-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NsxHf9YJX802Pv/LQSstmQiGGZIqh9Q2bAe0oBk5vfB5OnsxySPDem1beWB6xgmc KAgtwxty9GMvIIwfSAONIg== 0000950137-96-000368.txt : 19960328 0000950137-96-000368.hdr.sgml : 19960328 ACCESSION NUMBER: 0000950137-96-000368 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960327 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: 96539239 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 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, 1995 [ ] 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 incorporation or organization) (I.R.S. Employer Identification No.) 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 $172.1 million based upon the closing price of $16.75 on March 1, 1996, 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 1, 1996, 15,409,123 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 23, 1996. 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Surety and Fidelity Bond Operations . . . . . . . . . . . . . . . . . . . . . . . . . 5 Excess and Surplus Lines Operations . . . . . . . . . . . . . . . . . . . . . . . . . 10 Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Unpaid Losses and Loss Adjustment Expenses. . . . . . . . . . . . . . . . . . . . . . 15 Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Net Operating Tax Loss Carryforwards . . . . . . . . . . . . . . . . . . . . . . . . 18 Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . 19 PART II. Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters . . . . . . . . 20 Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . 22 Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . 33 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . 33 PART III. Item 10. Directors and Executive Officers of the Registrant. . . . . . . . . . . . . . . . . . . . 33 Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Item 12. Security Ownership of Certain Beneficial Owners and Management. . . . . . . . . . . . . . 33 Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . 33 PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. . . . . . . . . . . . . 34
-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 in September 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. Western Surety's sister company, Surety Bonding Company of America ("SBCA"), writes similar business and is licensed in 11 states. 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 21 states and the District of Columbia 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 has been a critical factor affecting 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 the combined Capsure organization'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 1994 acquisition of Universal Surety was an example of this strategy. Universal Surety has been a highly successful regional underwriter of small- to medium-sized contract surety bonds in Texas and adjacent states. The alliance of Universal Surety and Western Surety represents a unique opportunity for Capsure to capitalize on Western Surety's vast distribution network and national prominence and Universal Surety's contract bond underwriting expertise to (1) increase Universal Surety's geographic penetration and growth and (2) provide Western Surety agents with a more complete and competitive line of surety products. -3- 4 This joint venture of Capsure's surety companies has been named USA\Western. USA\Western acts as the contract bond division of Western Surety. Universal Surety personnel underwrite contract surety bonds submitted by Western Surety agents on Western Surety's bond forms. Contract bonds written through the USA\Western program are generally reinsured 100% by Universal Surety. The USA\Western program has shown steady growth in 1995 as the program is gradually introduced to Western Surety agents across the country. Gross written premiums for the program have grown from approximately $0.1 million in the first quarter of 1995 to $0.7 million in the fourth quarter of 1995 and totaled approximately $1.6 million for the full year. The USA\Western program was marketed to Western Surety agents in 21 states as of December 31, 1995. The expansion of Universal Surety's contract bond business through Western Surety's broad distribution network will be dependent on Universal Surety's ability to attract qualified underwriting and claims personnel and maintain distinctive service to agents. Western Surety's vast agency force is also being leveraged by the gradual expansion of an insurance agents' and brokers' E&O product. This product is marketed directly to Western Surety agents without third-party commissions and, as a result, provides a significant competitive advantage. Gross written premiums for this product in 1995 totaled $0.8 million. This product offering was expanded to 30 states as of December 31, 1995. Currently, Western Surety cedes 90% of this business to a third-party reinsurer. On February 29, 1996, the Company announced that it had signed an agreement to sell United Capitol Holding Company ("UCHC") and its subsidiaries, United Capitol, United Capitol Managers, Inc. ("Managers") and Fischer Underwriting Group, Incorporated ("Fischer"), to a subsidiary of Frontier Insurance Group, Inc. Estimated net proceeds to Capsure will be approximately $75 million, which includes the purchase price for the capital stock of UCHC and the release of United Capitol's excess statutory surplus on or before closing. The agreement is subject to several conditions including approval by insurance regulatory authorities and other governmental authorities. The transaction is expected to close in the second quarter of 1996. Capsure is exiting the E&S marketplace in order to focus on its surety operations and other admitted lines. Management has concluded that United Capitol's prospects can be best enhanced and realized by ownership under a larger company than Capsure. The sale of United Capitol will liberate approximately $75 million of Capsure's capital. Capsure is considering alternative uses of this capital including funding of acquisitions, stock repurchases, payment of stockholder dividends and some combination of the foregoing. 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. -4- 5 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 primarily in the southern United States. Contract bonds underwritten by Universal Surety, including those underwritten on behalf of Western Surety under the USA\Western program, 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 between 80% and 90% 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 directors' and officers' liability ("D&O"), 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 has been a critical factor affecting underwriting profitability during soft market conditions, which have prevailed in the property and casualty insurance 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 1995. There can be no assurance that these ratings will continue to be reaffirmed. SURETY AND FIDELITY BOND OPERATIONS According to 1994 statistics published by the Surety Association of America ("SAA"), the surety and fidelity bond market had direct written premiums of approximately $2.9 billion, of which the miscellaneous and contract bond segments accounted for approximately $0.9 billion and $1.3 billion, respectively. Capsure targets subsets of the miscellaneous bond segment and contract bond segment of the surety and fidelity market because of their favorable risk characteristics. -5- 6 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. Capsure issues thousands of different bond forms representing the many types of noncontract and contract bonds available in each of the jurisdictions in which it operates. The terms of such bonds in many cases are prescribed by 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. Capsure also writes E&O policies for three classes of insureds: notaries public, tax preparers and insurance agents and brokers. The notary public E&O policy is marketed as a companion product to the notary public bond and the tax preparer E&O policy is marketed to small tax return preparation firms. Western Surety introduced an insurance agents' and brokers' E&O insurance product in 1994 and expanded this product to 30 states as of December 31, 1995. -6- 7 The following tables set forth, for each principal class of bonds, combined Western Surety/SBCA and Universal Surety gross written premiums, net written premiums, net earned premiums and number of bonds and policies in force and the respective percentages of the total for the past three years. All tables in this section contain information reflecting the operations of Universal Surety prior to its acquisition 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 (dollars in thousands, except average bond amounts):
GROSS WRITTEN PREMIUMS ------------------------------------------------------------ % of % of % of 1995 Total 1994 Total 1993 Total ------- ------ ----------- ------------- ------- ------ Surety and fidelity bonds: License and permit ...... $28,742 31.7% $28,160 32.5% $27,934 32.5% Judicial and fiduciary .. 13,007 14.4 13,116 15.2 13,493 15.7 Fidelity ................ 14,357 15.9 13,821 16.0 13,111 15.3 Public official ......... 7,351 8.1 6,874 7.9 7,628 8.9 Notary public ........... 7,770 8.6 7,989 9.2 8,804 10.3 Contract ................ 12,448 13.7 10,393 12.0 9,111 10.6 Other ................... 1,905 2.1 1,935 2.3 1,723 2.0 ------- ------ ------- ----- ------- ------ 85,580 94.5 82,288 95.1 81,804 95.3 E&O policies .............. 4,984 5.5 4,261 4.9 4,031 4.7 ------- ------ ------- ----- ------- ------ $90,564 100.0% $86,549 100.0% $85,835 100.0% ======= ====== ======= ===== ======= ====== Premiums by company: Western Surety/SBCA ..... $73,703 81.4% $71,286 82.4% $72,064 84.0% Universal Surety ........ 16,861 18.6 15,263 17.6 13,771 16.0 ------- ------ ------- ----- ------- ------ $90,564 100.0% $86,549 100.0% $85,835 100.0% ======= ====== ======= ===== ======= ====== Premiums generated by largest agency: Western Surety .......... 1.2% 1.2% 1.3% ======= ======= ====== Universal Surety ........ 4.1% 4.0% 6.0% ======= ======= ====== Percentage of premiums in the top five states: Western Surety .......... 26.2% 26.5% 26.9% ======= ======= ====== Universal Surety ........ 93.1% 92.0% 95.0% ======= ======= ====== NET WRITTEN PREMIUMS ------------------------------------------------------- % of % of % of 1995 Total 1994 Total 1993 Total ------- ------ ------- ------ ------- ------ Surety and fidelity bonds: License and permit ...... $28,588 33.0% $28,003 33.3% $27,796 33.3% Judicial and fiduciary .. 12,329 14.2 12,379 14.7 12,715 15.2 Fidelity ................ 14,322 16.5 13,786 16.4 13,061 5.7 Public official ......... 7,204 8.3 6,731 8.0 7,422 8.9 Notary public ........... 7,683 8.8 7,922 9.4 8,718 10.4 Contract ................ 11,148 12.9 9,623 11.5 8,382 10.0 Other ................... 1,244 1.4 1,421 1.7 1,343 1.6 ------- ----- ------- ----- ------- ----- 82,518 95.1 79,865 95.0 79,437 95.1 E&O policies .............. 4,228 4.9 4,186 5.0 4,031 4.9 ------- ----- ------- ----- ------- ----- $86,746 100.0% $84,051 100.0% $83,468 100.0% ======= ===== ======= ===== ======= ===== Premiums by company: Western Surety/SBCA ..... $71,069 81.9% $69,738 83.0% $70,598 85.0% Universal Surety ........ 15,677 18.1 14,313 17.0 12,870 15.0 ------- ----- ------- ----- ------- ----- $86,746 100.0% $84,051 100.0% $83,468 100.0% ======= ===== ======= ===== ======= =====
-7- 8
NET EARNED PREMIUMS ----------------------------------------------------------- % of % of % of 1995 Total 1994 Total 1993 Total -------- ------ -------- -------- --------- ------- Surety and fidelity bonds: License and permit ...... $ 28,039 33.0% $ 27,692 33.4% $ 26,941 34.2% Judicial and fiduciary .. 12,396 14.6 12,476 15.1 12,603 16.0 Fidelity ................ 14,082 16.6 13,402 16.2 12,618 16.0 Public official ......... 7,045 8.3 7,017 8.5 7,059 9.0 Notary public ........... 7,883 9.3 7,561 9.1 6,949 8.8 Contract ................ 10,228 12.0 9,331 11.3 7,720 9.8 Other ................... 1,191 1.4 1,426 1.7 1,218 1.5 -------- ------ -------- -------- --------- ------ 80,864 95.2 78,905 95.3 75,108 95.3 E&O policies .............. 4,119 4.8 3,917 4.7 3,733 4.7 -------- ------ -------- -------- ------- ------ $ 84,983 100.0% $ 82,822 100.0% $ 78,841 100.0% ======== ====== ======== ======== ======== ====== Premiums by company: Western Surety/SBCA ..... $ 70,332 82.8% $ 69,212 83.6% $ 67,941 86.2% Universal Surety ........ 14,651 17.2 13,610 16.4 10,900 13.8 -------- ------ -------- -------- -------- ------ $ 84,983 100.0% $ 82,822 100.0% $ 78,841 100.0% ======== ====== ========= ======== ======== ====== BONDS AND POLICIES IN FORCE ------------------------------------------------------------- % of % of % of 1995 Total 1994 Total 1993 Total ------- ------- -------- -------- ------ -------- Surety and fidelity bonds: License and permit ............. 463 29.2% 460 29.4% 460 30.5% Judicial and fiduciary ......... 63 4.0 64 4.1 67 4.4 Fidelity ....................... 91 5.7 88 5.6 86 5.7 Public official ................ 62 3.9 64 4.1 63 4.2 Notary public .................. 747 47.0 758 48.6 714 47.5 Contract ....................... 8 0.5 7 0.4 6 0.3 Other .......................... 11 0.7 10 0.7 11 0.8 ------- ------ -------- ------ ------ ------- 1,445 91.0 1,451 92.9 1,407 93.4 E&O policies ...................... 143 9.0 120 7.1 107 6.6 ------- ------ -------- ------ ------ ------- 1,588 100.0% 1,571 100.0% 1,514 100.0% ======= ====== ======== ===== ===== ===== Bonds/policies in force by company: Western Surety/SBCA ............ 1,416 89.2% 1,389 88.4% 1,367 90.3% Universal Surety ............... 172 10.8 182 11.6 147 9.7 ------- ------ -------- ------ ------ ------- 1,588 100.0% 1,571 100.0% 1,514 100.0% ======= ====== ======== ====== ====== ======= Average bond penalty/policy limit: Western Surety .................. $10,030 $ 9,470 $ 9,186 ======= ======== ======= Universal Surety ................ $13,317 $ 11,507 $11,197 ======= ======== =======
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, powers of attorney, and facsimile authorizations that allow them to issue many standard bonds in their offices. -8- 9 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, San Antonio and Overland Park, Kansas. Universal Surety emphasizes innovative, flexible underwriting, product specialization and distinctive agent service backed by highly qualified, experienced employees. Of Universal Surety's gross written premiums in 1995, 71% related to contract bonds, including 10% that qualified for the SBA guarantee. The remaining 29% related to noncontract bonds, including 10% for notary public bonds. According to 1994 SAA statistics, Capsure ranked number one in volume of bonds and direct written premiums written in Texas, based on the combined results of Universal Surety and Western Surety. Universal Surety has concentrated its marketing efforts in expanding its share of the small contract bond market. Contract bonds underwritten by Universal Surety, including those underwritten on behalf of Western Surety under the USA\Western program, 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 under the USA\Western joint venture. The USA\Western program was marketed to Western Surety agents in 21 states as of December 31, 1995. Western Surety will generally cede 100% of each such contract surety bond written on Western bond forms to Universal Surety pursuant to a Surety Bond Quota Share Reinsurance Agreement. Gross written premiums for this coverage were $1.6 million in 1995. In 1994, these activities were not material. In addition, Western Surety is gradually expanding its product line by offering insurance agents' and 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. Gross written premiums for this coverage were $0.8 million in 1995. 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. -9- 10 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 1994, according to the SAA, controlled only 7% of the $2.9 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. 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 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. -10- 11 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 for the past three years (dollars in thousands):
GROSS WRITTEN PREMIUMS ------------------------ % of % of % of 1995 Total 1994 Total 1993 Total ------- ------ ----------- --------- ------- ------ General liability: Product liability ........ $ 5,252 25.2% $ 6,797 25.2% $ 7,992 27.8% D&O ...................... 4,336 20.8 5,582 20.6 714 2.5 Asbestos abatement ....... 1,730 8.3 4,633 17.1 7,481 26.1 Other general liability .. 3,481 16.7 6,033 22.3 8,207 28.6 ------- ------ ----------- --------- ------- ------ 14,799 71.0 23,045 85.2 24,394 85.0 Property .................. 6,030 29.0 3,912 14.5 4,117 14.3 Surety .................... 5 0.0 75 .3 200 .7 ------- ------ ----------- --------- ------- ------ $20,834 100.0% $27,032 100.0% $28,711 100.0% ======= ====== =========== ========= ======= ======
NET WRITTEN PREMIUMS ---------------------- % of % of % of 1995 Total 1994 Total 1993 Total ------- ------ ---------- ---------- ------- ------ General liability: Product liability ........ $ 2,977 27.1% $ 4,361 25.6% $ 4,905 27.7% D&O ...................... 2,431 22.1 3,298 19.3 498 2.8 Asbestos abatement ....... 1,444 13.2 3,358 19.7 5,994 33.9 Other general liability .. 3,317 30.2 5,100 29.9 5,439 30.7 ------- ------ ---------- -------- ------- ------ 10,169 92.6 16,117 94.5 16,836 95.1 Property .................. 600 5.5 670 3.9 515 2.9 Surety .................... 213 1.9 264 1.6 357 2.0 ------- ------ ---------- -------- ------- ------ $10,982 100.0% $17,051 100.0% $17,708 100.0% ======= ====== ========== ======== ======= ======
NET EARNED PREMIUMS ---------------------- % of % of % of 1995 Total 1994 Total 1993 Total ------- ------ ---------- -------- ------- ------ General liability: Product liability ........ $ 3,796 27.6% $ 5,138 26.7% $ 5,087 28.1% D&O ...................... 2,996 21.9 2,045 10.6 12 0.1 Asbestos abatement ....... 2,291 16.7 4,786 24.9 6,844 37.9 Other general liability .. 3,750 27.4 6,419 33.4 5,374 29.7 ------- ------ ---------- -------- ------- ------ 12,833 93.6 18,388 95.6 17,317 95.8 Property .................. 673 4.9 547 2.9 420 2.3 Surety .................... 203 1.5 291 1.5 351 1.9 ------- ------ ---------- -------- ------- ------ $13,709 100.0% $19,226 100.0% $18,088 100.0% ======= ====== ========== ======== ======= ======
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. -11- 12 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 (57% in 1995, 63% in 1994 and 66% in 1993); 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 $0.2 million, $0.5 million and $0.6 million in 1995, 1994 and 1993, 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 in 1995, 1994 and 1993 was approximately $113,000, $116,000 and $98,000, respectively, and the average gross limits of liability were $2.2 million, $2.0 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 its managing general agency subsidiary, 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 $10,000 in 1995, $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, 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. -12- 13 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 1995, 1994 and 1993, the average gross annual premium per policy for this class of business was approximately $46,000, $76,000 and $76,000, respectively. The average gross limit of liability was $3.0 million in 1995, $2.8 million in 1994 and $2.5 million in 1993. 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 1995, 1994 and 1993, asbestos abatement general liability policies written on an occurrence basis represented approximately 74%, 79% and 69% 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 and decreased demand 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 $19,000 in 1995, $18,000 in 1994 and $25,000 in 1993. In 1993, United Capitol's agency subsidiary, 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 1995 and 1994, Managers produced $3.2 million and $4.3 million, respectively, of gross premiums for Westport of which $0.1 million and $0.3 million, respectively, was retroceded to United Capitol. 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. In approximately 98% of United Capitol's liability policies, defense costs and other loss adjustment expenses are either included within the policy -13- 14 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, 1995, 1994 and 1993, United Capitol's top ten brokerage firms generated approximately 40%, 42% and 49%, respectively, of gross written premiums in those periods. In 1995, 1994 and 1993, United Capitol's top brokerage firm produced 10%, 12% and 14%, 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 insurance 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. -14- 15 REINSURANCE The Company's insurance subsidiaries, in the ordinary course of business, cede reinsurance to other insurance companies to limit their exposure to loss. 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, 1995, Capsure's largest reinsurance receivable, including prepaid reinsurance premiums of $1.2 million and estimated ceded incurred but not reported ("IBNR") losses of $11.8 million, was approximately $19.8 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 the Company's 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 of Financial Condition and Results of Operations and Note 6 to the Consolidated Financial Statements which presents a reconciliation of beginning and ending consolidated loss reserve balances for the three years ended December 31, 1995. Such tables highlight the impact of favorable development of 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, ---------------------------- 1995 1994 1993 -------- -------- -------- Reserves at end of year, GAAP basis ................... $126,061 $149,041 $135,825 Estimated salvage and subrogation recoverable (gross of reinsurance), not anticipated under SAP .............. 7,141 6,881 6,465 Estimated reinsurance recoverable netted against gross reserves for SAP ............................... (39,735) (38,606) (33,829) -------- -------- -------- Reserves at end of year, SAP basis .................... $93,467 $117,316 $108,461 ======== ======== ========
-15- 16 United Capitol's claims development through December 31, 1995 has been favorable relative to expectations based on industry experience. Due to the limited prior operating experience of United Capitol and the long-tail nature of its business, management previously relied principally upon industry development patterns and expected loss ratios in estimating IBNR. Given the availability of nine full years of experience and the growing evidence of favorable loss trends relative to industry indications, management concluded in the fourth quarter of 1995 that it was appropriate to place greater reliance on United Capitol's own development patterns and emerging loss ratios in estimating IBNR. United Capitol reduced loss and loss adjustment expenses by $23.2 million in 1995 for net favorable development related to prior years ($28.1 million favorable development, gross of reinsurance), substantially all of which pertains to this change in estimate. This loss reserve reduction increased Capsure's consolidated income before taxes by $23.2 million, and net income by $15.1 million, or $.98 per share. The following table presents the development under GAAP of combined balance sheet reserves for 1986 through 1995, 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 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, ------------------------------------------------------------------------------------------------ 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 -------- --------- -------- -------- -------- -------- ------- ------- ------- ------- Reserves for unpaid losses and LAE ............. $126,061 $149,041 $138,347 $130,435 $130,596 $124,708 $116,565 $83,733 $63,537 $22,483 Reserves re-estimated as of: One year later ............. -- 114,482 122,657 113,941 120,481 126,544 114,911 89,453 54,856 19,796 Two years later ............ -- -- 99,629 100,088 103,560 115,759 117,260 89,513 55,991 19,697 Three years later .......... -- -- -- 84,100 89,984 101,381 107,322 89,728 54,011 18,352 Four years later ........... -- -- -- -- 74,590 90,377 97,016 81,957 54,329 18,230 Five years later ........... -- -- -- -- -- 77,930 89,067 75,375 47,991 17,072 Six years later ............ -- -- -- -- -- -- 80,962 70,944 46,629 16,825 Seven years later .......... -- -- -- -- -- -- -- 67,547 43,991 17,057 Eight years later .......... -- -- -- -- -- -- -- -- 43,400 16,742 Nine years later ........... -- -- -- -- -- -- -- -- -- 16,115 Cumulative redundancy (deficiency) ............... $ -- $ 34,559 $ 38,718 $ 46,335 $ 56,006 $ 46,778 $ 35,603 $16,186 $20,137 $ 6,368 ======== ======== ======== ======== ======== ======== ======== ======= ======= ======= Cumulative redundancy (deficiency) as a percentage of original estimate ....... -- 23.2% 28.0% 35.5% 42.9% 37.5% 30.5% 19.3% 31.7% 28.3% ======== ======== ======== ======== ======== ======== ======== ======= ====== ======= Cumulative amount of liability paid through: One year later ............. $ -- $18,344 $19,084 $16,201 $21,280 $20,982 $19,737 $15,787 $10,398 $ 5,379 Two years later ............ -- -- 32,676 30,370 34,650 37,279 35,736 25,446 18,079 9,487 Three years later .......... -- -- -- 41,314 44,610 47,676 48,580 37,387 23,232 11,916 Four years later ........... -- -- -- -- 50,102 55,701 56,648 44,973 27,772 12,872 Five years later ........... -- -- -- -- -- 59,436 63,911 49,070 32,905 13,687 Six years later ............ -- -- -- -- -- -- 66,753 55,183 34,281 15,129 Seven years later .......... -- -- -- -- -- -- -- 57,648 36,841 15,406 Eight years later .......... -- -- -- -- -- -- -- -- 37,978 15,874 Nine years later ........... -- -- -- -- -- -- -- -- -- 15,893
