set forth in this Agreement. Any Borrowing or part thereof so refinanced shall be deemed to be repaid or prepaid in accordance with Section 2.04 or 2.10, as applicable, with the proceeds of a new Borrowing, and the proceeds of the new Borrowing, to the extent they do not exceed the principal amount of the Borrowing being refinanced, shall not be paid by the Lenders to the Administrative Agent or by the Administrative Agent to the Borrower pursuant to paragraph (c) above. SECTION 2.03. Notice of Borrowings. Except in the case of the Credit Event occurring on the Closing Date (which shall consist solely of an ABR Borrowing), the Borrower shall give the Administrative Agent written or telecopy notice (or telephone notice promptly confirmed in writing or by telecopy) (a) in the case of a Eurodollar Borrowing, not later than 12:00 noon, New York City time, three Business Days before a proposed borrowing and (b) in the case of an ABR Borrowing, not later than 12:00 (noon), New York City time, one Business Day before a proposed borrowing. Such notice shall be irrevocable and shall in each case refer to this Agreement and specify (a) whether such Borrowing is to be a Eurodollar Borrowing or an ABR Borrowing; (b) the date of such Borrowing (which shall be a Business Day) and the amount thereof; and (c) if such Borrowing is to be a Eurodollar Borrowing, the Interest Period with respect thereto. If no election as to the Type of Borrowing is specified in any such notice, then the requested Borrowing shall be an ABR Borrowing. If no Interest Period with respect to any Eurodollar Borrowing is specified in any such notice, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. If the Borrower shall not have given notice in accordance with this Section 2.03 of its election to refinance a Borrowing prior to the end of the Interest Period in effect for such Borrowing, then the Borrower shall (unless such Borrowing is repaid at the end of such Interest Period) be deemed to have given notice of an election to refinance such Borrowing with an ABR Borrowing. The Administrative Agent shall promptly advise the Lenders of any notice given pursuant to this Section 2.03 and of each Lender's portion of the requested Borrowing. SECTION 2.04. Notes; Repayment of Loans. The Loans made by each Lender shall be evidenced by a Note, duly executed on behalf of the Borrower, dated the Closing Date, in substantially the form attached hereto as Exhibit A, with the blanks appropriately filled, payable to the order of such Lender in a principal amount equal to such Lender's Commitment. The outstanding principal balance of each Loan, as evidenced by such a Note, shall be payable on the last day of the Interest Period applicable to such Loan and on the Maturity Date. Each Note shall bear interest from and including the date of the first Borrowing hereunder on the outstanding principal balance thereof as set forth in Section 2.06. Each Lender shall, and is hereby authorized by the Borrower to, endorse on the schedule attached to each Note delivered to such Lender (or on a continuation of such schedule attached to such Note and made a part thereof), or otherwise to record in such Lender's internal records, an appropriate notation evidencing the date and amount of each Loan from such Lender, each payment and prepayment of principal of any such Loan, each payment of 26 21 interest on any such Loan and the other information provided for on such schedule; provided, however, that the failure of any Lender to make such a notation or any error therein shall not affect the obligation of the Borrower to repay the Loans made by such Lender in accordance with the terms of this Agreement and the applicable Notes. Such a notation shall be conclusive absent manifest error. SECTION 2.05. Fees. (a) The Borrower agrees to pay to each Lender, through the Administrative Agent, the following fees (each, a "Commitment Fee"): (i) on the Closing Date, a Commitment Fee of 3/8 of 1% per annum on the average daily unused amount of the Commitment of such Lender during the period from and including the date on which such Lender's Commitment was accepted to but excluding the Closing Date and (ii) on the last day of March, June, September and December in each year, and on the date on which the Commitment of such Lender shall be terminated as provided herein, a Commitment Fee equal to the Applicable Commitment Fee Percentage on the average daily unused amount of the Commitment of such Lender during the preceding quarter (or shorter period commencing with the Closing Date or ending with the Maturity Date or the date on which the Commitment of such Lender shall be terminated). All Commitment Fees shall be computed on the basis of the actual number of days elapsed in a year of 360 days. (b) The Borrower agrees to pay to the Administrative Agent, for its own account, the fees set forth in the Fee Letter at the times set forth in the Fee Letter. (c) The Borrower agrees to pay to the Administrative Agent, for the account of the Lenders other than Chemical Bank, the participation fees (the "Participation Fees") set forth in the Fee Letter on the Closing Date. (d) All Fees shall be paid on the dates due, in immediately available funds, to the Administrative Agent for distribution, if and as appropriate, among the Lenders. Once paid, none of the Fees shall be refundable under any circumstances, absent manifest error in the calculation thereof. SECTION 2.06. Interest on Loans. (a) Subject to the provisions of Section 2.07, the Loans comprising each ABR Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as the case may be, when such interest is determined by reference to the Prime Rate and over a year of 360 days at all other times) at a rate per annum equal to the Alternate Base Rate plus the Applicable Margin at the time in effect. (b) Subject to the provisions of Section 2.07, the Loans comprising each Eurodollar Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360 days) at a rate per annum equal to the LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Margin in effect at the time of the making of such Loans. (c) Interest on each Loan shall be payable on the Interest Payment Dates applicable to such Loan except as otherwise provided in this Agreement. The applicable Alternate Base Rate or LIBO Rate for each Interest Period or day within an Interest Period, as the case may be, shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error. (d) Interest shall accrue from and including the first day of an Interest Period to but excluding the last day of such Interest Period. SECTION 2.07. Default Interest. If the Borrower shall default in the payment of the principal of or interest on any Loan or any other amount becoming due hereunder, by acceleration or otherwise, the 27 22 Borrower shall on demand from time to time pay interest, to the extent permitted by law, on such defaulted amount up to but excluding the date of actual payment (after as well as before judgment) at a rate per annum (computed on the same basis as an ABR Loan) equal to the rate that would at the time be applicable to an ABR Loan under Section 2.06 plus 2% per annum. SECTION 2.08. Alternate Rate of Interest. In the event, and on each occasion, that on the day two Business Days prior to the commencement of any Interest Period for a Eurodollar Borrowing the Administrative Agent shall have determined that dollar deposits in the principal amounts of the Loans comprising such Borrowing are not generally available in the London interbank market, or that the rates at which such dollar deposits are being offered will not adequately and fairly reflect the cost to Lenders having at such time Commitments representing at least 20% of the total Commitments at such time of making or maintaining their Eurodollar Loans during such Interest Period, or that reasonable means do not exist for ascertaining the LIBO Rate, the Administrative Agent shall, as soon as practicable thereafter, give written or telecopy notice of such determination to the Borrower and the Lenders. In the event of any such determination, any request by the Borrower for a Eurodollar Borrowing pursuant to Section 2.03 shall, until the Administrative Agent shall have advised the Borrower and the Lenders that the circumstances giving rise to such notice no longer exist, be deemed to be a request for an ABR Borrowing. Each determination by the Administrative Agent hereunder shall be conclusive absent manifest error. SECTION 2.09. Termination and Reduction of Commitments. (a) The Commitments shall be automatically and permanently terminated on the Maturity Date. (b) The Commitments shall be automatically and permanently reduced on each of the following dates in the amounts corresponding to such dates as set forth below:
Date Commitment Reduction March 31, 1996 $12,500,000 September 30, 1996 $12,500,000 March 31, 1997 $12,500,000 September 30, 1997 $12,500,000 March 31, 1998 $15,000,000 September 30, 1998 $15,000,000 March 31, 1999 $17,500,000 September 30, 1999 $17,500,000 March 31, 2000 $20,000,000
(c) The Commitments shall be automatically and permanently reduced (i) upon the payment of any dividend or other distribution in respect of the capital stock of the Borrower, any redemption, repurchase or retirement by the Borrower of any shares of its capital stock or any other cash payment from the Borrower or any of its subsidiaries to Capsure (other than Excluded Dividends and distributions in the form of additional capital stock of the Borrower), such reduction to be in an amount equal to the amount of such dividend, distribution, redemption, repurchase or other cash payment and (ii) upon any sale or other disposition permitted hereunder of assets (other than sales or dispositions of Invested Assets) by Capsure, the Borrower or any Subsidiary Guarantor (other than sales or other dispositions of assets in an amount not exceeding $2,000,000 in the aggregate in any fiscal year), such reduction to be in an amount equal to 100% of the net proceeds (after sales commissions, other expenses incurred in connection with such sale or disposition and a reasonable estimate of taxes payable in connection with such sale or disposition) of such sale or disposition. Commitment reductions pursuant to this paragraph (c) shall be applied pro rata against the reductions required under paragraph (b) above. 28 23 (d) Upon at least three Business Days' prior irrevocable written or telecopy notice to the Administrative Agent, the Borrower may at any time in whole permanently terminate, or from time to time in part permanently reduce, the Commitments; provided, however, that each partial reduction of the Commitments shall be in an integral multiple of $1,000,000 and in a minimum principal amount of $5,000,000. Reductions pursuant to this paragraph (d) shall be applied, first, in any six-month period, against the next succeeding reduction required during such six-month period under paragraph (b) above and, thereafter, pro rata against the remaining reductions required under paragraph (b) above. (e) Each reduction in the Commitments hereunder shall be made ratably among the Lenders in accordance with their respective Commitments. The Borrower shall pay to the Administrative Agent for the account of the Lenders, on the date of each termination or reduction, the Commitment Fees on the amount of the Commitments so terminated or reduced accrued to the date of such termination or reduction. SECTION 2.10. Prepayment. (a) The Borrower shall have the right at any time and from time to time to prepay any Borrowing, in whole or in part, upon at least two Business Days' prior written or telecopy notice (or telephone notice promptly confirmed by written or telecopy notice) to the Administrative Agent; provided, however, that each partial prepayment shall be in an amount that is an integral multiple of $1,000,000. (b) On the date of any termination or reduction of the Commitments pursuant to Section 2.09, the Borrower shall pay or prepay so much of the Borrowings as shall be necessary in order that the aggregate principal amount of the Loans outstanding on such date will not exceed the aggregate Commitments on such date (after giving effect to such termination or reduction). (c) On the date of any sale or transfer of any capital stock (or securities convertible into such capital stock) of United Capitol Holding Company to the Rightholder pursuant to the exercise of the Right, the Borrower shall pay or prepay the Borrowings in an amount equal to the proceeds received by NI Acquisition Corp. from such sale or transfer. (d) Each notice of prepayment shall specify the prepayment date and the principal amount of each Borrowing (or portion thereof) to be prepaid, shall be irrevocable and shall commit the Borrower to prepay such Borrowing by the amount stated therein on the date stated therein. All prepayments under this Section 2.10 shall be subject to Section 2.13 but otherwise without premium or penalty. All prepayments under this Section 2.10 shall be accompanied by accrued interest on the principal amount being prepaid to the date of payment. SECTION 2.11. Lender Reserve Requirements; Change in Circumstances. (a) Notwithstanding any other provision herein, if after the date of this Agreement any change (other than any such change that is reflected in the applicable LIBO Rate) in applicable law or regulation or in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof (whether or not having the force of law) shall change the basis of taxation of payments to any Lender of the principal of or interest on any Eurodollar Loan made by such Lender, Fees or other amounts payable hereunder (other than changes in respect of taxes imposed on the overall net income of such Lender by the jurisdiction in which such Lender has its principal office or by any political subdivision or state or taxing authority therein), or shall impose, modify or deem applicable any reserve, deposit insurance, special deposit or similar requirement against assets of, deposits with or for the account of or credit extended by such Lender or shall impose on such Lender or the London interbank market any other condition affecting this Agreement or Eurodollar Loans made by such Lender, and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Loan or 29 24 to reduce the amount of any sum received or receivable by such Lender hereunder or under the Notes (whether of principal, interest or otherwise) by an amount deemed by such Lender to be material, then the Borrower will pay to such Lender upon demand such additional amount or amounts as will compensate such Lender for such additional costs incurred or reduction suffered. (b) If any Lender shall have determined that the adoption after the date hereof of any law, rule, regulation, agreement or guideline regarding capital adequacy, or any change after the date hereof in any of the foregoing or in the interpretation or administration after the date hereof of any of the foregoing by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or any lending office of such Lender) or any Lender's holding company with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Lender's capital or on the capital of such Lender's holding company, if any, as a consequence of this Agreement or the Loans made by such Lender pursuant hereto to a level below that which such Lender or such Lender's holding company could have achieved but for such applicability, adoption, change or compliance (taking into consideration such Lender's policies and the policies of such Lender's holding company with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time the Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender or such Lender's holding company for any such reduction suffered. (c) A certificate of each Lender setting forth such amount or amounts as shall be necessary to compensate such Lender or its holding company as specified in paragraph (a) or (b) above, as the case may be, shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay each Lender the amount shown as due on any such certificate delivered by it within 10 days after its receipt of the same. (d) Failure on the part of any Lender to demand compensation for any increased costs or reduction in amounts received or receivable or reduction in return on capital with respect to any period shall not constitute a waiver of such Lender's right to demand compensation with respect to such period or any other period, provided that if such Lender shall not have notified the Borrower, within 90 days after the date on which such Lender shall have become aware of such increased costs or reductions, that such Lender will demand compensation for such increased costs or reductions, the Borrower's obligation to compensate such Lender for such increased costs or reductions shall be limited to increased costs or reductions accruing from and including the day that is 90 days prior to the date on which such Lender notifies the Borrower that such Lender will demand such compensation. The protection of this Section 2.11 shall be available to each Lender regardless of any possible contention of the invalidity or inapplicability of the law, rule, regulation, guideline or other change or condition that shall have occurred or been imposed. (e) Each Lender will, at the request of the Borrower, designate a different lending office if such designation (i) will avoid the need for, or minimize the amount of, any compensation to which such Lender is entitled pursuant to this Section 2.11 and (ii) will not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender. SECTION 2.12. Change in Legality. (a) Notwithstanding any other provision herein, if any change in any law or regulation or in the interpretation thereof by any governmental authority charged with the administration or interpretation thereof shall make it unlawful for any Lender to make or maintain any Eurodollar Loan or to give effect to its obligations as contemplated hereby with respect to any Eurodollar 30 25 Loan, then, by written or telecopy notice to the Borrower and to the Administrative Agent, such Lender may: (i) declare that Eurodollar Loans will not thereafter be made by such Lender hereunder, whereupon any request by the Borrower for a Eurodollar Borrowing shall, as to such Lender only, be deemed a request for an ABR Loan unless such declaration shall be subsequently withdrawn; and (ii) require that all outstanding Eurodollar Loans made by it be converted to ABR Loans, in which event all such Eurodollar Loans shall be automatically converted to ABR Loans as of the effective date of such notice as provided in paragraph (b) below. In the event any Lender shall exercise its rights under subparagraph (i) or (ii) above, all payments and prepayments of principal that would otherwise have been applied to repay the Eurodollar Loans that would have been made by such Lender or the converted Eurodollar Loans of such Lender shall instead be applied to repay the ABR Loans made by such Lender in lieu of, or resulting from the conversion of, such Eurodollar Loans. (b) For purposes of this Section 2.12, a notice to the Borrower by any Lender shall be effective as to each Eurodollar Loan, if lawful, on the last day of the Interest Period then applicable to such Eurodollar Loan; in all other cases such notice shall be effective on the date of receipt by the Borrower. SECTION 2.13. Indemnity. The Borrower shall indemnify each Lender against any loss or expense that such Lender may sustain or incur as a consequence of (a) any failure by the Borrower to fulfill on the date of any borrowing hereunder the applicable conditions set forth in Article IV, (b) any failure by the Borrower to borrow or to refinance any Loan hereunder after irrevocable notice of such borrowing or refinancing has been given pursuant to Section 2.03, (c) any payment or prepayment of a Eurodollar Loan required by any other provision of this Agreement or otherwise made or deemed made on a date other than the last day of the Interest Period applicable thereto or (d) any default in payment or prepayment of the principal amount of any Loan or any part thereof or interest accrued thereon, as and when due and payable (at the due date thereof, whether by scheduled maturity, acceleration, irrevocable notice of prepayment or otherwise), including, in each such case, any loss or expense sustained or incurred or to be sustained or incurred in liquidating or employing deposits from third parties acquired to effect or maintain such Loan or any part thereof as a Eurodollar Loan. Such loss or expense shall be equal to the sum of (a) such Lender's actual costs and expenses incurred (other than any lost profits) in connection with, or by reason of, any of the foregoing events and (b) the excess, if any, as determined by such Lender, of (i) its cost of obtaining the funds for the Loan being paid, prepaid or not borrowed (assumed to be the LIBO Rate applicable thereto) for the period from the date of such payment, prepayment or failure to borrow to the last day of the Interest Period for such Loan (or, in the case of a failure to borrow, the Interest Period for such Loan that would have commenced on the date of such failure) over (ii) the amount of interest (as determined by such Lender) that would be realized by such Lender in reemploying the funds so paid, prepaid or not borrowed for such period or Interest Period, as the case may be. A certificate of any Lender setting forth any amount or amounts that such Lender is entitled to receive pursuant to this Section 2.13 shall be delivered to the Borrower and shall be conclusive absent manifest error. SECTION 2.14. Pro Rata Treatment. Except as required under Section 2.12, each Borrowing, each payment or prepayment of principal of any Borrowing, each payment of interest on the Loans, each payment of the Commitment Fees, each reduction of the Commitments and each refinancing of any Borrowing with a Borrowing of any Type shall be allocated pro rata among the Lenders in accordance with their respective Commitments (or, if such Commitments shall have expired or been terminated, in 31 26 accordance with the respective principal amounts of their outstanding Loans). Each Lender agrees that in computing such Lender's portion of any Borrowing to be made hereunder, the Administrative Agent may, in its discretion, round each Lender's percentage of such Borrowing, computed in accordance with Section 2.01, to the next higher or lower whole dollar amount. SECTION 2.15. Sharing of Setoffs. Each Lender agrees that if it shall, through the exercise of a right of banker's lien, setoff or counterclaim against the Borrower, or pursuant to a secured claim under Section 506 of Title 11 of the United States Code or other security or interest arising from, or in lieu of, such secured claim, received by such Lender under any applicable bankruptcy, insolvency or other similar law or otherwise, or by any other means, obtain payment (voluntary or involuntary) in respect of any Loan or Loans as a result of which the unpaid principal portion of its Loans shall be proportionately less than the unpaid principal portion of the Loans of any other Lender, such Lender shall be deemed simultaneously to have purchased from such other Lender at face value, and shall promptly pay to such other Lender the purchase price for, a participation in the Loans of such other Lender so that the aggregate unpaid principal amount of the Loans and participations in Loans held by each Lender shall be in the same proportion to the aggregate unpaid principal amount of all Loans then outstanding as the principal amount of its Loans prior to such exercise of banker's lien, setoff or counterclaim or other event was to the principal amount of all Loans outstanding prior to such exercise of banker's lien, setoff or counterclaim or other event; provided, however, that if any such purchase or purchases or adjustments shall be made pursuant to this Section 2.15 and the payment giving rise thereto shall thereafter be recovered, such purchase or purchases or adjustments shall be rescinded to the extent of such recovery and the purchase price or prices or adjustment restored without interest. The Borrower expressly consents to the foregoing arrangements and agrees that any Lender holding a participation in a Loan deemed to have been so purchased may exercise any and all rights of banker's lien, setoff or counterclaim with respect to any and all moneys owing by the Borrower to such Lender by reason thereof as fully as if such Lender had made a Loan directly to the Borrower in the amount of such participation. SECTION 2.16. Payments. (a) The Borrower shall make each payment (including principal of or interest on any Borrowing or any Fees or other amounts) hereunder and under any other Loan Document not later than 12:00 noon, New York City time, on the date when due in dollars to the Administrative Agent for the account of the Administrative Agent or the Lenders, as the case may be, at the Administrative Agent's offices at 270 Park Avenue, New York, New York, in immediately available funds. (b) Whenever any payment (including principal of or interest on any Borrowing or any Fees or other amounts) hereunder or under any other Loan Document shall become due, or otherwise would occur, on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of interest or Fees, if applicable. SECTION 2.17. Taxes. (a) Any and all payments by the Borrower hereunder shall be made, in accordance with Section 2.16, free and clear of and without deduction for any and all current or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding (i) income taxes imposed on the net income of the Administrative Agent or any Lender (or any transferee or assignee thereof, including a participation holder (any such entity a "Transferee")) and (ii) franchise taxes imposed on the net income of the Administrative Agent or any Lender (or Transferee), in each case by the jurisdiction under the laws of which the Administrative Agent or such Lender (or Transferee) is organized or any political subdivision thereof or state therein (all such nonexcluded taxes, levies, imposts, deductions, charges, withholdings and liabilities, collectively or individually, "Taxes"). If the Borrower shall be required to deduct any Taxes from or in respect of any sum payable hereunder to any Lender (or 32 27 any Transferee) or the Administrative Agent, (i) the sum payable shall be increased by the amount (an "additional amount") necessary so that after making all required deductions (including deductions applicable to additional amounts payable under this Section 2.17) such Lender (or Transferee) or the Administrative Agent (as the case may be) shall receive an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law. (b) In addition, the Borrower agrees to pay to the relevant Governmental Authority in accordance with applicable law any current or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies that arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or any other Loan Document ("Other Taxes"). (c) The Borrower will indemnify each Lender (or Transferee) and the Administrative Agent for the full amount of Taxes and Other Taxes paid by such Lender (or Transferee) or the Administrative Agent, as the case may be, and any liability (including penalties, interest and expenses (including reasonable attorney's fees and expenses)) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted by the relevant Governmental Authority. A certificate setting forth the amount of such payment or liability prepared by a Lender or the Administrative Agent on its behalf, absent manifest error, shall be final, conclusive and binding for all purposes. Such indemnification shall be made within 30 days after the date any Lender (or Transferee) or the Administrative Agent, as the case may be, makes written demand therefor. (d) If a Lender (or Transferee) or the Administrative Agent shall become aware that it is entitled to claim a refund from a Governmental Authority in respect of Taxes or Other Taxes as to which it has been indemnified by the Borrower, or with respect to which the Borrower has paid additional amounts, pursuant to this Section 2.17, it shall promptly notify the Borrower of the availability of such refund claim and shall make a claim to such Governmental Authority for such refund at the Borrower's expense. If a Lender (or Transferee) or the Administrative Agent receives a refund (including pursuant to a claim for refund made pursuant to the preceding sentence) in respect of any Taxes or Other Taxes as to which it has been indemnified by the Borrower or with respect to which the Borrower has paid additional amounts pursuant to this Section 2.17, it shall within 30 days from the date of such receipt pay over such refund to the Borrower (but only to the extent of indemnity payments made, or additional amounts paid, by the Borrower under this Section 2.17 with respect to the Taxes or Other Taxes giving rise to such refund), net of all out-of-pocket expenses of such Lender (or Transferee) or the Administrative Agent and without interest (other than interest paid by the relevant Governmental Authority with respect to such refund); provided, however, that the Borrower, upon the request of such Lender (or Transferee) or the Administrative Agent, agrees to repay the amount paid over to the Borrower (plus penalties, interest or other charges) to such Lender (or Transferee) or the Administrative Agent in the event such Lender (or Transferee) or the Administrative Agent is required to repay such refund to such Governmental Authority. (e) As soon as practicable after the date of any payment of Taxes or Other Taxes by the Borrower to the relevant Governmental Authority, the Borrower will furnish to the Administrative Agent, at its address referred to in Section 10.01, the original or a certified copy of a receipt issued by such Governmental Authority evidencing payment thereof. (f) Without prejudice to the survival of any other agreement contained herein, the agreements and obligations contained in this Section 2.17 shall survive the payment in full of the principal of and interest on all Loans made hereunder and of all other Obligations. 