-----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, MhPQqGtqJAU3H2lHt+TVtxL+KYgOiEcSRDtYm8x2g5vc5T5y2ZO/CcQfimjlPcBl rojaPZS/yf7JetPyCewtqQ== 0000950137-97-001240.txt : 19970329 0000950137-97-001240.hdr.sgml : 19970329 ACCESSION NUMBER: 0000950137-97-001240 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 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: 97568068 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 ANNUAL REPORT ENDED 12/31/96 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ------------------------ [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 0-3565 CAPSURE HOLDINGS CORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ DELAWARE 34-1010356 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) TWO NORTH RIVERSIDE PLAZA, CHICAGO, ILLINOIS 60606 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) (312) 879-1900 ------------------------ 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 $121.1 million based upon the closing price of $11.50 per share on March 7, 1997, 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 7, 1997, 15,807,622 shares of the Registrant's Common Stock were outstanding. ================================================================================ 2 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES TABLE OF CONTENTS
PAGE ---- PART I. Item 1. Business......................................... 3 General......................................... 3 Pending Business Combination.................... 4 Summary of Insurance Operations................. 4 A.M. Best Ratings............................... 5 Surety and Fidelity Bond Operations............. 5 Reinsurance..................................... 10 Unpaid Losses and Loss Adjustment Expenses...... 10 Regulation...................................... 12 Investments..................................... 13 Net Operating Tax Loss Carryforwards............ 13 Employees....................................... 13 Item 2. Properties....................................... 13 Item 3. Legal Proceedings................................ 14 Item 4. Submission of Matters to a Vote of Security Holders.......................................... 14 PART II. Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters...................... 14 Item 6. Selected Financial Data.......................... 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 16 Item 8. Financial Statements and Supplementary Data...... 25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............. 25 PART III. Item 10. Directors and Executive Officers of the Registrant....................................... 25 Item 11. Executive Compensation........................... 28 Item 12. Security Ownership of Certain Beneficial Owners and Management................................... 34 Item 13. Certain Relationships and Related Transactions... 36 PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................. 37
2 3 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES PART I ITEM 1. BUSINESS GENERAL Capsure Holdings Corp. and its subsidiaries ("Capsure" or the "Company") provide surety and fidelity bonds in all 50 states through a combined network of 120,000 independent agents. Capsure is one of the premier, national property casualty franchises in the U.S. with a dominant position in the miscellaneous surety and fidelity bond business and a growing presence in the contractor bonding market. Capsure's principal subsidiaries are Western Surety Company ("Western Surety"), acquired in August 1992, 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 17 states. Universal Surety specializes in the underwriting of small contract and miscellaneous surety bonds. Universal Surety is licensed in 37 states and the District of Columbia with most of its business generated in Texas. The Company's business strategy has been to continue the underwriting focus of each of its operating companies and achieve growth in these segments from cross-marketing opportunities. 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 has been 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 have been the guiding principles. Contract bonds are more affected by prevailing market and general economic conditions than are noncontract bonds. 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. 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 showed significant growth in 1996 as expansion of the program continued to Western Surety agents across the country. Gross written premiums for the program have grown from approximately $1.6 million in 1995 to approximately $3.4 million in 1996. The USA\Western program was marketed to Western Surety agents in 30 states as of December 31, 1996. The further 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 have grown from $0.8 million in 1995 to $1.9 million in 1996. This product offering had expanded to 38 states as of December 31, 1996. Effective October 1, 1996, Western Surety modified its reinsurance agreements to increase its net retention on this business from 10% to 20%. 3 4 On May 22, 1996, the Company consummated the sale of United Capitol Holding Company ("UCHC") and its subsidiaries, United Capitol Insurance Company ("United Capitol"), United Capitol Managers, Inc. and Fischer Underwriting Group, Incorporated, to a subsidiary of Frontier Insurance Group, Inc. The operating results of UCHC and its subsidiaries are reflected in Capsure's results through the closing date. Net proceeds to Capsure of $77 million, which included the purchase price for the capital stock of UCHC and the release of United Capitol's excess statutory surplus at closing, approximated Capsure's carrying value. The goodwill associated with the 1990 acquisition of United Capitol was previously reduced to estimated net realizable value as of December 31, 1995, resulting in a $13.2 million impairment of goodwill in 1995. On September 11, 1996, the Company declared a special cash distribution in the amount of $10 per share of common stock, payable to all holders of record as of September 25, 1996. The declaration of the special distribution was the result of the previously announced review of strategic alternatives undertaken by Capsure's Board of Directors. The special distribution was paid on October 4, 1996 and was funded from $62 million of borrowings under Capsure's revolving credit agreement and approximately $94 million from available cash and marketable securities accumulated at the parent company level. In connection with the payment of the special distribution, the Board of Directors also authorized a corresponding repricing of all outstanding stock options. This resulted in a new measurement date for the stock options under applicable accounting pronouncements and required the Company to record in the third quarter of 1996 a non-recurring compensation charge of $4.1 million, after applicable income taxes, or 25 cents per share of which $3.6 million, or 22 cents per share, was non-cash. PENDING BUSINESS COMBINATION On December 19, 1996, Capsure and certain direct and indirect subsidiaries of CNA Financial Corporation ("CNAF") entered into a definitive Reorganization Agreement pursuant to which Capsure will merge with a wholly-owned subsidiary of CNA Surety Corporation ("CNA Surety"). CNAF, through its subsidiaries, will be the majority stockholder of CNA Surety, owning 61.75 percent of the shares on a fully diluted basis. The remaining shares will be issued to the existing Capsure stockholders (a portion of these shares will be reserved for issuance to the existing holders of Capsure options who will receive CNA Surety options in the merger) in a tax-free exchange for their Capsure shares on a one-for-one basis. The CNA Surety shares are expected to be traded on the New York Stock