-16- 17 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. SBCA is domiciled in South Dakota and licensed in 11 states. Universal Surety is domiciled in Texas and licensed in 20 other states and the District of Columbia. 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, 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 and casualty insurance companies is included in both Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 9 to the Consolidated Financial Statements. Without prior regulatory approval in 1996, Capsure's insurance subsidiaries may pay stockholder dividends of $23.8 million in the aggregate. In 1995, 1994 and 1993, Capsure received $40.9 million (including $21.6 million of dividends requiring prior approval), $21.0 million (including $5.0 million of dividends requiring prior approval), and $11.8 million, 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 Office of the Commissioner of Insurance 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 subsidiaries. -17- 18 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, Universal Surety and United Capitol 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 $3.7 million, $0.8 million and $6.1 million, respectively. Management believes that, going forward, regulation of its business will increase 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 predominately 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 market value of the assets under management. 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 production, 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 emergence from bankruptcy, the Company had oil and gas interests and approximately $300 million in NOLs. Approximately $177 million of these NOLs were available at December 31, 1995, to reduce the Company's future federal taxable income. -18- 19 EMPLOYEES As of December 31, 1995, 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. 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 $1.4 million as of December 31, 1995. 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 400 Perimeter Center Terrace, Suite 345, Atlanta, Georgia 30346, under a lease terminating June 30, 2000 with an annual rent of $0.4 million. Universal Surety leases office space for its executive offices at 950 Echo Lane, Suite 250, Houston, Texas 77024, 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. -19- 20 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. On March 1, 1996, the last reported sale price for the Common Stock was $16.75 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 for each calendar quarter of the past two years:
High Low 1995 ---- --- 4th Quarter .................................. $17.88 $13.13 3rd Quarter .................................. 14.88 13.00 2nd Quarter .................................. 14.88 12.50 1st Quarter .................................. 14.38 12.38 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
The number of stockholders of record of Common Stock on March 1, 1996, was approximately 2,300. The Company has not paid dividends on its Common Stock. Capsure has excess capital, and is considering alternative uses of this capital, including funding of acquisitions, stock repurchases, payment of stockholder dividends and some combination of the foregoing. -20- 21 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. In 1993, the Company adopted Statement of Financial Accounting Standard ("SFAS") No. 109 and No. 113 and has restated prior years' financial information for the effects of these pronouncements. Effective January 1, 1994, the Company adopted SFAS No. 115. 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 (dollars in thousands, except per share data):
Years Ended December 31, -------------------------------------------------- 1995 1994 1993 1992 1991 -------- -------- -------- -------- ---------- (Restated) (Restated) Total revenues ....................................... $117,516 $112,662 $108,445 $ 59,519 $ 34,890 ======== ======== ======== ======== ========== Gross written premiums ............................... $111,398 $102,356 $100,775 $ 50,105 $ 23,144 ======== ======== ======== ======== ========== Net written premiums ................................. $ 97,728 $ 90,578 $ 88,306 $ 40,310 $ 15,729 ======== ======== ======== ======== ========== Net earned premiums .................................. $ 98,692 $ 92,481 $ 86,029 $ 41,249 $ 15,826 ======== ======== ======== ======== ========== Underwriting income .................................. $ 44,831 $ 15,233 $ 15,224 $ 9,932 $ 2,484 Net investment income .............................. 20,471 19,129 19,815 15,504 13,823 Net investment gains (losses) ...................... (1,653) 945 2,071 380 1,119 Interest expense ..................................... (4,103) (4,726) (6,280) (4,838) (4,998) Write-off of unamortized deferred loan fees .......... -- (1,556) -- -- -- Amortization and impairment of goodwill and intangibles ................................... (16,853) (3,365) (3,407) (1,592) (852) Other expenses ....................................... (2,442) (1,881) (1,905) (1,914) (868) -------- -------- -------- -------- ---------- Income before income taxes ........................... 40,251 23,779 25,518 17,472 10,708 Income taxes ......................................... 19,721 9,401 9,234 6,777 3,500 -------- -------- -------- -------- ---------- Net income ........................................... $ 20,530 $ 14,378 $ 16,284 $ 10,695 $ 7,208 ======== ======== ======== ======== ========== Weighted average common shares outstanding ........... 15,404 15,160 15,036 12,214 10,606 ======== ======== ======== ======== ========== Earnings per common share ............................ $ 1.33 $ .95 $ 1.08 $ .88 $ .79 ======== ======== ======== ======== ========== Book value per share ................................. $ 16.70 $ 14.61 $ 13.80 $ 12.25 $ 7.68 ======== ======== ======== ======== ========== Loss ratio ........................................... (7.5)% 25.2% 23.2% 25.8% 58.5% Expense ratio ........................................ 62.1 % 58.3% 59.1% 50.1% 25.8% -------- -------- -------- -------- ---------- Combined ratio ....................................... 54.6 % 83.5% 82.3% 75.9% 84.3% ======== ======== ======== ======== ========== Invested assets and cash ............................. $307,556 $305,898 $317,077 $297,974 $ 163,027 Intangible assets and goodwill, net of amortization .. 84,158 102,130 85,566 94,006 22,842 Total assets ......................................... 514,768 553,370 530,075 507,574 226,536 Insurance reserves ................................... 202,842 225,671 205,188 194,357 112,745 Long-term debt ....................................... 25,000 71,000 85,214 103,214 46,352 Total liabilities .................................... 257,464 328,505 322,450 323,653 169,404 Stockholders' equity ................................. 257,304 224,865 207,625 183,921 57,132
-21- 22 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 audited Consolidated Financial Statements and 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 $177 million of these NOLs were available at December 31, 1995 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 in September 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 under-leveraged on an operating basis which exerts continued pressure on rates and terms. Although the industry has sustained significant losses from catastrophes in 1992 through 1995, 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 Capsure's surety operations; 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 and acceptable returns on capital can reasonably be expected. 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, including new products and programs, 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 -22- 23 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 21 states and the District of Columbia with most of its business generated in Texas (77% of 1995 gross written premiums). Contract bonds underwritten by Universal Surety, including those underwritten on behalf of Western Surety under the USA\Western program, 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 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 between 80% and 90% 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. 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. On February 29, 1996, the Company announced that it had signed an agreement to sell United Capitol Holding Company ("UCHC") and its subsidiaries, United Capitol, United Capitol Managers, Inc. ("Managers") and Fischer Underwriting Group, Incorporated ("Fischer") to a subsidiary of Frontier Insurance Group, Inc. Estimated net proceeds to Capsure will be approximately $75 million, which includes the purchase price for the capital stock of UCHC and the release of United Capitol's excess statutory surplus on or before closing. The agreement is subject to several conditions including approval by insurance regulatory authorities and other governmental authorities. The transaction is expected to close in the second quarter of 1996. Capsure is exiting the E&S marketplace in order to focus on its surety operations and other admitted lines. Management has concluded that United Capitol's prospects can be best enhanced and realized by ownership under a larger company than Capsure. The sale of United Capitol will liberate approximately $75 million of Capsure's capital. Capsure is considering alternative uses of this capital including funding of acquisitions, stock repurchases, payment of stockholder dividends and some combination of the foregoing. -23- 24 RESULTS OF OPERATIONS The components of income are summarized as follows (dollars in thousands):
Years Ended December 31, -------------------------- 1995 1994 1993 -------- ------- ------- Underwriting income ...................................... $44,831 $15,233 $15,224 Net investment income .................................... 20,471 19,129 19,815 Net investment gains (losses) ............................ (1,653) 945 2,071 Interest expense ......................................... (4,103) (4,726) (6,280) Write-off of unamortized deferred loan fees .............. -- (1,556) -- Amortization and impairment of goodwill and intangibles .. (16,853) (3,365) (3,407) Other expenses ........................................... (2,442) (1,881) (1,905) -------- ------- ------- Income before income taxes ............................... 40,251 23,779 25,518 Income taxes ............................................. 19,721 9,401 9,234 -------- ------- ------- Net income ........................................ $20,530 $14,378 $16,284 ======== ======= =======
INSURANCE UNDERWRITING Underwriting results are summarized in the following table (dollars in thousands):
Surety and Fidelity Excess and Surplus Lines Consolidated ------------------------- ------------------------- ---------------------------- 1995 1994 1993 1995 1994 1993 1995 1994 1993 ------- ------- ------- ------- ------- ------- -------- -------- -------- Gross written premiums .. $90,564 $75,324 $72,064 $20,834 $27,032 $28,711 $111,398 $102,356 $100,775 ======= ======= ======= ======= ======= ======= ======== ======== ======== Net written premiums .... $86,746 $73,527 $70,598 $10,982 $17,051 $17,708 $ 97,728 $90,578 $88,306 ======= ======= ======= ======= ======= ======= ======== ======== ======== Net earned premiums ..... $84,983 $73,255 $67,941 $13,709 $19,226 $18,088 $ 98,692 $92,481 $86,029 ------- ------- ------- ------- ------- ------- -------- -------- -------- Net losses and loss adjustment ....... 7,579 11,592 11,367 (15,030) 11,752 8,590 (7,451) 23,344 19,957 Underwriting expenses ... 58,170 49,583 46,933 3,142 4,321 3,915 61,312 53,904 50,848 ------- ------- ------- ------- ------- ------- -------- -------- -------- Total losses and expenses .............. 65,749 61,175 58,300 (11,888) 16,073 12,505 53,861 77,248 70,805 ------- ------- ------- ------- ------- ------- -------- -------- -------- Underwriting income ..... $19,234 $12,080 $ 9,641 $25,597 $ 3,153 $ 5,583 $ 44,831 $ 15,233 $ 15,224 ======= ======= ======= ======= ======= ======= ======== ======== ======== Loss ratio .............. 8.9% 15.8% 16.7% (109.6)% 61.1% 47.5% (7.5)% 25.2% 23.2% Expense ratio ........... 68.5% 67.7% 69.1% 22.9 % 22.5% 21.6% 62.1 % 58.3% 59.1% ------- ------- ------- ------- ------- ------- -------- -------- -------- Combined ratio .......... 77.4% 83.5% 85.8% (86.7)% 83.6% 69.1% 54.6 % 83.5% 82.3% ======= ======= ======= ======= ======= ======= ======== ======== ========
Surety and fidelity represents the combined results of Western Surety and Universal Surety, since its September 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 8.8%, or $9.0 million, for the year ended December 31, 1995, primarily due to an increase of $12.8 million for the inclusion of the full year results of Universal Surety in 1995, partially offset by reduced premium volume at United Capitol. Universal Surety contributed $16.9 million of gross written premiums in 1995. Western Surety experienced a 2.0% increase in gross written premiums, primarily due to the growth in the new agents' and brokers' E&O product introduced in 1994. United Capitol's gross written premiums decreased 22.9%, or $6.2 million, in 1995 as its premium volume, particularly in the increasingly competitive asbestos abatement line, continued to be significantly affected by prolonged soft market conditions. Significant declines in the asbestos abatement and other primary casualty business were partially offset by an increase in property writings. -24- 25 Net earned premiums increased $6.2 million for the year ended December 31, 1995, principally due to the inclusion of the full year results of Universal Surety in 1995. Universal Surety contributed net earned premiums of $14.7 million in 1995. Western Surety's net earned premiums increased 1.6% in 1995 compared to 1994. United Capitol's net earned premiums decreased 28.7%, or $5.5 million in 1995, reflecting decreases in both gross written premiums and net retentions. The lower net retentions are due primarily to the increased use of reinsurance for primary casualty risks in an effort to limit the potential loss volatility associated with a diminished premium base. United Capitol's net earned premiums for the years ended December 31, 1995 and 1994 were increased by $2.6 million and $2.5 million, respectively, for contingent premiums recognized under its reinsurance agreements. 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 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 and adversely 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. Underwriting income increased $29.6 million for the year ended December 31, 1995, primarily due to significant net favorable development of prior years' loss reserves. The consolidated combined ratio decreased to 54.6% in 1995 from 83.5% in 1994. The consolidated loss ratio decreased to (7.5)% in 1995 from 25.2% in 1994. The surety and fidelity loss ratio decreased to 8.9% in 1995 from 15.8% in 1994, primarily due to $4.0 million in fourth quarter net favorable development of prior years' loss reserves at Western Surety. United Capitol's loss ratio decreased to (109.6)% in 1995 from 61.1% in 1994. Excluding the effects of favorable development, United Capitol would have reported loss ratios of 59.3% and 98.3% in 1995 and 1994, respectively. United Capitol's claims development through December 31, 1995, has been favorable relative to expectations based on industry experience. Due to the limited prior operating experience of United Capitol and the long-tail nature of its business, management previously relied principally upon industry development patterns and expected loss ratios in estimating incurred but not reported ("IBNR") losses. Given the availability of nine full years of experience and the growing evidence of favorable loss trends relative to industry indications, management concluded in the fourth quarter of 1995 that it was appropriate to place greater reliance on United Capitol's own development patterns and emerging loss ratios in estimating IBNR. United Capitol reduced loss and loss adjustment expenses by $23.2 million in 1995 for net favorable development related to prior years, substantially all of which pertains to this change in estimate. This loss reserve reduction increased Capsure's consolidated income before taxes by $23.2 million, and net income by $15.1 million, or $0.98 per share. -25- 26 The consolidated expense ratio increased to 62.1% in 1995, compared to 58.3% in 1994. The surety and fidelity expense ratio increased slightly to 68.5% in 1995 from 67.7% in 1994, reflecting increased operating expenses, particularly, wage and postal expense increases. United Capitol's expense ratio increased to 22.9% in 1995 compared to 22.5% in 1994. 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. 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. INVESTMENT INCOME Net investment income for the years ended December 31, 1995, 1994 and 1993 was $20.5 million, $19.1 million and $19.8 million, respectively. The average pretax yields of the portfolio for the years ended December 31, 1995, 1994 and 1993 were 6.8%, 6.5% and 6.8%, respectively. Capsure's insurance companies invest funds provided by operations predominantly in high-quality, short-duration, taxable fixed income securities. The preservation of capital and utilization of the Company's available NOLs are Capsure's principal investment objectives. 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, 1995 and 1994, the carrying value of the Company's REIT portfolio was approximately $20.4 million and $24.3 million, respectively. ANALYSIS OF OTHER OPERATIONS Net investment gains (losses) were $(1.7) million, $0.9 million and $2.1 million for the years ended December 31, 1995, 1994 and 1993, respectively. Net investment gains on securities held at the parent company level were $1.0 million in 1995, $1.3 million in 1994 and $3.1 million in 1993. Net investment losses were $(2.7) million, $(0.4) million and $(1.0) million, respectively, from the insurance operations. The net investment losses from the insurance operations in 1995 reflect the write-down of the carrying value for two asset-backed securities from the same issuer which experienced an other than temporary decline in fair value. 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 $16.9 million for the year ended December 31, 1995, and $3.4 million in 1994 and 1993. Amortization expense in 1995, 1994 and 1993 included $1.2 million, $1.3 million and -26- 27 $1.8 million, respectively, of amortization of intangible assets and $15.7 million, $2.1 million and $1.6 million, respectively, of amortization of excess cost over net assets acquired related to the acquisitions of Western Surety, Universal Surety, United Capitol and Fischer. Amortization expense for 1995 included a $13.2 million write-down of goodwill associated with the 1990 United Capitol acquisition to reflect the estimated net realizable value on the sale of those operations. 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 by 13.2%, or $0.6 million, to $4.1 million for the year ended December 31, 1995, reflecting the effect of reduced debt. The Company's average debt outstanding for the year ended December 31, 1995, was approximately $49.6 million compared to $70.5 million in 1994. The weighted average interest rates were 6.9% and 5.7% for the years ended December 31, 1995 and 1994, respectively. In connection with the early retirement of the Company's bank term loans in 1994, the Company incurred a $1.6 million write-off of unamortized deferred loan fees in the year ended December 31, 1994. 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 year ended December 31, 1994, was approximately $70.5 million compared to $96.0 million in 1993. The weighted average interest rate was 5.7% for the year ended December 31, 1993. INCOME TAXES Income taxes were $19.7 million, $9.4 million and $9.2 million for the years ended December 31, 1995, 1994 and 1993, respectively. The effective income tax rates were 49.0%, 39.5% and 36.2%, respectively. The increase in the 1995 effective tax rate over 1994 was primarily due to the $13.2 million write-down of nondeductible goodwill associated with the 1990 United Capitol acquisition. The increase in the 1994 effective tax rate over the prior year 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 actual taxes paid, primarily due to the utilization of the Company's NOLs. Actual income taxes paid were $0.7 million for the year ended December 31, 1995 and $0.6 million for each of the years ended December 31, 1994 and 1993. 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, 1995, the carrying value of the Company's invested assets of the insurance operations was comprised of $235.7 million of fixed maturities, $33.1 million of short-term investments, $16.2 million of equity securities, $3.2 million of other investments and $2.7 million of cash. 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, $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. The increase in short- -27- 28 term investments at December 31, 1995 compared to the prior year primarily related to investments held at United Capitol. 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, 1995, the carrying value of the Company's invested assets of the non-insurance operations, principally at the parent company level, was comprised of $11.6 million of equity securities, $4.7 million of short-term investments and $0.3 million of cash. 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. The Company's consolidated net cash flow provided by operating activities was $30.7 million, $29.3 million and $32.1 million for the years ended December 31, 1995, 1994 and 1993, respectively. Consolidated operating cash flow (pretax income excluding the write-off of deferred loan fees, net investment gains and amortization and impairment of goodwill and intangibles) for the year ended December 31, 1995, was $58.8 million as compared to $27.8 million in 1994 and $26.9 million in 1993. 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 the principal amount of $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 $71 million and borrowings of $28 million for the acquisition of Universal Surety have occurred since then. The remaining availability under the Credit Facility of $110 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 1996, Capsure's insurance subsidiaries may pay stockholder dividends of $23.8 million in the aggregate. In 1995, 1994 and 1993 Capsure received $40.9 million (including $21.6 million of dividends requiring prior approval), $21.0 million (including $5.0 million of dividends requiring prior approval) and $11.8 million, respectively, in dividends from its insurance subsidiaries. On May 24, 1995, the Board of Directors of the Company approved a stock repurchase plan. The plan authorizes the Company to repurchase up to 500,000 shares of its common stock. These shares may be purchased from time to time in the public market or through privately negotiated transactions. As of December 31, 1995, no shares have been repurchased under this plan. On February 29, 1996, the Company announced that it had signed an agreement to sell United Capitol Holding Company ("UCHC") and its subsidiaries, United Capitol, Managers and Fischer, to a subsidiary of Frontier Insurance Group, Inc. Estimated net proceeds to Capsure will be approximately $75 million, which includes the purchase price for the capital stock of UCHC and the release of United Capitol's excess statutory surplus on or before closing. The agreement is subject to several conditions including approval by insurance regulatory authorities and other governmental authorities. The transaction -28- 29 is expected to close in the second quarter of 1996. Prior to closing, the Company must obtain a waiver from the lenders under the Credit Facility or otherwise amend the agreement to permit the sale of United Capitol. The sale of United Capitol will liberate approximately $75 million of Capsure's capital. Capsure is considering alternative uses of this capital including funding of acquisitions, stock repurchases, payment of stockholder dividends and some combination of the foregoing. 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 ("IRS"). Capsure received tax sharing payments from its subsidiaries of $12.8 million, $12.3 million and $13.0 million in 1995, 1994 and 1993, respectively. The Company continues to pursue acquisitions of financial services businesses with a particular focus on the insurance industry. Although the emphasis has been on acquisitions in financial services and insurance, the Company may consider other alternatives that would further enhance shareholder 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, 1995 and 1994, the carrying value of the Company's REIT portfolio was approximately $20.4 million and $24.3 million, respectively. -29- 30 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, 1995 (dollars in thousands): Amortized Cost Percent --------- ------- Credit Rating ------------- AAA/Aaa ....................... $203,933 87.4% AA/Aa ......................... 5,732 2.5 A/A ........................... 23,516 10.1 BBB/Baa or lower .............. 90 -- Not rated ..................... 5 -- -------- ------ Total ........................ $233,276 100.0% ======== =======