33 28 (g) Each Lender (or Transferee) that is organized under the laws of a jurisdiction other than the United States, any State thereof or the District of Columbia (a "Non-U.S. Lender") shall deliver to the Borrower and the Administrative Agent two copies of either United States Internal Revenue Service Form 1001 or Form 4224, or in the case of a Non-U.S. Lender claiming exemption from U.S. Federal withholding tax under Section 871(h) or 881(c) of the Code with respect to payments of "portfolio interest", a Form W-8, or any subsequent versions thereof or successors thereto (and, if such Non-U.S. Lender delivers a Form W-8, a certificate representing that such Non-U.S. Lender is not a bank for purposes of Section 881(c) of the Code, is not a 10-percent shareholder (within the meaning of Section 871(h)(3)(B) of the Code) of the Borrower and is not a controlled foreign corporation related to the Borrower (within the meaning of Section 864(d)(4) of the Code)), properly completed and duly executed by such Non-U.S. Lender claiming complete exemption from, or reduced rate of, U.S. Federal withholding tax on payments by the Borrower under this Agreement and the other Loan Documents. Such forms shall be delivered by each Non-U.S. Lender on or before the date it becomes a party to this Agreement (or, in the case of a Transferee that is a participation holder, on or before the date such participation holder becomes a Transferee hereunder) and on or before the date, if any, such Non-U.S. Lender changes its applicable lending office by designating a different lending office (a "New Lending Office"). In addition, each Non-U.S. Lender shall deliver such forms promptly upon the obsolescence or invalidity of any form previously delivered by such Non-U.S. Lender. Notwithstanding any other provision of this Section 2.17(g), a Non-U.S. Lender shall not be required to deliver any form pursuant to this Section 2.17(g) that such Non-U.S. Lender is not legally able to deliver. (h) The Borrower shall not be required to indemnify any Non-U.S. Lender, or to pay any additional amounts to any Non-U.S. Lender, in respect of United States Federal withholding tax pursuant to paragraph (a) or (c) above to the extent that (i) the obligation to withhold amounts with respect to United States Federal withholding tax existed on the date such Non-U.S. Lender became a party to this Agreement (or, in the case of a Transferee that is a participation holder, on the date such participation holder became a Transferee hereunder) or, with respect to payments to a New Lending Office, the date such Non-U.S. Lender designated such New Lending Office with respect to a Loan; provided, however, that this clause (i) shall not apply to any Transferee or New Lending Office that becomes a Transferee or New Lending Office as a result of an assignment, participation, transfer or designation made at the request of the Borrower; and provided further, however, that this clause (i) shall not apply to the extent the indemnity payment or additional amounts any Transferee, or Lender (or Transferee) through a New Lending Office, would be entitled to receive (without regard to this clause (i)) do not exceed the indemnity payment or additional amounts that the person making the assignment, participation or transfer to such Transferee, or Lender (or Transferee) making the designation of such New Lending Office, would have been entitled to receive in the absence of such assignment, participation, transfer or designation or (ii) the obligation to pay such additional amounts would not have arisen but for a failure by such Non-U.S. Lender to comply with the provisions of paragraph (g) above. (i) Any Lender (or Transferee) claiming any indemnity payment or additional amounts payable pursuant to this Section 2.17 shall use reasonable efforts (consistent with legal and regulatory restrictions) to file any certificate or document reasonably requested in writing by the Borrower or to change the jurisdiction of its applicable lending office if the making of such a filing or change would avoid the need for or reduce the amount of any such indemnity payment or additional amounts that may thereafter accrue and would not, in the sole determination of such Lender (or Transferee), be otherwise disadvantageous to such Lender (or Transferee). 34 29 (j) Nothing contained in this Section 2.17 shall require any Lender (or Transferee) or the Administrative Agent to make available any of its tax returns (or any other information that it deems to be confidential or proprietary). ARTICLE III REPRESENTATIONS AND WARRANTIES Each of the Borrower and Capsure represents and warrants to each Lender and the Administrative Agent that: SECTION 3.01. Organization; Powers. Each of Capsure, the Borrower and each of the Subsidiaries (a) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (b) has all requisite power and authority to own its property and assets and to carry on its business as now conducted and as proposed to be conducted, (c) is qualified to do business in every jurisdiction where such qualification is required, except for those jurisdictions in which the failure to so qualify would not result in a Material Adverse Effect, and (d) has the corporate power and authority to execute, deliver and perform its obligations under each of the Loan Documents and each other agreement or instrument contemplated thereby to which it is or will be a party and, in the case of the Borrower, to borrow hereunder. SECTION 3.02. Authorization. The execution, delivery and performance by each of the Borrower, Capsure, each Subsidiary Guarantor and each other Subsidiary of each of the Loan Documents, the borrowings hereunder and the creation of the security interests contemplated by the Security Documents (collectively, the "Transactions") (a) have been duly authorized by all requisite corporate and, if required, stockholder action and (b) will not (i) violate (A) any provision of any material law, statute, rule or regulation, or of the certificate of incorporation or other constitutive documents or by-laws of Capsure, the Borrower or any of the Subsidiaries, (B) any order of any Governmental Authority or (C) any provision of any indenture or other material agreement or instrument to which Capsure, the Borrower or any of the Subsidiaries is a party or by which any of them or any of their property is or may be bound, (ii) be in conflict with, result in a breach of or constitute (alone or with notice or lapse of time or both) a default under any such indenture or other material agreement or instrument or (iii) except for the Liens created by the Security Documents, result in the creation or imposition of any Lien upon or with respect to any property or assets now owned or hereafter acquired by Capsure, the Borrower or any of the Subsidiaries. SECTION 3.03. Enforceability. This Agreement has been duly executed and delivered by Capsure and the Borrower and constitutes, and each other Loan Document to which Capsure, the Borrower, any Subsidiary Guarantor or any other Subsidiary is a party, when executed and delivered by it will constitute, a legal, valid and binding obligation of Capsure, the Borrower, such Subsidiary Guarantor or such Subsidiary, as the case may be, enforceable against it in accordance with its terms. SECTION 3.04. Governmental Approvals. No action, consent or approval of, registration or filing with or any other action by any Governmental Authority is or will be required in connection with the Transactions, except (a) such filings as are necessary to record and perfect the security interest created by the Security Documents and (b) such as have been made or obtained and are in full force and effect. 35 30 SECTION 3.05. Financial Statements. Capsure has heretofore furnished to the Lenders (a) its consolidated and consolidating balance sheets and statements of income and changes in financial condition as of and for the fiscal year ended December 31, 1993, prepared in accordance with GAAP and audited by and accompanied by the opinion of Capsure's independent public accountants on the date hereof or other independent public accountants reasonably satisfactory to the Required Lenders, and (b) the Annual Statement of each of the Insurance Subsidiaries for the fiscal year ended December 31, 1993, prepared in accordance with SAP and filed with such Insurance Subsidiary's Applicable Insurance Regulatory Authority. All the foregoing financial statements that were prepared in accordance with GAAP present fairly the financial condition and results of Capsure and its subsidiaries and all the foregoing statements that were prepared in accordance with SAP present fairly the statutory assets, liabilities, capital and surplus, results of operations and cash flows of the applicable Insurance Subsidiary, in each case as of the relevant dates and for the relevant periods. All the foregoing balance sheets and the notes thereto disclose all material liabilities, direct or contingent, of Capsure and its subsidiaries or such Insurance Subsidiary, as the case may be, as of the dates thereof. SECTION 3.06. No Material Adverse Change. There has been no material adverse change in the business, assets, operations, prospects or condition, financial or otherwise, of Capsure and its subsidiaries, taken as a whole, since December 31, 1993. SECTION 3.07. Title to Properties; Possession Under Leases. (a) Each of Capsure, the Borrower and the Subsidiaries has good and marketable title to, or valid leasehold interests in, all its material properties and assets, except for minor defects in title that do not interfere with its ability to conduct its business as currently conducted or to utilize such properties and assets for their intended purposes. All such material properties and assets are free and clear of Liens, other than Liens expressly permitted by Section 6.02. (b) Each of Capsure, the Borrower and the Subsidiaries has complied in all material respects with all obligations under all material leases to which it is a party and all such leases are in full force and effect. Each of Capsure, the Borrower and the Subsidiaries enjoys peaceful and undisturbed possession under all such leases. SECTION 3.08. Subsidiaries. Schedule 3.08 sets forth as of the Closing Date a list of all subsidiaries of each of Capsure and the Borrower and the percentage ownership interest of Capsure or the Borrower therein. All outstanding shares of the capital stock of each Subsidiary are fully paid and nonassessable and are owned beneficially and of record as set forth in Schedule 3.08, free and clear of all Liens and encumbrances whatsoever, except such as are created pursuant to the Security Documents. There are no outstanding subscriptions, options, warrants, calls, rights (including preemptive rights) or other agreements or commitments of any nature relating to any capital stock of any Subsidiary, other than the Right. SECTION 3.09. Litigation; Compliance with Laws. (a) There are not any actions, suits or proceedings at law or in equity or by or before any Governmental Authority now pending or, to the knowledge of Capsure or the Borrower, threatened against or affecting Capsure, the Borrower or any of the Subsidiaries or any business, property or rights of any such person (i) that involve any Loan Document or the Transactions or (ii) as to which there is a reasonable possibility of an adverse determination and which, if adversely determined, could individually or in the aggregate, result in a Material Adverse Effect, other than any litigation arising in the ordinary course of business of any Insurance Subsidiary in connection with which recourse is sought against insurance policies or bonds issued by such Insurance Subsidiary or obligations arising in connection with such insurance policies or bonds. 36 31 (b) None of Capsure, the Borrower or any Subsidiary is in violation of any law, rule or regulation, nor is Capsure, the Borrower or any Subsidiary in default with respect to any judgment, writ, injunction or decree of any Governmental Authority, including any Applicable Insurance Regulatory Authority of any Insurance Subsidiary, where such violation or default could reasonably be expected to result in a Material Adverse Effect. None of the Transactions will violate any judgment, writ, injunction or decree of any Governmental Authority, including any Applicable Insurance Regulatory Authority of any Insurance Subsidiary, where such violation or default could reasonably be expected to result in a Material Adverse Effect. SECTION 3.10. Agreements. (a) None of Capsure, the Borrower or any of the Subsidiaries is a party to any agreement or instrument or subject to any corporate restriction that has resulted or could reasonably be expected to result in a Material Adverse Effect or an impairment of the rights of or benefits available to the Administrative Agent or any of the other Lenders under any Loan Document. (b) None of Capsure, the Borrower or any of the Subsidiaries is in default in any manner under any provision of any indenture or other agreement or instrument evidencing Indebtedness, or any other material agreement or instrument to which it is a party or by which it or any of its properties or assets are or may be bound, where such default could reasonably be expected to result in a Material Adverse Effect or an impairment of the rights of or benefits available to the Administrative Agent or any of the other Lenders under any Loan Document. SECTION 3.11. Federal Reserve Regulations. (a) None of Capsure, the Borrower or any of the Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Stock. (b) No part of the proceeds of any Loan will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately, (i) to purchase or carry Margin Stock or to extend credit to others for the purpose of purchasing or carrying Margin Stock or to refund indebtedness originally incurred for such purpose or (ii) for any purpose that entails a violation of, or is inconsistent with, the provisions of the Regulations of the Board, including Regulation G, U or X. SECTION 3.12. Investment Company Act; Public Utility Holding Company Act. None of Capsure, the Borrower or any of the Subsidiaries is (a) an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940 or (b) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. SECTION 3.13. Use of Proceeds. The Borrower will use the proceeds of the Loans only for the purposes specified in the preamble to this Agreement. SECTION 3.14. Tax Returns. Each of Capsure and its subsidiaries has filed or caused to be filed all Federal, all state and all local tax returns required to have been filed by it and has paid or caused to be paid all taxes shown to be due and payable on such returns or on any assessments received by it, except taxes that are being contested in good faith by appropriate proceedings and for which Capsure or the applicable subsidiary shall have set aside on its books adequate reserves. SECTION 3.15. No Material Misstatements. The information, reports, financial statements, exhibits and schedules furnished by or on behalf of Capsure or any of its subsidiaries to the Administrative Agent or any Lender in connection with the negotiation of any Loan Document or included therein or 37 32 delivered pursuant thereto, when taken as a whole, did not contain, does not contain and will not contain any material misstatement of fact and did not omit, does not omit and will not omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were, are or will be made, not misleading. The projections and pro forma financial information contained in such materials are based on good faith estimates and assumptions believed by Capsure to be reasonable as of the date such projections and pro forma financial information were furnished by Capsure. Such pro forma financial information was prepared in accordance with GAAP or SAP, as applicable. SECTION 3.16. Employee Benefit Plans. Each of Capsure, the Borrower and each of their ERISA Affiliates is in compliance in all material respects with the applicable provisions of ERISA and the Code and the final effective regulations and published interpretations of general applicability thereunder. No Reportable Event has occurred in respect of any Plan of Capsure, the Borrower or any such ERISA Affiliate. The present value of all benefit liabilities under each Plan (based on those assumptions used to fund such Plan) did not, as of the last annual valuation date applicable thereto, exceed by more than $250,000 the value of the assets of such Plan and the present value of all underfunded Plans (based on those assumptions used to fund each such Plan) did not, as of the last annual valuation dates applicable thereto, exceed by more than $250,000 the value of the assets of all such underfunded Plans. None of Capsure, the Borrower or any ERISA Affiliate has incurred any Withdrawal Liability that materially adversely affects the financial condition of Capsure, the Borrower and their ERISA Affiliates, taken as a whole. None of Capsure, the Borrower or any ERISA Affiliate has received any notification that any Multiemployer Plan is in reorganization or has been terminated, within the meaning of Title IV of ERISA, and no Multiemployer Plan is reasonably expected to be in reorganization or to be terminated where such reorganization or termination has resulted or can reasonably be expected to result in an increase in the contributions required to be made to such Plan that would materially and adversely affect the financial condition of Capsure, the Borrower and their ERISA Affiliates, taken as a whole. SECTION 3.17. Environmental and Safety Matters. Except as set forth on Schedule 3.17, Capsure and each of its subsidiaries is in compliance in all material respects with all applicable Environmental and Safety Laws. Except as set forth on Schedule 3.17, neither Capsure nor any of its subsidiaries has received notice of any material failure so to comply. Capsure's and each of its subsidiaries' facilities do not store, release or dispose of any Hazardous Substances in violation of any applicable Environmental and Safety Laws. Except as set forth on Schedule 3.17, neither Capsure nor the Borrower is aware, after reasonable inquiry, of any events, conditions or circumstances involving environmental pollution or contamination or employee health or safety that could reasonably be expected to result in a Material Adverse Effect. SECTION 3.18. Security Documents. (a) The Pledge Agreement is effective to create in favor of the Collateral Agent, for the ratable benefit of the Secured Parties, a legal, valid and enforceable security interest in the Collateral (as defined in the Pledge Agreement) and the proceeds thereof and, when the stock that is to be pledged as Collateral is delivered to the Collateral Agent, the Pledge Agreement shall constitute a fully perfected first priority lien on, and security interest in, all right, title and interest of Capsure, the Borrower, each Subsidiary Guarantor and each other Subsidiary party thereto (other than any interest represented by the Right) in such Collateral and the proceeds thereof, in each case prior and superior in right to any other person. (b) The Security Agreement is effective to create in favor of the Collateral Agent, for the ratable benefit of the Secured Parties, a legal, valid and enforceable security interest in the Collateral (as defined in the Security Agreement) and proceeds thereof, and when financing statements in appropriate form are filed in the offices specified on Schedule 3.18(b), the Lien created under the Security Agreement will constitute a fully perfected lien on, and security interest in, all right, title and interest of Capsure, the 38 33 Borrower and each Subsidiary Guarantor party thereto in such Collateral and the proceeds thereof, in each case prior and superior in right to any other person, other than with respect to Liens expressly permitted by Section 6.02. SECTION 3.19. Absence of Certain Restrictions. Except as required by law, rule or regulation or by any Governmental Authority, including any Applicable Insurance Regulatory Authority, no indenture, certificate of designation for preferred stock, agreement or instrument to which any Subsidiary is a party will, directly or indirectly, prohibit or restrain the payment of dividends by such Subsidiary. As of the Closing Date, no such indenture, certificate, agreement or instrument to which Capsure, the Borrower or any Subsidiary is a party will require the prepayment of any amounts owed by Capsure, the Borrower or such Subsidiary as a result of the consummation of the Transactions. SECTION 3.20. Reinsurance Agreements. Schedule 3.20 sets forth all the Reinsurance Agreements to which any Insurance Subsidiary is a party on the Closing Date, and the Borrower has delivered to the Administrative Agent copies of each such Reinsurance Agreement with respect to which the Administrative Agent has requested copies. On the Closing Date, each such Reinsurance Agreement is in full force and effect and none of Capsure, the Borrower, any Subsidiary or, to the best of the knowledge of Capsure and the Borrower, any other person party thereto is in default in respect of any material provision thereof. SECTION 3.21. Reserves. All reserves and other liabilities with respect to insurance contracts reflected in each Annual Statement or Quarterly Statement of each Insurance Subsidiary filed with an Applicable Insurance Regulatory Authority since December 31, 1993 or delivered to any Lender or the Administrative Agent ("Reserve Liabilities"), (a) were determined in accordance with generally accepted actuarial standards consistently applied, (b) were fairly stated in accordance with sound actuarial principles, (c) were based on actuarial assumptions that were in accordance with or more conservative than those appropriate (in the reasonable determination of the applicable Insurance Subsidiary) for the related insurance policies, (d) met the requirements of the applicable insurance laws, rules and regulations of their respective states of domicile and met in all material respects the requirements of the applicable insurance laws, rules and regulations of each other jurisdiction in which they are licensed to write insurance contracts and (e) reflected (on a net basis) the related reinsurance, coinsurance and other similar agreement of such Insurance Subsidiary. Adequate provision for all such Reserve Liabilities has been made (under generally accepted actuarial principles consistently applied) to cover the total amount of matured and unmatured benefits, claims and other liabilities of such Insurance Subsidiary under all insurance policies under which such Insurance Subsidiary has any liability (including any liability arising under or as