Exchange. Equity Capsure Limited Partnership ("Equity Capsure"), Capsure's largest stockholder with a 25.6 percent ownership interest, and certain other directors of the Company have agreed to vote their shares in favor of the merger. The agreement and the transactions contemplated thereby are subject to several conditions, including ratification by the affirmative vote of Capsure stockholders and approval by governmental and insurance regulatory authorities. The completion of the merger pursuant to the Reorganization Agreement will cause an ownership change under Section 382 of the Internal Revenue Code of 1986, as amended (the "Code") and significantly limit the future utilization of Capsure's net operating tax loss carryforwards ("NOLs"). If the Reorganization Agreement and transactions contemplated thereby are approved, Capsure stockholders will be asked to approve an amendment to its Certificate of Incorporation to delete a provision designed to facilitate the Company's ability to preserve and utilize its NOLs. SUMMARY OF INSURANCE OPERATIONS On August 14, 1992, the Company acquired Western Surety. Founded in 1900, Western Surety is one of the largest writers of miscellaneous bonds in the United States. Bonds underwritten by Western Surety are relatively low-risk, low-premium products where prompt service, easy-to-use forms and availability of an extensive array of bond products are emphasized. Western Surety's success is attributable to its product specialization, underwriting expertise and broad distribution network. Substantially all of Western Surety's bonds are mandated by various state statutes and local ordinances. On September 22, 1994, the Company acquired Universal Surety. Founded in 1984, Universal Surety specializes in writing miscellaneous and small- to medium-sized contract surety bonds primarily in the southern United States. Contract bonds underwritten by Universal Surety, including those underwritten on 4 5 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 Universal Surety's premiums consist of miscellaneous bonds underwritten in the same geographic area. A.M. BEST RATINGS Western Surety and Universal Surety are currently rated A+ (Superior) and A (Excellent), respectively, by A.M. Best Company, Inc. ("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. As is its practice upon announcement of a proposed merger, A.M. Best placed the ratings of Western Surety and Universal Surety under review in December 1996. If the insurance subsidiaries' ratings are downgraded below A by A.M. Best, sales of the insurance subsidiaries' products could be adversely affected. Based upon conversations with A.M. Best, management has no reason to believe that Western Surety and Universal Surety will not retain their current ratings. However, there can be no assurance that the ratings of Western Surety and Universal Surety will be maintained following the proposed merger or, if maintained, would not be changed in subsequent periodic reviews by A.M. Best. SURETY AND FIDELITY BOND OPERATIONS According to 1995 statistics published by the Surety Association of America ("SAA"), the surety and fidelity bond market had direct written premiums of approximately $2.7 billion, of which the miscellaneous and contract bond segments accounted for approximately $0.8 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. 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. 5 6 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 38 states as of December 31, 1996. 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 6 7 such, the financial information is not necessarily indicative of the financial results that would have occurred under the ownership and management of Capsure (amounts in thousands, except average bond amounts):
GROSS WRITTEN PREMIUMS -------------------------------------------------------- % OF % OF % OF 1996 TOTAL 1995 TOTAL 1994 TOTAL ------- ----- ------- ----- ------- ----- Surety and fidelity bonds: License and permit................. $28,112 29.2% $28,742 31.7% $28,160 32.5% Judicial and fiduciary............. 13,555 14.1 13,007 14.4 13,116 15.2 Fidelity........................... 15,134 15.7 14,357 15.9 13,821 16.0 Public official.................... 7,029 7.3 7,351 8.1 6,874 7.9 Notary public...................... 8,193 8.5 7,770 8.6 7,989 9.2 Contract........................... 16,347 17.0 12,448 13.7 10,393 12.0 Other.............................. 1,764 1.9 1,905 2.1 1,935 2.3 ------- ----- ------- ----- ------- ----- 90,134 93.7 85,580 94.5 82,288 95.1 E&O policies......................... 6,072 6.3 4,984 5.5 4,261 4.9 ------- ----- ------- ----- ------- ----- $96,206 100.0% $90,564 100.0% $86,549 100.0% ======= ===== ======= ===== ======= ===== Premiums by company: Western Surety/SBCA................ $75,119 78.1% $73,703 81.4% $71,286 82.4% Universal Surety................... 21,087 21.9 16,861 18.6 15,263 17.6 ------- ----- ------- ----- ------- ----- $96,206 100.0% $90,564 100.0% $86,549 100.0% ======= ===== ======= ===== ======= ===== Premiums generated by largest agency: Western Surety..................... 1.4% 1.2% 1.2% ======= ======= ======= Universal Surety................... 4.1% 4.1% 4.0% ======= ======= ======= Percentage of premiums in the top five states: Western Surety..................... 25.8% 26.2% 26.5% ======= ======= ======= Universal Surety................... 89.6% 93.1% 92.0% ======= ======= =======
NET WRITTEN PREMIUMS -------------------------------------------------------- % OF % OF % OF 1996 TOTAL 1995 TOTAL 1994 TOTAL ------- ----- ------- ----- ------- ----- Surety and fidelity bonds: License and permit................. $27,788 30.4% $28,588 33.0% $28,003 33.3% Judicial and fiduciary............. 12,665 13.9 12,329 14.2 12,379 14.7 Fidelity........................... 15,090 16.5 14,322 16.5 13,786 16.4 Public official.................... 6,902 7.6 7,204 8.3 6,731 8.0 Notary public...................... 8,193 9.0 7,683 8.8 7,922 9.4 Contract........................... 14,823 16.2 11,148 12.9 9,623 11.5 Other.............................. 1,400 1.5 1,244 1.4 1,421 1.7 ------- ----- ------- ----- ------- ----- 86,861 95.1 82,518 95.1 79,865 95.0 E&O policies......................... 4,421 4.9 4,228 4.9 4,186 5.0 ------- ----- ------- ----- ------- ----- $91,282 100.0% $86,746 100.0% $84,051 100.0% ======= ===== ======= ===== ======= ===== Premiums by company: Western Surety/SBCA................ $71,949 78.8% $71,069 81.9% $69,738 83.0% Universal Surety................... 19,333 21.2 15,677 18.1 14,313 17.0 ------- ----- ------- ----- ------- ----- $91,282 100.0% $86,746 100.0% $84,051 100.0% ======= ===== ======= ===== ======= =====
7 8
NET EARNED PREMIUMS -------------------------------------------------------- % OF % OF % OF 1996 TOTAL 1995 TOTAL 1994 TOTAL ------- ----- ------- ----- ------- ----- Surety and fidelity bonds: License and permit................. $27,761 31.1% $28,039 33.0% $27,692 33.4% Judicial and fiduciary............. 12,443 13.9 12,396 14.6 12,476 15.1 Fidelity........................... 14,701 16.5 14,082 16.6 13,402 16.2 Public official.................... 7,053 7.9 7,045 8.3 7,017 8.5 Notary public...................... 8,162 9.1 7,883 9.3 7,561 9.1 Contract........................... 13,534 15.2 10,228 12.0 9,331 11.3 Other.............................. 1,267 1.4 1,191 1.4 1,426 1.7 ------- ----- ------- ----- ------- ----- 84,921 95.1 80,864 95.2 78,905 95.3 E&O policies......................... 4,340 4.9 4,119 4.8 3,917 4.7 ------- ----- ------- ----- ------- ----- $89,261 100.0% $84,983 100.0% $82,822 100.0% ======= ===== ======= ===== ======= ===== Premiums by company: Western Surety/SBCA................ $71,341 79.9% $70,332 82.8% $69,212 83.6% Universal Surety................... 17,920 20.1 14,651 17.2 13,610 16.4 ------- ----- ------- ----- ------- ----- $89,261 100.0% $84,983 100.0% $82,822 100.0% ======= ===== ======= ===== ======= =====