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) 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 and highlights the impact of revisions to the estimated liability established in prior years (dollars in thousands):
1995 1994 1993 -------- -------- -------- Gross balance at January 1 ................. $149,041 $135,825 $128,122 Balance at date of acquisition ............. -- 2,738 -- Incurred related to: Current year ............................... 34,073 46,206 41,398 Prior years ................................ (34,559) (14,522) (14,991) -------- -------- -------- Total incurred ............................. (486) 31,684 26,407 -------- -------- -------- Paid related to: Current year ............................... 4,150 3,003 2,266 Prior years ................................ 18,344 18,203 16,438 -------- -------- -------- Total paid ................................. 22,494 21,206 18,704 -------- -------- -------- Gross balance at December 31 ............... $126,061 $149,041 $135,825 ======== ======== ======== Balance net of reinsurance at December 31 .. $ 87,078 $111,164 $102,688 ======== ======== ========
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 $34.6 million ($29.1 million, net of reinsurance) in 1995, $14.5 million ($8.3 million, net of reinsurance) in 1994 and $15.0 million ($11.3 million, net of reinsurance) in 1993. As described within Results of Operations - Insurance Underwriting, United Capitol reduced loss and loss adjustment expenses by $23.2 million in 1995 for net favorable development related to prior years. -30- 31 The National Association of Insurance Commissioners ("NAIC") has promulgated Risk-Based Capital ("RBC") requirements for property and casualty insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks such as asset quality, 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, 1995, 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, 1995, Western Surety's statutory surplus was $33.3 million and its net written premiums to surplus ratio was 2.1 to 1. On December 31, 1995, Universal Surety's statutory surplus was $9.2 million and its net written premiums to surplus ratio was 1.7 to 1. On December 31, 1995, United Capitol's statutory surplus was $68.0 million and its net written premiums to surplus ratio was 0.2 to 1. The Company believes that each insurance company's statutory surplus is sufficient to support its current and anticipated premium levels. The IRS 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 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 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 -31- 32 contractor and others required to be in the abatement area are not intended to be covered by United Capitol's policies. 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 1 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," effective January 1, 1993. IMPACT OF ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 is effective for fiscal years beginning after December 15, 1995. SFAS No. 123 introduces a preferable fair value-based method of accounting for stock-based compensation. SFAS No. 123 encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options, and other equity instruments to employees based on the new fair value-based method of accounting. As permitted under SFAS No. 123, the Company intends to continue applying the existing accounting rules contained in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and to disclose net income and earnings per share on a pro forma basis, based on the new fair value-based method of accounting. -32- 33 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page ---- FINANCIAL: Report of Independent Accountants ................................................. 35 Consolidated Balance Sheets as of December 31, 1995 and 1994 ...................... 36 Consolidated Statements of Income for the Years Ended December 31, 1995, 1994 and 1993 ................................................................. 37 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1995, 1994 and 1993 ............................................... 38 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 .................................................................. 39 Notes to Consolidated Financial Statements ........................................ 40 FINANCIAL STATEMENT SCHEDULES: Schedule I -- Summary of Investments .............................................. 58 Schedule II -- Condensed Financial Information of Registrant ...................... 59 Schedule III -- Supplementary Insurance Information ............................... 63 Schedule IV -- Reinsurance ........................................................ 64 Schedule V -- Valuation and Qualifying Accounts ................................... 65 Schedule VI -- Supplemental Information Concerning Property - Casualty Insurance Operations ........................................................... 66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 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 23, 1996, 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. -33- 34 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Page ---- (a)(1) Financial: Report of Independent Accountants....................................... 35 Consolidated Balance Sheets as of December 31, 1995 and 1994............ 36 Consolidated Statements of Income for the Years Ended December 31, 1995, 1994 and 1993......................................................... 37 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1995, 1994 and 1993.......................... 38 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993................................................... 39 Notes to Consolidated Financial Statements.............................. 40 (a)(2) Financial Statement Schedules: Schedule I -- Summary of Investments.................................... 58 Schedule II -- Condensed Financial Information of Registrant............ 59 Schedule III -- Supplementary Insurance Information..................... 63 Schedule IV -- Reinsurance.............................................. 64 Schedule V -- Valuation and Qualifying Accounts......................... 65 Schedule VI -- Supplemental Information Concerning Property - Casualty Insurance Operations.................................................. 66 (a)(3) Exhibits................................................................ 67 (b) Reports on Form 8-K None.
-34- 35 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Capsure Holdings Corp. We have audited the accompanying consolidated financial statements and financial statement schedules of Capsure Holdings Corp. and Subsidiaries listed in the index contained in Item 8 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, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation 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 1 to the Consolidated Financial Statements, the Company has changed its methods of accounting for investments in 1994, and income taxes in 1993. COOPERS & LYBRAND L.L.P. Chicago, Illinois March 1, 1996 -35- 36 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
December 31, ------------------ 1995 1994 -------- -------- ASSETS Invested assets and cash: Fixed maturities: At fair value (amortized cost: 1995 - $233,276; 1994 - $249,328) ...... $235,718 $235,625 At amortized cost (fair value: $10,326) ............................... -- 10,968 Equity securities, at fair value (cost: 1995 - $27,124; 1994 - $29,774) .. 27,753 28,205 Short-term investments, at cost which approximates fair value ............ 37,865 22,079 Other investments, at fair value ......................................... 3,219 4,890 Cash ..................................................................... 3,001 4,131 -------- -------- 307,556 305,898 Deferred policy acquisition costs ........................................... 27,057 25,150 Reinsurance receivable ...................................................... 40,097 39,582 Intangible assets, net of amortization ...................................... 15,715 18,031 Excess cost over net assets acquired, net of amortization ................... 68,443 84,099 Deferred income taxes, net of valuation allowance ........................... 29,293 54,205 Other assets ................................................................ 26,607 26,405 -------- -------- Total assets .......................................................... $514,768 $553,370 ======== ======== LIABILITIES Reserves: Unpaid losses and loss adjustment expenses ............................... $126,061 $149,041 Unearned premiums ........................................................ 76,781 76,630 -------- -------- 202,842 225,671 Reinsurance payable ......................................................... 773 3,373 Long-term debt .............................................................. 25,000 71,000 Other liabilities ........................................................... 28,849 28,461 -------- -------- Total liabilities ..................................................... 257,464 328,505 -------- -------- 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, 25,000,000 and 20,000,000 shares authorized in 1995 and 1994; 15,408,749 shares issued at December 31, 1995; 15,407,815 shares issued at December 31, 1994 ............................ 770 770 Additional paid-in capital .................................................. 179,276 179,250 Retained earnings from August 1, 1986 (date of reorganization) .............. 75,286 54,756 Unrealized gain (loss) on securities, net of deferred income taxes .......... 1,972 (9,830) Treasury stock, at cost (-0- shares in 1995 and 13,666 shares in 1994) ...... -- (81) -------- -------- Total stockholders' equity ............................................ 257,304 224,865 -------- -------- $514,768 $553,370 ======== ========
The accompanying notes are an integral part of these financial statements. -36- 37 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended December 31, ---------------------------- 1995 1994 1993 -------- -------- -------- Revenues: Net earned premiums ...................................... $ 98,692 $ 92,481 $ 86,029 Net investment income .................................... 20,471 19,129 19,815 Net investment gains (losses) ............................ (1,653) 945 2,071 Other income ............................................. 6 107 530 -------- -------- -------- 117,516 112,662 108,445 -------- -------- -------- Expenses: Net losses and loss adjustment expenses .................. (7,451) 23,344 19,957 Net commissions, brokerage and other underwriting ........ 61,312 53,904 50,848 Interest expense ......................................... 4,103 4,726 6,280 Write-off of unamortized deferred loan fees .............. -- 1,556 -- Amortization and impairment of goodwill and intangibles .. 16,853 3,365 3,407 Other .................................................... 2,448 1,988 2,435 -------- -------- -------- 77,265 88,883 82,927 -------- -------- -------- Income before income taxes ................................. 40,251 23,779 25,518 Income taxes ............................................... 19,721 9,401 9,234 -------- -------- -------- Net income ................................................. $ 20,530 $ 14,378 $ 16,284 ======== ======== ======== Weighted average common and common equivalent shares outstanding ........................................ 15,404 15,160 15,036 ======== ======== ======== Weighted average common and common equivalent shares outstanding - assuming full dilution ...................... 15,917 15,455 15,361 ======== ======== ======== Earnings per common and common equivalent share ............ $ 1.33 $ .95 $ 1.08 ======== ======== ======== Earnings per common share - assuming full dilution ......... $ 1.29 $ .93 $ 1.06 ======== ======== ========
The accompanying notes are an integral part of these financial statements. -37- 38 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Years Ended December 31, -------------------------------- 1995 1994 1993 -------- ------- ------- Common Stock: Balance, January 1 .............................................. $ 770 $ 753 $ 753 Common stock issued ............................................. -- 15 -- Common stock issued through exercise of warrants and options .... -- 2 -- -------- -------- -------- Balance, December 31 ............................................ $ 770 $ 770 $ 753 ======== ======== ======== Additional Paid-In Capital: Balance, January 1 .............................................. $179,250 $165,257 $159,263 Common stock issued ............................................. -- 3,985 -- Common stock issued through exercise of warrants and options .... 26 8 47 Repurchase of outstanding warrants .............................. -- -- (42) Change in valuation allowance for deferred tax asset ............ -- 10,000 6,000 Deferred issuance and offering costs ............................ -- -- (11) -------- -------- -------- Balance, December 31 ............................................ $179,276 $179,250 $165,257 ======== ======== ======== Retained Earnings: Balance, January 1 .............................................. $ 54,756 $ 40,378 $ 24,094 Net income ...................................................... 20,530 14,378 16,284 -------- -------- -------- Balance, December 31 ............................................ $ 75,286 $ 54,756 $ 40,378 ======== ======== ======== Unrealized Gain (Loss) on Securities, Net of Deferred Income Taxes: Balance, January 1 .............................................. $ (9,830) $ 1,318 $ 32 Impact of adopting SFAS No. 115 ................................. -- 3,203 -- Transfer of held-to-maturity securities ......................... 224 -- -- Change for the year ............................................. 11,578 (14,351) 1,286 -------- -------- -------- Balance, December 31 ............................................ $ 1,972 $ (9,830) $ 1,318 ======== ======== ======== Treasury Stock: Balance, January 1 .............................................. $ (81) $ (81) $ (221) Common stock reissued through exercise of warrants and options .. 81 -- 140 -------- -------- --- Balance, December 31 ............................................ $ -- $ (81) $ (81) ======== ======== ======== Common Stock ----------------------------- Issued In Treasury ---------- ----------- Shares: Balance, January 1, 1993 ......................................... 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) Common stock reissued from treasury through exercise of options .. -- 13,666 Common stock issued through exercise of options .................. 934 -- ---------- ----------- Balance, December 31, 1995 ....................................... 15,408,749 -- ========== ===========
The accompanying notes are an integral part of these financial statements. -38- 39 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
Years Ended December 31, ------------------------------- 1995 1994 1993 --------- --------- --------- OPERATING ACTIVITIES: Net income .......................................................... $ 20,530 $ 14,378 $ 16,284 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .................................... 18,272 4,617 4,476 Accretion of bond discount, net .................................. (2,471) (3,933) (3,024) Net investment (gains) losses .................................... 1,653 (945) (2,071) Gain on sale of oil and gas assets, net .......................... -- -- (258) Changes in: Reserve for unpaid losses and loss adjustment expenses ........... (22,980) 10,477 7,703 Reserve for unearned premiums .................................... 151 (1,160) 3,128 Deferred income taxes, net ....................................... 18,086 8,820 8,696 Other assets and liabilities ..................................... (2,502) (2,970) (2,821) --------- --------- --------- Net cash provided by operating activities ............................ 30,739 29,284 32,113 --------- --------- --------- INVESTING ACTIVITIES: Securities available-for-sale: Purchases - fixed maturities ..................................... (103,943) (92,342) (181,486) Sales - fixed maturities ......................................... 71,889 43,762 17,503 Maturities - fixed maturities .................................... 59,115 35,020 126,781 Purchases - equity securities .................................... (3,165) (28,350) (534) Sales - equity securities ........................................ 6,225 8,091 3,310 Securities held-to-maturity: Maturities - fixed maturities .................................... 4,200 -- -- Purchases - fixed maturities ..................................... (4,981) (1,110) -- Change in short-term investments .................................... (15,786) 47,881 24,533 Acquisitions, net of cash acquired .................................. -- (26,175) (1,375) Proceeds from sale of other invested assets ......................... 1,821 1,733 1,159 Capital expenditures, net ........................................... (1,351) (1,679) (2,802) --------- --------- --------- Net cash provided by (used in) investing activities .................. 14,024 (13,169) (12,911) --------- --------- --------- FINANCING ACTIVITIES: Proceeds from long-term debt ........................................ -- 96,000 -- Principal payments on long-term debt ................................ (46,000) (110,214) (18,000) Exercise of warrants and options .................................... 107 10 187 Repurchase of outstanding warrants .................................. -- -- (42) Debt issuance costs ................................................. -- (1,060) -- Stock issuance costs ................................................ -- -- (11) --------- --------- --------- Net cash used in financing activities ................................ (45,893) (15,264) (17,866) --------- --------- --------- Increase (decrease) in cash .......................................... (1,130) 851 1,336 Cash at beginning of year ............................................ 4,131 3,280 1,944 --------- --------- --------- Cash at end of year .................................................. $ 3,001 $ 4,131 $ 3,280 ========= ========= ========= Supplemental Disclosure of Cash Flow Information: Cash paid during the year for: Interest ......................................................... $ 3,759 $ 4,121 $ 5,761 Income taxes, net of refunds ..................................... $ 658 $ 642 $ 597 Supplemental Disclosure of Non-Cash Investing and Financing Activities Common stock issued in connection with acquisitions .............. $ -- $ 4,000 $ --
The accompanying notes are an integral part of these financial statements. -39- 40 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 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." 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. Prior to the adoption of SFAS No. 115, 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 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. The accounting policies for each investment 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. -40- 41 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 -- In 1994, certain debt securities, principally deposited with state insurance regulatory authorities, were considered held-to-maturity and reported at amortized cost. Effective December 31, 1995, the Company implemented the one-time reassessment provision contained in the FASB Special Report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities," and, accordingly, reclassified all held-to-maturity securities to the available-for-sale category as of December 31, 1995. The amortized cost and fair value of these transferred securities were $11.7 million and $12.0 million, respectively. Net unrealized gains on such securities, net of deferred income taxes, of $0.2 million have been 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 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 $21.1 million (includes $13.2 million write-down in 1995) and $5.4 million at December 31, 1995 and 1994, respectively. Intangible assets are reported net of accumulated amortization of $25.7 million and $23.3 million at December 31, 1995 and 1994, respectively. Management assesses the recoverability of goodwill and intangible assets based upon estimates of undiscounted future operating cash flows whenever significant events or changes in circumstances suggest that the carrying amount of an asset may not be recoverable. As described in Note 16, the operations of United Capitol are expected to be sold. Accordingly, the goodwill associated with such operations held for sale has been reduced by $13.2 million to estimated net realizable value. -41- 42 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 the Company's 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 initial estimates. 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. As described in Note 6, the Company's incurred losses and loss adjustment expenses in 1995 were reduced by $29.1 million, net of reinsurance, as a result of favorable claim settlements and certain changes in estimates relating to insured events of prior years. 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. CONTINGENT REINSURANCE PREMIUMS AND COMMISSIONS Contingent reinsurance premiums and commissions are earned in accordance with the applicable reinsurance agreement and are based on the estimated level of profitability relating to such reinsured business. Such estimates are continually reviewed and any adjustments are reflected in current operations. The Company's net earned premiums on the income statement were increased by $2.6 million and $2.5 million in 1995 and 1994, respectively, as a result of contingent reinsurance premium adjustments under its reinsurance agreements. The Company did not recognize any such contingent reinsurance premium adjustment in 1993. 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. 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 tax loss carryforwards ("NOLs"), loss reserve discounting, deferred policy acquisition costs and intangible assets. Under SFAS No. 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period of enactment. 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 -42- 43 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. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. Tax benefits resulting from the future utilization of such NOLs will reduce the net deferred tax asset established in accordance with SFAS No. 109. 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. EARNINGS PER SHARE Earnings per common and common equivalent shares outstanding are computed using the treasury stock method. Weighted average shares outstanding assuming full dilution for 1995, 1994 and 1993 were 15.9 million, 15.5 million and 15.4 million, respectively. PENDING ACCOUNTING STANDARDS In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 is effective for fiscal years beginning after December 15, 1995. SFAS No. 123 introduces a preferable fair value-based method of accounting for stock-based compensation. SFAS No. 123 encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options, and other equity instruments to employees based on the new fair value-based method of accounting. The Company intends to continue applying the existing accounting rules contained in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and to disclose net income and earnings per share on a pro forma basis, based on the new fair value-based method of accounting. 2. 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. 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. -43- 44 The 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 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 following table of unaudited pro forma information has been prepared as if the acquisition of USHC had been consummated on January 1, 1993, 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; (ii) decreased operating expenses at USHC; and (iii) 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 acquisition taken place on January 1, 1993, or of future results of operations of USHC 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 ---------------- ---------------- Revenues ..................... $ 122,967 $ 120,141 Net income ................... $ 15,086 $ 17,339 Net income per common share .. $ .98 $ 1.13