a result of any reinsurance, coinsurance or other similar agreement) on the respective dates of the Annual Statements or Quarterly Statements based on commonly accepted actuarial assumptions as to future contingencies that are reasonable and appropriate under the circumstances. ARTICLE IV CONDITIONS OF LENDING The obligations of the Lenders to make Loans (each making of a Loan, a "Credit Event") hereunder are subject to the satisfaction of the following conditions: 39 34 SECTION 4.01. All Credit Events. On the date of each Credit Event, including each Borrowing in which Loans are refinanced with new Loans as contemplated by Section 2.02(e): (a) The Administrative Agent shall have received a notice of such Credit Event as required by Section 2.03. (b) The representations and warranties set forth in Article III hereof (except in the case of a refinancing that does not increase the aggregate principal amount of Loans outstanding) shall be true and correct in all material respects on and as of the date of such Credit Event with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date. (c) Each of Capsure, the Borrower, each Subsidiary Guarantor and each other Subsidiary shall be in compliance in all material respects with all the terms and provisions set forth herein and in each other Loan Document on its part to be observed or performed, and at the time of and immediately after such Borrowing no Event of Default or Default shall have occurred and be continuing. (d) In the case of any Borrowing other than a Borrowing the proceeds of which are to be used for general corporate purposes in the ordinary course of the Borrower's business (including funding the working capital requirements of the Borrower and the Subsidiaries), no person or group (within the meaning of Rule 13d-5 of the Securities and Exchange Commission as in effect on the date hereof) other than the Zell Entities shall own, directly or indirectly, beneficially or of record, shares representing more than 50% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of Capsure. Each Credit Event shall be deemed to constitute a representation and warranty by Capsure and the Borrower on the date of such Borrowing as to the matters specified in paragraphs (b) and (c) of this Section 4.01. SECTION 4.02. First Credit Event. On the Closing Date: (a) Each Lender shall have received a duly executed Note complying with the provisions of Section 2.04. (b) The Administrative Agent shall have received a favorable written opinion of Rosenberg & Liebentritt, P.C., counsel for Capsure and the Borrower, to the effect set forth in Exhibit E hereto, dated the Closing Date and addressed to the Administrative Agent and the Lenders, and Capsure and the Borrower hereby instruct such counsel to deliver such opinion to the Administrative Agent. (c) All legal matters incident to this Agreement and the Borrowings hereunder shall be satisfactory to the Lenders and their counsel and to Cravath, Swaine & Moore, counsel for the Administrative Agent. (d) The Administrative Agent shall have received (i) a copy of the certificate or articles of incorporation, including all amendments thereto, of Capsure, the Borrower and each Subsidiary Guarantor, certified as of a recent date by the Secretary of State of the state of its organization, and a certificate as to the good standing of Capsure, the Borrower and each Subsidiary Guarantor as of a recent date from such Secretary of State; (ii) a certificate of the Secretary or Assistant Secretary of Capsure, the Borrower and each Subsidiary Guarantor dated the Closing Date and certifying (A) that attached thereto is a true and complete copy of the by-laws of Capsure, the Borrower or such Subsidiary Guarantor, as the case may be, 40 35 as in effect on the Closing Date and at all times since a date prior to the date of the resolutions described in clause (B) below, (B) that attached thereto is a true and complete copy of resolutions duly adopted by the Board of Directors of Capsure, the Borrower or such Subsidiary Guarantor, as the case may be (or a duly authorized committee thereof), authorizing the execution, delivery and performance of the Loan Documents and the borrowings hereunder, and that such resolutions have not been modified, rescinded or amended and are in full force and effect as of the Closing Date, (C) that the certificate or articles of incorporation of Capsure, the Borrower or such Subsidiary Guarantor, as the case may be, have not been amended since the date of the last amendment thereto shown on the certificate of good standing furnished pursuant to clause (i) above and (D) as to the incumbency and specimen signature of each officer executing any Loan Document or any other document delivered in connection herewith on behalf of Capsure, the Borrower or such Subsidiary Guarantor, as the case may be; (iii) a certificate of another officer as to the incumbency and specimen signature of the Secretary or Assistant Secretary executing the certificate pursuant to (ii) above; and (iv) such other documents as the Lenders or their counsel or Cravath, Swaine & Moore, counsel for the Administrative Agent, may reasonably request. (e) The Administrative Agent shall have received a certificate, dated the Closing Date and signed by a Financial Officer of each of Capsure and the Borrower, confirming compliance with the conditions precedent set forth in paragraphs (b) and (c) of Section 4.01. (f) The Administrative Agent shall have received all Fees and other amounts due and payable on or prior to the Closing Date. (g) The Pledge Agreement shall have been duly executed by the parties thereto and delivered to the Collateral Agent and shall be in full force and effect, and all the outstanding capital stock of the Borrower and each of Western Surety, United Capitol and the other Subsidiaries listed on Schedule 4.02(g) shall have been duly and validly pledged thereunder to the Collateral Agent for the ratable benefit of the Secured Parties and certificates representing such shares, accompanied by instruments of transfer and stock powers endorsed in blank, shall be in the actual possession of the Collateral Agent. (h) The Security Agreement shall have been duly executed by Capsure, the Borrower, the Subsidiary Guarantors and the Collateral Agent and shall be in full force and effect, and each document (including each Uniform Commercial Code financing statement) required by law or reasonably requested by the Administrative Agent to be filed, registered or recorded in order to create in favor of the Collateral Agent for the benefit of the Secured Parties a valid and perfected first priority security interest in or lien on the Collateral described in such agreement shall have been delivered to the Collateral Agent. (i) The Collateral Agent shall have received the results of a search of the Uniform Commercial Code filings (or equivalent filings) made with respect to Capsure, the Borrower and each Subsidiary Guarantor in the states (or other jurisdictions) in which the chief executive offices of such persons are located, or in which any offices of such persons in which records have been kept relating to accounts receivable are located, and in the other jurisdictions in which Uniform Commercial Code filings (or equivalent filings) are to be made pursuant to the preceding subsection, together with copies of the financing statements (or similar documents) disclosed by such search, and accompanied by evidence satisfactory to the Administrative Agent that the Liens indicated in any such financing statement (or similar document) would be permitted under Section 6.02 or have been released. (j) The Collateral Agent shall have received a Perfection Certificate with respect to each of Capsure, the Borrower and the Subsidiary Guarantors dated the Closing Date and duly executed by a Financial Officer of each of Capsure and the Borrower. 41 36 (k) The Guarantee Agreement shall have been duly executed by the Subsidiary Guarantors and delivered to the Collateral Agent, and shall be in full force and effect. (l) The Indemnity, Subrogation and Contribution Agreement shall have been duly executed by the Borrower and the Subsidiary Guarantors and delivered to the Collateral Agent, and shall be in full force and effect. (m) All amounts due under the Existing Credit Facilities shall have been repaid in full, the commitments thereunder shall have been permanently terminated and all obligations thereunder and security interests relating thereto shall have been discharged, and the Administrative Agent shall have received satisfactory evidence of such repayment, termination and discharge. (n) The Lenders shall be reasonably satisfied that Capsure has made (or shall make, contemporaneously with the initial Borrowing hereunder) the Equity Contribution. (o) All requisite Governmental Authorities and third parties shall have approved or consented to (or, if applicable law or regulation provides that approval or consent of the requisite Governmental Authority shall be deemed to have been granted if no disapproval is issued within a specified period, such Governmental Authority did not disapprove within such specified period) the Transactions and the other transactions contemplated hereby to the extent required, all applicable appeal periods shall have expired and there shall be no governmental or judicial action, actual or threatened, that has or would have a reasonable likelihood of restraining, preventing or imposing burdensome conditions on the Transactions or the other transactions contemplated hereby. (p) There shall be no litigation or administrative proceedings or other legal or regulatory developments with respect to Capsure or any of its subsidiaries (including any governmental policy or initiative relating to insurance), actual or overtly threatened, that, in the reasonable judgment of the Lenders, could reasonably be expected to result in a Material Adverse Effect or an impairment of the rights of or benefits available to the Administrative Agent or any of the other Lenders under any Loan Document. (q) There shall have been no material adverse change with respect to the business, assets, financial condition, prospects or material agreements of Capsure and its subsidiaries, taken as a whole, since December 31, 1993. (r) The Lenders shall have received (i) the management letter from Coopers & Lybrand for the fiscal year 1992 (together with any response thereto prepared by Capsure) and (ii) a reasonably satisfactory consolidated balance sheet and income statement of Capsure and its subsidiaries as of and for the year ended December 31, 1993, and the Lenders shall be reasonably satisfied that such balance sheet and income statement are not materially inconsistent with the projections previously furnished to the Lenders. (s) The Lenders shall be reasonably satisfied with (i) the tax position, including the amount of the Available Net Operating Losses, of Capsure and its subsidiaries, (ii) the arrangements for tax sharing, including the terms and provisions of the Tax Sharing Agreements, among Capsure and its subsidiaries and (iii) all other legal, tax and accounting matters relating to the Transactions and the other transactions contemplated hereby. 42 37 (t) The Lenders shall be reasonably satisfied with the nature and amount of any contingent liabilities of Capsure and its subsidiaries (including environmental, pension and tax liabilities) and the amount of reserves established by Capsure and its subsidiaries in connection therewith. (u) The Lenders shall be reasonably satisfied with the amount, terms and provisions of all Indebtedness of Capsure and its subsidiaries that will be outstanding as of the Closing Date as set forth on Schedule 6.01. (v) The Borrower shall have (i) extended the maturity date of the Subordinated Note (the "Subordinated Note") dated February 20, 1990, from NI Acquisition Corp. to Capsure (and contributed to the Borrower as part of the Equity Contribution) to a date not earlier than the Maturity Date (it being understood that such Subordinated Note shall continue to provide that no payments of principal of or interest on such note shall be made prior to such maturity date, as so extended) or (ii) forgiven the repayment of the Indebtedness evidenced thereby. ARTICLE V AFFIRMATIVE COVENANTS Each of the Borrower and Capsure covenants and agrees with each Lender and the Administrative Agent that so long as this Agreement shall remain in effect or the principal of or interest on any Loan, any Fees or any other expenses or amounts payable under any Loan Document shall be unpaid, unless the Required Lenders shall otherwise consent in writing, each of the Borrower and Capsure will, and will cause each of its subsidiaries to: SECTION 5.01. Existence; Businesses and Properties. (a) Do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence, except as otherwise expressly permitted under Section 6.05. (b) Do or cause to be done all things necessary to obtain, preserve, renew, extend and keep in full force and effect the rights, licenses, permits, franchises, authorizations, patents, copyrights, trademarks and trade names material to the conduct of its business; maintain and operate such business in substantially the manner in which it is currently conducted and operated (or, in the case of any business acquired in a Permitted Acquisition, in substantially the manner in which it is conducted and operated on the date on which such Permitted Acquisition is consummated), which, in the case of any Insurance Subsidiary, may include the underwriting of property and casualty lines of business not currently underwritten by such person; comply in all material respects with all applicable laws, rules, regulations and orders of any Governmental Authority, whether now in effect or hereafter enacted; and at all times maintain and preserve all property material to the conduct of such business and keep such property in good repair, working order and condition and from time to time make, or cause to be made, all needful and proper repairs, renewals, additions, improvements and replacements thereto necessary in order that the business carried on in connection therewith may be properly conducted at all times. SECTION 5.02. Insurance. Keep its insurable properties adequately insured at all times by financially sound and reputable insurers; maintain such other insurance to such extent and against such risks, including fire and other risks insured against by extended coverage, as is customary with companies in the same or similar businesses, including public liability insurance against claims for personal injury or death or property damage occurring upon, in, about or in connection with the use of any properties owned, 43 38 occupied or controlled by it; maintain sufficient insurance so that neither any Insurance Subsidiary nor any other Subsidiary will be considered a co-insurer or co-insurers; maintain such other insurance as may be required by law; and cause each insurance policy that is required by this Section 5.02 and insures any of the Collateral to be endorsed or otherwise amended to include a lender's loss payable endorsement (except in the case of liability policies) in form and substance reasonably satisfactory to the Collateral Agent and to name the Collateral Agent as an additional insured. SECTION 5.03. Obligations and Taxes. Pay its Indebtedness and other obligations promptly and in accordance with its terms and pay and discharge promptly when due all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or in respect of its property, before the same shall become delinquent or in default, as well as all lawful claims for labor, materials and supplies or otherwise that, if unpaid, might give rise to a Lien upon such properties or any part thereof; provided, however, that such payment and discharge shall not be required with respect to any such tax, assessment, charge, levy or claim so long as the validity or amount thereof shall be contested in good faith by appropriate proceedings and Capsure or the applicable subsidiary thereof shall have set aside on its books, in accordance with GAAP, adequate reserves with respect thereto. SECTION 5.04. Financial Statements, Reports, etc. Furnish to the Administrative Agent and each Lender: (a) within 105 days after the end of each fiscal year, its consolidated and consolidating balance sheets and related statements of income and changes in financial position, showing the financial condition of Capsure and its subsidiaries as of the close of such fiscal year and the results of their operations during such year, all audited by Coopers & Lybrand or other independent public accountants of recognized national standing acceptable to the Required Lenders and accompanied by an opinion of such accountants (which shall not be qualified in any material respect) to the effect that such consolidated financial statements fairly present the financial condition and results of operations of Capsure on a consolidated basis in accordance with GAAP consistently applied; (b) within 50 days after the end of each of the first three fiscal quarters of each fiscal year, the consolidated and consolidating balance sheets and related statements of income and changes in financial position, showing the financial condition of Capsure and its subsidiaries as of the close of such fiscal quarter and the results of their operations during such fiscal quarter and the then elapsed portion of the fiscal year, all certified by a Financial Officer of each of Capsure and the Borrower as fairly presenting the financial condition and results of operations of Capsure on a consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments; (c) concurrently with any delivery of financial statements under paragraph (a) or (b) above, a certificate of the accounting firm or Financial Officers opining on or certifying such statements (which certificate, when furnished by an accounting firm, may be limited to accounting matters and disclaim responsibility for legal interpretations) (i) certifying that no Event of Default or Default has occurred or, if such an Event of Default or Default has occurred, specifying the nature and extent thereof and any corrective action taken or proposed to be taken with respect thereto and (ii) setting forth computations in detail reasonably satisfactory to the Administrative Agent demonstrating compliance with the covenants contained in Sections 6.13, 6.14, 6.15 and 6.16; (d) as soon as available and in any event within 90 days after the end of each fiscal year, (i) the Statement of Actuarial Opinion of each Insurance Subsidiary for such fiscal year and as filed with the Applicable Insurance Regulatory Authority and (ii) the Annual Statement of each Insurance Subsidiary for 44 39 such fiscal year and as filed with the Applicable Insurance Regulatory Authority, together with, in the case of the statements delivered pursuant to clause (ii) above, a certificate of a Responsible Officer of the Borrower to the effect that such statements present fairly the statutory assets, liabilities, capital and surplus, results of operations and cash flows of such Insurance Subsidiary in accordance with SAP; (e) as soon as available and in any event within 45 days after the end of each of the first three fiscal quarters of each fiscal year, the Quarterly Statement of each Insurance Subsidiary for such fiscal quarter and as filed with the Applicable Insurance Regulatory Authority, certified by a Responsible Officer of the Borrower as fairly presenting the statutory assets, liabilities, capital and surplus, results of operations and cash flows of such Insurance Subsidiary; (f) as soon as available and in any event at least once each fiscal year and no later than 30 days after the completion thereof, an actuarial report of each Insurance Subsidiary, prepared by any independent actuarial or accounting firm of nationally recognized standing acceptable to the Required Lenders; (g) promptly after delivery to an Insurance Subsidiary, final copies of all regular and periodic reports of examinations of such Insurance Subsidiary, delivered to such Insurance Subsidiary by the Applicable Insurance Regulatory Authority; (h) promptly after the same become publicly available, copies of all periodic and other reports, proxy statements and other materials filed by it (and any filing on Schedule 13D or Schedule 13G with respect to the ownership of Capsure's equity securities) with the Securities and Exchange Commission, or any governmental authority succeeding to any of or all the functions of said Commission, or with any national securities exchange, or distributed to its shareholders, as the case may be; (i) upon the request of the Administrative Agent or the Required Lenders, and promptly following the preparation thereof, copies of each management letter prepared by Capsure's auditors (together with any response thereto prepared by Capsure); (j) as soon as available, and in any event no later than 90 days after the end of each fiscal year, a revised Schedule 3.20 as of such date, and, upon the request of the Administrative Agent or the Required Lenders, copies of any Reinsurance Agreement of any Insurance Subsidiary; (k) as soon as available, and in any event no later than 90 days after the end of each fiscal year, forecasted financial projections and summary data through the end of the then-current fiscal year, including a specification of the underlying assumptions, all certified by a Financial Officer of each of Capsure and the Borrower to be a fair summary of results and a good faith estimate of the forecasted financial projections and results of operations for such year; (l) at least ten Business Days prior to any Permitted Acquisition, financial projections covering the period from the date of such Permitted Acquisition through the Maturity Date giving effect to such Permitted Acquisition and demonstrating compliance by Capsure and its subsidiaries on a pro forma basis with the covenants in Article VI from and after the date of, and after giving effect to, such Permitted Acquisition through the Maturity Date; (m) promptly after receipt thereof, copies of any notices or other communications received by it with respect to the Pledged Securities (as defined in the Pledge Agreement); 45 40 (n) at least 10 days' prior written notice of the payment of any dividend, distribution or other payment by the Borrower to Capsure or by Capsure to any holder of its capital stock if such dividend, distribution or payment will result in a reduction in the Commitments under Section 2.09(c); (o) no later than 90 days after the end of each fiscal year and within 10 days after any filing on Schedule 13D or Schedule 13G with respect to the ownership of Capsure's equity securities, a certificate of a Financial Officer and the chief legal officer of Capsure certifying that since the Closing Date there has been no "ownership change" within the meaning of Section 382(g) of the Code. (p) no later than 30 days after the end of each fiscal quarter, a certificate of a Responsible Officer of each of Capsure and the Borrower setting forth the aggregate amount of dividends, distributions and other payments paid by Capsure and the Borrower during such fiscal quarter and the aggregate cost basis of the Excluded Investments as of the last day of such fiscal quarter. (q) promptly, from time to time, such other information regarding the operations, business affairs and financial condition of Capsure or its subsidiaries, or compliance with the terms of any Loan Document, as the Administrative Agent or any Lender may reasonably request. SECTION 5.05. Litigation and Other Notices. Furnish to the Administrative Agent and each Lender written notice of the following promptly after any Responsible Officer of Capsure or the Borrower obtains knowledge thereof: (a) any Event of Default or Default, specifying the nature and extent thereof and the corrective action (if any) proposed to be taken with respect thereto; (b) the filing or commencement of any action, suit or proceeding, whether at law or in equity or by or before any Governmental Authority, against Capsure, the Borrower or any Subsidiary that, if adversely determined, could result in a Material Adverse Effect (other than any litigation arising in the ordinary course of business of any Insurance Subsidiary in connection with which recourse is sought against insurance policies or bonds issued by such Insurance Subsidiary or obligations arising in connection with such insurance policies or bonds); (c) any development that has resulted in, or could reasonably be anticipated to result in, a Material Adverse Effect; and (d) any "ownership change" within the meaning of Section 382(g) of the Code. SECTION 5.06. Employee Benefits. (a) Comply in all material respects with the applicable provisions of ERISA and the Code and (b) furnish to the Administrative Agent and each Lender (i) as soon as possible after, and in any event within 30 days after any Responsible Officer of Capsure, the Borrower or any of their ERISA Affiliates knows or has reason to know that, any Reportable Event has occurred that alone or together with any other Reportable Event could reasonably be expected to result in liability of Capsure, the Borrower or any Subsidiary Guarantor to the PBGC in an aggregate amount exceeding $250,000, a statement of a Financial Officer of the Borrower setting forth details as to such Reportable Event and the action that Capsure, the Borrower or such Subsidiary Guarantor proposes to take with respect thereto, together with a copy of the notice, if any, of such Reportable Event given to the PBGC, (ii) promptly after receipt thereof, a copy of any notice that Capsure, the Borrower or any of their ERISA Affiliates may receive from the PBGC relating to the intention of the PBGC to terminate any Plan or Plans (other than a Plan maintained by an ERISA Affiliate that is considered an ERISA Affiliate only pursuant 46 41 to subsection (m) or (o) of Code Section 414) or to appoint a trustee to administer any such Plan, (iii) within 10 days after the due date for filing with the PBGC pursuant to Section 412(n) of the Code a notice of failure to make a required installment or other payment with respect to a Plan, a statement of a Financial Officer of the Borrower setting forth details as to such failure and the action that Capsure, the Borrower or any ERISA Affiliate proposes to take with respect thereto, together with a copy of any such notice given