BONDS AND POLICIES IN FORCE -------------------------------------------------------- % OF % OF % OF 1996 TOTAL 1995 TOTAL 1994 TOTAL ------- ----- ------- ----- ------- ----- Surety and fidelity bonds: License and permit................. 460 28.1% 463 29.2% 460 29.3% Judicial and fiduciary............. 61 3.7 63 4.0 64 4.1 Fidelity........................... 94 5.7 91 5.7 88 5.6 Public official.................... 60 3.7 62 3.9 64 4.1 Notary public...................... 784 47.9 747 47.0 758 48.2 Contract........................... 8 .5 8 0.5 7 0.5 Other.............................. 14 .8 11 0.7 10 0.6 ------- ----- ------- ----- ------- ----- 1,481 90.4 1,445 91.0 1,451 92.4 E&O policies......................... 157 9.6 143 9.0 120 7.6 ------- ----- ------- ----- ------- ----- 1,638 100.0% 1,588 100.0% 1,571 100.0% ======= ===== ======= ===== ======= ===== Bonds/policies in force by company: Western Surety/SBCA................ 1,424 86.9% 1,416 89.2% 1,389 88.4% Universal Surety................... 214 13.1 172 10.8 182 11.6 ------- ----- ------- ----- ------- ----- 1,638 100.0% 1,588 100.0% 1,571 100.0% ======= ===== ======= ===== ======= ===== Average bond penalty/policy limit: Western Surety..................... $10,944 $10,030 $ 9,470 ======= ======= ======= Universal Surety................... $11,122 $13,317 $11,507 ======= ======= =======
MARKETING Western Surety enjoys broad national distribution of its products, which are marketed through approximately 37,000 of the approximately 44,000 independent property and casualty insurance agencies in the United States. These independent agencies are paid an average commission of approximately 30% of a miscellaneous bond's premium. Western Surety also employs 58 full-time salaried marketing representatives whose principal duties are to continually service their producer network on a local basis. 8 9 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. 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, and San Antonio, Texas; Overland Park, Kansas; Golden, Colorado; and Seattle, Washington. 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 1996, 73% related to contract bonds, including 5% that qualified for the SBA guarantee. The remaining 27% related to noncontract bonds, including 12% for notary public bonds. Universal Surety has concentrated its marketing efforts in expanding its share of the small contract bond market. Contract bonds underwritten by Universal Surety, 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 has utilized 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 30 states as of December 31, 1996. Western Surety has generally ceded 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 $3.4 million in 1996 compared to $1.6 million in 1995. In 1994, these activities were not material. In addition, Western Surety has been gradually expanding its product line by offering insurance agents' and brokers' E&O insurance directly to a majority of its vast agency force. Effective October 1, 1996, Western Surety modified its reinsurance agreements to increase its net retention on this business from 10% to 20%. Gross written premiums for this coverage were $1.9 million in 1996 compared to $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. Their underwriting criteria, including the extent of bonding authority granted to independent agents, vary depending on the class of business and the type of bond. For example, relatively little underwriting information is required of certain low-exposure risks such as notary bonds. Other bonds, such as fiduciary or probate bonds, are subjected to greater individual risk scrutiny, including verification of the credit history and financial resources of an applicant. Contract bonds underwritten by Universal Surety, which have higher bond amounts and inherent risk, are subject to stringent financial analysis and credit review. Both companies grant authority to independent agents to issue certain low-risk bonds subject to underwriting guidelines. COMPETITION The surety and fidelity market is highly competitive. The largest market shares are held by large diversified insurance companies; however, the single largest writer nationally in 1995, according to the SAA, controlled only 7% of the $2.7 billion market. The small fidelity and noncontract surety or miscellaneous 9 10 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. 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, 1996, Capsure's largest reinsurance receivable, including prepaid reinsurance premiums of $0.8 million, was approximately $2.3 million with Transatlantic Reinsurance Company. Transatlantic Reinsurance Company is rated A+ (Superior) by A.M. Best. 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) 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 LAE is an accounting estimate and, similar to other accounting estimates, there is the potential that actual future loss payments will differ significantly 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. Capsure's insurance subsidiaries employ 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, 1996. Such tables highlight the impact of favorable development of the estimated liability established in prior years. 10 11 The following table sets forth a reconciliation of the consolidated loss reserves reported in accordance with generally accepted accounting principles ("GAAP"), and the reserves reported to state insurance regulatory authorities in accordance with statutory accounting principles ("SAP") (dollars in thousands):
YEARS ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 ------- -------- -------- Reserves at end of year, GAAP basis................. $38,874 $126,061 $149,041 Estimated salvage and subrogation recoverable (gross of reinsurance), not anticipated under SAP........ 6,805 7,141 6,881 Estimated reinsurance recoverable netted against gross reserves for SAP............................ (6,062) (39,735) (38,606) ------- -------- -------- Reserves at end of year, SAP basis.................. $39,617 $ 93,467 $117,316 ======= ======== ========
The following table presents the development under GAAP of combined balance sheet reserves for surety and fidelity operations only for 1987 through 1996, including periods prior to Capsure's ownership. It does not include the reserve development data with respect to the Company's former excess and surplus lines subsidiary, United Capitol. 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, ------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Reserves for unpaid losses and LAE.................... $38,874 $39,846 $40,251 $35,522 $31,274 $29,054 $27,801 $26,940 $22,188 $19,651 Reserves re-estimated as of: One year later............. -- 32,493 33,685 33,788 30,356 28,087 26,269 24,829 22,636 19,992 Two years later............ -- -- 27,920 29,231 28,905 28,061 26,633 24,175 21,470 19,817 Three years later.......... -- -- -- 24,946 25,322 25,872 27,404 24,948 20,751 19,550 Four years later........... -- -- -- -- 21,701 22,696 25,675 24,969 22,285 18,801 Five years later........... -- -- -- -- -- 21,976 23,138 23,507 22,083 20,210 Six years later............ -- -- -- -- -- -- 22,602 21,213 20,790 20,575 Seven years later.......... -- -- -- -- -- -- -- 20,151 19,389 19,561 Eight years later.......... -- -- -- -- -- -- -- -- 18,672 18,745 Nine years later........... -- -- -- -- -- -- -- -- -- 18,280 Cumulative redundancy (deficiency)............... $ -- $ 7,353 $12,331 $10,576 $ 9,573 $ 7,078 $ 5,199 $ 6,789 $ 3,516 $ 1,371 ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= Cumulative redundancy (deficiency) as a percentage of original estimate................... -- 18.5% 30.6% 29.8% 30.6% 24.4% 18.7% 25.2% 15.8% 7.0% ======= ======= ======= ======= ======= ======= ======= ======= ======= ======= Cumulative amount of liability paid through: One year later............. $ -- $ 8,612 $ 8,252 $ 8,194 $ 7,116 $ 8,803 $ 7,801 $ 7,408 $ 7,130 $ 6,302 Two years later............ -- -- 12,275 13,085 11,594 13,114 13,705 12,442 11,469 10,826 Three years later.......... -- -- -- 14,885 14,534 15,816 16,621 16,164 13,973 13,388 Four years later........... -- -- -- -- 15,232 17,047 18,534 17,688 16,357 15,014 Five years later........... -- -- -- -- -- 17,287 19,145 18,816 17,319 16,982 Six years later............ -- -- -- -- -- -- 19,081 18,752 18,064 17,433 Seven years later.......... -- -- -- -- -- -- -- 18,563 18,131 17,951 Eight years later.......... -- -- -- -- -- -- -- -- 18,012 17,861 Nine years later........... -- -- -- -- -- -- -- -- -- 17,766