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 pro forma financial information above. -44- 45 3. INVESTMENTS The cost and estimated fair values of investments in debt and equity securities as of December 31, 1995 and 1994 were as follows (dollars in thousands):
Amortized Gross Gross Estimated Cost Unrealized Unrealized Fair As of December 31, 1995: or Cost Gains Losses Value - --------------------------------------------------- --------- ---------- ---------- --------- Fixed maturities: U.S. Treasury securities and obligations of U.S. Government corporations and agencies: U.S. Treasury notes ............................ $ 15,047 $ 488 $ (1) $ 15,534 Collateralized mortgage obligations ............ 64,610 430 (349) 64,691 Mortgage pass-through securities ............... 40,313 788 (3) 41,098 Debt securities of foreign governments ............ 5 -- -- 5 Obligations of states and political subdivisions .. 5,748 10 (18) 5,740 Corporate bonds ................................... 91 -- (16) 75 Non-agency collateralized mortgage obligations .... 34,574 392 (66) 34,900 Asset-backed securities: Second mortgages/home equity loans ............. 49,060 947 (102) 49,905 Automobile loans ............................... 8,229 1 (2) 8,228 Other underlying assets ........................ 15,599 97 (154) 15,542 --------- ---------- ---------- --------- Total fixed maturities ....................... 233,276 3,153 (711) 235,718 Equity securities ................................. 24,758 1,303 (1,245) 24,816 --------- ---------- ---------- --------- Total available-for-sale securities .......... $ 258,034 $ 4,456 $ (1,956) $ 260,534 ========= ========== ========== ========= Equity trading securities ......................... $ 2,366 $ 593 $ (22) $ 2,937 ========= ========== ========== ========= As of December 31, 1994: - --------------------------------------------------- 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. Treasury securities ....... $ 10,968 $ 19 $ (661) $ 10,326 ========= ========== ========== ========= Equity trading securities ......................... $ 2,298 $ 59 $ (433) $ 1,924 ========= ========== ========== =========
As of December 31, 1995, 100% of the Company's debt securities were considered investment grade by The Standard & Poors Corporation or Moody's Investor Services, Inc., and 90% 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. -45- 46 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 has reduced the prepayment variability commonly associated with collateralized mortgage obligations by generally investing in planned amortization class tranches which are structured largely to insulate the investor from prepayment risk. The Company's insurance subsidiaries, as required by state law, deposit certain securities with state insurance regulatory authorities. At December 31, 1995, fixed maturities on deposit had an aggregate carrying value of $13.6 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, 1995, the carrying value of the Company's REIT portfolio was $20.4 million. Short-term investments are generally comprised of U.S. Treasury notes, maturing corporate notes, money market and mutual funds, and investment grade commercial paper equivalents. The amortized cost and estimated fair value of debt securities at December 31, 1995, 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 ................................. $ 3,981 $ 4,026 Due after one year but within five years ............ 6,225 6,482 Due after five years but within ten years ........... 7,444 7,602 Due after ten years ................................. 3,241 3,244 --------- --------- 20,891 21,354 Mortgage pass-through securities, collateralized mortgage obligations and asset-backed securities .. 212,385 214,364 --------- --------- $233,276 $235,718 ========= =========
-46- 47 Major categories of net investment income and net investment gains (losses) were as follows (dollars in thousands):
1995 1994 1993 -------- ------- ------- Investment income: Fixed maturities .................... $16,964 $16,405 $16,282 Equity securities ................... 1,924 915 143 Short-term investments .............. 1,814 1,722 2,820 Other ............................... 260 532 990 -------- ------- ------- Total investment income ............. 20,962 19,574 20,235 Investment expenses .................... 491 445 420 -------- ------- ------- Net investment income .................. $20,471 $19,129 $19,815 ======== ======= ======= Gross investment gains: Fixed maturities .................... $ 722 $ 88 $1,821 Equity securities ................... 2,505 3,762 3,430 Gross investment losses: Fixed maturities .................... (3,757) (625) (2,911) Equity securities ................... (2,068) (1,802) (269) Net unrealized gains (losses) on trading securities .......................... 945 (374) -- Other .................................. -- (104) -- -------- ------- ------- Net investment gains (losses) .......... $(1,653) $ 945 $2,071 ======== ======= =======
Net unrealized gain (loss) on securities included in stockholders' equity was as follows (dollars in thousands):
1995 1994 ------------------------- --------------------------- Gains Losses Net Gains Losses Net ------ -------- ------- ----- --------- --------- Fixed maturities .......................... $3,153 $ (711) $2,442 $207 $(13,910) $ (13,703) Equity securities ......................... 1,303 (1,245) 58 208 (1,403) (1,195) Other ..................................... 534 -- 534 -- (225) (225) ------ -------- ------- ----- --------- --------- $4,990 $(1,956) 3,034 $415 $(15,538) (15,123) ====== ======== ===== ========= Deferred income taxes ..................... (1,062) 5,293 ------- --------- Net unrealized gain (loss) on securities .. $1,972 $ (9,830) ======= =========
The net investment losses from the insurance operations in 1995 reflected the write-down of the carrying value for two asset-backed securities from the same issuer which experienced an other than temporary decline in fair value. At December 31, 1994, the carrying value of debt securities on non-accrual status was $1.9 million, 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 1995, investment activity for the equity trading portfolio held at the parent company level included gross realized investment gains of $1.9 million and gross realized investment losses of $1.8 million. 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. -47- 48 4. DEFERRED POLICY ACQUISITION COSTS Policy acquisition costs deferred and the related amortization charged to income were as follows (dollars in thousands):
1995 1994 1993 -------- -------- -------- Balance at January 1 ............ $ 25,150 $ 18,421 $ 9,428 Balance at date of acquisition .. -- 4,369 -- Costs deferred during year ...... 37,666 31,750 30,157 Amortization during year ........ (35,759) (29,390) (21,164) -------- -------- -------- Balance at December 31 .......... $ 27,057 $ 25,150 $ 18,421 ======== ======== ========
5. REINSURANCE The Company's insurance subsidiaries, in the ordinary course of business, cede reinsurance to other insurance companies to limit their exposure to loss. Reinsurance 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, 1995, Capsure's largest reinsurance receivable, including prepaid reinsurance premiums of $1.2 million and estimated ceded IBNR of $11.8 million, was approximately $19.8 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. The effect of reinsurance on premiums written and earned was as follows (dollars in thousands):
1995 1994 1993 ------------------ ------------------ ------------------ Written Earned Written Earned Written Earned -------- -------- -------- -------- -------- -------- Direct ........ $111,305 $113,538 $102,062 $103,871 $100,355 $ 97,543 Assumed ....... 93 247 294 143 420 455 Ceded ......... (13,670) (15,093) (11,778) (11,533) (12,469) (11,969) -------- -------- -------- -------- -------- -------- Net premiums .. $ 97,728 $ 98,692 $ 90,578 $ 92,481 $ 88,306 $ 86,029 ======== ======== ======== ======== ======== ========
The effect of reinsurance on losses and loss adjustment expenses incurred was as follows (dollars in thousands):
1995 1994 1993 -------- ------- ------- Gross losses and loss adjustment expenses .. $ (486) $31,684 $26,407 Reinsurance recoveries ..................... (6,965) (8,340) (6,450) -------- ------- ------- Net losses and loss adjustment expenses .... $ (7,451) $23,344 $19,957 ======== ======= =======
-48- 49 6. LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES Activity in the liability for unpaid losses and loss adjustment expenses was as follows (dollars in thousands):
1995 1994 1993 ----------------- ------------------ --------------- Gross balance at January 1 ................. $ 149,041 $ 135,825 $ 128,122 Balance at date of acquisition ............. -- 2,738 -- Incurred related to: Current year ............................... 34,073 46,206 41,398 Prior years ................................ (34,559) (14,522) (14,991) ----------------- ------------------ --------------- Total incurred ............................. (486) 31,684 26,407 ----------------- ------------------ --------------- Paid related to: Current year ............................... 4,150 3,003 2,266 Prior years ................................ 18,344 18,203 16,438 ----------------- ------------------ --------------- Total paid ................................. 22,494 21,206 18,704 ----------------- ------------------ --------------- Gross balance at December 31 ............... $ 126,061 $ 149,041 $ 135,825 ================= ================== =============== Balance net of reinsurance at December 31 .. $ 87,078 $ 111,164 $ 102,688 ================= ================== ===============
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 $34.6 million ($29.1 million, net of reinsurance) in 1995, $14.5 million ($8.3 million, net of reinsurance) in 1994 and $15.0 million ($11.3 million, net of reinsurance) in 1993. United Capitol's claims development through December 31, 1995, has been favorable relative to expectations based on industry experience. Due to the limited prior operating experience of United Capitol and the long-tail nature of its business, management previously relied principally upon industry development patterns and expected loss ratios in estimating IBNR. Given the availability of nine full years of experience and the growing evidence of favorable loss trends relative to industry indications, management concluded in the fourth quarter of 1995 that it was appropriate to place greater reliance on United Capitol's own development patterns and emerging loss ratios in estimating IBNR. United Capitol reduced loss and loss adjustment expenses by $23.2 million in 1995 for net favorable development related to prior years, substantially all of which pertains to this change in estimate. This loss reserve reduction increased Capsure's consolidated income before taxes by $23.2 million, and net income by $15.1 million, or $0.98 per share. 7. 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. -49- 50 The carrying amounts and estimated fair values of financial instruments were as follows (dollars in thousands):
1995 1994 -------------------------- -------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------- ---------- -------- ---------- Debt securities ......... $235,718 $235,718 $246,593 $245,951 Equity securities ....... 27,753 27,753 28,205 28,205 Short-term investments .. 37,865 37,865 22,079 22,079 Other investments ....... 3,219 3,219 4,890 4,890 Cash .................... 3,001 3,001 4,131 4,131 Long-term debt .......... 25,000 25,000 71,000 71,000
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 values. 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 maturity. 8. 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 the principal amount of $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, 1995 and 1994, $25 million and $71 million, respectively, were 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, 1995, the weighted average interest rate on outstanding borrowings was 6.57% and the applicable commitment fee was 0.25%. -50- 51 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, 1995, 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. 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. 9. 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 by the company or regulators. As of -51- 52 December 31, 1995, 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 payment of dividends. Generally, statutory surplus of each insurance subsidiary in excess of a statutorily prescribed minimum is available for payment of dividends to the parent company. However, such distributions as dividends may be subject to prior regulatory approval, including a review of the implication on RBC. Without prior regulatory approval in 1996, Capsure's insurance subsidiaries may pay stockholder dividends of $23.8 million in the aggregate. In 1995, 1994 and 1993, Capsure received $40.9 million (including $21.6 million of dividends requiring prior approval), $21.0 million (including $5.0 million of dividends requiring prior approval), and $11.8 million, respectively, in dividends from its insurance subsidiaries. Combined statutory surplus and net income for insurance operations, including preacquisition results, as reported to regulatory authorities were as follows (dollars in thousands):
1995 1994 1993 -------- -------- -------- Statutory surplus $113,894 $109,750 $104,343 Statutory net income $ 41,717 $ 23,796 $ 19,308
10. INCOME TAXES The components of deferred income taxes were as follows (dollars in thousands):
1995 1994 -------- ------- Deferred tax assets: Net operating losses .................................................. $62,000 $79,100 Loss and loss adjustment expense reserves ............................. 5,534 7,913 Unearned premium reserves ............................................. 4,791 5,302 Accrued expenses ...................................................... 3,768 3,755 Unrealized loss on securities ......................................... -- 5,293 Other ................................................................. 839 1,537 -------- ------- Total gross deferred tax assets .................................... 76,932 102,900 Valuation allowance ................................................... 30,800 30,800 -------- ------- Deferred tax asset, net of valuation allowance .......................... 46,132 72,100 -------- ------- Deferred tax liabilities: Intangible assets ..................................................... 5,477 6,278 Deferred policy acquisition costs ..................................... 9,470 8,803 Unrealized gain on securities ......................................... 1,062 -- Other ................................................................. 830 2,814 -------- ------- Total deferred tax liabilities ..................................... 16,839 17,895 -------- ------- Net deferred tax asset .................................................. $29,293 $54,205 ======== =======
Capsure and its subsidiaries file a consolidated federal income tax return. As of December 31, 1995, based upon the Company's consolidated federal income tax returns, approximately $177 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 $31.2 million of tax benefits from its available NOLs at December 31, 1995. Such estimate is based upon the earnings history of each of its insurance subsidiaries and projections of future -52- 53 taxable income. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. The income tax provisions consisted of the following (dollars in thousands):
1995 1994 1993 ------- ------- ------ Federal deferred . . . . . . . . . . . . . $18,086 $8,820 $8,696 Federal current . . . . . . . . . . . . . 1,500 305 338 State . . . . . . . . . . . . . . . . . . 135 276 200 ------- ------ ------ Total income tax expense . . . . . . . . . $19,721 $9,401 $9,234 ======= ====== ======
Reconciliations from the federal statutory tax rate to the effective tax rate are as follows:
1995 1994 1993 ------- ------ ------ Federal statutory rate ................................................... 35.0% 35.0% 35.0% Excess of cost over net assets acquired and other purchase accounting adjustments ....................................... 13.7 3.0 2.2 State income and environmental tax, net of federal income tax benefit .................................................... .1 .8 .6 Tax exempt interest ...................................................... (.3) (.3) (.2) Other .................................................................... .5 1.0 (1.4) ------- ------ ------ Effective tax rate .................................................... 49.0% 39.5% 36.2% ======= ====== ======
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 ("IRS"). Capsure received tax sharing payments from its subsidiaries of $12.8 million, $12.3 million and $13.0 million in 1995, 1994 and 1993, respectively. The IRS 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. 11. COMMITMENTS AND CONTINGENCIES At December 31, 1995, the future minimum commitment under operating leases was as follows: 1996 - $2.2 million; 1997 - $2.0 million; 1998 - $1.8 million; 1999 - $1.8 million; 2000 - $1.4 million and 2001 and after - $1.4 million. Total rental expense for 1995, 1994 and 1993 was $2.3 million, $2.3 million and $2.2 million, respectively. 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. -53- 54 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 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. 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. 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. 12. EMPLOYEE BENEFITS The Company sponsors a tax-deferred savings plan (401(k)) covering substantially all of its employees. The Company matches 50% of the participating employee's contribution up to 6% of eligible compensation (3% maximum matching). Western Surety employees may also receive a discretionary profit sharing payment up to 3% of eligible compensation. Company contributions, including profit sharing payments, for the years ended December 31, 1995, 1994 and 1993, were $0.7 million, $0.7 million and $0.5 million, respectively. The Company sponsors a noncontributory defined contribution retirement plan covering all eligible employees other than Western Surety personnel. The Company contributes 4.35% of eligible compensation (8.7% on amounts exceeding the social security wage base). Company contributions for the years ended December 31, 1995, 1994 and 1993, were $0.3 million, $0.1 million and $0.1 million, respectively. Western Surety sponsors two postretirement benefit plans covering substantially all of its employees. One plan provides medical benefits, and the other plan provides sick leave termination payments. The postretirement health care plan is contributory; the sick leave plan is noncontributory. The actuarially determined net periodic postretirement benefit costs for these plans were $0.3 million, $0.5 million and $0.5 million for the years ended December 31, 1995, 1994 and 1993, respectively. The unfunded accumulated postretirement benefit obligation (for retirees and fully vested active plan participants) was $4.1 million and $4.0 million as of December 31, 1995 and 1994, respectively. -54- 55 13. STOCKHOLDERS' EQUITY At the Annual Meeting of Stockholders on May 24, 1995, stockholders approved an amendment to the Company's Certificate of Incorporation to increase the maximum number of shares of Common Stock the Company is authorized to issue from 20,000,000 shares to 25,000,000 shares. On May 24, 1995, the Board of Directors of the Company approved a stock repurchase plan. The plan authorizes the Company to repurchase up to 500,000 shares of its common stock. These shares may be purchased from time to time in the public market or through privately negotiated transactions. As of December 31, 1995, no shares have been repurchased under this plan. The Company has reserved shares of its Common Stock for issuance to directors, officers, 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 a majority of independent members of the Board of Directors. The option prices are determined by the Committee, but may not be less than the fair market value of the Common Stock of the Company at the date of grant for incentive stock options, and may not be less than the par value of the Common Stock of the Company for non-qualified stock options. The Plan provides for the granting of incentive stock 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. Since January 1, 1993, all stock options were granted at an option price equal to fair market value at the date of grant. Stock option activity for the three years ended December 31, 1995 was as follows:
Shares Subject Average Option to Option Price Per Share -------------- ---------------- Balance at January 1, 1993 .... 711,000 $6.75 to $9.75 Options granted .............. 222,500 $12.25 to $14.88 Options canceled ............. (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 canceled ............. (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 Options granted .............. 190,000 $13.13 to $14.00 Options canceled ............. (9,063) $12.25 to $13.50 Options exercised ............ (14,600) $12.63 to $14.25 --------- Balance at December 31, 1995 .. 1,364,449 $6.75 to $14.88 =========
As of December 31, 1995, 994,611 shares were exercisable under the Plan. The number of shares available for granting of options under the Plan were 96,189 and 277,126 at December 31, 1995 and 1994, respectively. -55- 56 14. 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 1995, 1994 and 1993. The Company paid $0.2 million in 1995, 1994 and 1993 for financial planning, tax, accounting, investor relations and computer support and maintenance to EGI or its affiliates. The Company paid approximately $0.1 million, $0.2 million and $0.1 million in fees for legal services to a law firm affiliated with EGI in 1995, 1994 and 1993, 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 1995, 1994 and 1993. 15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of the unaudited results of operations for the past two years. 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):
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1995 ---- Revenues ..................... $29,539 $29,486 $29,432 $29,059 ======= ======= ======= ======= Income before income taxes ... $ 6,968 $ 7,287 $ 7,235 $18,761 Income taxes ................. 2,731 2,851 2,816 11,323 ------- ------- ------- ------- Net income ................... $ 4,237 $ 4,436 $ 4,419 $ 7,438 ======= ======= ======= ======= Earnings per common and common equivalent share ............ $ .28 $ .28 $ .29 $ .48 ======= ======= ======= ======= 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 ======= ======= ======= =======
16. SUBSEQUENT EVENTS On February 29, 1996, the Company announced that it had signed an agreement to sell United Capitol Holding Company ("UCHC") and its subsidiaries, United Capitol, United Capitol Managers, Inc. and Fischer, to a subsidiary of Frontier Insurance Group, Inc. Estimated net proceeds to Capsure will be approximately $75 million, which includes the purchase price for the capital stock of UCHC and the release of United Capitol's excess statutory surplus on or before closing. The agreement is subject to several conditions including approval by insurance regulatory authorities and other governmental authorities. The transaction is expected to close in the second quarter of 1996. -56- 57 Summarized financial information for United Capitol follows (dollars in thousands):