to the PBGC and (iv) promptly and in any event within 30 days after receipt thereof by Capsure, the Borrower or such ERISA Affiliate from the sponsor of a Multiemployer Plan, a copy of each notice received by Capsure, the Borrower or any ERISA Affiliate concerning (A) the imposition of Withdrawal Liability or (B) a determination that a Multiemployer Plan is, or is expected to be, terminated or in reorganization, both within the meaning of Title IV of ERISA. SECTION 5.07. Maintaining Records; Access to Properties and Inspections. Maintain all financial records in accordance with GAAP and, with respect to any Insurance Subsidiary, SAP, and, upon reasonable notice, permit any representatives designated by any Lender to visit and inspect the financial records and the properties of Capsure or any of its subsidiaries at reasonable times and as often as requested and to make extracts from and copies of such financial records, and permit any representatives designated by any Lender to discuss the affairs, finances and condition of Capsure or any of its subsidiaries with the officers thereof and, in the presence of representatives of Capsure if requested by Capsure, independent accountants therefor. SECTION 5.08. Use of Proceeds. Use the proceeds of the Loans only for the purposes set forth in the preamble to this Agreement. SECTION 5.09. Further Assurances. (a) Execute and cause to be executed any and all further documents, financing statements, agreements and instruments, and take all further action (including (i) filing Uniform Commercial Code and other financing statements, (ii) executing and delivering a Mortgage and (iii) executing and delivering a Pledgeholder Agreement) that may be required under applicable law, or which the Required Lenders, the Administrative Agent or the Collateral Agent may reasonably request, in order to effectuate the transactions contemplated by the Loan Documents and in order to grant, preserve, protect and perfect the validity and first priority of the security interests or liens created or intended to be created by the Security Documents. Each of Capsure and the Borrower agrees to provide such evidence as the Required Lenders shall reasonably request as to the perfection and priority status of such security interests and Lien. (b) (i) Cause each subsidiary created, and (to the extent required by Section 6.05(c)(ii)) each subsidiary acquired, by the Borrower or its subsidiaries from time to time in accordance with the terms of this Agreement and each existing Subsidiary (to the extent required by Section 6.05(c)(ii) and to the extent not a party thereto at such time) that acquires stock or assets in a Permitted Acquisition (A) to undertake the obligation of and to become a Subsidiary Guarantor under the Guarantee Agreement pursuant to one or more instruments or agreements substantially in the form of Annex 1 to the Guarantee Agreement, (B) to undertake the obligation of and to become a Subsidiary Guarantor under the Indemnity, Subrogation and Contribution Agreement pursuant to one or more instruments or agreements substantially in the form of Annex I thereto, (C) to undertake the obligation of and to become a Grantor under the Security Agreement pursuant to one or more instruments or agreements substantially in the form of Annex 1 to the Security Agreement, (D) to undertake the obligation of and to become a Pledgor under the Pledge Agreement pursuant to one or more instruments or agreements substantially in the form of Annex I to the Pledge Agreement, (E) to undertake the obligation of and become a Mortgagor under a Mortgage if such subsidiary acquires real property in such Permitted Acquisition and (F) to undertake the obligation of and become a Pledgor under a Pledgeholder Agreement to the extent required by Section 5.14 and 47 42 (ii) pledge or cause to be pledged the shares of capital stock of any such created or acquired subsidiary (other than the capital stock of any acquired subsidiary, the stock of which may not be pledged due to any applicable insurance regulatory prohibition on such a pledge) to the Collateral Agent for the benefit of the Lenders pursuant to the Pledge Agreement or one or more agreements substantially in the form of Annex 1 to the Pledge Agreement. (c) Use its best efforts to obtain (as soon as the same practicably may be obtained) any approvals required in order for any subsidiary of an Insurance Subsidiary to grant any security interest or lien contemplated by Section 6.05(c)(ii)(E). (d) Use its best efforts to obtain, as soon as the same may practicably be obtained following receipt of a request from the Required Lenders, all requisite approvals and consents from the Applicable Insurance Regulatory Authority necessary to permit it to cause, as soon as practicable after receipt of such approvals, (i) the capital stock of each of Fischer Underwriting Group, Incorporated and United Capitol Managers, Inc. to be duly and validly pledged under the Pledge Agreement to the Collateral Agent for the ratable benefit of the Secured Parties, (ii) certificates representing such stock, accompanied by instruments of transfer and stock powers endorsed in blank, to be delivered to the Collateral Agent and (iii) each of Fischer Underwriting Group, Incorporated and United Capitol Managers, Inc. to become a party to each of the Security Documents, the Guarantee Agreement and the Indemnity, Subrogation and Contribution Agreement. SECTION 5.10. Environmental and Safety Laws. (a) Comply with all Environmental and Safety Laws and obtain and comply with and maintain any and all licenses, approvals, registrations or permits required by Environmental and Safety Laws, except to the extent that failure so to comply or to obtain and comply with and maintain such licenses, approvals, registrations and permits does not have, and could not reasonably be expected to result in, a Material Adverse Effect. (b) Conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions, required under Environmental and Safety Laws and promptly comply with all lawful orders and directives of all Governmental Authorities in respect of Environmental and Safety Laws, except to the extent that the same are being contested in good faith by appropriate proceedings, the pendency of which would not have a Material Adverse Effect. (c) Notify the Administrative Agent and the Lenders of any of the following that is reasonably likely to have a Material Adverse Effect: (i) any Environmental Claim received by Capsure or any of its subsidiaries, including any such Environmental Claim seeking to cause Capsure of any of its subsidiaries to take or pay for any remedial, removal, response or cleanup or other action with respect to any Hazardous Substance contained on any property owned or leased by Capsure or any of its subsidiaries; (ii) any notice of any alleged violation of or knowledge by Capsure or any of its subsidiaries of a condition that might reasonably result in a violation of any Environmental and Safety Law; and (iii) any commencement or threatened commencement of any judicial or administrative proceeding or investigation alleging a violation or potential violation of any requirement of any Environmental and Safety Law by Capsure or any of its subsidiaries. 48 43 SECTION 5.11. Risk-Based Capital. Cause each Insurance Subsidiary to maintain at all times Risk-Based Capital in an amount in excess of the level at which the Applicable Insurance Regulatory Authority may issue a corrective order or take any other action the effect of which is substantially equivalent to the issuance of a corrective order. SECTION 5.12. Insurance Regulatory Information System. Cause each Insurance Subsidiary to comply in all material respects with the requirements of the Insurance Regulatory Information System. SECTION 5.13. Investment Ratios. (a) Cause all Invested Assets (other than (i) Excluded Investments and (ii) investments in the capital stock of any subsidiary, so long as such person owns, directly, beneficially and of record, shares representing at least 80% of the shares of each class of capital stock of such subsidiary before giving effect to such investment) owned by it or any of its subsidiaries (other than the Insurance Subsidiaries) to be in the form of cash, Cash Equivalents and Permitted Investments. (b) Cause at any time at least 90% of the Invested Assets of each Insurance Subsidiary (excluding investments in the capital stock of subsidiaries of such Insurance Subsidiary) to constitute Investment Grade Securities, cash and Cash Equivalents. (c) Cause each Insurance Subsidiary to own at any time Invested Assets (excluding investments in United States Government Securities), of which no single Invested Asset equals or exceeds 3% (or, in the case of any Invested Asset that is in the form of a Cash Equivalent, 6%) of the value of all Invested Assets owned by such Insurance Subsidiary at such time. SECTION 5.14. Deposit and Investment Accounts. (a) In the case of the Borrower, establish not later than 30 days after the Closing Date and thereafter maintain, and, in the case of the Borrower and its subsidiaries, cause each Subsidiary Guarantor (other than any Subsidiary Guarantor that is a subsidiary of any Insurance Subsidiary) to establish not later than 30 days after the Closing Date and thereafter maintain, all its collection or deposit accounts with the Collateral Agent. (b) (i) In the case of the Borrower, execute and deliver, and, in the case of the Borrower and its subsidiaries, cause each of Pin Oak Petroleum, Inc.and NI Acquisition Corp.to execute and deliver, to the Collateral Agent an effective Pledgeholder Agreement not later than 30 days after the Closing Date and (ii) in the case of the Borrower, execute and deliver, and, in the case of the Borrower and its subsidiaries, cause each Subsidiary Guarantor (other than any Subsidiary Guarantor that is an Insurance Subsidiary or a subsidiary of any Insurance Subsidiary) to execute and deliver, to the Collateral Agent an effective Pledgeholder Agreement substantially contemporaneously with the establishment by any such person after the date hereof of any brokerage, investment, money market or similar account with any person other than the Collateral Agent. SECTION 5.15. Fiscal Year. Cause its fiscal year to end on December 31 of each year. ARTICLE VI NEGATIVE COVENANTS Each of the Borrower and Capsure covenants and agrees with each Lender and the Administrative Agent that so long as this Agreement shall remain in effect or the principal of or interest on any Loan, any 49 44 Fees or any other expenses or amounts payable under any Loan Document shall be unpaid, unless the Required Lenders shall otherwise consent in writing, the Borrower and Capsure will not, and will not cause or permit any of their respective subsidiaries to: SECTION 6.01. Indebtedness. Incur, create, issue, assume, guarantee or permit to exist any Indebtedness, except: (a) Indebtedness existing on the date hereof and set forth on Schedule 6.01, but not any extensions, renewals, replacements or refinancings of such Indebtedness; (b) in the case of the Borrower, Indebtedness consisting of the Borrowings hereunder; (c) in the case of the Borrower or any of its wholly owned Subsidiaries, Indebtedness assumed or incurred in connection with any Permitted Acquisition, so long as such Indebtedness is permitted to be so assumed or incurred under Section 6.05(c)(ii); (d) in the case of Capsure, its guarantee of the Obligations pursuant to Article VIII; and (e) in the case of each Subsidiary Guarantor, its guarantee of the Obligations pursuant to the Guarantee Agreement. SECTION 6.02. Liens. Create, incur, assume or permit to exist any Lien on any property or assets (including stock or other securities of any person, including any subsidiary) now owned or hereafter acquired by it or on any income or revenues or rights in respect thereof, except: (a) Liens on property or assets existing on the date hereof and set forth on Schedule 6.02, provided that such Liens shall secure only those obligations that they secure on the date hereof; (b) any Lien existing on any property or asset prior to the acquisition thereof by the Borrower or any wholly owned Subsidiary, provided that (i) such Lien is not created in contemplation of or in connection with such acquisition, (ii) such Lien does not apply to any other property or assets of Capsure or its subsidiaries and (iii) such Lien secures Indebtedness permitted by Section 6.01(c); (c) Liens for taxes not yet due or that are being contested in compliance with Section 5.03; (d) carriers', warehousemen's, mechanic's, materialmen's or other like Liens arising in the ordinary course of business and securing obligations that are not due or that are being contested in compliance with Section 5.03; (e) pledges and deposits made in the ordinary course of business in compliance with workmen's compensation, unemployment insurance and other social security laws or regulations other than in respect of employee benefit plans subject to ERISA; (f) deposits to secure the performance of bids, trade contracts (other than for Indebtedness), leases (other than Capital Lease Obligations), statutory obligations (including reserves held by or deposited with regulatory agencies or guaranty funds), surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; 50 45 (g) zoning restrictions, easements, servitudes, restrictions on use of real property and other similar encumbrances incurred in the ordinary course of business that, in the aggregate, are not substantial in amount and do not materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the business of Capsure or any of its subsidiaries; (h) Liens contemplated by the Security Documents; and (i) extensions, renewals and replacements of Liens referred to in clauses (a) and (b) above; provided that any such extension, renewal or replacement Lien is limited to the property or assets covered by the Lien extended, renewed or replaced and does not secure any Indebtedness in addition to that secured immediately prior to such extension, renewal or replacement. SECTION 6.03. Sale and Leaseback Transactions. Enter into any arrangement (a "Sale and Leaseback Transaction"), directly or indirectly, with any person whereby it shall sell or transfer any property, real or personal, used or useful in its business, whether now owned or hereafter acquired, and thereafter rent or lease such property or other property which it intends to use for substantially the same purpose or purposes as the property being sold or transferred, provided that the Borrower or any Subsidiary may, in the ordinary course of business, enter into any Sale and Leaseback Transaction involving automobiles or office equipment if, after giving effect to such Sale and Leaseback Transaction, the aggregate purchase price of all property subject to Sale and Leaseback Transactions does not exceed $1,000,000. SECTION 6.04. Investments, Loans and Advances. Purchase, hold or acquire any capital stock, evidences of indebtedness or other securities of, make or permit to exist any loans or advances to, or make or permit to exist any investment or any other interest in, any other person, except: (a) investments existing on the date hereof; (b) investments by the Borrower, any Subsidiary Guarantor or any Insurance Subsidiary in the capital stock of any Insurance Subsidiary, so long as such capital stock has been pledged to the Collateral Agent under the Pledge Agreement; (c) investments permitted under Section 5.13; (d) in the case of any Guarantor, any Guarantee permitted by Section 6.01 hereof; (e) investments by the Borrower or any of its wholly owned Subsidiaries in capital stock in connection with Permitted Acquisitions so long as the Borrower, such wholly owned Subsidiary and any subsidiary formed or acquired in connection with such Permitted Acquisition shall have complied with Section 5.09; and (f) in the case of Capsure, the Borrower and the Subsidiaries (other than any Insurance Subsidiary), investments ("Excluded Investments") having a cost basis not in excess of $30,000,000 in the aggregate at any time less the sum, without duplication, of (i) the amount of dividends, distributions or other payments made by Capsure to any holder of its capital stock since the Closing Date, (ii) the amount expended by Capsure to repurchase, retire, redeem or otherwise acquire shares of its capital stock since the Closing Date and (iii) an amount equal to the excess of (A) the amount paid to the Rightholder or its successors or assigns by NI Acquisition Corp. to repurchase or redeem any capital stock (or securities convertible into such capital stock) purchased by the Rightholder pursuant to the exercise of the Right over 51 46 (B) the amount paid to NI Acquisition Corp. by the Rightholder to purchase such capital stock (or securities convertible into such capital stock) pursuant to the exercise of the Right. SECTION 6.05. Mergers, Consolidations and Acquisitions. Merge into or consolidate with any other person, or permit any other person to merge into or consolidate with it, or sell, transfer, lease or otherwise dispose of (in one transaction or in a series of transactions) any of its assets (whether now owned or hereafter acquired) or any capital stock of any subsidiary, or purchase, lease or otherwise acquire (in one transaction or a series of transactions) all or any substantial part of the capital stock or assets of any other person, except that (a) the Borrower and any Subsidiary may purchase and sell, transfer, lease or otherwise dispose of assets (including Invested Assets to the extent permitted hereunder) in the ordinary course of business on an arm's-length basis, (b) Capsure may purchase and sell, transfer, lease or otherwise dispose of Invested Assets to the extent permitted hereunder and (c) if at the time thereof and immediately after giving effect thereto no Event of Default or Default shall have occurred and be continuing: (i) (A) any wholly owned Subsidiary of the Borrower may merge into the Borrower in a transaction in which the Borrower is the surviving corporation and (B) any wholly owned Subsidiary (other than any Insurance Subsidiary) may merge into or consolidate with any other wholly owned Subsidiary (other than any Insurance Subsidiary) in a transaction in which the surviving entity is a wholly owned Subsidiary and no person other than the Borrower or a wholly owned Subsidiary receives any consideration; (ii) the Borrower or any of its wholly owned Subsidiaries (other than, except as contemplated by clause (C)(II) below, any Insurance Subsidiary) may make acquisitions of assets or capital stock, so long as (A) such acquisition shall not have been preceded by an unsolicited tender offer for such capital stock by Capsure or any of its Affiliates (it being understood that an unsolicited bid letter or other unsolicited expression of interest in an acquisition shall not constitute an unsolicited tender offer); (B) such acquisition and all transactions related thereto shall be consummated in accordance with applicable laws, including insurance laws and regulations and Regulations of the Board; (C) such acquisition shall constitute an acquisition of all or a portion of the assets of, or 100% of the common stock of, a corporation engaged in the Insurance Business (other than (I) acquisitions of all or a portion of the assets of, or 100% of the common stock of, corporations primarily engaged in the financial services business, the aggregate consideration paid in connection with which does not (when added together with all other acquisitions since the Closing Date of all or a portion of the assets of, or 100% of the common stock of, corporations primarily engaged in the financial services business) exceed $10,000,000 and (II) acquisitions by any Insurance Subsidiary of all or a portion of the assets of, or 100% of the common stock of, an insurance agency of such Insurance Subsidiary); (D) simultaneously with the acquisition thereof, all capital stock acquired in connection with such acquisition shall be duly and validly pledged to the Collateral Agent for the ratable benefit of the Secured Parties (other than the capital stock of any acquired Subsidiary, the stock of which may not be pledged due to an applicable insurance regulatory prohibition on such a pledge); (E)(I) a valid and perfected first priority security interest or lien in favor of the Collateral Agent for the ratable benefit of the Secured Parties shall be created in all assets acquired in connection with such acquisition, (x) in the case of any acquisition by the Borrower or any Subsidiary (other than any Insurance Subsidiary and any subsidiary of an Insurance Subsidiary), simultaneously with the acquisition thereof or (y) in the case of any acquisition by an Insurance Subsidiary or by a subsidiary of an Insurance Subsidiary, to the extent permitted by, and as soon as practicable after receipt of any approval required under, applicable law, ordinance or regulation and (II) a valid and perfected first priority security interest or lien in favor of the Collateral Agent for the ratable benefit of the Secured Parties shall be created in all the assets of any Subsidiary (other than any Insurance Subsidiary or any subsidiary of an Insurance Subsidiary, in 52 47 each case except to the extent permitted by and as soon as practicable after receipt of any approval required under, applicable law, ordinance or regulation), the capital stock of which is acquired in connection with such acquisition, and any acquiring subsidiary or acquired or created Subsidiary that is required to grant a security interest or lien under this clause (E) shall become (to the extent not a party thereto at such time) a Grantor under the Security Agreement, a Pledgor under the Pledge Agreement and a Subsidiary Guarantor under the Guarantee Agreement and the Indemnity, Subrogation and Contribution Agreement, in each case in accordance with Section 5.09, and the Borrower and any subsidiary shall execute and/or deliver any documents, financing statements, agreements and instruments (including a Mortgage, a Pledgeholder Agreement and, if requested by the Collateral Agent, an appraisal of any real property acquired in such acquisition) and take all action (including filing Uniform Commercial Code and other financing statements) that may be required under applicable law, or that the Collateral Agent may request, in order to grant, preserve, protect and perfect any security interest or lien contemplated by this clause (E); (F) no capital stock or assets acquired in connection with such acquisition shall be subject to any Lien (other than Liens permitted by Section 6.02(b), (d) or (g)); (G) neither the Borrower nor any Subsidiary may assume or incur, directly or indirectly, any Indebtedness or other liability (including any contingent liability) in connection with such acquisition (other than (I) the Borrowings hereunder used to finance all or part of the purchase price of such acquisition, (II) liabilities in the ordinary course of business of the acquired business in an amount not in excess of $2,000,000, provided that the aggregate amount of liabilities assumed by the Borrower and the Subsidiaries, collectively, under this clause (G) (II) shall not exceed $10,000,000 since the Closing Date and (III) Insurance Liabilities incurred in the ordinary course of business of the acquired business); (H) Capsure and its subsidiaries shall satisfy, on a pro forma basis as of the date on which such acquisition is consummated, after giving effect to such acquisition as if it had occurred on the first day of the most recently completed period of four consecutive fiscal quarters preceding the date on which such acquisition is consummated, the covenants set forth in Sections 6.13, 6.14, 6.15 and 6.16; (I) after giving effect to such acquisition, there shall not have occurred any Material Adverse Effect; and (J) the person to be acquired, or from which any assets are acquired, shall have had taxable income for (I) at least one of its preceding two fiscal years and (II) at least three of its preceding five fiscal years, in each case after giving effect to pro forma adjustments (including adjustments attributable to purchasing only a portion of the assets of such person) such that such taxable income will include (A) extraordinary compensation paid during the applicable period, (B) to the extent that there are Available Net Operating Losses at the determination date, the amount of income lost by such person during the applicable period as a result of investing in tax-exempt securities as opposed to taxable securities, (C) amounts paid pursuant to reinsurance arrangements during the applicable period, (D) management fees or other payments to Affiliates during the applicable period and (E) income lost during the applicable period due to the tax treatment of purchased intangibles (but only if such tax treatment will not result in an increase in the tax liability of Capsure or its subsidiaries after the acquisition of such person or from such person is consummated) (any acquisition satisfying each of the criteria set forth in this sentence is referred to herein as a "Permitted Acquisition"); and (iii) upon the exercise of the Right by the Rightholder, NI Acquisition Corp. may sell or transfer to the Rightholder the shares of convertible preferred stock (and the shares of common stock into which such shares are convertible) of United Capitol Holding Company that are subject to such Right, so long as on the date that is 90 days after the date of such sale or transfer to the Rightholder, NI Acquisition Corp. shall own 100% of the capital stock (and securities convertible into the capital stock) of United Capitol Holding Company (it being understood that the pendency beyond such 90-day period of any appraisal rights proceeding shall not be deemed to violate this Section 6.05(c)(iii)). 