11 12 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 17 states. Universal Surety is domiciled in Texas and licensed in 37 other states and the District of Columbia. Insurance regulations generally also require registration and periodic disclosure of certain information concerning ownership, financial condition, capital structure, general business operations and any material transactions or agreements by or among affiliates. Such regulation also typically restricts the ability of any one person to acquire 10% or more, either directly or indirectly, of a company's stock without prior approval of the applicable insurance regulatory authority. In addition, dividends and other distributions to stockholders generally may be paid only out of unreserved and unrestricted statutory earned surplus. Such distributions may be subject to prior regulatory approval, including a review of the implications on Risk-Based Capital requirements. A discussion of Risk-Based Capital requirements for property and casualty insurance companies is included in both Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 9 to the Consolidated Financial Statements. Without prior regulatory approval in 1997, Capsure's insurance subsidiaries may pay stockholder dividends of $18.0 million in the aggregate. In 1996, 1995 and 1994, Capsure received $65.7 million (including $50.2 million of dividends requiring prior approval), $40.9 million (including $21.6 million of dividends requiring prior approval), and $21.0 million (including $5.0 million of dividends requiring prior approval), respectively, in dividends from its insurance subsidiaries. Capsure received $15.6 million, $21.9 million and $9.5 million in dividends from its surety and fidelity subsidiaries in 1996, 1995 and 1994, respectively. 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 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 last examination of Universal Surety as of September 30, 1992. This examination included both financial and market conduct procedures. There were no significant issues noted which required corrective action by any of Capsure's insurance subsidiaries. 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 and Universal Surety each qualifies as an acceptable surety for federal and other public works project bonds pursuant to U.S. Department of Treasury regulations. The underwriting limitations of Western Surety and Universal Surety, based on each insurer's statutory surplus, are currently $3.3 million and $0.9 million, respectively. 12 13 INVESTMENTS Insurance company investment practices must comply with insurance laws and regulations and must also comply with certain covenants under Capsure's $100 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 subsidiaries. Capsure's insurance subsidiaries 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 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 $143 million of these NOLs were available at December 31, 1996, to reduce the Company's future federal taxable income. The Company believes that there is currently no restriction on the ability of the Company to utilize its NOLs. If the previously discussed pending business combination is consummated, an ownership change of the Company will occur. This will result in significant restrictions of the Company's ability to utilize NOLs during all taxable periods after the date of the business combination. EMPLOYEES As of December 31, 1996, the Company employed approximately 550 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. 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. The Company also leases a corporate office in Atlanta, Georgia, for certain executives with an annual rent of approximately $0.1 million. 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, 1996. Western Surety also leases a 7,900 square foot branch office in Dallas, Texas. Annual rent for the branch office was $0.1 million and the lease expires in 1999. Universal Surety leases office space for its executive offices at 950 Echo Lane, Suite 250, Houston, Texas 77024, under a lease terminating October 31, 1999 with an annual rent of $0.2 million. Universal Surety also leases space for branch offices in Austin, Dallas and San Antonio, Texas; Overland Park, Kansas; Golden, Colorado; and Seattle, Washington, for an additional annual rent of approximately $0.1 million. 13 14 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. 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 7, 1997, the last reported sale price for the Common Stock was $11.50 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 ------ ------ 1996 4th Quarter.......................................... $18.38 $ 8.00 3rd Quarter.......................................... 18.88 16.63 2nd Quarter.......................................... 18.75 15.75 1st Quarter.......................................... 17.63 15.00 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
The number of stockholders of record of Common Stock on March 7, 1997, was approximately 2,300. On September 11, 1996, the Company declared a special cash distribution in the amount of $10 per share of common stock, payable to all holders of record as of September 25, 1996. The special distribution was paid on October 4, 1996. On the first business day following payment of the distribution, the Common Stock opened at a price $10 per share less than the previous business day's closing price. Prior to the special cash distribution, Capsure had not paid any dividends to its stockholders. The Company does not anticipate paying any additional dividends prior to the consummation of the previously discussed pending business combination with CNAF. 14 15 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 filed Annual Reports on Form 10-K and should be read in conjunction with such financial statements and related notes thereto. The Company acquired Western Surety in August 1992 and Universal Surety in September 1994 and disposed of United Capitol on May 22, 1996. The inclusion of the results of United Capitol through May 22, 1996, and of Western Surety and Universal Surety from their respective dates of acquisition affects the comparability of financial information. Such results are not necessarily indicative of future results. Effective January 1, 1994, the Company adopted 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 filed 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, ----------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- Total revenues............................ $110,650 $117,510 $112,555 $107,915 $ 57,133 ======== ======== ======== ======== ======== Gross written premiums.................... $107,269 $111,398 $102,356 $100,775 $ 50,105 ======== ======== ======== ======== ======== Net written premiums...................... $ 95,109 $ 97,728 $ 90,578 $ 88,306 $ 40,310 ======== ======== ======== ======== ======== Net earned premiums....................... $ 92,491 $ 98,692 $ 92,481 $ 86,029 $ 41,249 ======== ======== ======== ======== ======== Underwriting income....................... $ 19,233 $ 44,831 $ 15,233 $ 15,224 $ 9,932 Net investment income..................... 