1995 1994 1993 -------- --------- --------- Net earned premiums ............. $13,709 $19,226 $18,088 Net losses and loss adjustment .. (15,030) 11,752 8,590 Underwriting expenses ........... 3,142 4,321 3,915 -------- --------- --------- Underwriting income ............. $25,597 $3,153 $5,583 ======== ========= ========= Income before income taxes ...... $19,872 $11,693 $15,349 ======== ========= ========= Net income ...................... $8,657 $7,311 $9,912 ======== ========= ========= Invested assets and cash ........ $129,878 $138,263 $148,510 Intangible and other assets ..... 51,831 72,763 70,535 -------- --------- --------- Total assets .................... 181,709 211,026 219,045 Insurance reserves .............. (96,209) (121,621) (117,048) Other liabilities ............... (10,455) (9,355) (13,120) -------- --------- --------- Net assets ...................... $75,045 $80,050 $88,877 ======== ========= =========
The goodwill associated with the 1990 acquisition of United Capitol has been reduced to estimated net realizable value as of December 31, 1995, resulting in a $13.2 million impairment of goodwill in 1995. Prior to closing, the Company must obtain a waiver from the lenders under the Credit Facility or otherwise amend the agreement to permit the sale of United Capitol. -57- 58 SCHEDULE I CAPSURE HOLDINGS CORP. AND SUBSIDIARIES SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES AS OF DECEMBER 31, 1995 (AMOUNTS IN THOUSANDS)
Fair Carrying Cost Value Value -------- -------- -------- FIXED MATURITIES: Bonds: U.S. Government and government agencies and authorities .. $119,970 $121,323 $121,323 States, municipalities and political subdivisions ........ 5,748 5,740 5,740 Foreign governments ...................................... 5 5 5 All other corporate bonds ................................ 107,553 108,650 108,650 -------- -------- -------- Total fixed maturities ................................ 233,276 235,718 235,718 -------- -------- -------- EQUITY SECURITIES: Common stocks .............................................. 26,378 26,978 26,978 Non-redeemable preferred stocks ............................ 746 775 775 -------- -------- -------- Total equity securities ............................... 27,124 27,753 27,753 -------- -------- -------- Short-term investments ..................................... 37,865 37,865 Other investments .......................................... 2,686 3,219 -------- -------- Total investments ..................................... $300,951 $304,555 ======== ========
-58- 59 SCHEDULE II CAPSURE HOLDINGS CORP. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY) BALANCE SHEETS (AMOUNTS IN THOUSANDS)
December 31, ------------------ 1995 1994 -------- -------- ASSETS Investment in and advances to Capsure Financial Group, Inc. ......... $221,552 $170,772 Deferred income taxes, net of valuation allowance ................... 37,275 55,616 -------- -------- $258,827 $226,388 ======== ======== LIABILITIES Other liabilities ................................................... $ 1,523 $ 1,523 -------- -------- STOCKHOLDERS' EQUITY Common stock ........................................................ 770 770 Additional paid-in capital .......................................... 179,276 179,250 Retained earnings from August 1, 1986 (date of reorganization) ...... 75,286 54,756 Unrealized gain (loss) on securities, net of deferred income taxes .. 1,972 (9,830) Treasury stock, at cost ............................................. -- (81) -------- -------- Total stockholders' equity .......................................... 257,304 224,865 -------- -------- $258,827 $226,388 ======== ========
See Notes to Condensed Financial Information and Notes to Consolidated Financial Statements -59- 60 SCHEDULE II CAPSURE HOLDINGS CORP. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY) - (CONTINUED) STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS)
Years Ended December 31, ---------------------------- 1995 1994 1993 -------- -------- -------- Revenues: Net investment income .................................... $ -- $ 17 $ 1,897 Net investment gains ..................................... -- 444 3,103 Other income ............................................. -- -- 10 -------- -------- -------- -- 461 5,010 Expenses: Corporate expense ........................................ -- 355 2,251 -------- -------- -------- Income from operations before income taxes and equity in net income of subsidiaries ................. -- 106 2,759 Income taxes ............................................... -- 37 690 -------- -------- -------- Income before equity in net income of subsidiaries .......................................... -- 69 2,069 Cash dividends from subsidiaries ........................... -- -- 1,500 Equity in net income of subsidiaries, less cash dividends .. 20,530 14,309 12,715 -------- -------- -------- Net income ................................................. $ 20,530 $ 14,378 $ 16,284 ======== ======== ========
See Notes to Condensed Financial Information and Notes to Consolidated Financial Statements -60- 61 SCHEDULE II CAPSURE HOLDINGS CORP. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY) - (CONTINUED) STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
Years Ended December 31, ---------------------------- 1995 1994 1993 -------- -------- -------- OPERATING ACTIVITIES: Net income .................................................... $ 20,530 $ 14,378 $16,284 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ............................................... -- -- 3 Equity in net income of subsidiaries, less cash dividends .. (20,530) (14,309) (12,715) Net investment gains ....................................... -- (444) (3,103) Changes in: Deferred income taxes, net ................................. 18,341 1,217 (5,648) Other assets and liabilities ............................... -- 2,406 6,328 -------- -------- -------- Net cash provided by operating activities ....................... 18,341 3,248 1,149 -------- -------- -------- INVESTING ACTIVITIES: Available-for-sale equity securities purchased ................ -- (209) (30,512) Available-for-sale equity securities sold ..................... -- -- 31,048 Change in short-term investments .............................. -- 5,451 2,846 Change in investments in and advances to subsidiaries ......... (18,448) (8,981) (4,389) Capital expenditures, net ..................................... -- -- (13) -------- -------- -------- Net cash used in investing activities ........................... (18,448) (3,739) (1,020) -------- -------- -------- FINANCING ACTIVITIES: Exercise of warrants and options .............................. 107 10 187 Repurchase of outstanding warrants ............................ -- -- (42) Stock issuance costs .......................................... -- -- (11) -------- -------- -------- Net cash provided by financing activities ....................... 107 10 134 -------- -------- -------- Increase (decrease) in cash ..................................... -- (481) 263 Cash at beginning of year ....................................... -- 481 218 -------- -------- -------- Cash at end of year ............................................. $ -- $ -- $ 481 ======== ======== ========
See Notes to Condensed Financial Information and Notes to Consolidated Financial Statements -61- 62 SCHEDULE II 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. (parent company of Western Surety), NI Acquisition Corp. (parent company of United Capitol) and Pin Oak Petroleum, Inc. -62- 63 SCHEDULE III CAPSURE HOLDINGS CORP. AND SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (AMOUNTS IN THOUSANDS)
Property and Casualty Insurance ------------------------------------- 1995 1994 1993 ----------- ----------- ----------- Deferred policy acquisition costs ......................... $ 27,057 $ 25,150 $ 18,421 =========== =========== =========== Future policy benefits, losses, claims and loss expenses .. $ 126,061 $ 149,041 $ 135,825 =========== =========== =========== Unearned premiums ......................................... $ 76,781 $ 76,630 $ 69,363 =========== =========== =========== Other policy claims and benefits payable .................. $ -- $ -- $ -- =========== =========== =========== Net premium revenue ....................................... $ 98,692 $ 92,481 $ 86,029 =========== =========== =========== Net investment income ..................................... $ 19,773 $ 18,597 $ 18,753 =========== =========== =========== Benefits, claims, losses and settlement expenses .......... $ (7,451) $ 23,344 $ 19,957 =========== =========== =========== Amortization of deferred policy acquisition costs ......... $ 35,759 $ 29,390 $ 21,164 =========== =========== =========== Other operating expenses .................................. $ 25,553 $ 24,514 $ 29,684 =========== =========== =========== Net premiums written ...................................... $ 97,728 $ 90,578 $ 88,306 =========== =========== ===========
-63- 64 SCHEDULE IV CAPSURE HOLDINGS CORP. AND SUBSIDIARIES REINSURANCE FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (AMOUNTS IN THOUSANDS)
Percentage Ceded to Assumed of Amount Gross Other from Other Net Assumed Amount Companies Companies Amount To Net -------- --------- ---------- ------- ---------- 1995 - ---- Premiums: Property and casualty insurance .. $113,538 $15,093 $247 $98,692 0.3% -------- --------- ---------- ------- ---------- Total premiums ................. $113,538 $15,093 $247 $98,692 0.3% ======== ========= ========== ======= ========== 1994 - ---- Premiums: Property and casualty insurance .. $103,871 $11,533 $143 $92,481 0.2% -------- --------- ---------- ------- ---------- Total premiums ................. $103,871 $11,533 $143 $92,481 0.2% ======== ========= ========== ======= ========== 1993 - ---- Premiums: Property and casualty insurance .. $97,543 $11,969 $455 $86,029 0.5% -------- --------- ---------- ------- ---------- Total premiums ................. $97,543 $11,969 $455 $86,029 0.5% ======== ========= ========== ======= ==========
-64- 65 SCHEDULE V CAPSURE HOLDINGS CORP. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (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, 1995 Allowance for possible losses on premiums receivable ..... $ 898 $245 $-- $375 $ 768 ====== ==== === ==== ====== Allowance for possible losses on reinsurance receivable .. $ 5 $ 65 $-- $ -- $ 70 ====== ==== === ==== ====== Year ended December 31, 1994 Allowance for possible losses on premiums receivable(2) .. $1,276 $190 $-- $568 $ 898 ====== ==== === ==== ====== Allowance for possible losses on reinsurance receivable .. $ 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 receivable .. $ -- $ 2 $-- $ -- $ 2 ====== ==== === ==== ======
(1) Accounts charged against allowance. (2) Includes balance at acquisition date of Universal Surety of $52. -65- 66 SCHEDULE VI CAPSURE HOLDINGS CORP. AND SUBSIDIARIES SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (AMOUNTS IN THOUSANDS)
1995 1994 1993 --------- -------- --------- Deferred policy acquisition costs ........................... $ 27,057 $ 25,150 $ 18,421 ========= ======== ========= Reserves for unpaid claims and claim adjustment expenses .... $ 126,061 $149,041 $ 135,825 ========= ======== ========= Discount (if any) deducted .................................. $ -- $ -- $ -- ========= ======== ========= Unearned premiums ........................................... $ 76,781 $ 76,630 $ 69,363 ========= ======== ========= Net earned premiums ......................................... $ 98,692 $ 92,481 $ 86,029 ========= ======== ========= Net investment income ....................................... $ 19,773 $ 18,597 $ 18,753 ========= ======== ========= Net claims and claim adjustment expenses incurred related to: Current year ............................................ $ 21,631 $ 31,688 $ 31,250 ========= ======== ========= Prior years ............................................. $(29,082) $(8,344) $(11,293) ========= ======== ========= Amortization of deferred policy acquisition costs ........... $ 35,759 $ 29,390 $ 21,164 ========= ======== ========= Net paid claims and claim adjustment expenses ............... $ 16,636 $ 16,719 $ 15,455 ========= ======== ========= Net premiums written ........................................ $ 97,728 $ 90,578 $ 88,306 ========= ======== =========
-66- 67 (A)(3) EXHIBITS
Exhibit Number Description - ------- ----------- 2 Not applicable. 3(1) 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(2) Amendment to the Certificate of Incorporation dated July 14, 1995. 3(3) 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 (filed on March 30, 1995 as Exhibit 4 to Capsure Holdings Corp.'s Form 10-K, and incorporated herein by reference). 9 Not applicable. 10(1) Employment Agreement dated as of September 30, 1995 by and between Capsure Holdings Corp., a Delaware corporation, and Bruce A. Esselborn, an individual. 10(2) Employment Agreement dated as of September 30, 1995 by and between Capsure Holdings Corp., a Delaware corporation and Mary Jane Robertson, an individual. 10(3) Employment Agreement dated as of February 20, 1995 by and between Capsure Holdings Corp., a Delaware corporation, and Steven S. Zeitman, an individual (filed on March 30, 1995 as Exhibit 10.6 to Capsure Holdings Corp's Form 10-K, and incorporated herein by reference). 10(4) Executive Change in Control and Termination Benefits Agreement dated as of November 6, 1995 by and among Capsure Holdings Corp., a Delaware corporation, United Capitol Insurance Company, a Wisconsin corporation, and Steven S. Zeitman, an individual. 10(5) 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 (filed on March 30, 1995 as Exhibit 10.7 to Capsure Holdings Corp's Form 10-K, and incorporated herein by reference). 10(6) 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 (filed on March 30, 1995 as Exhibit 10.8 to Capsure Holdings Corp's Form 10-K, and incorporated herein by reference). 10(7) 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).
-67- 68 Exhibit Number Description - ------ ----------- 10(8) 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(9) 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(10) 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 (filed on March 30, 1995 as Exhibit 10.17 to Capsure Holdings Corp's Form 10-K, and incorporated herein by reference). 10(11) 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(12) 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(13) 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(14) Second Amendment to the 1990 Stock Option Plan (filed on March 31, 1994 as part of Capsure Holdings Corp.'s Proxy Statement for the Annual Meeting of Shareholders on May 19, 1994, and incorporated herein by reference). 10(15) 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). 10(16) 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(17) Contract Surety Bond Reinsurance Agreement dated as of September 22, 1994 between Western Surety Company, a South Dakota corporation, and Universal Surety of America, a Texas corporation (filed on March 30, 1995 as Exhibit 10.23 to Capsure Holdings Corp's Form 10-K, and incorporated herein by reference). 10(18) Co-Employee Agreement dated as of September 22, 1994 between Western Surety Company and Universal Surety of America (filed on March 30, 1995 as Exhibit 10.24 to Capsure Holdings Corp's Form 10-K, and incorporated herein by reference). -68- 69 Exhibit Number Description - ------ ----------- 10(19) Directors' and Officers' and Errors and Omissions Liability Quota Share Reinsurance Agreement dated as of August 15, 1994 between Western Surety Company, a South Dakota corporation, and United Capitol Insurance Company, a Wisconsin corporation. 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 20, 1996. 24(1) Power of Attorney for Herbert A. Denton dated March 1, 1996. 24(2) Power of Attorney for Bradbury Dyer, III dated March 1, 1996. 24(3) Power of Attorney for Talton R. Embry dated March 4, 1996. 24(4) Power of Attorney for Dan L. Kirby dated March 4, 1996. 24(5) Power of Attorney for Joe P. Kirby dated March 4, 1996. 24(6) Power of Attorney for Richard I. Weingarten dated March 11, 1996. 27 Financial Data Schedule. 28 Information from reports furnished to state insurance regulatory authorities - Schedule P from 1995 Combined Annual Statement of Capsure Holdings Corp. _________________________ "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: The statements which are not historical facts contained in this Annual Report and Form 10-K are forward-looking statements that involve risks and uncertainties, including, but not limited to, product and policy demand and market response risks, the effect of economic conditions, the impact of competitive products, policies and pricing, product and policy development, regulatory changes and conditions, rating agency policies and practices, development of claims and the effect on loss reserves, the performance of reinsurance companies under reinsurance contracts with the Company, investment portfolio developments and reaction to market conditions, the results of financing efforts, the actual closing of contemplated transactions and agreements, the effect of the Company's accounting policies, and other risks detailed in the Company's Securities and Exchange Commission filings. No assurance can be given that the actual results of operations and financial condition will conform to the forward-looking statements contained herein. -69- 70 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 Vice President and Controller (Principal Accounting Officer) Dated: March 20, 1996 -------------------- (CONTINUED) -70- 71 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 20, 1996 Chairman of the Board and /s/ Samuel Zell - --------------- Chief Executive Officer --------------------- Samuel Zell March 20, 1996 Director /s/ Rod F. Dammeyer - --------------- --------------------- Rod F. Dammeyer March 20, 1996 Director * Herbert A. Denton - --------------- --------------------- * Herbert A. Denton March 20, 1996 Director * Bradbury Dyer, III - --------------- ------------------------ * Bradbury Dyer, III March 20, 1996 Director * Talton R. Embry - --------------- ------------------------ * Talton R. Embry March 20, 1996 Director /s/ Bruce A. Esselborn - --------------- ------------------------ Bruce A. Esselborn March 20, 1996 Director * Dan L. Kirby - --------------- ------------------------ * Dan L. Kirby March 20, 1996 Director * Joe P. Kirby - --------------- ------------------------ * Joe P. Kirby March 20, 1996 Director /s/ Donald W. Phillips - --------------- ------------------------ Donald W. Phillips March 20, 1996 Director and /s/ Sheli Z. Rosenberg - --------------- *Attorney-in-Fact ------------------------ Sheli Z. Rosenberg Director - --------------- ------------------------ L.G. Schafran March 20, 1996 Director * Richard I. Weingarten - --------------- ------------------------ * Richard I. Weingarten -71- 72 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES EXHIBIT INDEX Exhibit Page Number Description No. - ------- ----------- ----- 3(2) Amendment to the Certificate of Incorporation dated July 14, 1995. 10(1) Employment Agreement dated as of September 30, 1995 by and between Capsure Holdings Corp., a Delaware corporation, and Bruce A. Esselborn, an individual.......................... 10(2) Employment Agreement dated as of September 30, 1995 by and between Capsure Holdings Corp., a Delaware corporation and Mary Jane Robertson, an individual............................. 10(4) Executive Change in Control and Termination Benefits Agreement dated as of November 6, 1995 by and among Capsure Holdings Corp., a Delaware corporation, United Capitol Insurance Company, a Wisconsin corporation, and Steven S. Zeitman, an individual. 10(19) Directors' and Officers' and Errors and Omissions Liability Quota Share Reinsurance Agreement dated as of August 15, 1994 between Western Surety Company, a South Dakota corporation, and United Capitol Insurance Company, a Wisconsin corporation. 11 Earnings per share computation................................. 21 Subsidiaries of the Registrant................................. 23 Consent of Coopers & Lybrand dated March 20, 1996.............. 24(1) Power of Attorney for Herbert A. Denton dated March 1, 1996.... 24(2) Power of Attorney for Bradbury Dyer, III dated March 1, 1996... 24(3) Power of Attorney for Talton R. Embry dated March 4, 1996...... 24(4) Power of Attorney for Dan L. Kirby dated March 4, 1996......... 24(5) Power of Attorney for Joe P. Kirby dated March 4, 1996......... 24(6) Power of Attorney for Richard I. Weingarten dated March 11, 1996................................................ 27 Financial Data Schedule........................................ 28 Information from reports furnished to state insurance regulatory authorities - Schedule P from 1995 Combined Annual Statement of Capsure Holdings Corp. ......................................... -72- EX-3.(2) 2 AMENDMENT TO CERTIFICATE OF INCORPORATION 1 EXHIBIT 3(2) CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF CAPSURE HOLDINGS CORP. It is hereby certified that: 1. The name of the corporation (hereinafter called the "corporation") is Capsure Holdings Corp. 2. The certificate of incorporation of the corporation is hereby amended by striking out Article FOURTH thereof and by substituting in lieu of said Article the following new Article: "FOURTH: The number of authorized shares of capital stock of the Corporation is 30,000,000 of which 25,000,000 shares shall be Common Stock, par value five cents ($.05) per share, and 5,000,000 shares shall be Preferred Stock, par value one cent ($.01) per share. The Board of Directors is expressly granted the authority to issue the Preferred Stock in one or more series and to determine in the resolution or resolutions adopted by the Board of Directors providing for the issuance thereof (i) the powers, designation, preferences and relative participating, optional or other rights, and the qualifications, limitations or restrictions of the shares of said series of Preferred Stock, (ii) any restrictions on the Corporation in connection with the Preferred Stock , and (iii) the amount of consideration received in respect of the Preferred Stock which shall be capital. The holder of each share of Common Stock shall have the right to one (1) vote per share on each matter submitted to the stockholders for a vote." 3. The amendment of the certificate of incorporation herein certified has been duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. Signed on July 13, 1995. /s/ Kelly L. Stonebraker - -------------------------------- Kelly L. Stonebraker Vice President EX-10.(1) 3 EMPLOYMENT AGREEMENT 1 EXHIBIT 10(1) EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT entered into as of the 30th day of September, 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, February 20, 1990, and February 20, 1995 (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 to terminate, to the extent not previously terminated, the Prior Agreements effective September 30, 1995. Article Two: Term and Employment A. (i) Capsure will now continue to employ the Employee on a rolling, two-year basis, with the period of the Employee's employment under this New Agreement commencing on September 30, 1995, and continuing for a minimum period of two years thereafter, with a provisional ending date of September 29, 1997 ("the Provisional Term"), such ending date subject to automatic extension as provided below. The period of the Employee's employment hereunder within the Provisional Term and any automatically extended terms is herein referred to as the "Employment Period". (ii) On October 1, 1995, and on each day thereafter, the Employment Period shall be extended automatically by one day unless at any time after October 1, 1995, Capsure delivers to the Employee, or the Employee delivers to Capsure, written notice that the Employment Period will not thereafter be further extended and will therefore end at the expiration of the then existing Employment Period, including any previous extensions. Following such notice, the Employment Period will not be further extended except by mutual agreement of Capsure and the Employee. Thus, after October 1, 1995, until written notice is received by Page 1 2 either party, the Employment Period at any point in time shall be two years. The Employment Period shall continue until the expiration of all automatic extensions effected as described above, unless and until it ceases or is terminated sooner as provided for in Article Five. B. During the Employment Period, the Employee shall serve as President of Capsure, and, unless and until Capsure shall sell, assign or transfer its ownership interest therein, 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. In the event that Capsure shall sell, assign, or transfer its ownership interest in UCHC or UCIC, then upon the closing of any such sale, assignment or transfer, the Employee shall resign as Chairman of the Board of Directors, President and Chief Executive Officer of UCHC and/or UCIC, however, the Employee shall continue as the President of Capsure subject to and in accordance with the terms and conditions of this Agreement. C. The Employee accepts such employment and agrees to serve in the capacities set forth in this New Agreement and to perform such services 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. D. During the Employment Period the Employee's office shall be customary to his position and shall be located in northern DeKalb County, Georgia, and the Employee shall not be obligated to maintain his office in any other place and shall not be required or obligated to relocate or transfer away from northern DeKalb County, Georgia. 