53 48 SECTION 6.06. Dividends and Distributions. Declare or pay, directly or indirectly, any dividend or make any other distribution (by reduction of capital or otherwise), whether in cash, property, securities (other than additional capital stock of the Borrower, as long as such capital stock is pledged to the Collateral Agent under the Pledge Agreement) or a combination thereof, with respect to any shares of the Borrower's capital stock or, in the case of the Borrower and its subsidiaries, directly or indirectly redeem, purchase, retire or otherwise acquire for value (or permit any Subsidiary to purchase or acquire for value) any shares of any class of capital stock of Capsure or any of its subsidiaries or set aside any amount for any such purpose; provided, however, that (a) any Subsidiary may declare and pay dividends or make other distributions to any other Subsidiary that is its parent and to the Borrower and (b) if at the time thereof and immediately after giving effect thereto no Default or Event of Default shall have occurred and be continuing, the Borrower may declare and pay dividends or make other distributions to Capsure (i) in an amount not to exceed, in any fiscal year, 25% of Excess Cash Flow for the fiscal year immediately preceding the payment thereof, (ii) in an aggregate amount not to exceed (A) $2,500,000 in each calendar year from 1994 through 1997 and (B) $3,000,000 in each calendar year from 1998 through 2000, in each case solely to enable Capsure to pay reasonable and customary accounting, legal and other administrative expenses (to the extent such expenses have not been reimbursed by the Borrower or by any subsidiary of the Borrower or Capsure) in the ordinary course of its business, (iii) to the extent required under the Tax Sharing Agreement between Capsure and the Borrower and (iv) in addition to dividends and other distributions permitted under clauses (i), (ii) and (iii) above, in an aggregate amount not to exceed $30,000,000 since the Closing Date minus an amount equal to the excess of (A) the amount paid to the Rightholder or its successors or assigns by NI Acquisition Corp. to repurchase or redeem any capital stock (or securities convertible into such capital stock) purchased by the Rightholder pursuant to the exercise of the Right over (B) the amount paid to NI Acquisition Corp. by the Rightholder to purchase such capital stock (or securities convertible into such capital stock) pursuant to the exercise of the Right. SECTION 6.07. Transactions with Affiliates. Sell or transfer any property, assets or services to, or purchase or acquire any property, assets or services from, or otherwise engage in any other transaction or series of transactions with, any of its Affiliates, except that, so long as no Default or Event of Default shall have occurred and be continuing, Capsure or any of its subsidiaries may engage in any of the foregoing transactions in the ordinary course of business at prices and on terms and conditions not less favorable to such person than could be obtained on an arm's-length basis from unrelated third parties. SECTION 6.08. Nature of Business. (a) In the case of the Borrower and the Subsidiaries, engage or permit any Subsidiary to engage at any time in any business or business activity other than the property and casualty Insurance Business and business activities reasonably incidental thereto; and (b) in the case of Capsure, engage at any time in any business or business activity other than owning (i) all the capital stock of the Borrower and (ii) other investments to the extent permitted by Section 6.04(f), and business activities reasonably incidental thereto. SECTION 6.09. Net Operating Losses. Take any action that could result in a reduction of the Available Net Operating Losses to an amount less than $220,000,000 minus the amount of such Available Net Operating Losses utilized in taxable years since the Closing Date to offset the taxable income for Federal income tax purposes of Capsure and its subsidiaries. SECTION 6.10. Debt Payments. Directly or indirectly make any optional payment, prepayment, redemption, retirement or defeasance, whether in cash, property, securities or a combination thereof, on 54 49 account of the principal amount of any Indebtedness (other than the Obligations), except payments by any Subsidiary of Insurance Liabilities in the ordinary course of the Insurance Business. SECTION 6.11. Limitation on Surplus Relief Reinsurance Agreements. Permit any Insurance Subsidiary to enter into any Surplus Relief Reinsurance Agreement. SECTION 6.12. Reinsurance. Permit any Insurance Subsidiary to (a) enter into any Reinsurance Agreement with any reinsurer except (i) insurance companies (other than any other Insurance Subsidiary) rated A- or better by A.M. Best & Co. or A or better by Standard & Poor's, (ii) other insurance companies (including any other Insurance Subsidiary), but only if the obligations of such other insurance companies under such Reinsurance Agreements are secured by letters of credit, trust funds, withheld funds or other security such that such Insurance Subsidiary would be permitted to take credit for substantially all the ceded reinsurance in accordance with SAP for financial statement reporting purposes, even if such reinsurer was admitted in a state other than the state in which such Insurance Subsidiary is domiciled, and (iii) insurance companies not admitted in South Dakota, Wisconsin or any other state in which any Insurance Subsidiary is domiciled, but only if the obligations of such insurance companies under such Reinsurance Agreements are secured by letters of credit, trust funds, withheld funds or other security in a form such that such Insurance Subsidiary is permitted to take credit for substantially all the ceded reinsurance in accordance with SAP for financial statement reporting purposes or (b) modify in any respect adverse to the interests of the Lenders, its policies with respect to reinsurance from those in effect at December 31, 1993. SECTION 6.13. Total Debt to Adjusted Capital Ratio. Permit the ratio of Total Debt to Adjusted Capital on the last day of any fiscal quarter ending on the last day of or during any period indicated below to be in excess of the ratio set forth opposite such period:
From and Including: To and Including: Ratio: January 1, 1994 December 31, 1994 0.55 to 1.00 January 1, 1995 December 31, 1996 0.50 to 1.00 January 1, 1997 December 31, 1997 0.40 to 1.00 January 1, 1998 December 31, 1998 0.35 to 1.00 January 1, 1999 March 31, 2000 0.25 to 1.00
SECTION 6.14. Fixed Charge Coverage Ratio. Permit the Fixed Charge Coverage Ratio on the last day of any period of four consecutive fiscal quarters, commencing with the period of four consecutive fiscal quarters ending on the Closing Date (which for purposes of any determination made under this Section 6.14 prior to March 31, 1994, shall be presumed to be the end of the fiscal quarter that began on January 1, 1994) to be less than 1.35 to 1.00. SECTION 6.15. Total Debt to Total Cash Flow Sources Ratio. Permit the ratio of Total Debt to Total Cash Flow Sources on the last day of any period of four consecutive fiscal quarters ending on the last day of or during any period indicated below to be less than the ratio set forth opposite such period (provided that for purposes of any determination made under this Section 6.15 prior to March 31, 1994, the Closing Date shall be presumed to be the end of the fiscal quarter that began on January 1, 1994):
From and Including: To and Including: Ratio: March 31, 1994 December 31, 1994 4.50 to 1.00 January 1, 1995 December 31, 1995 4.00 to 1.00
55 50 January 1, 1996 December 31, 1996 3.50 to 1.00 January 1, 1997 December 31, 1997 2.50 to 1.00 January 1, 1998 March 31, 2000 2.00 to 1.00
SECTION 6.16. Operating Leverage Ratio. Permit, at any time, the Operating Leverage Ratio to be greater than (a) in the case of Western Surety, 3.00 to 1.00, (b) in the case of United Capitol, 2.00 to 1.00 and (c) in the case of any Insurance Subsidiary hereafter acquired by the Borrower or any of its wholly owned Subsidiaries, (i) 2.00 to 1.00 with respect to any such Insurance Subsidiary for which 50% or more of its Net Written Premiums are in respect of Long Tail Insurance Lines of Business and (ii) 3.00 to 1.00 with respect to any such Insurance Subsidiary for which less than 50% of its Net Written Premiums are in respect of Long Tail Insurance Lines of Business. SECTION 6.17. Amendment of Certain Documents. Permit or agree to, or permit any Subsidiary to agree to, (a) any amendment or modification that is adverse in any material respect to the Lenders (or, in the case of any Reinsurance Agreement, that could reasonably be expected to result in a Material Adverse Effect) to its certificate of incorporation or by-laws, any Reinsurance Agreement, any agreement evidencing Indebtedness or any other material agreement to which it is a party or (b) any amendment to, or modification or termination of, the Tax Sharing Agreements (which shall be maintained in full force and effect at all times). ARTICLE VII EVENTS OF DEFAULT In case of the happening of any of the following events ("Events of Default"): (a) any representation or warranty made or deemed made in or in connection with any Loan Document or the borrowings hereunder, or any representation, warranty, statement or information contained in any report, certificate, financial statement or other instrument furnished in connection with or pursuant to any Loan Document, shall prove to have been false or misleading in any material respect when so made, deemed made or furnished; (b) default shall be made in the payment of any principal of any Loan when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or by acceleration thereof or otherwise; (c) default shall be made in the payment of any interest on any Loan or any Fee or any other amount (other than an amount referred to in paragraph (b) above) due under any Loan Document, when and as the same shall become due and payable, and such default shall continue unremedied for a period of three Business Days; (d) default shall be made in the due observance or performance by Capsure or the Borrower of any covenant, condition or agreement contained in Section 5.01(a) or 5.05 or in Article VI (other than Sections 6.04 and 6.12); (e) default shall be made in the due observance or performance by Capsure or the Borrower of any covenant, condition or agreement contained in Section 6.04 or 6.12 and such default shall continue 56 51 unremedied for a period of (i) in the case of any covenant, condition or agreement contained in Section 6.04, ten days, or (ii) in the case of any covenant, condition or agreement contained in Section 6.12, thirty days, in either case after any Responsible Officer of Capsure or the Borrower obtains knowledge of such default; (f) default shall be made in the due observance or performance by Capsure or any of its subsidiaries of any covenant, condition or agreement contained in any Loan Document (other than those specified in paragraph (b), (c), (d) or (e) above) and such default shall continue unremedied for a period of five days after notice thereof from the Administrative Agent or any Lender to the Borrower; (g) Capsure or any of its subsidiaries shall (i) fail to pay any principal or interest, regardless of amount, due in respect of any Indebtedness in a principal amount in excess of $2,000,000, when and as the same shall become due and payable, or (ii) fail to observe or perform any other term, covenant, condition or agreement contained in any agreement or instrument evidencing or governing any such Indebtedness if the effect of any failure referred to in this clause (ii) is to cause, or to permit the holder or holders of such Indebtedness or a trustee on its or their behalf (with or without the giving of notice, the lapse of time or both) to cause, such Indebtedness to become due prior to its stated maturity; (h) an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief in respect of Capsure or any of its subsidiaries, or of a substantial part of the property or assets of Capsure or any of its subsidiaries, under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership or similar law, (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for Capsure or any of its subsidiaries or for a substantial part of the property or assets of Capsure or any of its subsidiaries or (iii) the winding-up or liquidation of Capsure or any of its subsidiaries; and such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered; (i) Capsure or any of its subsidiaries shall (i) voluntarily commence any proceeding or file any petition seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership or similar law, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or the filing of any petition described in (h) above, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for Capsure or any of its subsidiaries or for a substantial part of the property or assets of Capsure or any of its subsidiaries, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors, (vi) become unable, admit in writing its inability or fail generally to pay its debts as they become due or (vii) take any action for the purpose of effecting any of the foregoing; (j) one or more judgments (other than judgments or such portion thereof for which there is full insurance or reinsurance and with respect to which a creditworthy insurer or reinsurer, as applicable, has assumed responsibility in writing) for the payment of money in an aggregate amount (after giving effect to the existence of such insurance or reinsurance) in excess of $4,000,000 shall be rendered against Capsure or any of its subsidiaries or any combination thereof and the same shall remain undischarged for a period of 30 consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to levy upon assets or properties of Capsure or any of its subsidiaries to enforce any such judgment; 57 52 (k) (i) a Reportable Event or Reportable Events, or a failure to make a required installment or other payment (within the meaning of Section 412(n)(l) of the Code), shall have occurred with respect to any Plan or Plans that reasonably could be expected to result in liability of Capsure, the Borrower or any Subsidiary Guarantor to the PBGC or to a Plan in an aggregate amount exceeding $250,000 and, within 30 days after the reporting of any such Reportable Event to the Administrative Agent or after the receipt by the Administrative Agent of the statement required pursuant to Section 5.06, the Administrative Agent shall have notified Capsure or the Borrower in writing that (A) the Required Lenders have made a determination that, on the basis of such Reportable Event or Reportable Events or the failure to make a required payment, there are reasonable grounds for the termination of such Plan or Plans by the PBGC, the appointment by the appropriate United States district court of a trustee to administer such Plan or Plans or the imposition of a Lien in favor of a Plan and (B) as a result thereof an Event of Default exists hereunder; (ii) a trustee shall be appointed by a United States district court to administer any such Plan or Plans; or (iii) the PBGC shall institute proceedings (including giving notice of intent thereof) to terminate any Plan or Plans; (l) (i) Capsure, the Borrower or any of their ERISA Affiliates shall have been notified by the sponsor of a Multiemployer Plan that it has incurred Withdrawal Liability to such Multiemployer Plan, (ii) Capsure, the Borrower or such ERISA Affiliate does not have reasonable grounds for contesting such Withdrawal Liability or is not contesting such Withdrawal Liability in a timely and appropriate manner and (iii) the amount of such Withdrawal Liability specified in such notice, when aggregated with all other amounts required to be paid to Multiemployer Plans in connection with Withdrawal Liabilities (determined as of the date or dates of such notification), either (A) exceeds $250,000 or requires payments exceeding $100,000 in any year or (B) is less than $250,000 but any Withdrawal Liability payment remains unpaid 30 days after such payment is due; (m) Capsure, the Borrower or any of their ERISA Affiliates shall have been notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is in reorganization or is being terminated, within the meaning of Title IV of ERISA, if solely as a result of such reorganization or termination the aggregate annual contributions of Capsure, the Borrower and their ERISA Affiliates to all Multiemployer Plans that are then in reorganization or have been or are being terminated have been or will be increased over the amounts required to be contributed to such Multiemployer Plans for their most recently completed plan years by an amount exceeding $250,000; (n) there shall have occurred a Change in Control; (o) any security interest purported to be created by any Security Document shall cease to be, or shall be asserted by Capsure or any of its subsidiaries not to be, a valid, perfected, first priority security interest in the securities or assets covered thereby, except to the extent that any such loss of perfection or priority results from the failure of the Collateral Agent (i) to maintain possession of certificates representing securities pledged under the Pledge Agreement or (ii) to file any continuation statement required to be filed under the Uniform Commercial Code; (p) any Loan Document shall cease to be, or shall be asserted by Capsure or any of its subsidiaries not to be, in full force and effect and enforceable in accordance with its terms; (q) any Applicable Insurance Regulatory Authority shall issue with respect to any Insurance Subsidiary (i) any order of conservation, supervision or any other order of like effect or (ii) any other order that could result in a Material Adverse Effect or an impairment of the rights of or benefits available to the Administrative Agent or any of the other Lenders under any Loan Document; 58 53 (r) (i) any party to any Reinsurance Agreement (whether entered into as of the date hereof or hereafter entered into) to which any Insurance Subsidiary is a party shall fail to comply with any material provision thereof or (ii) any reinsurer under any Reinsurance Agreement shall become or shall be declared insolvent or any order of liquidation, rehabilitation, conservation or supervision shall be entered against any such reinsurer, or any other kind of delinquency proceeding shall be commenced against any such reinsurer, if any event contemplated by clause (i) or (ii) could reasonably be expected to result in a Material Adverse Effect; (s) the amount of Available Net Operating Losses at any time shall be less than $220,000,000 minus the amount of such Available Net Operating Losses utilized in taxable years since the Closing Date to offset the taxable income for Federal income tax purposes of Capsure and its subsidiaries; (t) any person that shall (i) become a direct or indirect "parent" (as such term is used in the Tax Sharing Agreements) of Capsure and (ii) enter into any tax sharing arrangement with Capsure, shall fail to enter into, substantially contemporaneously with becoming such a parent, an agreement (on terms satisfactory to the Required Lenders) pursuant to which such parent shall guarantee the Obligations; or (u) Capsure shall at any time fail to, or be unable to, file a Federal consolidated income tax return with each of its subsidiaries; then, and in every such event (other than an event with respect to Capsure and its subsidiaries described in paragraph (h) or (i) above), and at any time thereafter during the continuance of such event, the Administrative Agent may, and at the request of the Required Lenders shall, by notice to the Borrower, take any or all of the following actions, at the same or different times: (i) terminate forthwith the Commitments, (ii) declare the Loans then outstanding to be forthwith due and payable in whole or in part, whereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of the Borrower accrued hereunder and under any other Loan Document, shall become forthwith due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by the Borrower, anything contained herein or in any other Loan Document to the contrary notwithstanding and (iii) exercise any remedies available under any Loan Document or otherwise; and in any event with respect to Capsure and its subsidiaries described in paragraph (h) or (i) above, the Commitments shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of the Borrower accrued hereunder and under any other Loan Document, shall automatically become due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by the Borrower, anything contained herein or in any other Loan Document to the contrary notwithstanding. ARTICLE VIII GUARANTEE Capsure unconditionally and irrevocably guarantees, jointly with the other Guarantors and severally, as a principal obligor and not merely as a surety, the due and punctual payment and performance of all the Obligations. Capsure further agrees that the Obligations may be extended or renewed, in whole or in part, without notice or further assent from it, and that it will remain bound upon the provisions of this Article VIII notwithstanding any extension or renewal of any Obligation. 59 54 Capsure waives presentment to, demand of, payment from and protest to the Borrower of any of the Obligations, and also waives notice of acceptance of the guarantee set forth in this Article VIII and notice of protest for nonpayment. The obligations of Capsure hereunder shall not be affected by (a) the failure of the Administrative Agent (which term, for purposes of this Article VIII, shall be deemed to refer to the Administrative Agent and the Collateral Agent) or any Lender to assert any claim or demand or to enforce any right or remedy against the Borrower under the provisions of any guarantee or any Loan Document; (b) any rescission, waiver, amendment or modification of, or any release from any of the terms or provisions of this Agreement, any other Loan Document, any guarantee or any other agreement, including with respect to any other Guarantor under the Guarantee Agreement; (c) the release of any security held by the Collateral Agent or any other Secured Party for the Obligations or any of them; or (d) the failure of the Administrative Agent or any other Secured Party to exercise any right or remedy against any other Guarantor or guarantor of the Obligations. Capsure hereby authorizes the Collateral Agent and each of the other Secured Parties, in accordance with the terms and subject to the conditions set forth in the Security Documents to which Capsure is a party, to (a) take and hold security for the payment of this guarantee or the Obligations and exchange, enforce, waive and release any such security, (b) apply such security and direct the order or manner of sale thereof as they in their sole discretion may determine and (c) release or substitute any one or more endorsees, other guarantors or other obligors. Capsure further agrees that the guarantee set forth in this Article VIII constitutes a guarantee of payment when due and not of collection and waives any right to require that any resort be had by the Administrative Agent or any Lender to the balance of any deposit account or credit on the books of the Administrative Agent or such Lender, as applicable, in favor of the Borrower or any other person. The obligations of Capsure hereunder shall be absolute and unconditional and shall not be subject to any reduction, limitation, impairment or termination for any reason, including any claim or waiver, release, surrender, alteration or comprise, and shall not be subject to any defense of setoff, counterclaim, deduction, diminution, abatement, suspension, deferment, reduction, recoupment, termination or defense whatsoever by reason of the invalidity, illegality or unenforceability of the Obligations or otherwise. Without limiting the generality of the foregoing, the Obligations shall not be released, discharged or impaired or otherwise affected by the failure of the Administrative Agent or any Lender to assert any claim or demand or to enforce any remedy under this Agreement or any other Loan Document, by any waiver or modification of any thereof, by any default, failure or delay, wilful or otherwise, in the performance of the Obligations or by any other circumstance or condition whatsoever (whether or not Capsure, the Borrower, the Administrative Agent or any Lender has knowledge thereof) that may or might in any manner or to any extent vary the risk of Capsure or would otherwise operate as a discharge of Capsure as a matter of law or equity (other than the indefeasible payment in full of all the Obligations), including: (a) any termination, amendment, modification, addition, deletion or supplement to or other change to any of the terms of any Loan Document or any other instrument or agreement applicable to any of the parties hereto or thereto, or any assignment or transfer of any thereof, or any furnishing or acceptance of security, or any release of any security, for any Obligations of the Borrower, Capsure or any other Guarantor hereunder or thereunder, or the failure of any security or the failure of any person to perfect any interest in any collateral; (b) any failure, forbearance, omission or delay on the part of the Borrower or any Guarantor or the Administrative Agent or any other Secured Party to conform or comply with any term of any Loan 60 55 Document or any other instrument or agreement, or any failure to give notice to the Borrower or any Guarantor of the occurrence of an Event of Default or any Default occurring hereunder; (c) any waiver of the payment, performance or observance of any of the obligations, conditions, covenants or agreements contained in any Loan Document, or any other waiver, consent, extension, renewal, indulgence, compromise, release, settlement, refunding or other action or inaction under or in respect of any Loan Document or any other instrument or agreement, or under or in respect of any obligation or liability of the Borrower or any Guarantor or the Administrative Agent or any other Secured Party or any exercise or nonexercise of any right, remedy, power or privilege under or in respect of any such instrument of agreement or any such obligation or liability; (d) any extension of the time for payment of the principal of or interest on any Obligation, or of the time for performance of any other obligations, covenants or agreements under or arising out of any Loan Document, or the extension or the renewal of any thereof; (e) the exchange, surrender, substitution or modification of, or the furnishing of any additional, collateral security for the Obligations under any Loan Document; (f) any failure, omission or delay on the part of the Administrative Agent or any other Secured Party to enforce, assert or exercise any right, power or remedy conferred on it in any Loan Document, or any such failure, omission or delay on the part of the Administrative