16,444 20,471 19,129 19,815 15,504 Net investment gains (losses)............. 1,715 (1,653) 945 2,071 380 Interest expense.......................... (1,717) (4,103) (4,726) (6,280) (4,838) Write-off of unamortized deferred loan fees.................................... (700) -- (1,556) -- -- Non-recurring compensation and merger costs................................... (7,865) -- -- -- -- Amortization and impairment of goodwill and intangibles......................... (2,761) (16,853) (3,365) (3,407) (1,592) Other expenses, net....................... (2,789) (2,442) (1,881) (1,905) (1,914) -------- -------- -------- -------- -------- Income before income taxes................ 21,560 40,251 23,779 25,518 17,472 Income taxes.............................. 8,181 19,721 9,401 9,234 6,777 -------- -------- -------- -------- -------- Net income................................ $ 13,379 $ 20,530 $ 14,378 $ 16,284 $ 10,695 ======== ======== ======== ======== ======== Weighted average common shares outstanding............................. 16,395 15,404 15,160 15,036 12,214 ======== ======== ======== ======== ======== Earnings per common share................. $ .82 $ 1.33 $ .95 $ 1.08 $ .88 ======== ======== ======== ======== ======== Cash distributions and dividends per common share............................ $ 10.00 $ -- $ -- $ -- $ -- ======== ======== ======== ======== ======== Book value per share...................... $ 7.76 $ 16.70 $ 14.61 $ 13.80 $ 12.25 ======== ======== ======== ======== ======== Loss ratio................................ 10.9% (7.5)% 25.2% 23.2% 25.8% Expense ratio............................. 68.3% 62.1% 58.3% 59.1% 50.1% -------- -------- -------- -------- -------- Combined ratio............................ 79.2% 54.6% 83.5% 82.3% 75.9% ======== ======== ======== ======== ======== Invested assets and cash.................. $165,268 $307,556 $305,898 $317,077 $297,974 Intangible assets and goodwill, net of amortization............................ 75,956 84,158 102,130 85,566 94,006 Total assets.............................. 313,139 514,768 553,370 530,075 507,574 Insurance reserves........................ 108,444 202,842 225,671 205,188 194,357 Long-term debt............................ 60,000 25,000 71,000 85,214 103,214 Total liabilities......................... 190,556 257,464 328,505 322,450 323,653 Stockholders' equity...................... 122,583 257,304 224,865 207,625 183,921
15 16 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. The Company, through its principal subsidiaries, Western Surety Company ("Western Surety"), acquired in August 1992, and Universal Surety of America ("Universal Surety"), acquired in September 1994, provides surety and fidelity bonds in all 50 states through a combined network of 120,000 independent agents. 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 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 37 states and the District of Columbia with most of its business generated in Texas (74% of 1996 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 utilizes 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. On May 22, 1996, the Company consummated the sale of United Capitol Holding Company ("UCHC") and its subsidiaries, United Capitol Insurance Company ("United Capitol"), United Capitol Managers, Inc. and Fischer Underwriting Group, Incorporated ("Fischer"), to a subsidiary of Frontier Insurance Group, Inc. The operating results of UCHC and its subsidiaries are reflected in Capsure's results through the closing date. Net proceeds to Capsure of $77 million, which included the purchase price for the capital stock of UCHC and the release of United Capitol's excess statutory surplus at closing, approximated Capsure's carrying value. The goodwill associated with the 1990 acquisition of United Capitol was previously reduced to estimated net realizable value as of December 31, 1995, resulting in a $13.2 million impairment of goodwill in 1995. On September 11, 1996, the Company declared a special cash distribution in the amount of $10 per share of common stock, payable to all holders of record as of September 25, 1996. The special distribution was paid on October 4, 1996 and was funded from $62 million of borrowings under Capsure's revolving credit 16 17 agreement and approximately $94 million from available cash and marketable securities accumulated at the parent company level. In connection with the payment of the special distribution, the Board of Directors also authorized a corresponding repricing of all outstanding stock options. This resulted in a new measurement date for the stock options under applicable accounting pronouncements and required the Company to record in the third quarter of 1996 a non-recurring compensation charge of $4.1 million, after applicable income taxes, or 25 cents per share of which $3.6 million, or 22 cents per share, was non-cash. PENDING BUSINESS COMBINATION On December 19, 1996, Capsure and certain direct and indirect subsidiaries of CNA Financial Corporation ("CNAF") entered into a definitive Reorganization Agreement pursuant to which Capsure will merge with a wholly-owned subsidiary of CNA Surety Corporation ("CNA Surety"). CNAF, through its subsidiaries, will be the majority stockholder of CNA Surety, owning 61.75 percent of the shares on a fully diluted basis. The remaining shares will be issued to the existing Capsure stockholders (a portion of these shares will be reserved for issuance to the existing holders of Capsure options who will receive CNA Surety options in the merger) in a tax-free exchange for their Capsure shares on a one-for-one basis. The CNA Surety shares are expected to be traded on the New York Stock Exchange. Equity Capsure Limited Partnership ("Equity Capsure"), Capsure's largest stockholder with a 25.6 percent ownership interest, and certain other directors of the Company have agreed to vote their shares in favor of the merger. The agreement and the transactions contemplated thereby are subject to several conditions, including ratification by the affirmative vote of Capsure stockholders and approval by governmental and insurance regulatory authorities. The completion of the merger pursuant to the Reorganization Agreement will cause an ownership change under Section 382 of the Internal Revenue Code of 1986, as amended (the "Code") and significantly limit the future utilization of Capsure's net operating tax loss carryforwards ("NOLs"). If the Reorganization Agreement and transactions contemplated thereby are approved, Capsure shareholders will be asked to approve an amendment to its Certificate of Incorporation to delete a provision designed to facilitate the Company's ability to preserve and utilize its NOLs. RESULTS OF OPERATIONS The components of income are summarized as follows (dollars in thousands):
1996 1995 1994 ------- -------- ------- Underwriting income.......................... $19,233 $ 44,831 $15,233 Net investment income........................ 16,444 20,471 19,129 Net investment gains (losses)................ 1,715 (1,653) 945 Interest expense............................. (1,717) (4,103) (4,726) Write-off of unamortized deferred loan fees....................................... (700) -- (1,556) Non-recurring compensation and merger costs...................................... (7,865) -- -- Amortization and impairment of goodwill and intangibles................................ (2,761) (16,853) (3,365) Other expenses, net.......................... (2,789) (2,442) (1,881) ------- -------- ------- Income before income taxes................... 21,560 40,251 23,779 Income taxes................................. 8,181 19,721 9,401 ------- -------- ------- Net income......................... $13,379 $ 20,530 $14,378 ======= ======== =======