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 unreasonably inconvenient for him. Article Three: Compensation During the Employment Period A. Capsure 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 salary of $387,500, payable in accordance with the Capsure's 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. Page 2 3 Capsure reserves 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 Capsure and 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 of Capsure (or the Compensation Committee of Capsure 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. Capsure's 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 Article Five. E. The Employee shall be entitled to an annual bonus and the amount of such bonus shall be determined and paid in February of each year, unless sooner agreed upon by both Capsure and the Employee, and the amount of such bonus shall be mutually agreed upon between the Employee and the Compensation Committee of Capsure (or any other body or group of persons responsible for setting the Employee's bonus). F. In addition to any other benefits provided to the Employee, Capsure and the Companies shall provide the Employee with the following during the term of this New Agreement: (i) the right to first class air travel and first class hotel accommodations; (ii) all reasonable club dues and membership fees for clubs and other similar organizations which are important to the conduct of the business of Capsure or the Companies and which he uses for business purposes; (iii) reasonable consultations with financial and tax advisors or counselors; and (iv) an annual physical examination. Page 3 4 H. In addition to any other benefits to be provided to the Employee by Capsure, Capsure 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 Article Five, 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 Capsure or the Companies to the Employee. I. Capsure or 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 Capsure or the Companies. 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 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 Five: Termination by Mutual Agreement, Death, Disability or For Cause This New Agreement and the Employment Period: A. May be terminated at any time by mutual agreement between the Employee and Capsure; B. 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; C. May be terminated by Capsure 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 and the Employment Period 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 Page 4 5 Employee. Any disability of less than six cumulative months duration in a twelve consecutive month period shall not be cause for interruption, suspension or withholding of the salary due the Employee by Capsure; D. 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 New Agreement, the term "for cause" shall be limited to: (i) the willful engaging of the Employee in conduct materially injurious to Capsure or the Companies; (ii) 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; (iii) 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 Capsure or the Companies; and (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. If Capsure terminates this New Agreement for cause, all of the Employee's rights to receive salary and related benefits hereunder shall forthwith cease. Article Six: Termination for Good Reason This New Agreement may be terminated by the Employee for a "good reason" (as hereinafter defined) without any reduction in benefits or of the amounts payable to him hereunder. The term "good reason" shall mean and include one or more of the following: A. A material change in the Employee's status or position(s) with Capsure or the Companies that represents a demotion from the Employee's status or position(s) in effect immediately before the effective date of this New Agreement; provided, however, that the change in position arising from a sale by Capsure of certain of its subsidiaries shall not constitute "good reason" pursuant to this Article Six; Page 5 6 B. The assignment to the Employee of any significant and material duties or responsibilities that are materially inconsistent with the Employee's status or position(s) in effect immediately before the effective date of this New Agreement; C. Notice by Capsure to the Employee of termination of his employment, this New Agreement or the Employment Period for any reason whatsoever, except in connection with (i) a notice that this Agreement shall terminate at the expiration of the then existing Employment Period pursuant to Section 2(A) hereof, or (ii) the termination of the Employee's employment for cause or as a result of the Employee's disability or death; D. A reduction in the minimum annual salary then being paid to the Employee by Capsure, or a 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 Capsure or the Companies; E. A material increase in the Employee's responsibilities or duties without a commensurate increase in total compensation; F. A change in the Employee's place of employment without his written consent or the imposition of a requirement by Capsure or the Companies that the Employee be based anywhere other than 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 northern DeKalb County, Georgia unreasonably difficult or unreasonably inconvenient for him; G. A material increase in the frequency or duration of the Employee's business travel; and H. Other substantial, material and adverse changes in the Employee's conditions of employment imposed on him by Capsure or the Companies or any material breach by Capsure of the provisions of this New Agreement, after compliance with the provisions of Article Four hereof. Article Seven: Termination Benefits If this New Agreement, the Employee's employment or the Employment Period is terminated by Capsure for any reason other than as provided in Section 2(A) or Article Five, or if this New Agreement is terminated by the Employee for good reason as provided in Article Six, the following benefits shall be paid or provided to the Employee: A. Compensation: A payment, payable in cash or by bank check or by wire transfer to the Employee's bank account, within 30 days after the effective date of such termination, equal to two times the Employee's "Annual Cash Compensation". "Annual Cash Compensation" as used herein shall mean the total cash compensation paid to the Employee during the last full calendar year, as would be required to be disclosed in Item 11 o f Capsure's Annual Report on Form 10-K pursuant to the Securities Exchange Act of 1934 and the rules and regulations Page 6 7 thereunder, as in effect on the date hereof, whether or not Capsure is then subject to such reporting requirements (including amounts not required to be disclosed on the basis of immateriality, but excluding amounts payable pursuant to pension, retirement or stock option or stock incentive plans). Notwithstanding the foregoing, Capsure and the Employee agree that this lump sum payment, payable after termination of the Employee by Capsure as described above, or payable in the event of termination by the Employee for good reason (as hereinbefore defined), shall be paid to the Employee as liquidated damages in lieu of all obligations of Capsure to the Employee hereunder (other than the other obligations of Capsure to the Employee specifically set forth in Article Seven) and any other liability of Capsure to the Employee, including damage to his reputation, and that such an amount constitutes a realistic and reasonable valuation of the damages. B. Insurance Benefits: For a period not to exceed a maximum of 24 months after the termination date, the Employee is entitled to participate in all life insurance, medical, dental, health, and disability plans, programs or arrangements to the same degree as if he had remained in the employment of Capsure, to the extent such plans, programs, or arrangements are offered by Capsure during such 24-month period. In the event that the Employee's participation in any such continuing plan, program or arrangement is not directly permitted by the provisions of these plans, programs or arrangements, Capsure shall arrange, at its expense, to provide the Employee with substantially similar benefits. C. All unexercised options granted to the Employee shall fully vest immediately upon a termination by Capsure of the Employee's employment as described above, or a termination by the Employee for a good reason. If such a termination occurs at any time within two (2) years following a "Change in Control" (as hereinafter defined), Capsure will, at the election of the Employee by notice (the "Election") given to Capsure within eighty-five (85) days following the Change in Control, pay to the Employee in cash equivalents an amount (an "option payment") equal to the excess, if any, of the fair market value for each share of Capsure's common stock subject to an unexercised option held by the Employee over the exercise price per share of such option(s). For purposes of determining the amount of the option payment, the fair market value for each share of Capsure's stock subject to an unexercised option held by the Employee shall be determined by calculating the average last trade price for Capsure's common stock traded on the New York Stock Exchange on each of the ten (10) business days prior to the delivery to Capsure of the Election by the Employee. Capsure shall pay the option payment to the Employee within five (5) business days following the receipt of the Election. D. Retirement Benefits: If such a termination occurs at any time within two years following a Change in Control, the Employee shall be deemed to be completely vested under all pension plans and all supplemental non-qualified plans, or any successor plan, (collectively, the "Retirement Plans") in effect immediately prior to the date the Change in Control occurs regardless of the Employee's actual vesting service credit thereunder. Any part of the foregoing retirement benefits which are not paid through the Retirement Plans shall be paid by Capsure. With the consent of the Employee, Capsure's obligation under this Section 7(D) may be satisfied by the purchase of an individual retirement annuity providing the foregoing retirement benefits Page 7 8 are calculated in accordance with the provisions of the Retirement Plans in effect immediately prior to the date a Change in Control occurs. E. Executive Outplacement Counseling: If such a termination occurs at any time within two years following a Change in Control, upon written request of the Employee within two years from such termination date], Capsure shall engage an outplacement counseling service of national reputation to assist the Employee in obtaining employment. Employee shall be entitled to only one such engagement of an outplacement counseling service, and Capsure shall reimburse the Employee for all reasonable travel and other costs associated with such an engagement. F. Make-Whole Payments: (i) Notwithstanding any provisions to the contrary in this Agreement, if any payment made pursuant to this Article Seven which is in the nature of compensation payable to the Employee by Capsure (or any subsidiary thereof) under this Agreement or otherwise (a "Payment") would, if paid, constitute a "parachute payment" under Section 280G of the Internal Revenue Code of 1986, as amended ("the Code") or is subject to any tax under Section 4999 of the Code, or any similar federal, state, local, or other law, (an "Excise Tax"), then the Company shall pay to the Employee an additional amount (the "Make-Whole Amount") which, after payment of all income, payroll, and excise taxes thereon is equal to the Excise Tax. For purposes of determining the Make-Whole Amount, the Employee shall be deemed to be taxed at the highest marginal rate under all applicable local, state, and federal income tax laws for the year in which the Make-Whole Amount is paid. The Make-Whole Amount payable with respect to an Excise Tax shall be paid by the Company coincident with the receipt by the Employee of the Payment with respect to which such Excise Tax relates. (b) All calculations under Section 7(F)(i) shall be made initially by Capsure and Capsure shall provide prompt written notice thereof to the Employee to enable the Employee to timely file all applicable tax returns. Upon request of the Employee, Capsure shall provide the Employee with sufficient tax and compensation data to enable the Employee or his tax advisor to independently make the calculations described in Section 7(F)(i) and Capsure shall reimburse the Employee for reasonable fees and expenses incurred for any such verification. If the Employee gives written notice to Capsure of any objection to the results of Capsure's calculations within 60 days of the Employee's receipt of written notice thereof, the dispute shall be referred for determination to tax counsel selected by the independent auditors of Capsure ("Tax Counsel"). Capsure shall pay all fees and expenses of such Tax Counsel. Pending such determination by Tax Counsel, Capsure shall pay the Employee the Make-Whole Amount as determined by it in good faith. The determination by Tax Counsel shall be conclusive and binding upon all parties unless the Internal Revenue Service, a court of competent jurisdiction, or such other duly empowered governmental body or agency (a "Tax Authority") determines that the Employee Page 8 9 owes a greater or lesser amount of Excise Tax with respect to any Payment than the amount determined by Tax Counsel. At the request of Capsure, the Employee shall take all reasonable steps to appeal any adverse determination by a Tax Authority with respect to any Excise Tax; provided that Capsure advances to the Employee all reasonable legal fees, costs, and other expenses incurred in such appeal. Should a Tax Authority finally determine that an additional Excise Tax is owed, then Capsure shall pay an additional Make-Whole Amount to the Employee in a manner consistent with this Section 7(F) with respect to any additional Excise Tax and any assessed interest, fines, or penalties. If any Excise Tax as calculated by Capsure or Tax Counsel, as the case may be, is finally determined by a Tax Authority to exceed the amount required to be paid under applicable law, then the Employee shall repay such excess to Capsure within 30 days of such determination; provided that such repayment shall be reduced by the amount of any taxes paid by the Employee on such excess which is not offset by the tax benefit resulting from the reduced Excess Tax. G. "Change in Control": For purposes of this Article Seven, a "Change in Control" of Capsure shall be deemed to have occurred if: (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 [the "Exchange Act"], as in effect on the date hereof), becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act, as in effect on the date hereof), directly or indirectly, of securities of Capsure representing 51% or more of the combined voting power of Capsure's then outstanding voting securities; or (ii) at any time less than a majority of the members of the Board shall be persons who were either nominated for election by the Board or were elected by the Board; or (iii) the closing of a merger or consolidation of Capsure with any other corporation, other than a merger or consolidation which would result in the voting securities of Capsure outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 51% of the combined voting power of the voting securities of Capsure or such surviving entity outstanding immediately after such merger or consolidation; or (iv) the stockholders Capsure approve a plan of complete liquidation of Capsure; or (v) the closing of a sale or disposition by Capsure of all or substantially all its assets. Page 9 10 Article Eight: Indemnification Capsure and the Companies 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 Capsure or 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 Capsure or any of the Companies. If the existing certificates of incorporation and by-laws of Capsure or 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 Nine: 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 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 Capsure or the Companies. Article Ten: Non-Solicitation A. The Employee shall not at any time during the period of his employment by Capsure or the Companies or within five years after termination of his employment by Capsure or the Companies (regardless of the reason for termination), directly or indirectly, solicit any employee of Capsure or 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 Capsure or 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 Capsure and the Companies, and Capsure and the Companies will be materially damaged if such covenants are not specifically enforced. Accordingly, the Employee agrees that Capsure and 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 Capsure and the Companies may be entitled to under this New Agreement. Page 10 11 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 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 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 notice 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 5557 Stapleton Drive, Dunwoody, GA 30338, 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 Fourteen: 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 Fifteen: 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 Sixteen: 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. Page 11 12 Article Seventeen: 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 Six. Article Eighteen: Withholding Capsure 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 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: 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-One: Headings The headings contained in this New Agreement are inserted for convenience only and do not constitute a part of this New Agreement. Page 12 13 IN WITNESS WHEREOF, the parties have executed this New Agreement effective September 30, 1995. "Capsure" "The Employee" Capsure Holdings Corp. Bruce A. Esselborn By: /s/ Sam Zell By: /s/ Bruce A. Esselborn --------------------------------- --------------------------------- Its: Chairman Bruce A. Esselborn --------------------------------- dated this 30th day of October, 1995 dated this 1st day of November, 1995 at Chicago, Illinois at Atlanta, Georgia Witness: /s/ Kelly Stonebraker Witness: /s/ Jane Lowendick ---------------------------- ---------------------------- Page 13 EX-10.(2) 4 EMPLOYMENT AGREEMENT 1 EXHIBIT 10(2) EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT entered into as of the 30th day of September, 1995, by and between CAPSURE HOLDINGS CORP. ("Capsure"), a Delaware 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 Employment Agreements dated February 20, 1990, and February 20, 1995 (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 to terminate, to the extent not previously terminated, the Prior Agreements effective September 30, 1995. Article Two: Term and Employment A. (i) Capsure will now continue to employ the Employee on a rolling, two-year basis, with the period of the Employee's employment under this New Agreement commencing on September 30, 1995, and continuing for a minimum period of two years thereafter, with a provisional ending date of September 29, 1997 ("the Provisional Term"), such ending date subject to automatic extension as provided below. The period of the Employee's employment hereunder within the Provisional Term and any automatically extended terms is herein referred to as the "Employment Period". (ii) On October 1, 1995, and on each day thereafter, the Employment Period shall be extended automatically by one day unless at any time after October 1, 1995, Capsure delivers to the Employee, or the Employee delivers to Capsure, written notice that the Employment Period will not thereafter be further extended and will therefore end at the expiration of the then existing Employment Period, including any previous extensions. Following such notice, the Employment Period will not be further extended except by mutual agreement of Capsure and the Employee. Thus, after October 1, 1995, until written notice is received by either party, the Employment Period at any point in time shall be two years. The Employment Period shall continue until the expiration of all automatic extensions effected as described above, unless and until it ceases or is terminated sooner as provided for in Article Five. B. During the Employment Period, the Employee shall serve as Senior Vice President and Chief Financial Officer of Capsure, and, unless and until Capsure shall sell, assign or transfer its ownership interest therein, 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 Page 1 2 and as are consistent with past practice. In the event that Capsure shall sell, assign, or transfer its ownership interest in UCHC or UCIC, then upon the closing of any such sale, assignment or transfer, the Employee shall resign as Executive Vice President of UCHC and/or UCIC, however, the Employee shall continue as the Senior Vice President and Chief Financial Officer of Capsure subject to and in accordance with the terms and conditions of this Agreement. C. The Employee accepts such employment and agrees to serve in the capacities set forth in this New Agreement and to perform such services 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. D. During the Employment Period the Employee's office shall be customary to her position and shall be located in Atlanta, Georgia, and the Employee shall not be obligated to maintain her office in any other place and shall not be required or obligated to relocate or transfer away from Atlanta, Georgia. 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 unreasonably inconvenient for her. Article Three: Compensation During the Employment Period A. Capsure 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 salary of $225,000.00, payable in accordance with the Capsure's 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. Capsure reserves 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 Capsure and 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 of Capsure (or the Compensation Committee of Capsure 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. Page 2 3 D. Capsure's 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 Article Five. E. The Employee shall be entitled to an annual bonus and the amount of such bonus shall be determined and paid in December of each year, unless sooner agreed upon by both Capsure and the Employee, and the amount of such bonus shall be mutually agreed upon between the Employee and the Compensation Committee of Capsure (or any other body or group of persons responsible for setting the Employee's bonus). F. Capsure or 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 Capsure or the Companies. 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 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 Five: Termination by Mutual Agreement, Death, Disability or For Cause This New Agreement and the Employment Period: A. May be terminated at any time by mutual agreement between the Employee and Capsure; B. 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; C. May be terminated by Capsure 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 New Agreement on thirty (30) day's written notice, at the end of which time the Employee's employment and the Employment Period shall be terminated. As used in this New Agreement, the term "disability" shall mean the substantial inability of the Employee to perform her 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 cumulative months duration in a twelve consecutive month period shall not be cause for interruption, suspension or withholding of the salary due the Employee by Capsure; D. 