Agent or any other Secured Party in connection with any Loan Document or any other action or inaction on the part of the Administrative Agent or any other Secured Party; (g) to the extent permitted by applicable law, any voluntary or involuntary bankruptcy, insolvency, reorganization, moratorium, arrangement, adjustment, readjustment, composition, assignment for the benefit of creditors, receivership, conservatorship, custodianship, liquidation, marshalling of assets and liabilities or similar proceedings with respect to the Borrower or any Guarantor or any other person or any of their respective properties or creditors, or any action taken by any trustee or receiver or by any court in any such proceeding (including any automatic stay incident to any such proceeding); (h) any limitation on the liability or obligations of the Borrower or any Guarantor under any Loan Document or any other instrument or agreement that may now or hereafter be imposed by any statute, regulation, rule of law or otherwise, or any discharge, termination, cancellation, frustration, irregularity, invalidity or unenforceability, in whole or in part, of any thereof; (i) any merger, consolidation or amalgamation of the Borrower or any Guarantor into or with any other person, or any sale, lease or transfer of any of the assets of the Borrower or any Guarantor to any other person; (j) any change in the ownership of any shares of capital stock of the Borrower or any Guarantor; (k) to the extent permitted by applicable law, any release or discharge, by operation of law, of the Borrower, Capsure or any other Guarantor from the performance or observance of any obligation, covenant or agreement contained in any Loan Document; or (l) any other occurrence, circumstance, happening or event whatsoever, whether similar or dissimilar to the foregoing, whether foreseen or unforeseen, and any other circumstance that might otherwise constitute a legal or equitable defense, release or discharge (including the release or discharge 61 56 of the liabilities of a guarantor or surety or that might otherwise limit recourse against the Borrower or any Guarantor, whether or not the Borrower of any Guarantor shall have notice or knowledge of the foregoing). Capsure hereby waives any claim, right or remedy that it may now have or hereafter acquire against the Borrower or any other Guarantor that arises under any Loan Document and/or from the performance of such Guarantor under any Loan Document, including any claim, right or remedy of the Administrative Agent or any Secured Party or any security that the Administrative Agent or any Secured Party now has or hereafter acquires, regardless of whether such claim, right or remedy arises in equity, under contract, by statute, under common law or otherwise. Capsure agrees that, as between Capsure, on the one hand, and the Administrative Agent and the other Secured Parties, on the other hand, (a) the maturity of the Obligations guaranteed hereby may be accelerated as provided herein for the purposes of Capsure's guarantee herein, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the Obligations guaranteed hereby and (b) in the event of any declaration of acceleration of such Obligations as provided herein, such Obligations (whether or not due and payable) shall forthwith become due and payable in full by Capsure for purposes of this Agreement. Upon the occurrence and during the continuance of an Event of Default, the Collateral Agent may elect to nonjudicially or judicially foreclose against any real or personal property security it holds for the Obligations or any part thereof, or accept an assignment of any such security in lieu of foreclosure or compromise or adjust any part of the Obligations, or make any other accommodation with the Borrower or any Guarantor, or exercise any other remedy against the Borrower or any Guarantor or any security, in accordance with and subject to the provisions of the Security Documents. No such action by the Collateral Agent will release or limit the liability of Capsure to the Administrative Agent, even if the effect of that action is to deprive Capsure of the right to collect reimbursement from the Borrower for any sums paid to the Administrative Agent. To the extent permitted by applicable law, Capsure waives any defense based on or arising out of any defense of the Borrower or the unenforceability of the Obligations or any part thereof from any cause, or the cessation from any cause of the liability of the Borrower, other than the indefeasible payment in full of the Obligations. The Collateral Agent and the other Secured Parties may, at their election, in accordance with the terms and subject to the conditions set forth in the Security Documents to which Capsure is a party, foreclose on any security held by one or more of them by one or more judicial or nonjudicial sales, or exercise any other right or remedy available to them against the Borrower or any Guarantor, or any security, without affecting or impairing in any way the liability of Capsure hereunder except to the extent the Obligations have been indefeasibly paid in full. Capsure waives any defense arising out of any such election even though such election operates to impair or to extinguish any right of reimbursement or subrogation or other right or remedy of Capsure against the Borrower or any other Guarantor, as the case may be, or any security. Capsure further agrees that this guarantee shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of any Obligation is rescinded, invalidated, declared to be fraudulent or preferential, or must otherwise be returned, refunded, repaid or restored by the Administrative Agent or any Lender upon the bankruptcy or reorganization of the Borrower, any Guarantor or otherwise. In furtherance of the foregoing and not in limitation of any other right that the Administrative Agent or any Lender may have at law or in equity against Capsure by virtue hereof, upon the failure of 62 57 the Borrower to pay any Obligation when and as the same shall become due, whether at maturity, by acceleration, after notice of prepayment or otherwise, Capsure hereby promises to and will, upon receipt of written demand by the Administrative Agent, promptly pay, or cause to be paid, to the Administrative Agent in cash the amount of such unpaid Obligation. The guarantee made hereunder shall terminate when all the Obligations have been indefeasibly paid in full and the Lenders have no further commitment to lend under the Credit Agreement. Without limiting the generality of the foregoing, (a) Capsure assumes all responsibility for being and keeping itself informed of the Borrower's financial condition and assets, and all other circumstances bearing upon the risk of nonpayment of the Obligations and the nature, scope and extent of the risks Capsure assumes and incurs hereunder, and agrees that none of the Administrative Agent and the other Secured Parties will have any duty to advise Capsure of information known to it or any of them regarding such circumstances or risks, and (b) the execution and delivery of any instrument adding a Subsidiary Guarantor as a party to the Guarantee Agreement pursuant to Section 5.09 shall not require the consent of Capsure hereunder. The rights and obligations of Capsure hereunder shall remain in full force and effect notwithstanding the addition of any new Subsidiary Guarantor as a party to the Guarantee Agreement. ARTICLE IX THE ADMINISTRATIVE AGENT In order to expedite the transactions contemplated by this Agreement, Chemical Bank is hereby appointed to act as Administrative Agent (which term, for purposes of this Article IX, shall be deemed to refer to the Administrative Agent and the Collateral Agent) on behalf of the Lenders. Each of the Lenders and each subsequent holder of any Note, by its acceptance thereof, hereby irrevocably authorizes the Administrative Agent to take such actions on their behalf and to exercise such powers as are specifically delegated to the Administrative Agent by the terms and provisions hereof and of the other Loan Documents, together with such actions and powers as are reasonably incidental thereto. The Administrative Agent is hereby expressly authorized by the Lenders, without limiting any implied authority, (a) to receive on behalf of the Lenders all payments of principal of and interest on the Loans and all other amounts due to the Lenders hereunder, and promptly to distribute to each Lender its proper share of each payment so received; (b) promptly to give notice on behalf of each of the Lenders to the Borrower of any Event of Default specified in this Agreement of which the Administrative Agent has actual knowledge acquired in connection with its agency hereunder; and (c) promptly to distribute to each Lender copies of all notices, financial statements and other materials delivered by Capsure, the Borrower or any Subsidiary pursuant to this Agreement as received by the Administrative Agent. Neither the Administrative Agent nor any of its directors, officers, employees or agents shall be liable as such for any action taken or omitted by any of them except for its, his or her own gross negligence or wilful misconduct, or be responsible for any statement, warranty or representation herein or the contents of any document delivered in connection herewith, or be required to ascertain or to make any inquiry concerning the performance or observance by Capsure or any of its subsidiaries of any of the terms, conditions, covenants or agreements contained in any Loan Document. The Administrative Agent shall not be responsible to the Lenders or the holders of the Notes for the due execution, genuineness, validity, enforceability or effectiveness of this Agreement, the Notes or any other Loan Documents or other instruments or agreements. The Administrative Agent may deem and treat the payee of any Note as the owner thereof for all purposes hereof until it shall have received from the payee of such Note notice, given 63 58 as provided herein, of the transfer thereof in compliance with Section 10.04. The Administrative Agent shall in all cases be fully protected in acting, or refraining from acting, in accordance with written instructions signed by the Required Lenders and, except as otherwise specifically provided herein, such instructions and any action or inaction pursuant thereto shall be binding on all the Lenders and each subsequent holder of any Note. The Administrative Agent shall, in the absence of knowledge to the contrary, be entitled to rely on any instrument or document believed by it in good faith to be genuine and correct and to have been signed or sent by the proper person or persons. Neither the Administrative Agent nor any of its directors, officers, employees or agents shall have any responsibility to the Borrower or any other person on account of the failure of or delay in performance or breach by any Lender of any of its obligations hereunder or to any Lender or any other person on account of the failure of or delay in performance or breach by any other Lender or by Capsure, the Borrower or any Subsidiary of any of their respective obligations hereunder or under any other Loan Document or in connection herewith or therewith. The Administrative Agent may execute any and all duties hereunder by or through agents or employees and shall be entitled to rely upon the advice of legal counsel selected by it with respect to all matters arising hereunder and shall not be liable for any action taken or suffered in good faith by it in accordance with the advice of such counsel. The Lenders hereby acknowledge that the Administrative Agent shall be under no duty to take any discretionary action permitted to be taken by it pursuant to the provisions of this Agreement or any other Loan Document unless it shall be requested in writing to do so by the Required Lenders. Subject to the appointment and acceptance of a successor Administrative Agent as provided below, the Administrative Agent may resign at any time by notifying the Lenders and the Borrower. Upon any such resignation, the Required Lenders shall have the right to appoint a successor, subject to the Borrower's approval, which shall not be unreasonably withheld. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent, which shall be a bank with an office in the United States of America having a combined capital and surplus of at least $500,000,000 or an Affiliate of any such bank. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor bank, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. After the Administrative Agent's resignation hereunder, the provisions of this Article and Section 10.05 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Administrative Agent. With respect to the Loans made by it hereunder and the Notes issued to it, the Administrative Agent in its individual capacity and not as Administrative Agent shall have the same rights and powers as any other Lender and may exercise the same as though it were not the Administrative Agent, and the Administrative Agent and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with Capsure or any of its subsidiaries or other Affiliates as if it were not the Administrative Agent. Each Lender agrees (a) to reimburse the Administrative Agent, on demand, in the amount of its pro rata share (based on its Commitment hereunder) of any expenses incurred for the benefit of the Lenders by the Administrative Agent, including counsel fees and compensation of agents and employees paid for services rendered on behalf of the Lenders, that shall not have been reimbursed by the Borrower and (b) to indemnify and hold harmless the Administrative Agent and its Affiliates and each of their respective directors, officers, employees and agents, on demand, in the amount of such pro rata share, from and 64 59 against any and all liabilities, taxes, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that are imposed on, incurred by or asserted against the Administrative Agent in its capacity as the Administrative Agent or any of them in any way relating to or arising out of this Agreement or any other Loan Document or any action taken or omitted by it or any of them under this Agreement or any other Loan Document, to the extent the same shall not have been reimbursed by the Borrower, provided that no Lender shall be liable to any such indemnified person for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements that are determined to have resulted from the gross negligence or wilful misconduct of such indemnified person. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement or any other Loan Document, any related agreement or any document furnished hereunder or thereunder. ARTICLE X MISCELLANEOUS SECTION 10.01. Notices. Notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy as follows: (a) if to Capsure, the Borrower or any Subsidiary Guarantor, to it at Capsure Holdings Corp., 1400 Lake Hearn Drive, Suite 130, Atlanta, Georgia 30319, Attention of Mary Jane Robertson (Telecopy No. (404) 843-5034) with a copy to Rosenberg & Liebentritt, P.C., Two North Riverside Plaza, Suite 1600, Chicago, Illinois 60606, Attention of Sheli Z. Rosenberg (Telecopy No. (312) 454-0335); (b) if to the Administrative Agent, to Chemical Bank Agency Services Corporation, Grand Central Tower, 140 East 45th Street, New York, New York 10017, Attention of Maxeen Francis (Telecopy No. (212) 622-0002), with a copy to Chemical Bank, at 270 Park Avenue, New York, New York 10017, Attention of Brian Turrentine (Telecopy No. (212) 270-5222); or (c) if to a Lender, to it at its address (or telecopy number) set forth on Schedule 2.01 or in the Assignment and Acceptance pursuant to which such Lender shall have become a party hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt if delivered by hand or overnight courier service or sent by telecopy with confirmation of receipt from the sending telecopy machine or on the date five Business Days after dispatch by certified or registered mail if mailed, in each case delivered, sent or mailed (properly addressed) to such party as provided in this Section 10.01 or in accordance with the latest unrevoked direction from such party given in accordance with this Section 10.01. SECTION 10.02. Survival of Agreement. Unless a longer period is provided herein, all covenants, agreements, representations and warranties made by Capsure and the Borrower herein and by Capsure, the 65 60 Borrower or any Subsidiary Guarantor in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement or any other Loan Document shall be considered to have been relied upon by the Administrative Agent and the Lenders and shall survive the making by the Lenders of the Loans and the execution and delivery to the Lenders of the Notes evidencing such Loans, regardless of any investigation made by the Lenders or on any of their behalf, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any Fee or any other amount payable under this Agreement or any other Loan Document is outstanding and unpaid and so long as the Commitments have not been terminated, provided that, without prejudice to the survival of any other agreement contained herein, the agreements and obligations contained in Sections 2.11 and 2.13 shall survive the payment in full of the principal of and interest on all Loans made hereunder. SECTION 10.03. Binding Effect. This Agreement shall become effective when it shall have been executed by Capsure, the Borrower and the Administrative Agent and when the Administrative Agent shall have received copies hereof that, when taken together, bear the signatures of each Lender, and thereafter shall be binding upon and inure to the benefit of Capsure, the Borrower, the Administrative Agent and each Lender and their respective successors and assigns, except that neither Capsure nor the Borrower shall have the right to assign its rights hereunder or any interest herein without the prior consent of all the Lenders. SECTION 10.04. Successors and Assigns. (a) Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party, and all covenants, promises and agreements by or on behalf of Capsure, the Borrower, the Administrative Agent or the Lenders that are contained in this Agreement shall bind and inure to the benefit of their respective successors and assigns. (b) Each Lender may assign to one or more assignees all or a portion of its interests, rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it and the Notes held by it); provided, however, that (i) except in the case of an assignment to a Lender or an Affiliate of such Lender, the Borrower and the Administrative Agent must each give their prior written consent to such assignment (which consent shall not be unreasonably withheld), (ii) each such assignment shall be of a constant, and not a varying, percentage of all the assigning Lender's rights and obligations under this Agreement, (iii) the amount of the Commitment of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent) shall not be less than $5,000,000 (or the Commitment of the assigning Lender immediately prior to the assignment, if such Commitment is less than $5,000,000), (iv) the parties to each such assignment shall execute and deliver to the Administrative Agent an Assignment and Acceptance, together with the Note or Notes subject to such assignment and a processing and recordation fee of $3,500, and (v) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire and any certificates or other instruments required to be delivered pursuant thereto. Upon acceptance and recording pursuant to paragraph (e) of this Section 10.04, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five Business Days after the execution thereof, (i) the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement and (ii) the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.11, 2.13, 2.15, 2.17 and 10.05, as well as to any Fees accrued for its account and not yet paid). 66 61 (c) By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the assignee thereunder shall be deemed to confirm to and agree with each other and the other parties hereto as follows: (i) such assigning Lender warrants that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim and that its Commitment and the outstanding balances of its Loans, in each case without giving effect to assignments thereof that have not become effective, are as set forth in such Assignment and Acceptance, (ii) except as set forth in clause (i) above, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement, or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement, any other Loan Document or any other instrument or document furnished pursuant hereto, or the financial condition of Capsure or any of its subsidiaries or the performance or observance by Capsure or any of its subsidiaries of any of its obligations under this Agreement, any other Loan Document or any other instrument or document furnished pursuant hereto; (iii) such assignee represents and warrants that it is legally authorized to enter into such Assignment and Acceptance; (iv) such assignee confirms that it has received a copy of this Agreement, together with copies of the most recent financial statements delivered pursuant to Section 5.04 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (v) such assignee will independently and without reliance upon the Administrative Agent, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (vi) such assignee appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all the obligations that by the terms of this Agreement are required to be performed by it as a Lender. (d) The Administrative Agent shall maintain at one of its offices in The City of New York a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and principal amount of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive in the absence of manifest error and the Borrower, the Administrative Agent and the Lenders may treat each person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower and any Lender, at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Lender and an assignee together with the Note or Notes subject to such assignment, an Administrative Questionnaire completed in respect of the assignee (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) above and the written consent of the Borrower and the Administrative Agent to such assignment, the Administrative Agent shall (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Lenders. Within five Business Days after receipt of notice, the Borrower, at its own expense, shall execute and deliver to the Administrative Agent, in exchange for the surrendered Note or Notes, a new Note or Notes to the order of such assignee in a principal amount equal to the applicable Commitment assumed by it pursuant to such Assignment and Acceptance and, if the assigning Lender has retained a Commitment, a new Note to the order of such assigning Lender in a principal amount equal to the applicable Commitment retained by it. Such new Note or Notes that shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Note; such new 67 62 Notes shall be dated the date of the surrendered Notes that they replace and shall otherwise be in substantially the form of Exhibit A, as appropriate. Canceled Notes shall be returned to the Borrower. (f) Each Lender may without the consent of the Borrower or the Administrative Agent sell participations to one or more banks or other entities in all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it and the Notes held by it); provided, however, that (i) such Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the participating banks or other entities shall be entitled to the benefit of the cost protection provisions contained in Sections 2.11, 2.13 and 2.17 to the same extent as if they were Lenders, provided that the Borrower shall not be required to reimburse a participating lender or other entity pursuant to Section 2.11, 2.13 or 2.17 in an amount in excess of the amount that would have been payable thereunder to the Lender granting such participation had such Lender not sold such participation and (iv) the Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement, and such Lender shall retain the sole right to enforce the obligations of the Borrower relating to the Loans and to approve any amendment, modification or waiver of any provision of this Agreement (other than amendments, modifications or waivers decreasing any fees payable hereunder or the amount of principal of or the rate at which interest is payable on the Loans, extending the final maturity date or date fixed for the payment of interest on the Loans or changing or extending the Commitments or releasing all or substantially all the Collateral). (g) Any Lender or participant may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 10.04, disclose to the assignee or participant or proposed assignee or participant any information relating to Capsure and its subsidiaries furnished to such Lender by or on behalf of the Borrower, provided that, prior to any disclosure of information designated by the Borrower as confidential, each such assignee or participant or proposed assignee or participant shall execute an agreement whereby such assignee or participant shall agree (subject to customary exceptions) to preserve the confidentiality of such confidential information. (h) Any Lender may at any time assign to a Federal Reserve Bank all or any portion of its rights under this Agreement and the Notes issued to it, provided that no such assignment shall release a Lender from any of its obligations hereunder. (i) Neither Capsure nor the Borrower shall assign or delegate any of its rights or duties hereunder. SECTION 10.05. Expenses; Indemnity. (a) The Borrower agrees to pay all out-of-pocket expenses incurred by the Administrative Agent and the Collateral Agent in connection with the preparation of this Agreement and the other Loan Documents or in connection with any amendments, modifications or waivers of the provisions hereof or thereof (whether or not the transactions hereby contemplated shall be consummated) or incurred by the Administrative Agent, the Collateral Agent or any Lender in connection with the enforcement or protection of their rights in connection with this Agreement and the other Loan Documents or in connection with the Loans made or the Notes issued hereunder, including the fees, other charges and disbursements of Cravath, Swaine & Moore, counsel for the Administrative Agent and the Collateral Agent, and, in connection with any such enforcement or protection, the fees, charges and disbursements of any other counsel for the Administrative Agent, the Collateral Agent or any Lender. The Borrower further agrees that it shall indemnify the Lenders and the Collateral Agent from and hold them harmless against any documentary taxes, assessments or charges made by any Governmental Authority by reason of the execution and delivery of this Agreement or any of the other Loan Documents. 