17 18 INSURANCE UNDERWRITING Underwriting results are summarized in the following table (dollars in thousands):
SURETY AND FIDELITY EXCESS AND SURPLUS LINES CONSOLIDATED --------------------------- ---------------------------- ------------------------------ 1996 1995 1994 1996 1995 1994 1996 1995 1994 ------- ------- ------- ------- -------- ------- -------- -------- -------- Gross written premiums.... $96,206 $90,564 $75,324 $11,063 $ 20,834 $27,032 $107,269 $111,398 $102,356 ======= ======= ======= ======= ======== ======= ======== ======== ======== Net written premiums...... $91,282 $86,746 $73,527 $ 3,827 $ 10,982 $17,051 $ 95,109 $ 97,728 $ 90,578 ======= ======= ======= ======= ======== ======= ======== ======== ======== Net earned premiums....... $89,261 $84,983 $73,255 $ 3,230 $ 13,709 $19,226 $ 92,491 $ 98,692 $ 92,481 ------- ------- ------- ------- -------- ------- -------- -------- -------- Net losses and loss adjustment.............. 8,444 7,579 11,592 1,610 (15,030) 11,752 10,054 (7,451) 23,344 Underwriting expenses..... 63,070 58,170 49,583 134 3,142 4,321 63,204 61,312 53,904 ------- ------- ------- ------- -------- ------- -------- -------- -------- Total losses and expenses................ 71,514 65,749 61,175 1,744 (11,888) 16,073 73,258 53,861 77,248 ------- ------- ------- ------- -------- ------- -------- -------- -------- Underwriting income....... $17,747 $19,234 $12,080 $ 1,486 $ 25,597 $ 3,153 $ 19,233 $ 44,831 $ 15,233 ======= ======= ======= ======= ======== ======= ======== ======== ======== Loss ratio................ 9.5% 8.9% 15.8% 49.8% (109.6)% 61.1% 10.9% (7.5)% 25.2% Expense ratio............. 70.6% 68.5% 67.7% 4.2% 22.9% 22.5% 68.3% 62.1% 58.3% ------- ------- ------- ------- -------- ------- -------- -------- -------- Combined ratio............ 80.1% 77.4% 83.5% 54.0% (86.7)% 83.6% 79.2% 54.6% 83.5% ======= ======= ======= ======= ======== ======= ======== ======== ========
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 through May 22, 1996. United Capitol's principal lines of business were other liability, product liability and commercial property primarily written on an excess and surplus lines basis. Gross written premiums decreased 3.7%, or $4.1 million, for the year ended December 31, 1996. Surety and fidelity gross written premiums increased 6.2%, or $5.6 million, reflecting strong growth in the contract surety and insurance agents' and brokers' E&O businesses. Gross written premiums at Universal Surety increased 25.1% to $21.1 million in 1996 due to an increase of $4.1 million in contract surety premiums. Gross written premiums at Western Surety increased 1.9% to $75.1 million in 1996, reflecting strong growth in agents' E&O business, and modest growth in core miscellaneous surety bond business. United Capitol's gross written premiums decreased $9.8 million in 1996 as compared to a full year in 1995. Net earned premiums decreased 6.3%, or $6.2 million, for the year ended December 31, 1996, reflecting a decrease of $10.5 million at United Capitol, partially offset by an increase of $4.3 million in surety and fidelity operations, primarily attributable to strong growth in contract surety. Net earned premiums at Universal Surety increased 22.3% to $17.9 million in 1996. Net earned premiums at Western Surety increased 1.4% to $71.3 million in 1996. 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. 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 were 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 18 19 December 31, 1995 and 1994 were increased by $2.6 million and $2.5 million, respectively, for contingent premiums recognized under its reinsurance agreements. Underwriting income decreased $25.6 million for the year ended December 31, 1996, reflecting a decrease of $1.5 million in surety and fidelity underwriting income, and a decrease of $24.1 million for United Capitol. The consolidated combined ratio increased to 79.2% in 1996 from 54.6% in 1995. The consolidated loss ratio increased to 10.9% in 1996 from (7.5)% in 1995. The surety and fidelity loss ratio increased moderately to 9.5% in 1996 from 8.9% in 1995, principally due to a higher level of net favorable development of prior years' loss reserves in 1995. Generally, the favorable loss trends recognized in the fourth quarter of 1995 continued in 1996. The consolidated expense ratio increased to 68.3% in 1996, compared to 62.1% in 1995. The surety and fidelity expense ratio increased to 70.6% in 1996 from 68.5% in 1995, reflecting costs associated with ongoing re-engineering and automation efforts. 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, had 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. 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. INVESTMENT INCOME Net investment income for the years ended December 31, 1996, 1995 and 1994 was $16.4 million, $20.5 million and $19.1 million, respectively. The decrease in 1996 primarily reflected a net decrease in invested assets as a result of the sale of United Capitol. The average pretax yields of the portfolio for the years ended December 31, 1996, 1995 and 1994 were 7.0%, 6.8% and 6.5%, 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. ANALYSIS OF OTHER OPERATIONS Net investment gains (losses) were $1.7 million, $(1.7) million and $0.9 million for the years ended December 31, 1996, 1995 and 1994, respectively. Net investment gains on securities held at the parent company level were $0.8 million in 1996, $1.0 million in 1995 and $1.3 million in 1994. Net investment gains 19 20 (losses) were $0.9 million, $(2.7) million and $(0.4) million, respectively, from the insurance operations. 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. Amortization expense was $2.8 million for the year ended December 31, 1996, $16.9 million in 1995 and $3.4 million in 1994. Amortization expense in 1996, 1995 and 1994 included $1.1 million, $1.2 million and $1.3 million, respectively, of amortization of intangible assets and $1.7 million, $15.7 million and $2.1 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 was not recorded in 1996 for the goodwill associated with the United Capitol operations. 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 58.2%, or $2.4 million, to $1.7 million for the year ended December 31, 1996, reflecting the effect of reduced average debt outstanding. The Company's average debt outstanding for the year ended December 31, 1996, was approximately $20.4 million compared to $49.6 million in 1995. The weighted average interest rates on outstanding balances were 6.3% and 6.9% for the years ended December 31, 1996 and 1995, respectively. In connection with the amendment of the Credit Facility (as herein defined) during the second quarter of 1996, the Company incurred a $0.7 million write-off of unamortized deferred loan fees in the year ended December 31, 1996. 