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 New Agreement, the term "for cause" shall be limited to: (i) the willful engaging of the Employee in conduct materially injurious to Capsure or the Companies; Page 3 4 (ii) 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; (iii) 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 Capsure or the Companies; and (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. If Capsure terminates this New Agreement for cause, all of the Employee's rights to receive salary and related benefits hereunder shall forthwith cease. Article Six: Termination for Good Reason This New Agreement may be terminated by the Employee for a "good reason" (as hereinafter defined) without any reduction in benefits or of the amounts payable to her hereunder. The term "good reason" shall mean and include one or more of the following: A. A material change in the Employee's status or position(s) with Capsure or the Companies that represents a demotion from the Employee's status or position(s) in effect immediately before the effective date of this New Agreement; provided, however, that the change in position arising from a sale by Capsure of certain of its subsidiaries shall not constitute "good reason" pursuant to this Article Six; B. The assignment to the Employee of any significant and material duties or responsibilities that are materially inconsistent with the Employee's status or position(s) in effect immediately before the effective date of this New Agreement; C. Notice by Capsure to the Employee of termination of her employment, this New Agreement or the Employment Period for any reason whatsoever, except in connection with (i) a notice that this Agreement shall terminate at the expiration of the then existing Employment Period pursuant to Section 2(A) hereof, or (ii) the termination of the Employee's employment for cause or as a result of the Employee's disability or death; D. A reduction in the minimum annual salary then being paid to the Employee by Capsure, or a 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 Capsure or the Companies; E. A material increase in the Employee's responsibilities or duties without a commensurate increase in total compensation; F. A change in the Employee's place of employment without her written consent or the imposition of a requirement by Capsure or the Companies that the Employee be based Page 4 5 anywhere other than 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 unreasonably inconvenient for her; G. A material increase in the frequency or duration of the Employee's business travel; and H. Other substantial, material and adverse changes in the Employee's conditions of employment imposed on her by Capsure or the Companies or any material breach by Capsure of the provisions of this New Agreement, after compliance with the provisions of Article Four hereof. Article Seven: Termination Benefits If this New Agreement, the Employee's employment or the Employment Period is terminated by Capsure for any reason other than as provided in Section 2(A) or Article Five, or if this New Agreement is terminated by the Employee for good reason as provided in Article Six, the following benefits shall be paid or provided to the Employee: A. Compensation: A payment, payable in cash or by bank check or by wire transfer to the Employee's bank account, within 30 days after the effective date of such termination, equal to two times the Employee's "Annual Cash Compensation". "Annual Cash Compensation" as used herein shall mean the total cash compensation paid to the Employee during the last full calendar year, as would be required to be disclosed in Item 11 of Capsure's Annual Report on Form 10-K pursuant to the Securities Exchange Act of 1934 and the rules and regulations thereunder, as in effect on the date hereof, whether or not Capsure is then subject to such reporting requirements (including amounts not required to be disclosed on the basis of immateriality, but excluding amounts payable pursuant to pension, retirement or stock option or stock incentive plans). Notwithstanding the foregoing, Capsure and the Employee agree that this lump sum payment, payable after termination of the Employee by Capsure as described above, or payable in the event of termination by the Employee for good reason (as hereinbefore defined), shall be paid to the Employee as liquidated damages in lieu of all obligations of Capsure to the Employee hereunder (other than the other obligations of Capsure to the Employee specifically set forth in Article Seven) and any other liability of Capsure to the Employee, including damage to her reputation, and that such an amount constitutes a realistic and reasonable valuation of the damages. B. Insurance Benefits: For a period not to exceed a maximum of 24 months after the termination date, the Employee is entitled to participate in all life insurance, medical, dental, health, and disability plans, programs or arrangements to the same degree as if she had remained in the employment of Capsure, to the extent such plans, programs, or arrangements are offered by Capsure during such 24-month period. In the event that the Employee's participation in any such continuing plan, program or arrangement is not directly permitted by the provisions of these plans, programs or arrangements, Capsure shall arrange, at its expense, to provide the Employee with substantially similar benefits. C. All unexercised options granted to the Employee shall fully vest immediately upon a termination by Capsure of the Employee's employment as described above, or a termination by the Employee for a good reason. In addition, Capsure will, at the election of the Employee by notice (the "Election") given to Capsure within eighty-five (85) days following the termination of the Employee's employment as described above, or a termination by the Employee for a good reason, pay to the Employee Page 5 6 in cash equivalents an amount (an "option payment") equal to the excess, if any, of the fair market value for each share of Capsure's common stock subject to an unexercised option held by the Employee over the exercise price per share of such option(s). For purposes of determining the amount of the option payment, the fair market value for each share of Capsure's stock subject to an unexercised option held by the Employee shall be determined by calculating the average last trade price for Capsure's common stock traded on the New York Stock Exchange on each of the ten (10) business days prior to the delivery to Capsure of the Election by the Employee. Capsure shall pay the option payment to the Employee within five (5) business days following the receipt of the Election. D. Retirement Benefits: If such a termination occurs at any time within two years following a Change in Control, the Employee shall be deemed to be completely vested under all pension plans and all supplemental non-qualified plans, or any successor plan, (collectively, the "Retirement Plans") in effect immediately prior to the date the Change in Control occurs regardless of the Employee's actual vesting service credit thereunder. Any part of the foregoing retirement benefits which are not paid through the Retirement Plans shall be paid by Capsure. With the consent of the Employee, Capsure's obligation under this Section 7(D) may be satisfied by the purchase of an individual retirement annuity providing the foregoing retirement benefits are calculated in accordance with the provisions of the Retirement Plans in effect immediately prior to the date a Change in Control occurs. E. Executive Outplacement Counseling: If such a termination occurs at any time within two years following a Change in Control, upon written request of the Employee within two years from such termination date, Capsure shall engage an outplacement counseling service of national reputation to assist the Employee in obtaining employment. Employee shall be entitled to only one such engagement of an outplacement counseling service, and Capsure shall reimburse the Employee for all reasonable travel and other costs associated with such an engagement. F. Make-Whole Payments: (i) Notwithstanding any provisions to the contrary in this Agreement, if any payment made pursuant to this Article Seven which is in the nature of compensation payable to the Employee by Capsure (or any subsidiary thereof) under this Agreement or otherwise (a "Payment") would, if paid, constitute a "parachute payment" under Section 280G of the Internal Revenue Code of 1986, as amended ("the Code") or is subject to any tax under Section 4999 of the Code, or any similar federal, state, local, or other law, (an "Excise Tax"), then the Company shall pay to the Employee an additional amount (the "Make-Whole Amount") which, after payment of all income, payroll, and excise taxes thereon is equal to the Excise Tax. For purposes of determining the Make-Whole Amount, the Employee shall be deemed to be taxed at the highest marginal rate under all applicable local, state, and federal income tax laws for the year in which the Make-Whole Amount is paid. The Make-Whole Amount payable with respect to an Excise Tax shall be paid by the Company coincident with the receipt by the Employee of the Payment with respect to which such Excise Tax relates. (ii) All calculations under Section 7(F)(i) shall be made initially by Capsure and Capsure shall provide prompt written notice thereof to the Employee to enable the Employee to timely file all applicable tax returns. Upon request of the Employee, Capsure shall provide the Employee with sufficient tax and compensation data to enable the Employee or her tax advisor to independently make the calculations described in Section 7(F)(i) and Capsure shall reimburse Page 6 7 the Employee for reasonable fees and expenses incurred for any such verification. If the Employee gives written notice to Capsure of any objection to the results of Capsure's calculations within 60 days of the Employee's receipt of written notice thereof, the dispute shall be referred for determination to tax counsel selected by the independent auditors of Capsure ("Tax Counsel"). Capsure shall pay all fees and expenses of such Tax Counsel. Pending such determination by Tax Counsel, Capsure shall pay the Employee the Make-Whole Amount as determined by it in good faith. The determination by Tax Counsel shall be conclusive and binding upon all parties unless the Internal Revenue Service, a court of competent jurisdiction, or such other duly empowered governmental body or agency (a "Tax Authority") determines that the Employee owes a greater or lesser amount of Excise Tax with respect to any Payment than the amount determined by Tax Counsel. At the request of Capsure, the Employee shall take all reasonable steps to appeal any adverse determination by a Tax Authority with respect to any Excise Tax; provided that Capsure advances to the Employee all reasonable legal fees, costs, and other expenses incurred in such appeal. Should a Tax Authority finally determine that an additional Excise Tax is owed, then Capsure shall pay an additional Make-Whole Amount to the Employee in a manner consistent with this Section 7(F) with respect to any additional Excise Tax and any assessed interest, fines, or penalties. If any Excise Tax as calculated by Capsure or Tax Counsel, as the case may be, is finally determined by a Tax Authority to exceed the amount required to be paid under applicable law, then the Employee shall repay such excess to Capsure within 30 days of such determination; provided that such repayment shall be reduced by the amount of any taxes paid by the Employee on such excess which is not offset by the tax benefit resulting from the reduced Excess Tax. G. "Change in Control": For purposes of this Article Seven, a "Change in Control" of Capsure shall be deemed to have occurred if: (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 [the "Exchange Act"], as in effect on the date hereof), becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act, as in effect on the date hereof), directly or indirectly, of securities of Capsure representing 51% or more of the combined voting power of Capsure's then outstanding voting securities; or (ii) at any time less than a majority of the members of the Board shall be persons who were either nominated for election by the Board or were elected by the Board; or (iii) the closing of a merger or consolidation of Capsure with any other corporation, other than a merger or consolidation which would result in the voting securities of Capsure outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 51% of the combined voting power of the voting securities of Capsure or such surviving entity outstanding immediately after such merger or consolidation; or (iv) the stockholders Capsure approve a plan of complete liquidation of Capsure; or (v) the closing of a sale or disposition by Capsure of all or substantially all its assets. Page 7 8 Article Eight: Indemnification ------------------------------ Capsure and the Companies 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 Capsure or 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 she (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 Capsure or any of the Companies. If the existing certificates of incorporation and by-laws of Capsure or 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 Nine: 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 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 Capsure or the Companies. Article Ten: Non-Solicitation ----------------------------- A. The Employee shall not at any time during the period of her employment by Capsure or the Companies or within five years after termination of her employment by Capsure or the Companies (regardless of the reason for termination), directly or indirectly, solicit any employee of Capsure or 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 she is an owner, partner, substantial shareholder or principal executive to solicit the employment of, any person who was employed by Capsure or 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 Capsure and the Companies, and Capsure and the Companies will be materially damaged if such covenants are not specifically enforced. Accordingly, the Employee agrees that Capsure and 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 Capsure and the Companies may be entitled to under this New 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 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. Page 8 9 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 notice 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 her 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 Fourteen: 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 Fifteen: 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 Sixteen: 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 Seventeen: 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 Six. Article Eighteen: Withholding ----------------------------- Capsure shall be entitled to withhold from amounts payable to the Employee hereunder such amounts as may be required by applicable law. Page 9 10 Article Nineteen: 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: 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-One: Headings ---------------------------- The headings contained in this New Agreement are inserted for convenience only and do not constitute a part of this New Agreement. Page 10 11 IN WITNESS WHEREOF, the parties have executed this New Agreement effective September 30, 1995. "Capsure" "The Employee" Capsure Holdings Corp. Mary Jane Robertson By: /s/ Sam Zell By: /s/ Mary Jane Robertson ---------------------------- ------------------------- Its: Chairman Mary Jane Robertson ---------------------------- dated this 30th day of October,1995 dated this 6th day of November, 1995 ---- ------- --- --------- at Chicago, Illinois at Atlanta, Georgia Witness: /s/ Kelly Stonebraker Witness: /s/ Victoria E. Hicks --------------------- --------------------- Page 11 EX-10.(4) 5 EXEC. CHANGE IN CONTROL AND TERMINATION BENEFITS 1 EXHIBIT 10(4) EXECUTIVE CHANGE IN CONTROL AND TERMINATION BENEFITS AGREEMENT THIS AGREEMENT, between CAPSURE HOLDINGS CORP., a Delaware corporation (hereinafter called "Capsure"), UNITED CAPITOL INSURANCE COMPANY, a Wisconsin Corporation (hereinafter called "UCIC"), and STEVEN S. ZEITMAN (hereinafter called the "Employee"), dated as of this 6th day of November, 1995. W I T N E S S E T H: -------------------- WHEREAS, Capsure considers it essential to the best interests of Capsure and its stockholders that the Employee, as a member of the key management personnel of UCIC, a wholly-owned indirect subsidiary of Capsure, be encouraged to remain with UCIC, and to continue to devote full attention to UCIC's business in the event an effort is made by Capsure to relinquish control of UCIC through a sale of UCIC by Capsure or otherwise. In this connection, Capsure recognizes that the possibility of a change in control and the uncertainty and questions which it may raise among management may result in the departure or distraction of key management personnel of UCIC to the detriment of Capsure and its stockholders. As such, the Board of Directors of Capsure (the "Board") has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of key members of UCIC's management to their assigned duties without distraction in the face of the potentially disturbing circumstances arising from the possibility of a change in control of UCIC; WHEREAS, the Employee is a key member of UCIC's management personnel; WHEREAS, Capsure believes the Employee has made and will continue to make valuable contributions to UCIC; WHEREAS, should Capsure receive any proposal from a third person concerning the acquisition of 51% or more of the voting securities of UCIC, the Board believes it imperative that UCIC, Capsure and the Board be able to rely upon the Employee to continue as a member of management of UCIC, and that UCIC and Capsure be able to receive and rely upon the advice and services of the Employee, without concern that he or she might be distracted by the personal uncertainties and risks created by such a proposal; and WHEREAS, should Capsure receive any such proposals, in addition to the Employee's regular duties, the Employee may be called upon to assist in the assessment and furtherance of such proposals, and to take such other actions as UCIC, Capsure or the Board might determine to be appropriate; NOW, THEREFORE, to ensure Capsure and UCIC that they will have the continued, undivided attention and services of the Employee and the availability of the Employee's cooperation, advice and counsel notwithstanding the possibility, threat or occurrence of a bid to take over control of UCIC, and to induce the Employee to remain in the employ of UCIC, and for other good and valuable consideration, Capsure, UCIC, and the Employee agree as follows: Page 1 2 1. Change in Control. For purposes of this Agreement, a "Change in Control of UCIC" shall be deemed to have occurred if, on or before December 31, 1996 Capsure or Capsure's subsidiary, Capsure Financial Group, Inc., actually transfers, assigns, sells or disposes of (i) all or substantially all of UCIC's assets, or (ii) 51% or more of the voting securities of UCIC or United Capitol Holding Company. 2. Payment of a Transaction Bonus. Upon the occurrence of a Change in Control of UCIC, the Employee shall be entitled to a transaction bonus payable by either Capsure or UCIC (as Capsure may elect) to the Employee, such bonus to be in an amount to be determined by the Board (or the Compensation Committee of the Board or any other person or entity designated by the Board) prior to the closing of the Change in Control of UCIC. The transaction bonus shall be in an amount which is not less than 50% and not more than 75% of the sum of the Employee's effective annual base salary, plus the last cash bonus paid to the Employee, prior to the Change in Control of UCIC. The transaction bonus shall be payable in cash at the closing of the Change in Control of UCIC, subject to any applicable payroll or other taxes required to be withheld. The determination of whether the Employee receives 50% or 75% of his annual base salary plus bonus (or something in between) as a transaction bonus shall be made solely at the discretion of the Board (or the Compensation Committee of the Board or any other person or entity designated by the Board), following the consideration of such factors as the Employee's assistance, furtherance efforts, general attitude and spirit of cooperation with Capsure and UCIC during the circumstances arising from the possibility of a Change in Control of UCIC. 3. Employee Stock Options. (a) Upon a Change in Control of UCIC, Capsure will, at the election of the Employee by notice (the "Election") given to Capsure within eighty-five (85) days following the Change in Control of UCIC, pay to the Employee in cash equivalents an amount (an "option payment") equal to the excess, if any, of the fair market value for each share of Capsure's common stock subject to an unexercised option held by the Employee over the exercise price per share of such option(s). For purposes of determining the amount of the option payment, the fair market value for each share of Capsure's stock subject to an unexercised option held by the Employee shall be the last trade price for Capsure's common stock on the New York Stock Exchange at the close of trading on the day prior to the delivery to Capsure of the Election by the Employee. Capsure shall pay the option payment to the Employee within five (5) business days following the receipt of the Election. Page 2 3 (b) All unexercised options granted to the Employee shall fully vest immediately upon the closing of a Change in Control of UCIC. 4. Termination of the Employee Following a Change in Control of UCIC. (a) Following the closing of a Change in Control of UCIC, the Employee shall be entitled to the benefits set forth in Sections 6 and 7 hereof upon any termination by UCIC or its successor of the Employee's employment by UCIC or its successor within 24 months following a Change in Control of UCIC for any reason, except the following: (i) Termination by reason of the Employee's death, provided the Employee has not previously given a "Notice of Termination" pursuant to Section 5 hereof; or (ii) Termination by reason of the Employee's "disability". For the purposes of this Agreement, disability shall be defined as the Employee's inability by reason of physical or mental illness or other physical or mental disability to substantially perform the duties required by the position held by the Employee at the inception of such illness or disability for any consecutive ninety (90) day period unless within 30 days after written notice of termination is thereafter given by UCIC to the Employee, the Employee shall have returned to the full time performance of his duties; or (iii) Termination by reason of retirement on or after normal retirement age in accordance with and under UCIC's Employee's Money Purchase Pension Plan (the "Pension Plan") or any plan in substitution thereof; or (iv) Termination upon a good faith determination by a majority vote of the Board of Directors of UCIC, or of any affiliate or subsidiary of UCIC, that termination is necessary by reason of a determination by the Insurance Department of any state having jurisdiction over UCIC, or any affiliate or subsidiary, that the Employee must be removed or disqualified from acting as an officer of UCIC or any of its subsidiaries; or (v) Termination for "cause". For purposes of this Agreement, "cause" shall mean when in the judgment of the Board of Directors of UCIC, the Employee has (A) willfully and continually failed to substantially perform his duties or (B) engaged in misconduct materially detrimental to the best interests of UCIC or conduct which is illegal; provided that, termination for cause based on the Employee's willful and continued failure to substantially perform his duties shall not be effective unless the Employee shall have received written notice from either the Chairman of the Board of Directors of UCIC or the President of UCIC of such failure and demand for substantial performance 30 days prior to such termination and the Employee has failed after receipt of such Page 3 4 notice to resume the diligent performance of his duties. Examples of the types of misconduct which would be considered materially detrimental or illegal and justifying termination for cause include embezzlement, fraud, payoffs, kickbacks, illegal political contributions, and the like. (b) Capsure shall also provide the Employee with the benefits set forth in Sections 6 and 7 upon any termination of employment with UCIC by the Employee for "Good Reason" within 24 months following a Change in Control of UCIC. For purposes of this Agreement, "Good Reason" shall mean the occurrence of any one of the following events without the Employee's consent: (i) The assignment of the Employee to any duties substantially inconsistent with his position, duties, responsibilities or status with UCIC immediately prior to the Change in Control of UCIC, or a substantial reduction of Employee's duties or responsibilities, as compared with the duties or responsibilities immediately prior to the Change in Control of UCIC, and the continuation of such inconsistent assignment or reduction for thirty (30) days following written notice thereof from the Employee to UCIC; or (ii) A reduction by UCIC in the amount of the Employee's base salary as compared to that which was paid immediately prior to the Change in Control of UCIC; or (iii) The failure by UCIC or its successor to continue to provide to the Employee benefits substantially similar in the aggregate to the benefits provided under UCIC's benefit programs prior to the Change in Control of UCIC, such as any of UCIC's pension, life insurance, medical, health or disability plans in which the Employee was participating at the time of the Change in Control of UCIC; or (iv) Requiring the Employee to be transferred outside the metropolitan Atlanta area at the time within 24 months after the Change in Control of UCIC, except with the Employee's consent; or (v) Any breach by UCIC of any of the provisions of this Agreement or any failure by UCIC to carry out its obligations hereunder and the continuation of such breach or failure for thirty (30) days following written notice thereof from the Employee to UCIC. (c) Notwithstanding the other provisions of this Section 4, in the event that the Employee shall resign the employment with UCIC without "Good Reason", then the Employee shall not be entitled to the benefits set forth in Sections 6 and 7 upon such resignation. Page 4 5 5. Notice of Termination. Any termination of the Employee's employment by UCIC as contemplated by Section 4(a) of this Agreement or by the Employee as contemplated by Section 4(b) of this Agreement shall be communicated by written "Notice of Termination" to the other party hereto. Any "Notice of Termination" shall indicate the effective date of termination which shall not be less than 30 days after the date the Notice of Termination is delivered (the "Termination Date"), the specific provision in this Agreement relied upon, and will set forth in reasonable detail the facts and circumstances claimed to provide a basis for such termination. 