68 63 (b) The Borrower and Capsure agree, jointly and severally, to indemnify the Administrative Agent, each Lender and the Collateral Agent and each of their respective directors, officers, employees and agents (each such person being called an "Indemnitee") against, and to hold each Indemnitee harmless from, any and all losses, claims, demands, damages, penalties, fines, liabilities, settlements, costs and related expenses, including reasonable counsel fees, charges and disbursements, incurred by or asserted against any Indemnitee arising out of, in any way connected with, or as a result of (i) the execution or delivery of this Agreement or any other Loan Document or any agreement or instrument contemplated thereby, the performance by the parties thereto of their respective obligations thereunder or the consummation of the Transactions and the other transactions contemplated hereby, (ii) the use of the proceeds of the Loans, (iii) any claim, litigation, investigation or proceeding relating to any of the foregoing, whether or not any Indemnitee is a party thereto, or (iv) the violation of, noncompliance with or liability under any Environmental and Safety Laws applicable to the operations of Capsure and its subsidiaries, or any orders, requirements or demands of Governmental Authorities related thereto (including reasonable and documented attorneys' and consultants' fees, investigation and laboratory fees, response costs, court costs and litigation expenses relating thereto), provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses resulted from the gross negligence or wilful misconduct of such Indemnitee. (c) The provisions of this Section 10.05 shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the Transactions or the other transactions contemplated hereby, the repayment of any of the Loans, the invalidity or unenforceability of any term or provision of this Agreement or any other Loan Document, or any investigation made by or on behalf of the Administrative Agent, the Collateral Agent or any Lender. All amounts due under this Section 10.05 shall be payable on written demand therefor. SECTION 10.06. Right of Setoff. If an Event of Default shall have occurred and be continuing, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the Borrower or Capsure against any of and all the obligations of the Borrower or Capsure now or hereafter existing under this Agreement and other Loan Documents held by such Lender, irrespective of whether such Lender shall have made any demand under this Agreement or such other Loan Document and although such obligations may be unmatured. The rights of each Lender under this Section 10.06 are in addition to other rights and remedies (including other rights of setoff) that such Lender may have. SECTION 10.07. APPLICABLE LAW. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. SECTION 10.08. Waivers; Amendment. (a) No failure or delay of the Administrative Agent, the Collateral Agent or any Lender in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agent, the Collateral Agent and the Lenders hereunder and under the other Loan Documents are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of this Agreement or any other Loan Document or consent to any departure by Capsure or any of its subsidiaries therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) below, and then such waiver or consent shall be effective only in the specific instance and for the purpose 69 64 for which given. No notice or demand on Capsure or any of its subsidiaries in any case shall entitle such person to any other or further notice or demand in similar or other circumstances. (b) Neither this Agreement, the Guarantee Agreement or any of the Security Documents nor any provision hereof or thereof may be waived, amended or modified except, in the case of this Agreement, pursuant to an agreement or agreements in writing entered into by Capsure, the Borrower and the Required Lenders or, in the case of any of the Security Documents, pursuant to an agreement or agreement in writing entered into by Capsure, the Borrower, the Subsidiary Guarantors and the Collateral Agent and consented to by the Required Lenders or, in the case of the Guarantee Agreement, pursuant to an agreement or agreements in writing entered into by the Guarantors and the Collateral Agent and consented to by the Required Lenders; provided, however, that no such agreement shall (i) decrease the principal amount of, or extend the final maturity date of or date for the payment of any interest on any Loan, or waive or excuse any such payment or any part thereof, or decrease the rate of interest on any Loan, or amend or modify the provisions of Section 2.09(b), without the prior written consent of each Lender affected thereby, (ii) change or extend the Commitment of any Lender or decrease the Commitment Fees of any Lender without the prior written consent of such Lender, (iii) amend or modify the provisions of Section 2.14, the provisions of this Section 10.08 or the definition of the term "Required Lenders" without the prior written consent of each Lender or (iv) release all or substantially all the Collateral under any Security Document without the prior written consent of each Lender; provided further that no such agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent hereunder without the prior written consent of the Administrative Agent. Each Lender and each holder of a Note shall be bound by any waiver, amendment or modification authorized by this Section 10.08 regardless of whether its Note shall have been marked to make reference thereto, and any consent by any Lender or holder of a Note pursuant to this Section 10.08 shall bind any person subsequently acquiring a Note from it, whether or not such Note shall have been so marked. SECTION 10.09. Interest Rate Limitation. Notwithstanding anything herein or in the Notes to the contrary, if at any time the applicable interest rate, together with all fees and charges that are treated as interest under applicable law (collectively, the "Charges"), as provided for herein or in any other document executed in connection herewith, or otherwise contracted for, charged, received, taken or reserved by any Lender, shall exceed the maximum lawful rate (the "Maximum Rate") that may be contracted for, charged, taken, received or reserved by such Lender in accordance with applicable law, the rate of interest payable under the Note held by such Lender, together with all Charges payable to such Lender, shall be limited to the Maximum Rate. SECTION 10.10. Entire Agreement. This Agreement and the other Loan Documents constitute the entire contract between the parties relative to the subject matter hereof and thereof. Any previous agreement among the parties with respect to the subject matter hereof is superseded by this Agreement and the other Loan Documents. Nothing in this Agreement or in the other Loan Documents, express or implied, is intended to confer upon any party other than the parties hereto and thereto any rights, remedies, obligations or liabilities under or by reason of this Agreement or the other Loan Documents. SECTION 10.11. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES 70 65 HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, AS APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 10.11. SECTION 10.12. Severability. In the event any one or more of the provisions contained in this Agreement or in any other Loan Document should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby. The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions, the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. SECTION 10.13. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one contract, and shall become effective as provided in Section 10.03. SECTION 10.14. Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Agreement. SECTION 10.15. Jurisdiction; Consent to Service of Process. (a) Each of Capsure, the Borrower, the Administrative Agent and each Lender hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the other Loan Documents, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that any Lender may otherwise have to bring any action or proceeding relating to this Agreement or the other Loan Documents against Capsure or any of its subsidiaries or the properties of any of the foregoing in the courts of any jurisdiction. (b) Each of Capsure, the Borrower, the Administrative Agent and each Lender hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the other Loan Documents in any New York State or Federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. 71 66 (c) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 10.01. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. IN WITNESS WHEREOF, the Borrower, Capsure, the Administrative Agent and the Lenders have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. CAPSURE FINANCIAL GROUP, INC. by Bruce A. Esselborn -------------------------------- Name: Bruce A. Esselborn Title: President CAPSURE HOLDINGS CORP., by Bruce A. Esselborn -------------------------------- Name: Bruce A. Esselborn Title: President CHEMICAL BANK, individually and as Administrative Agent, by Brian J. Turrentine -------------------------------- Name: Brian J. Turrentine Title: Vice President BANK ONE, TEXAS, N.A., by D. Keith Thompson -------------------------------- Name: D. Keith Thompson Title: Banking Officer 72 67 BANQUE PARIBAS, by Steven M. Heinen -------------------------------- Name: Steven M. Heinen Title: Vice President by Rowena P. Festin -------------------------------- Name: Rowena P. Festin Title: Vice-President THE BANK OF NEW YORK, by Timothy J. Stambaugh -------------------------------- Name: Timothy J. Stambaugh Title: Vice President FIRST BANK NATIONAL ASSOCIATION, by Mark R. Olson -------------------------------- Name: Mark R. Olson Title: Vice President FIRST UNION NATIONAL BANK OF NORTH CAROLINA, by Tammy Benton -------------------------------- Name: Tammy Benton Title: Vice President NATIONSBANK OF GEORGIA, N.A., by Katherine W. Howland -------------------------------- Name: Katherine W. Howland Title: Vice President 73 68 SHAWMUT BANK OF CONNECTICUT, N.A., by Joseph J. Wadlinger, Jr. -------------------------------- Name: Joseph J. Wadlinger, Jr. Title: Insurance Industry Officer UNION BANK, by J.R. Fothergill -------------------------------- Name: James R. Fothergill Title: VP by Robert C. Dawson -------------------------------- Name: Robert C. Dawson Title: VP EX-10.(23) 9 CONTRACT SURETY BOND-REINSURANCE AGREEMENT 1 EXHIBIT 10(23) CONTRACT SURETY BOND REINSURANCE AGREEMENT ISSUED TO WESTERN SURETY COMPANY A SOUTH DAKOTA CORPORATION (HEREINAFTER REFERRED TO AS THE "COMPANY") BY UNIVERSAL SURETY OF AMERICA A TEXAS CORPORATION (HEREINAFTER REFERRED TO AS THE "REINSURER) ARTICLE I BUSINESS COVERED (A) The Company obligates itself to cede to the Reinsurer and the Reinsurer obligates itself to accept as reinsurance from the Company the net retained liability which may accrue to the Company under all policies, binders, contracts and agreements of insurance whether oral or written (hereinafter called "policies") written by the Company pursuant to a Co-Employee Agreement with the Reinsurer during the continuance of this Agreement and classified by the Company as Contract Surety Bonds. (B) The Company will cede to the Reinsurer and the Reinsurer will accept as reinsurance from the Company the net retained liability which may accrue to the Company under policies, binders, contracts and agreements of insurance whether oral or written (hereinafter called "policies") written by the Company pursuant to a Co-Employee Agreement with the Reinsurer during the continuance of this Agreement and classified by the Company as Miscellaneous Bond Business, as shall be mutually agreed upon by the Company and the Reinsurer. ARTICLE II NET RETAINED LINES This Agreement applies only to that portion of any insurance covered by this Agreement which the Company retains net for its own account and in calculating the amount of any loss hereunder only loss or losses in respect of that portion of any insurance which the Company retains net for its own account shall be included. It being understood and agreed that 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 reinsurance whether specific or general, any amounts which may have become due from them, whether such inability arises from the insolvency of such other reinsurers or otherwise. 2 LIMITS The Reinsurer shall accept as reinsurance 100% of the net retained liability of the Company as respects Contract Surety Bonds written by the Company pursuant to the Co-Employee Agreement with the Reinsurer. MAXIMUM BOND LIMITS The Company shall limit the maximum bond issued subject to this Treaty to $3,000,000.00 bonded, uncompleted work-in-progress in the aggregate per principal. These amounts may be increased and made subject to this agreement as a special acceptance, by mutual agreement of both parties. The Company may also increase these limits by use of facultative reinsurance or increased net retention by the Company. If facultative excess of loss reinsurance is purchased, the Company shall be the sole judge in proportioning premiums. ARTICLE III COMMENCEMENT This Agreement shall take effect 12:01 A.M., Central Standard Time, ____________ ____, 1994 and shall apply to all losses occurring on and after this date in respect of new and renewal business written on and after this date and shall remain continuously in force, unless canceled in accordance with the Termination of Special Termination provisions of this Agreement. TERMINATION This Agreement may be terminated by either party by giving 90 days notice in writing by certified mail to the other party to take effect 12:01 A.M., Local Standard Time, __________ _____, 1995 or any [ANNIVERSARY DATE OF THE AGREEMENT] thereafter. Notwithstanding the options available solely to the Company, termination of this Agreement shall be on a run-off basis and the Reinsurer shall remain liable as respects business in-force at the date of termination for losses occurring subsequent thereto; however, the liability of the Reinsurer shall cease at the expiration of the business in-force at the time of cancellation but not to extend beyond twelve months, plus odd time, after the date of termination. Special acceptances exceeding twelve months plus odd time may be agreed to by the Reinsurer. TERMINATION ON CUT-OFF BASIS Solely at the option of the Company this Agreement may be terminated on a cut-off basis, and the Reinsurer shall incur no liability for losses occurring subsequent to the effective date of termination. Should the Company exercise its option to terminate 3 this Agreement on a cut-off basis, the Company shall prepare a statement of the unearned premium, calculated on a monthly pro rata basis, and the Reinsurer shall return to the Company such unearned premium less the ceding commission stated in Article VI. COMMUTATION OPTION Solely at the option of the Company, the Company may reassume from the Reinsurer the losses outstanding under this Agreement at the date of termination. Should the Company exercise this option, a settlement shall be made by the Reinsurer to the Company based on the Company's estimate of losses outstanding as of the date of termination. Such payment shall be considered final by mutual agreement of the parties hereto. Otherwise, further periodic adjustments shall be made so that the total amounts paid by the Reinsurer shall equal the actual loss settlements made by the Company for losses outstanding as of the date of termination. SPECIAL TERMINATION It is understood and agreed that should at any time the Company or the Reinsurer lose 20% or more of its policyholders' surplus, become insolvent, or be placed in conservation, rehabilitation or liquidation, or have a receiver appointed, or be acquired or controlled by, merged with, or reinsure its entire business with any other company or corporation, the other party shall have the right to terminate this Agreement forthwith upon the giving of 30 days notice in writing, which shall be in accordance with the termination provisions of this Article. This Agreement may be terminated by the Company on a cut-off basis should the Reinsurer's rating by A.M. Best Company be lowered a letter grade or more. The Company shall have the right to exercise its option to commute the losses outstanding under this Agreement at the date of any termination under this paragraph pursuant to the commutation provisions set forth above. Thirty days written notice by the Company, shall be given to the Reinsurer by Certified Mail. If any law or regulation of the federal or state or local government of any jurisdiction in which the Company is doing business shall render illegal the arrangements made in this Agreement, this Agreement can be terminated immediately insofar as it applies to such jurisdiction by the Company giving notice to the Reinsurer to such effect. ARTICLE IV TERRITORY The liability of the Reinsurer under this Agreement shall be limited to losses located in the United States of America, its territories and possessions, including U.S. Embassies and Military Bases outside the United States of America and Canada. 4 ARTICLE V EXCLUSIONS This Agreement shall exclude business accepted by the Company as assumed reinsurance. ARTICLE VI PREMIUM AND COMMISSION The Company shall cede to the Reinsurer 100% of the original net written premium charged by the Company for the business covered hereunder. The Reinsurer shall allow the Company a commission equal to the Company's original commission plus 7.5% ceding commission. The commission allowances shall cover premium taxes of all kinds, local board assessments, and all other expenses and charges whatsoever based upon premium (except losses and loss adjustment expenses) ceded under this Agreement. The term "original, net written premium" shall be understood to mean all written premium subject to this Treaty less cancellations, returns, and premiums paid to the Company's facultative reinsurers (if any). ARTICLE VII REINSURER'S LIABILITY The liability of the Reinsurer shall commence obligatorily and simultaneously with that of the Company; the premium on account of such liability to be credited to the Reinsurer from the original date of the Company's liability. REINSURER TO FOLLOW COMPANY All reinsurances for which the Reinsurer shall be liable by virtue of this Agreement shall be subject in all respects to the same rates, terms, conditions, interpretations adopted by the Company, waivers, modifications, alterations, and cancellations, as the respective insurances of the Company to which such reinsurances relate, the true intent of this Agreement is that the reinsurer shall in every case to which the Agreement applies and in the proportion specified, follow the fortunes of the Company. ARTICLE VIII ACCOUNTS AND STATISTICAL REPORTS The Company shall render a monthly account to the Reinsurer within 30 days after the close of each calendar quarter, summarizing premium, return premium, allowance for commission, losses paid, loss adjustment expenses paid and salvage recovered, 5 and showing the net balance due from either party. Balances shall be paid by the debtor party within 45 days following the end of the quarter. The Company agrees to furnish unearned premium and outstanding loss figures monthly as soon as possible after the close of the corresponding quarter, and the customary year end statistics for completion of the Reinsurer's annual statement within thirty days after the close of the calendar year. ARTICLE IX (Applies only to the Reinsurer when it does not qualify for full credit as admitted reinsurance by any State or any other governmental authority having jurisdiction over the Company's reserves.) FUNDING OF RESERVES As regards policies or bonds issued by the Company coming within the scope of this Agreement, the Company agrees that when it shall file with the South Dakota Insurance Division or set up on its books reserves for unearned premium and losses covered hereunder which it shall be required by law to set up, it will forward to the Reinsurer a statement showing the proportion of such reserves which is applicable to the Reinsurer. The Reinsurer hereby agrees to fund such reserves in respect of unearned premium and known outstanding losses that have been reported to the Reinsurer and allocated loss expenses relating thereto (excluding reserves for losses incurred but not reported) , as shown in the statement prepared by the Company, by either funds withheld or cash advances deposited with a bank or trust company pursuant to the terms of a separate Trust Agreement. The Reinsurer shall have the option of determining the method of funding provided it is acceptable to the insurance regulatory authorities involved. Notwithstanding any other provision of this Agreement, the Company or its successors in interest may draw upon such reserve funding at any time without diminution because of the insolvency of the Company or of the Reinsurer for one or more of the following purposes only, unless otherwise provided for in a separate Trust Agreement: (a) To pay the Reinsurer's share or to reimburse the Company for the Reinsurer's share of any loss reinsured by the Agreement, the payment of which has been agreed by the Reinsurer and which has not otherwise been paid. (b) To make refund of any sum which is in excess of the actual amount required to pay the Reinsurer's share of any liability reinsured by this Agreement. 6 (c) To establish a deposit of the Reinsurer's share of unearned premium and known and reported outstanding losses and allocated expenses relating thereto excluding reserves for losses incurred but not reported under this Agreement. Such cash deposit shall be held in an interest bearing account separate from the Company's other assets, and interest thereon shall accrue to the benefit of the Reinsurer. (d) To pay or reimburse the Company for the Reinsurer's share of any other amounts which are due the Company under the terms of this Agreement, but not to include IBNR. The bank or trust company holding any cash advance pursuant to a separate Trust Agreement shall have no responsibility whatsoever in connection with the propriety of withdrawals made by the Company or the disposition of funds withdrawn, except to ensure that withdrawals are made only upon the order of properly authorized representatives of the Company. At annual intervals, or more frequently as agreed but never more frequently than quarterly, the Company shall prepare a specific statement, for the sole purpose of adjusting the amount of any cash funding, of the Reinsurer's share of unearned premium and known and reported outstanding losses and allocated expenses relating thereto excluding reserves for losses incurred but not reported. If the statement shows that the Reinsurer's share of such unearned premium and losses and allocated loss expenses excluding reserves for losses incurred but not reported exceeds the balance of credit as of the statement date, the Reinsurer shall, within thirty (30) days after receipt of notice of such excess, increase any cash funding by the amount of such difference. If, however, the statement shows that the Reinsurer's share of unearned premium and known and reported outstanding losses and allocated loss expenses relating thereto, excluding reserves for losses incurred but not reported is less than the balance of credit as of the statement date, the Company shall, within thirty days (30) days after receipt of written request from the Reinsurer, release such excess credit by reducing any cash funding by the amount of such difference. ARTICLE X LOSSES AND LOSS SETTLEMENTS The Company or its designated representatives shall adjust, settle or compromise all losses hereunder. All such adjustments, settlements and compromises, including ex-gratia payments shall be binding on the Reinsurer, in proportion to its participation and the Reinsurer shall benefit proportionately in all salvage, subrogation and recoveries. 