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 rate on outstanding balances was 5.7% for the year ended December 31, 1994. The Company incurred a $1.6 million write-off of unamortized deferred loan fees in the year ended December 31, 1994, associated with the early retirement of bank term loans. In connection with the payment of the $10 per share special cash distribution on October 4, 1996, the Board of Directors also authorized a corresponding repricing of all outstanding stock options. This resulted in a new measurement date for the stock options under applicable accounting pronouncements and required the Company to record in the third quarter of 1996 a non-recurring compensation charge of $4.1 million, after applicable income taxes, or 25 cents per share of which $3.6 million, or 22 cents per share, was non-cash. In the fourth quarter of 1996, the Company incurred $1.1 million, after applicable income taxes, or 7 cents per share, in merger-related costs associated with the previously discussed pending business combination with CNAF. INCOME TAXES Income taxes were $8.2 million, $19.7 million and $9.4 million for the years ended December 31, 1996, 1995 and 1994, respectively. The effective income tax rates were 37.9%, 49.0% and 39.5%, respectively. The decrease in the 1996 effective tax rate was principally attributable to a decreased level of nondeductible goodwill amortization. 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 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 $1.2 million for the year ended December 31, 1996, $0.7 million for the year ended December 31, 1995 and $0.6 million for the year ended December 31, 1994. 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 20 21 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, 1996, the carrying value of the Company's invested assets of the insurance operations was comprised of $135.9 million of fixed maturities, $15.9 million of short-term investments, $4.5 million of equity securities, $2.7 million of other investments and $1.4 million of cash. 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. The decrease in investments at December 31, 1996 compared to the prior year primarily related to the net decrease in investments as a result of the sale of 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, 1996, the carrying value of the Company's invested assets of the non-insurance operations, principally at the parent company level, was comprised of $3.5 million of short-term investments and $1.3 million of cash. 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. The decrease in investments at December 31, 1996 compared to the prior year related to the payment of the special cash distribution on October 4, 1996. The Company's consolidated net cash flow provided by operating activities was $31.1 million, $30.7 million and $29.3 million for the years ended December 31, 1996, 1995 and 1994, respectively. Consolidated operating cash flow (pretax income excluding the write-off of deferred loan fees, non-recurring compensation and merger costs, net investment gains (losses) and amortization and impairment of goodwill and intangibles) for the year ended December 31, 1996, was $31.2 million as compared to $58.8 million in 1995 and $27.8 million in 1994. On March 29, 1994, the Company entered into a senior reducing revolving credit agreement with a syndicate of banks for $135 million (the "Credit Facility"). At closing, $68 million of funds drawn under the Credit Facility, together with a portion of the Company's cash, were used to repay $84.6 million of previously existing bank term debt. The Company borrowed $28 million for the acquisition of Universal Surety in September 1994. Concurrent with the sale of UCHC and its subsidiaries, Capsure and its lenders entered into an agreement to amend and restate the Credit Facility. The amendment reduced the commitment to $100 million from $135 million and permitted an initial draw of up to $70 million for a special distribution to stockholders. The remaining availability may be used for additional dividends, stock repurchases, acquisitions, and for general corporate purposes. Transaction costs totaled approximately $0.5 million. The credit available under the Credit Facility reduces semi-annually commencing March 31, 1997 and expires March 31, 2003. Interest on borrowings under the facility varies based on leverage. On September 11, 1996, the Company declared a special cash distribution in the amount of $10 per share of common stock, payable to all holders of record as of September 25, 1996. The special distribution was paid on October 4, 1996 and was funded from $62 million of borrowings under the Credit Facility and approximately $94 million from available cash and marketable securities accumulated at the parent company level. 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. 21 22 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 1997, Capsure's insurance subsidiaries may pay stockholder dividends of $18.0 million in the aggregate. In 1996, 1995 and 1994, Capsure received $65.7 million (including $50.2 million of dividends requiring prior approval), $40.9 million (including $21.6 million of dividends requiring prior approval) and $21.0 million (including $5.0 million of dividends requiring prior approval), respectively, in dividends from its insurance subsidiaries. Capsure received $15.6 million, $21.9 million and $9.5 million in dividends from its surety and fidelity subsidiaries in 1996, 1995 and 1994, respectively. 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 $17.3 million, $12.8 million and $12.3 million in 1996, 1995 and 1994, respectively, of which $10.8 million, $8.3 million and $7.3 million, respectively, were from its surety and fidelity 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, 1996, no shares had been repurchased under this plan. 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 have been 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. 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, 1996 (dollars in thousands):
AMORTIZED CREDIT RATING COST PERCENT ------------- --------- ------- AAA/Aaa....................... $124,448 91.9% AA/Aa......................... 757 .6 A/A........................... 10,215 7.5 -------- ----- Total............... $135,420 100.0% ======== =====
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 22 23 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 significantly 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):
1996 1995 1994 -------- -------- -------- Gross balance at January 1................. $126,061 $149,041 $135,825 Balance at date of acquisition (disposition)............................ (84,823) -- 2,738 Incurred related to: Current year............................... 23,685 34,073 46,206 Prior years................................ (10,579) (34,559) (14,522) -------- -------- -------- Total incurred................... 13,106 (486) 31,684 -------- -------- -------- Paid related to: Current year............................... 3,390 4,150 3,003 Prior years................................ 12,080 18,344 18,203 -------- -------- -------- Total paid....................... 15,470 22,494 21,206 -------- -------- -------- Gross balance at December 31............... $ 38,874 $126,061 $149,041 ======== ======== ======== Balance net of reinsurance at December 31....................................... $ 33,378 $ 87,078 $111,164 ======== ======== ========