6. Termination Benefits. Upon termination of the Employee's employment by UCIC as described in Section 4(a) or 4(b) of this Agreement, the following payments (subject to any applicable payroll or other taxes required to be withheld) and benefits shall be paid and provided to the Employee: (a) Compensation UCIC shall pay to the Employee an amount equal to two (2) times the greater of (i) the Employee's effective annual base salary at the Termination Date, or (ii) the Employee's effective annual base salary immediately prior to the Change in Control of UCIC. UCIC shall make monthly payments of a portion of such amount in 24 equal monthly installments on the first day of each month after the Termination Date. The amount payable to the Employee under either (i) or (ii) shall be reduced by one monthly installment for each full month the Employee remains employed by UCIC after the Change in Control of UCIC, provided, however, that such payments shall cease after the month in which Employee reaches normal retirement age in accordance with UCIC's Money Purchase Pension Plan. (b) Insurance Benefits, Etc. UCIC shall provide or cause to be provided to the Employee, for a period of 24 months after the Date of Termination, all life insurance, medical, health, and disability plans, programs or arrangements in which the Employee would have been entitled to participate if he had continued in the employment of UCIC, to the extent such plans, programs, or arrangements are offered by UCIC during such 24-month period. This 24-month time obligation of UCIC to furnish these aforementioned benefits shall be reduced by one month for each full month the Employee remains employed by UCIC after the closing of the Change in Control of UCIC. In the event that the Employee's participation in any such continuing plan, program or arrangement is not directly permitted by the provisions of these plans, programs or arrangements, UCIC shall arrange, at its expense, to provide the Employee with substantially similar benefits. Page 5 6 7. Other Benefits. Upon termination of the Employee's employment by UCIC as described in Sections 4(a) or 4(b) of this Agreement, the following benefits (subject to any applicable payroll or other taxes required to be withheld) shall be paid or provided to the Employee: (a) Retirement Benefits For purposes of this Agreement, the Employee shall be deemed to be completely vested under the UCIC Money Purchase Pension Plan and all supplemental, non-qualified plans (or any successor plan), in effect immediately prior to the Change in Control of UCIC (collectively the "Retirement Plans"), regardless of the Employee's actual vesting service credit thereunder. Any part of the foregoing retirement benefits which are not paid through the Retirement Plans shall be paid by UCIC. With the consent of the Employee, UCIC's obligation under this Section 7(a) may be satisfied by the purchase of an individual retirement annuity providing the foregoing retirement benefits are calculated and payable in accordance with the provisions of the Retirement Plans in effect as of the date of Change in Control of UCIC. (b) Executive Outplacement Counseling Upon written request of the Employee, UCIC shall engage an outplacement counseling service of national reputation to assist the Employee in obtaining employment. The Employee shall be entitled to only one such engagement of an outplacement counseling service. The Employee's right to elect this counseling shall terminate 90 days from the Termination Date of the Employee. 8. Mitigation. (a) The Employee is required to seek other employment or otherwise mitigate the amount of any payments (other than any payments pursuant to Section 2 hereof) or benefits to be made by UCIC or Capsure pursuant to this Agreement. (b) If the Employee is employed (including self-employment) by any business, whether or not the other employment is in direct competition with the business of UCIC or its subsidiaries, after the Termination Date, then the amount of any prospective payments provided for in Section 6(a) shall be reduced by any base salary or other similar form of compensation (except for incentive compensation) earned by the Employee as the result of such other employment including any voluntary deferral of such base salary or similar form of compensation. (c) To the extent the Employee is eligible to participate in a plan providing benefits comparable to those to be provided by Section 6(b) hereof upon obtaining other employment (including self-employment), whether or not the Page 6 7 other employment is in direct competition with the business of UCIC or its subsidiaries, the comparable benefits UCIC would otherwise provide pursuant to Section 6(b) hereof shall not be required of UCIC. The benefit payments provided for in Section 7 shall not be reduced. (d) The Employee hereby agrees to notify UCIC promptly upon obtaining any other employment, and to furnish UCIC with details of the employee's base salary or similar form of compensation, employee benefits and the like. 9. Services During Certain Events. For purposes of this Agreement, a "potential Change in Control of UCIC" shall be deemed to have occurred if (i) Capsure enters into an agreement or arrangement, the consummation of which would result in the occurrence of a Change in Control of UCIC as defined in Section 1 of this Agreement, or (ii), the Board adopts a resolution to the effect that, for purposes of this Agreement, a potential Change in Control of UCIC has occurred. The Employee agrees that, subject to the terms and conditions of this Agreement, in the event of the occurrence of a potential Change in Control in UCIC on or before December 31, 1996, the Employee will remain in the employ of UCIC until the earliest of (A) a date which is six months from the occurrence of such potential Change in Control of UCIC, or (B) the termination by the Employee of employment by reason of disability or retirement (at the Employee's normal retirement age), or (C) the occurrence of a Change in Control of UCIC. 10. Successors. (a) Capsure shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the equity securities, business and/or assets of UCIC to expressly assume and agree to perform this Agreement. Upon the assumption of this Agreement by such successor, Capsure shall be released from any and all of its obligations and liabilities under this Agreement. Failure of Capsure to obtain such assumption prior to the effectiveness of any such Change in Control of UCIC shall be a breach of this Agreement, and shall entitle the Employee to compensation from Capsure in the same amount and on the same terms as the Employee would be entitled hereunder if the Employee were to terminate employment for Good Reason following a Change in Control of UCIC, except that for purposes of implementing the foregoing, the date on which any such Change in Control of UCIC closes shall be deemed the Termination Date. For purposes of this Agreement, "UCIC" shall mean United Capitol Insurance Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) This Agreement shall inure to the benefit of and be enforceable by the Employee's personal or legal representatives, executors, administrators, Page 7 8 successors, heirs, distributees, devisees and legatees. If the Employee should die while any amounts are payable to him hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Employee's devisee, legatee or other designee or, if there be no such designee, to the Employee's estate. 11. Notices. For the purposes of this Agreement, notices and all other communications provided for herein shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Employee: Steven S. Zeitman 2870 Pharr Ct. So. Apt. 1205 ---------------------------- Atlanta, GA 30305 ---------------------------- If to Capsure Holdings Corp. ("Capsure"): 2 North Riverside Plaza Chicago, IL 60606 Attn: General Counsel If to United Capitol Insurance Company ("UCIC"): 400 Perimeter Center Terrace Suite 345 Atlanta, GA 30346 Attn: President or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 12. Governing Law. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Georgia. 13. Miscellaneous. No provisions of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in a writing signed by the Employee, Capsure and UCIC, excepting that after the date a Change in Control of UCIC has occurred, Capsure shall not be required to be a party to any such modification, waiver or discharge. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar Page 8 9 provisions or conditions at the same or any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. 14. Separability. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement, which shall remain in full force and effect. 15. Non-Assignability. This Agreement is personal in nature and neither of the parties hereto shall, without the consent of the other, assign or transfer this Agreement or any rights or obligations hereunder, except as provided in Section 10. Without limiting the foregoing, the Employee's right to receive payments hereunder shall not be assignable or transferable, whether by pledge, creation of a security interest or otherwise, other than a transfer by his will or trust or by the laws of descent or distribution, and in the event of any attempted assignment or transfer contrary to this Section 15 Capsure and UCIC shall have no liability to pay any amount so attempted to be assigned or transferred. 16. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect through December 31, 1996, provided that the expiration of this Agreement shall not affect the rights or obligations of Capsure, UCIC, or Employee arising from a Change in Control of UCIC occurring prior to the expiration of the Agreement. Page 9 10 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered as of the day and year first set forth on page 1 of this agreement. Capsure Holdings Corp. ("Capsure") Steven S. Zeitman ("the Employee") by: /s/ Bruce A. Esselborn /s/ Steven S. Zeitman ----------------------------------------- --------------------------------------------- its: President signed this 6th day of November , 1995 ----------------------------------------- ------ -------- signed this 6th day of November , 1995 at Atlanta, GA ------ ------------ ------------------------------------------- at Atlanta, GA ----------------------------------------- United Capitol Insurance Company ("UCIC") by: /s/ Mary Jane Robertson ----------------------------------------- its: Executive VP and CFO ----------------------------------------- signed this 6th day of November , 1995 ------- ------------- at Atlanta, GA -----------------------------------------
Page 10 EX-10.(19) 6 DIRECTORS' AND OFFICERS ERROR'S AND OMISSIONS LIAB 1 EXHIBIT 10(19) Directors' and Officers' and Errors and Omissions Liability QUOTA SHARE REINSURANCE AGREEMENT issued to WESTERN SURETY COMPANY A South Dakota Corporation 2 ARTICLE CONTENTS PAGE - ------- -------- ---- I Business Covered 1 II Net Retained Lines 1 Limits Maximum Limits of Liability III Commencement 2 Termination Termination on Cut-Off Basis Commutation Option Special Termination IV Territory 3 V Exclusions 3 VI Premium and Commission 3 VII Reinsurer's Liability 3 Reinsurer to Follow Company 4 VIII Accounts and Statistical Reports 4 IX Funding of Reserves 4 X Losses and Loss Settlements 5 Cash Losses 6 Definition of Occurrence XI Extra Contractual Obligations 6 XII Taxes 6 XIII Currency 7 XIV Access to Records 7 XV Errors and Omissions 7 XVI Insolvency 7 XVII Arbitration 8 XVIII Offset Clause 8 XIX Choice of Law 9 3 Directors' and Officers' and Errors and Omissions Liability QUOTA SHARE REINSURANCE AGREEMENT issued to WESTERN SURETY COMPANY A South Dakota Corporation (hereinafter referred to as the "Company") by UNITED CAPITOL INSURANCE COMPANY A Wisconsin Corporation (hereinafter referred to as the "Reinsurer") ARTICLE I Business Covered 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 during the continuance of this Agreement and covering insurance underwritten by United Capitol Managers, Inc. and classified by the Company as Directors' and Officers' ("D&O") and Errors and Omissions ("E&O") Liability insurance. The reinsurance agreement does not cover notary public, tax preparer or agent's E&O insurance underwritten by the Company and its agents. 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 reinsurer or otherwise. Limits The Reinsurers shall accept as Quota Share reinsurance 100% of the net retained liability of the Company as respects D&O and E&O insurance. Maximum Limits of Liability The Company shall limit the maximum policy issued subject to this Treaty to $5,000,000. This limit 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. 4 WESTERN SURETY COMPANY Directors' and Officers' and Errors and Omissions Liability QUOTA SHARE REINSURANCE Effective: August 15, 1994 Page 2 ARTICLE III Commencement This Agreement shall take effect 12:01 A.M., Central Standard Time, August 15, 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 cancelled in accordance with the Termination or 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 August 15, 1994 or any August 15 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 this Agreement on a cut-off basis, the Company shall prepare a statement of the unearned premium, calculated on the daily 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 settlement 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 thirty (30) days notice in writing, which shall be in accordance with the termination provisions of this Article. 5 WESTERN SURETY COMPANY Directors' and Officers' and Errors and Omissions Liability QUOTA SHARE REINSURANCE Effective: August 15, 1994 Page 3 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 (30) 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. 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 30%. The commission allowances shall cover direct commissions, 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 shall be credited to the Reinsurer form the original date of the Company's liability. 6 WESTERN SURETY COMPANY Directors' and Officers' and Errors and Omissions Liability QUOTA SHARE REINSURANCE Effective: August 15, 1994 Page 4 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 thirty (30) days after the close of each month, summarizing premium, return premium, allowance for commission, losses paid, loss adjustment expenses paid and salvage recovered, and showing the net balance due from either party. Balances shall be paid by the debtor party within forty-five (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 month, and the customary year end statistics for completion of the Reinsurer's annual statement within thirty (30) 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 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 ("IBNR")), 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. 7 WESTERN SURETY COMPANY Directors' and Officers' and Errors and Omissions Liability QUOTA SHARE REINSURANCE Effective: August 15, 1994 Page 5 (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. (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 (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. The Reinsurer shall bear its proportionate share of 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 its proportionate share of any and all recoveries of such expense, excluding office expenses or salaries of and expenses incurred by the Company's regular employees. 8 WESTERN SURETY COMPANY Directors' and Officers' and Errors and Omissions Liability QUOTA SHARE REINSURANCE Effective: August 15, 1994 Page 6 Cash Losses It is understood that when the amount of loss paid by the Company under policies subject to this Agreement as a result of any one occurrence exceeds $100,000, the Reinsurer's share will, at the option and demand of the Company, be paid by special remittance immediately, but the Reinsurer shall have the right to deduct from such special remittance any overdue balance due the Reinsurer by the Company. Any special remittance made pursuant to this provision is to be credited to the Reinsurer in the account in which the paid loss appears. Definition of Occurrence Occurrence, as used herein, shall be defined as a loss or losses per insured. 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 tax returns, other than income or profits tax returns, to the appropriate tax authorities. 9 WESTERN SURETY COMPANY Directors' and Officers' and Errors and Omissions Liability QUOTA SHARE REINSURANCE Effective: August 15, 1994 Page 7 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 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 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. Where two or more Reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be proportioned in accordance with the terms of the reinsurance agreement as though such expense had been incurred by the Company. 10 WESTERN SURETY COMPANY Directors' and Officers' and Errors and Omissions Liability QUOTA SHARE REINSURANCE Effective: August 15, 1994 Page 8 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 insureds 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 (30) 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 (30) 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 (30) 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. 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. 11 WESTERN SURETY COMPANY Directors' and Officers' and Errors and Omissions Liability QUOTA SHARE REINSURANCE Effective: August 15, 1994 Page 9 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 August 15, 1994 on behalf of Western Surety Company, "the Company" by /s/ Joe P. Kirby, President, this 16th day of August, 1994. ---------------- Joe P. Kirby President and CEO Signed and accepted, effective August 15, 1994 on behalf of United Capitol Insurance Company, "the Reinsurer" by /s/ Bruce A. Esselborn , this 15th day of August , 1994. -------------------------- Bruce A. Esselborn President and CEO EX-11 7 COMPUTATION OF EPS 1 EXHIBIT 11 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES EARNINGS PER SHARE COMPUTATION (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended December 31, ---------------------------- 1995 1994 1993 -------- -------- -------- Net income ..................................................... $ 20,530 $ 14,378 $ 16,284 ======== ======== ======== Shares: Weighted average shares outstanding ............................ 15,404 15,160 15,036 Additional shares from assumed warrants and options exercised .. 298 256 379 -------- -------- -------- Total shares outstanding for calculation ....................... 15,702 15,416 15,415 Additional shares from assumed warrants and options exercised - assuming full dilution(1) .................................... 215 39 (54) -------- -------- -------- Total shares outstanding - assuming full dilution .............. 15,917 15,455 15,361 ======== ======== ======== Earnings per share based on: Weighted average common shares outstanding ................... $ 1.33 $ .95 $ 1.08 ======== ======== ======== Weighted average common and common equivalent shares outstanding(2) ............................................ $ 1.31 $ .93 $ 1.06 ======== ======== ======== Weighted average common and common equivalent shares outstanding - assuming full dilution(2) ................... $ 1.29 $ .93 $ 1.06 ======== ======== ========
- ---------------- (1) Amount is anti-dilutive for 1993. (2) The dilutive effect of common stock equivalents was less than 3% for all years. EX-21 8 SUBSIDIARIES 1 EXHIBIT 21 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES AS OF DECEMBER 31, 1995
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 9 CONSENT OF INDEPENDENT ACCOUNTANTS 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 March 1, 1996, on our audits of the consolidated financial statements and financial statement schedules of Capsure Holdings Corp. and Subsidiaries as of December 31, 1995 and 1994, and for the years ended December 31, 1995, 1994, and 1993, which report is included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Chicago, Illinois March 20, 1996 EX-24.(1) 10 DENTON 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 1st day of March, 1996. /s/ Herbert A. Denton ----------------------------------- Herbert A. Denton I, Laurie A. Jelenek , 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 1st day of March , 1996. /s/ Laurie A. Jelenek ------------------------------ (Notary Public) My Commission Expires: 12/27/97 - ---------------------- EX-24.(2) 11 DYER 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 1st day of March, 1996. /s/ Bradbury Dyer, III ------------------------------------- Bradbury Dyer, III I, Sheila Slayton, 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 1st day of March, 1996. /s/ Sheila Slayton ------------------------------------- (Notary Public) My Commission Expires: 3/15/97 - --------------------- EX-24.(3) 12 EMBRY 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 4th day of March, 1996. /s/ Talton R. Embry ------------------------------------- Talton R. Embry I, Jean C. Valitutto, 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 4th day of March, 1996. /s/ Jean C. Valitutto ------------------------------------- (Notary Public) My Commission Expires: 3/30/98 - -------------------- EX-24.(4) 13 KIRBY 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 4th day of March, 1996. /s/ Dan L. Kirby ---------------------------- Dan L. Kirby I, Barbara Jo Claus, 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 4th day of March, 1996. /s/ Barbara Jo Claus ----------------------------- (Notary Public) My Commission Expires: 1/29/98 - --------------------- EX-24.(5) 14 KIRBY 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 4th day of March, 1996. /s/ Joe P. Kirby ------------------------- Joe P. Kirby I, Barbara Jo Claus, 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 4th day of March, 1996. /s/ Barbara Jo Claus ------------------------- (Notary Public) My Commission Expires: 1/29/98 EX-24.(6) 15 WEINGARTEN POWER OF ATTORNEY 1 EXHIBIT 24(6) POWER OF ATTORNEY STATE OF GEORGIA ) ) SS COUNTY OF DEKALB ) KNOW ALL MEN BY THESE PRESENTS that Richard I. Weingarten, having an address at Equity Group Investments, Inc., 400 Perimeter Center Terrace, Atlanta, Georgia 30346, 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, Richard I. Weingarten, has hereunto set his hand this 11th day of March, 1996. /s/ Richard I. Weingarten ------------------------------ Richard I. Weingarten I, Laura C. Bone, a Notary Public in and for said County in the State aforesaid, do hereby certify that Richard I. Weingarten, 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 11th day of March, 1996. /s/ Laura C. Bone ------------------------------ (Notary Public) My Commission Expires: 1/31/99 EX-27 16 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-31-1995 DEC-31-1995 235,718 0 0 27,753 0 0 304,555 3,001 40,097 27,057 514,768 126,061 76,781 0 0 25,000 0 0 770 256,534 514,768 98,692 20,471 (1,653) 6 (7,451) 35,759 25,553 40,251 19,721 20,530 0 0 0 20,530 1.33 1.29 149,041 34,073 (34,559) 4,150 18,344 126,061 34,559
-----END PRIVACY-ENHANCED MESSAGE-----