7 The Reinsurer shall bear all loss adjustment expenses incurred by the Company, (but not including office expenses or salaries of and expenses incurred by the Company's regular employees) in the investigation, adjustment, appraisal or defense of all claims under policies reinsured hereunder and the Reinsurer shall receive any and all recoveries of such expense, excluding office expenses or salaries of and expenses incurred by the Company's regular employees. The Reinsurer's portion of loss adjustment expenses shall be in addition to its limit of liability. Collateral, if applicable, will be used as loss and/or loss adjustment expenses where applicable, and will be assigned proportionately between the Company and the Reinsurers. ARTICLE XI EXTRA CONTRACTUAL OBLIGATIONS This Agreement shall protect the Company, within the limits hereof, where the loss includes any Extra Contractual Obligations incurred by the Company. "Extra Contractual Obligations" are defined as those liabilities not covered under any other provisions of this Agreement and which arise from the handling of any claim on business covered hereunder, such liabilities arising because of, but not limited to, the following: failure by the Company to settle within the policy limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement, or in the preparation of the defense, or in the trial of any action against its insured, or in the preparation or prosecution of an appeal consequent upon such action. The date on which any Extra Contractual Obligation is incurred by the Company shall be deemed, in all circumstances, to be the date of the original loss. However, this Article shall not apply where the loss has been incurred due to the fraud of a member of the Board of Directors or a corporate officer of the Company acting individually or collectively in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder. However, only 80% of any loss as described above may be included in the loss hereon, the remaining 20% to be retained by the Company and not reinsured in any way. ARTICLE XII TAXES It is understood and agreed that in consideration of the terms under which this Agreement is issued, the Company undertakes not to claim any deduction with respect to the premium hereon when making 8 tax returns, other than income or profits tax returns, to the appropriate tax authorities. ARTICLE XIII CURRENCY All payments made under this Agreement shall be in currency of the United States of America. ARTICLE XIV ACCESS TO RECORDS The Reinsurer, or its duly appointed representatives, shall at all reasonable times have free access to the books and records of the Company so far as they relate to the business reinsured under this Agreement. ARTICLE XV 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 delay, omission or error is rectified immediately upon discovery. ARTICLE XVI INSOLVENCY In the event of the insolvency of the Company this reinsurance shall be payable by the Reinsurer directly to the Company or its liquidator, receiver, conservator or statutory successor on the basis of the liability of the Company without diminution because of the insolvency of the Company or because the liquidator, receiver, conservator or statutory successor of the Company has failed to pay all or a portion of any claim. It is agreed however, that the liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the insolvent Company indicating the policy or bonds reinsured which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceedings or in the receivership, and that during the pendency of such claims the Reinsurer may investigate such claims and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or 9 defenses which it may deem available to the Company or its liquidator, receiver, conservator or statutory successor; that the expense thus incurred by the Reinsurer shall be chargeable subject to court approval against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. This reinsurance shall be payable by the Reinsurer directly to the Company, or to its liquidator, receiver, conservator or statutory successor, except (a) where the Agreement specifically provides another payee of such reinsurance in the event of the insolvency of the Company, and (b) where the Reinsurer with the consent of the direct insured or uninsureds has assumed such policy obligations of the Company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the Company to such payees. ARTICLE XVII ARBITRATION As a precedent to any right of action hereunder, if any differences shall arise between the contracting parties with reference to the interpretation of this Agreement or the rights with respect to any transaction involved, whether arising before or after termination of this Agreement, such differences shall be submitted to arbitration upon the written request of one of the contracting parties. Each party shall appoint an arbitrator within thirty days of being requested to do so, and the two named shall select a third arbitrator before entering upon the arbitration. If either party refuses or neglects to appoint an arbitrator within the time specified, the other party may appoint the second arbitrator. If the two arbitrators fail to agree on a third arbitrator within thirty days of their appointment, each of them shall name three individuals, of whom the other shall decline two, and the choice shall be made by drawing lots. All arbitrators shall be active or retired disinterested officers of insurance or reinsurance companies or Underwriters at Lloyd's, London not under the control of either party to this Agreement. Each party shall submit its case to its arbitrator within thirty days of the appointment of the third arbitrator or within such period as may be agreed by the arbitrators. All arbitrators shall interpret this Agreement as an honorable engagement rather than as merely a legal obligation. They are relieved of all judicial formalities and may abstain from following the strict rules of law. They shall make their award with a view to effecting the general purpose of this Agreement rather than in accordance with a literal interpretation of the language. 10 The decision in writing of any two arbitrators, when filed with the contracting parties, shall be final and binding on both parties. Judgment upon the award rendered 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 expense of the third arbitrator and of the arbitration. In the event that two arbitrators are chosen by one party as above provided, the expense of the arbitrators and the arbitration shall be equally divided between the two parties. Any arbitration shall take place in Sioux Falls, South Dakota unless some other place is mutually agreed upon by the contracting parties. ARTICLE XVIII OFFSET CLAUSE The Company and the Reinsurer, each at its option, may offset any balance or balances, whether on account of premiums, claims and losses, loss expenses or salvages due from one party to the other under this Agreement, provided, however, that in the event of the insolvency of a party hereto, offsets shall only be allowed in accordance with the provisions of the statutes and/or regulations of the state having jurisdiction over the insolvency. ARTICLE XIX CHOICE OF LAW This Agreement shall be governed by and interpreted in accordance with the laws of the State of South Dakota. **** Signed and accepted, effective September 22, 1994 on behalf of Western Surety Company, "the Company" by Bruce A. Esselborn this 22nd day of September, 1994. Signed and accepted, effective September 22, 1994 on behalf of Universal Surety of America, "the Reinsurer" by John Knox, Jr. President, this 22nd day of September, 1994. EX-10.(24) 10 CO-EMPLOYMENT AGREEMENT 1 EXHIBIT 10(24) CO-EMPLOYEE AGREEMENT BETWEEN WESTERN SURETY COMPANY AND UNIVERSAL SURETY OF AMERICA This Agreement is made this 22nd day of September, 1994 by and between Western Surety Company, an insurance company organized under the laws of South Dakota ("Western Surety") and Universal Surety of America, an insurance company organized under the laws of Texas ("USA.") WHEREAS, Western Surety and USA are affiliated companies; and WHEREAS, USA and Western Surety each desire to use certain personnel of the other; NOW THEREFORE, the parties, in consideration of the mutual covenants and agreements herein contained, do hereby agree as follows: 1. Certain of USA's underwriters and claims managers will become co-employed by Western Surety to underwrite contract surety business and administer the related claims for Western Surety. 2 2. Certain of Western Surety's underwriters and claims managers will become co-employed by USA to underwrite certain types of miscellaneous fidelity and surety bond business and administer the related claims for USA. 3. This Agreement shall not cause any co-employee to be eligible for duplicate benefits under any employee benefit plan of USA, Western Surety, or any related company. 4. This Agreement may be terminated at any time by either party upon not less than 30 days prior written notice to the other. IN WITNESS WHEREOF, the parties hereto have caused the Agreement to be executed on the date and the year written above. Universal Surety of America John Knox, Jr. ------------------ By: John Knox, Jr. President Western Surety Company Phil Lundy ------------------ By: Phil Lundy Treasurer EX-11 11 EARNINGS PER SHARE COMPUTATION 1 EXHIBIT 11 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES EARNINGS PER SHARE COMPUTATION (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended December 31, ---------------------------------------- 1994 1993 1992 --------- -------- --------- Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,378 $ 16,284 $ 10,695 ========= ======== ========= Shares: Weighted average shares outstanding . . . . . . . . . . . . . . . . . . . 15,160 15,036 10,997 Additional shares from assumed warrants and options exercised . . . . . . 256 379 736 --------- -------- --------- Total shares outstanding for calculation . . . . . . . . . . . . . . . . 15,416 15,415 11,733 Additional shares from assumed warrants and options exercised - assuming full dilution(1) . . . . . . . . . . . . . . . . . . . . . . . 39 (54) 481 --------- -------- --------- Total shares outstanding - assuming full dilution . . . . . . . . . . . . 15,455 15,361 12,214 ========= ======== ========= Earnings per share based on: Weighted average common shares outstanding . . . . . . . . . . . . . . $ .95 $ 1.08 $ .97 ========= ======== ========= Weighted average common and common equivalent shares outstanding(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .93 $ 1.06 $ .91 ========= ======== ========= Weighted average common and common equivalent shares outstanding - assuming full dilution(2) . . . . . . . . . . . . . . . $ .93 $ 1.06 $ .88 ========= ======== =========
______________________________ (1) Amount is anti-dilutive for 1993. (2) In 1994 and 1993, the dilutive effect of common stock equivalents was less than 3%. EX-21 12 CAPSURE HOLDINGS CORP. & SUBSIDIARIES 1 EXHIBIT 21 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES AS OF DECEMBER 31, 1994
INCORPORATED COMPANY IN - ------- ------------ Capsure Holdings Corp. (f/k/a Nucorp, Inc.) . . . . . . . . . . . . . . . . . . . . . . . Delaware Capsure Financial Group, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Oklahoma (f/k/a/ Nucorp Energy of Oklahoma, Inc.) APGO Drilling & Production Services . . . . . . . . . . . . . . . . . . . . . . . . Oklahoma Capital Dredge & Dock Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ohio Capsure Agency Holding Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . Texas (f/k/a Nucorp Insurance Services, Inc., f/k/a Bill Dorland Machine & Equipment, Inc.) Cogburn Pump & Supply Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware Condor Pipe, Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Texas Crowder Tank, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Oklahoma Del-Tex, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Oklahoma Eagle Upsetters, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Colorado Jim Williams & Associates, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . Louisiana Martin Pipe Co., Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Louisiana NI Acquisition Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Texas United Capitol Holding Company. . . . . . . . . . . . . . . . . . . . . . . . . Delaware United Capitol Insurance Company . . . . . . . . . . . . . . . . . . . . . . Wisconsin United Capitol Managers, Inc. . . . . . . . . . . . . . . . . . . . . . Delaware Fischer Underwriting Group, Incorporated . . . . . . . . . . . . . . New Jersey Nucorp Compressor, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Texas Nucorp Management Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ohio Nucorp Properties, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ohio Pin Oak Petroleum, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Texas SI Acquisition Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Texas Surewest Financial Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . South Dakota Surety Bonding Company of America . . . . . . . . . . . . . . . . . . . . . South Dakota Western Surety Company . . . . . . . . . . . . . . . . . . . . . . . . . . . South Dakota Troy Fain Insurance, Inc. . . . . . . . . . . . . . . . . . . . . . . . Florida SMCI Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mississippi Superior Allied Products, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . Texas Sweetwater Pump & Supply, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . Texas Taylor Rig and Equipment Company . . . . . . . . . . . . . . . . . . . . . . . . . . Oklahoma Universal Surety Holding Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . Texas Universal Surety of America . . . . . . . . . . . . . . . . . . . . . . . . . . Texas Wildcat Supply, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Oklahoma
EX-23 13 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Capsure Holdings Corp. and Subsidiaries on Form S-8 (File No. 33-87048) of our report dated February 24, 1995, on our audits of the consolidated financial statements and financial statement schedules of Capsure Holdings Corp. and Subsidiaries as of December 31, 1994 and 1993, and for the years ended December 31, 1994, 1993, and 1992, which report is included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Chicago, Illinois March 29, 1995 EX-24.(1) 14 POWER OF ATTORNEY 1 EXHIBIT 24(1) POWER OF ATTORNEY STATE OF NEW YORK ) ) SS COUNTY OF NEW YORK ) KNOW ALL MEN BY THESE PRESENTS that Herbert A. Denton, having an address at Providence Capital, 730 Fifth Avenue, New York, New York 10019, has made, constituted and appointed and BY THESE PRESENTS, does make, constitute and appoint SHELI Z. ROSENBERG, having an address at Rosenberg & Liebentritt, Two North Riverside Plaza, Chicago, Illinois 60606, his true and lawful Attorney-in-Fact for him and in his name, place and stead to sign and execute in any and all capacities this Annual Report on Form 10-K and any or all amendments to this Annual Report on Form 10-K, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, giving and granting unto Sheli Z. Rosenberg, said Attorney-in-Fact, full power and authority to do and perform each and every act and thing, requisite and necessary to be done in and about the premises, as fully, to all intents and purposes as he might or could do if personally present at the doing thereof, with full power of substitution and revocation, hereby ratifying and confirming all that said Attorney-in-Fact or her substitutes shall lawfully do or cause to be done by virtue hereof. This Power of Attorney shall remain in full force and effect until terminated by the undersigned through the instrumentality of a signed writing. IN WITNESS WHEREOF, Herbert A. Denton, has hereunto set his hand this ________________ day of ____________________________________, 1995. ________________________________________ Herbert A. Denton I, __________________________________________________________, a Notary Public in and for said County in the State aforesaid, do hereby certify that Herbert A. Denton, personally known to me to be the same person whose name is subscribed to the foregoing instrument appeared before me this day in person and acknowledged that he signed and delivered said instrument as his own free and voluntary act for the uses and purposes therein set forth. Given under my hand and notarial seal this ________________ day of ________________________________________, 1995. ________________________________________ (Notary Public) My Commission Expires: _______________________________________ EX-24.(2) 15 POWER OF ATTORNEY 1 EXHIBIT 24(2) POWER OF ATTORNEY STATE OF TEXAS ) ) SS COUNTY OF DALLAS ) KNOW ALL MEN BY THESE PRESENTS that Bradbury Dyer, III, having an address at Paragon Associates, 500 Crescent Court, Dallas, Texas 75201, has made, constituted and appointed and BY THESE PRESENTS, does make, constitute and appoint SHELI Z. ROSENBERG, having an address at Rosenberg & Liebentritt, Two North Riverside Plaza, Chicago, Illinois 60606, his true and lawful Attorney-in-Fact for him and in his name, place and stead to sign and execute in any and all capacities this Annual Report on Form 10-K and any or all amendments to this Annual Report on Form 10-K, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, giving and granting unto Sheli Z. Rosenberg, said Attorney-in-Fact, full power and authority to do and perform each and every act and thing, requisite and necessary to be done in and about the premises, as fully, to all intents and purposes as he might or could do if personally present at the doing thereof, with full power of substitution and revocation, hereby ratifying and confirming all that said Attorney-in-Fact or her substitutes shall lawfully do or cause to be done by virtue hereof. This Power of Attorney shall remain in full force and effect until terminated by the undersigned through the instrumentality of a signed writing. IN WITNESS WHEREOF, Bradbury Dyer, III, has hereunto set his hand this ________________ day of _____________________________________, 1995. ________________________________________ Bradbury Dyer, III I, __________________________________________________________, a Notary Public in and for said County in the State aforesaid, do hereby certify that Bradbury Dyer, III, personally known to me to be the same person whose name is subscribed to the foregoing instrument appeared before me this day in person and acknowledged that he signed and delivered said instrument as his own free and voluntary act for the uses and purposes therein set forth. Given under my hand and notarial seal this ________________ day of ________________________________________, 1995. ________________________________________ (Notary Public) My Commission Expires: _______________________________________ EX-24.(3) 16 POWER OF ATTORNEY 1 EXHIBIT 24(3) POWER OF ATTORNEY STATE OF NEW YORK ) ) SS COUNTY OF NEW YORK ) KNOW ALL MEN BY THESE PRESENTS that Talton R. Embry, having an address at Magten Asset Management Corp., 35 East 21st Street, New York, New York 10010, has made, constituted and appointed and BY THESE PRESENTS, does make, constitute and appoint SHELI Z. ROSENBERG, having an address at Rosenberg & Liebentritt, Two North Riverside Plaza, Chicago, Illinois 60606, his true and lawful Attorney-in-Fact for him and in his name, place and stead to sign and execute in any and all capacities this Annual Report on Form 10-K and any or all amendments to this Annual Report on Form 10-K, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, giving and granting unto Sheli Z. Rosenberg, said Attorney-in-Fact, full power and authority to do and perform each and every act and thing, requisite and necessary to be done in and about the premises, as fully, to all intents and purposes as he might or could do if personally present at the doing thereof, with full power of substitution and revocation, hereby ratifying and confirming all that said Attorney-in-Fact or her substitutes shall lawfully do or cause to be done by virtue hereof. This Power of Attorney shall remain in full force and effect until terminated by the undersigned through the instrumentality of a signed writing. IN WITNESS WHEREOF, Talton R. Embry, has hereunto set his hand this ________________ day of _____________________________________, 1995. ________________________________________ Talton R. Embry I, __________________________________________________________, a Notary Public in and for said County in the State aforesaid, do hereby certify that Talton R. Embry, personally known to me to be the same person whose name is subscribed to the foregoing instrument appeared before me this day in person and acknowledged that he signed and delivered said instrument as his own free and voluntary act for the uses and purposes therein set forth. Given under my hand and notarial seal this ________________ day of ________________________________________, 1995. ________________________________________ (Notary Public) My Commission Expires: _______________________________________ EX-24.(4) 17 POWER OF ATTORNEY 1 EXHIBIT 24(4) POWER OF ATTORNEY STATE OF SOUTH DAKOTA ) ) SS COUNTY OF MINNEHAHA ) KNOW ALL MEN BY THESE PRESENTS that Dan L. Kirby, having an address at Western Surety Company, 101 South Phillips Avenue, Sioux Falls, South Dakota 57102, has made, constituted and appointed and BY THESE PRESENTS, does make, constitute and appoint SHELI Z. ROSENBERG, having an address at Rosenberg & Liebentritt, Two North Riverside Plaza, Chicago, Illinois 60606, his true and lawful Attorney-in-Fact for him and in his name, place and stead to sign and execute in any and all capacities this Annual Report on Form 10-K and any or all amendments to this Annual Report on Form 10-K, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, giving and granting unto Sheli Z. Rosenberg, said Attorney-in-Fact, full power and authority to do and perform each and every act and thing, requisite and necessary to be done in and about the premises, as fully, to all intents and purposes as he might or could do if personally present at the doing thereof, with full power of substitution and revocation, hereby ratifying and confirming all that said Attorney-in-Fact or her substitutes shall lawfully do or cause to be done by virtue hereof. This Power of Attorney shall remain in full force and effect until terminated by the undersigned through the instrumentality of a signed writing. IN WITNESS WHEREOF, Dan L. Kirby, has hereunto set his hand this ________________ day of __________________________________, 1995. ________________________________________ Dan L. Kirby I, __________________________________________________________, a Notary Public in and for said County in the State aforesaid, do hereby certify that Dan L. Kirby, personally known to me to be the same person whose name is subscribed to the foregoing instrument appeared before me this day in person and acknowledged that he signed and delivered said instrument as his own free and voluntary act for the uses and purposes therein set forth. Given under my hand and notarial seal this ________________ day of ________________________________________, 1995. ________________________________________ (Notary Public) My Commission Expires: _______________________________________ EX-24.(5) 18 POWER OF ATTORNEY 1 EXHIBIT 24(5) POWER OF ATTORNEY STATE OF SOUTH DAKOTA ) ) SS COUNTY OF MINNEHAHA ) KNOW ALL MEN BY THESE PRESENTS that Joe P. Kirby, having an address at Western Surety Company, 101 South Phillips Avenue, Sioux Falls, South Dakota 57102, has made, constituted and appointed and BY THESE PRESENTS, does make, constitute and appoint SHELI Z. ROSENBERG, having an address at Rosenberg & Liebentritt, Two North Riverside Plaza, Chicago, Illinois 60606, his true and lawful Attorney-in-Fact for him and in his name, place and stead to sign and execute in any and all capacities this Annual Report on Form 10-K and any or all amendments to this Annual Report on Form 10-K, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, giving and granting unto Sheli Z. Rosenberg, said Attorney-in-Fact, full power and authority to do and perform each and every act and thing, requisite and necessary to be done in and about the premises, as fully, to all intents and purposes as he might or could do if personally present at the doing thereof, with full power of substitution and revocation, hereby ratifying and confirming all that said Attorney-in-Fact or her substitutes shall lawfully do or cause to be done by virtue hereof. This Power of Attorney shall remain in full force and effect until terminated by the undersigned through the instrumentality of a signed writing. IN WITNESS WHEREOF, Joe P. Kirby, has hereunto set his hand this ________________ day of _____________________________________, 1995. ________________________________________ Joe P. Kirby I, __________________________________________________________, a Notary Public in and for said County in the State aforesaid, do hereby certify that Joe P. Kirby, personally known to me to be the same person whose name is subscribed to the foregoing instrument appeared before me this day in person and acknowledged that he signed and delivered said instrument as his own free and voluntary act for the uses and purposes therein set forth. Given under my hand and notarial seal this ________________ day of ________________________________________, 1995. ________________________________________ (Notary Public) My Commission Expires: _______________________________________ EX-24.(6) 19 POWER OF ATTORNEY 1 EXHIBIT 24(6) POWER OF ATTORNEY STATE OF MARYLAND ) ) SS COUNTY OF PRINCE GEORGE ) KNOW ALL MEN BY THESE PRESENTS that L.G. Schafran, having an address at Dart Group, 3300 75th Avenue, Landover, Maryland 20785, has made, constituted and appointed and BY THESE PRESENTS, does make, constitute and appoint SHELI Z. ROSENBERG, having an address at Rosenberg & Liebentritt, Two North Riverside Plaza, Chicago, Illinois 60606, his true and lawful Attorney-in-Fact for him and in his name, place and stead to sign and execute in any and all capacities this Annual Report on Form 10-K and any or all amendments to this Annual Report on Form 10-K, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, giving and granting unto Sheli Z. Rosenberg, said Attorney-in-Fact, full power and authority to do and perform each and every act and thing, requisite and necessary to be done in and about the premises, as fully, to all intents and purposes as he might or could do if personally present at the doing thereof, with full power of substitution and revocation, hereby ratifying and confirming all that said Attorney-in-Fact or her substitutes shall lawfully do or cause to be done by virtue hereof. This Power of Attorney shall remain in full force and effect until terminated by the undersigned through the instrumentality of a signed writing. IN WITNESS WHEREOF, L.G. Schafran, has hereunto set his hand this ________________ day of ________________________________________, 1995. ________________________________________ L.G. Schafran I, __________________________________________________________, a Notary Public in and for said County in the State aforesaid, do hereby certify that L.G. Schafran, personally known to me to be the same person whose name is subscribed to the foregoing instrument appeared before me this day in person and acknowledged that he signed and delivered said instrument as his own free and voluntary act for the uses and purposes therein set forth. Given under my hand and notarial seal this ________________ day of ________________________________________, 1995. ________________________________________ (Notary Public) My Commission Expires: _______________________________________ EX-27 20 FINANCIAL DATA SCHEDULE
7 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CAPSURE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES AND SCHEDULES THERETO INCLUDED IN THIS ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1994 DEC-31-1994 235,625 10,968 10,326 28,205 0 0 301,767 4,131 39,582 25,150 553,370 149,041 76,630 0 0 71,000 770 0 0 224,095 553,370 92,481 19,129 945 107 23,344 29,390 24,514 23,779 9,401 14,378 0 0 0 14,378 .95 .95 138,563 46,206 (14,522) 3,003 18,203 149,041 15,690
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