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 $10.6 million ($6.9 million, net of reinsurance) in 1996, $34.6 million ($29.1 million, net of reinsurance) in 1995 and $14.5 million ($8.3 million, net of reinsurance) in 1994. 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. 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, 1996, 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). On December 31, 1996, Western Surety's statutory surplus was $37.2 million and its net written premiums to surplus ratio was 1.9 to 1. On December 31, 1996, Universal Surety's statutory surplus was $11.7 million and its net written premiums to surplus ratio was 1.7 to 1. The Company believes that each insurance company's statutory surplus is sufficient to support its current and anticipated premium levels. 23 24 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 NOLs. Approximately $143 million of these NOLs were available at December 31, 1996 to reduce the Company's future federal taxable income. 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. If the previously discussed pending business combination is consummated, an ownership change of the Company will occur. This will result in significant restrictions of the Company's ability to utilize NOLs during all taxable periods after the date of the business combination. 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. IMPACT OF ADOPTING STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS ("SFAS") In October 1995, the Financial Accounting Standards Board ("FASB") 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 has continued to apply the existing accounting rules contained in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, and has disclosed net income and earnings per share on a pro forma basis, based on the new fair value-based method of accounting in Note 13 to the Consolidated Financial Statements. IMPACT OF ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." SFAS No. 128 is effective for both interim and annual periods ending after December 15, 1997. SFAS No. 128 replaces APB Opinion No. 15, "Earnings Per Share." APB Opinion No. 15 required that entities with simple capital structures present a single earnings per common share ("EPS") on the face of the income statement, whereas those with complex capital structures had to present both primary and fully diluted EPS. SFAS No. 128 simplifies the computation of EPS by replacing the presentation of primary EPS with a presentation of basic EPS and requires dual presentation of basic and diluted EPS by entities with complex capital structures. Basic EPS includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period, whereas primary EPS includes the dilutive effect of common stock equivalents, such as stock options. Diluted EPS reflects the potential dilution of securities that could share in the earnings of an entity, similar to fully diluted EPS. The Company intends to present basic and diluted EPS in financial statements issued after the effective date. 24 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE ---- FINANCIAL: Report of Independent Accountants........................... 38 Consolidated Balance Sheets as of December 31, 1996 and 1995...................................................... 39 Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and 1994.......................... 40 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1996, 1995 and 1994...... 41 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994.......................... 42 Notes to Consolidated Financial Statements.................. 43 FINANCIAL STATEMENT SCHEDULES: Schedule I -- Summary of Investments........................ 60 Schedule II -- Condensed Financial Information of Registrant................................................ 61 Schedule III -- Supplementary Insurance Information......... 65 Schedule IV -- Reinsurance.................................. 66 Schedule V -- Valuation and Qualifying Accounts............. 67 Schedule VI -- Supplemental Information Concerning Property -- Casualty Insurance Operations................. 68
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following sets forth the name, age, position and offices with the Company, present principal occupation or employment and material occupations and employment for the past five years of each person who is presently a director, or an executive officer of the Company. ROD F. DAMMEYER, age 56; Director of the Company since January 19, 1993; Managing Director of EGI Corporate Investments, a division of Equity Group Investments, Inc. ("EGI"), since January 1996; President and a director since 1985 and Chief Executive Officer since 1993 of Anixter International Inc. ("Anixter"); Director since 1992 and President and Chief Executive Officer since 1994 of Great American Management and Investment, Inc. ("GAMI"). Director of ANTEC Corporation, Falcon Building Products, Inc. ("Falcon"), IMC Global Inc., Jacor Communications, Inc. ("Jacor"), Lukens Inc., Revco D.S., Inc. ("Revco"), Sealy Corporation ("Sealy") and TeleTech Holdings, Inc. ("TeleTech"); Trustee of several Van Kampen Merritt, Inc. Closed End Mutual Funds and Series Trusts. HERBERT A. DENTON, age 49; Director of the Company since August 2, 1988; President of Providence Capital, Inc. since February 1991. BRADBURY DYER, III, age 54; Director of the Company since August 13, 1986; General Partner, Paragon Associates and Paragon Associates II; Managing Agent, Paragon Joint Venture; Director of Falcon and Roosevelt Financial Group, Inc. TALTON R. EMBRY, age 50; Director of the Company since August 1, 1986; Investment Advisor, Magten Asset Management Corp. ("Magten"); Co-Chairman of the Board of Revco; Director of Anacomp, Inc., Combined Broadcasting Corporation, BDK Holdings, Inc., Thermadyne Holdings Corp., and VARCO International Inc. See "Litigation Relating to Director." BRUCE A. ESSELBORN, age 54; Director of the Company since February 20, 1990 and President since June 24, 1992; Chairman of the Board from 1988 until May 22, 1996 and President and Chief Executive Officer from 1986 until May 22, 1996 of UCHC and United Capitol. 25 26 DAN L. KIRBY, age 50; Director of the Company since May 27, 1993; Executive Vice President, General Counsel and Secretary of Western Surety since 1974. JOE P. KIRBY, age 43; Director of the Company since May 27, 1993; President from 1979 until 1995 and Chief Executive Officer of Western Surety since 1979. DONALD W. PHILLIPS, age 48; Director of the Company since May 9, 1990; President of the Company from March 28, 1990 until June 24, 1992; Senior Partner of EGI Capital Markets, L.L.C. since January 2, 1997; Executive Vice President of Equity Financial and Management Company ("Equity") since March 1990; Chairman of the Board of Equity Institutional Investors, Inc. from July 1990 until December 31, 1996; Director of SIT Investments Mutual Fund Group. SHELI Z. ROSENBERG, age 55; Director of the Company since May 15, 1987; Vice President since February 20, 1990; General Counsel of the Company from February 20, 1990 until September 8, 1994; President and Chief Executive Officer since November 1994, Executive Vice President from 1986 until 1994 and Director of EGI; President and Chief Executive Officer since November 1994, Executive Vice President from 1980 until 1994 and a Director of Equity; Principal of the law firm of Rosenberg & Liebentritt, P.C.; Board Chair of Jacor; Chairman of the Board of CFI Industries, Inc. ("CFI") from January 1994 until September 1994 and Co-Chairman from September 1994 until March 1995; Director of American Classic Voyages Co. ("American Classic"), Anixter, Falcon, Manufactured Home Communities, Inc. ("MHC"), Revco and Sealy; Trustee of Equity Residential Properties Trust ("Equity Residential"); Vice President of First Capital Benefit Administrators, Inc. ("Benefits Administrators") from July 22, 1987 until November 15, 1995. Benefits Administrators filed for a petition under the Federal bankruptcy laws on January 3, 1995 which resulted in its liquidation on November 15, 1995. L.G. SCHAFRAN, age 58; Director of the Company since August 1, 1986; Managing General Partner of L.G. Schafran & Associates; Director of Crown Books Corporation, Dart Group Corporation, Delta - Omega Technologies, Inc., Glasstech, Inc., OXiGENE, Inc., Publicker Industries, Inc. and Trak-Auto Corporation. RICHARD I. WEINGARTEN, age 46; Director of the Company since March 2, 1994; President of Richard Weingarten & Company, Inc. since 1991. SAMUEL ZELL, age 55; Director of the Company since August 13, 1986; Chairman of the Board and Chief Executive Officer of the Company since October 15, 1987; President of the Company from July 25, 1989 until March 27, 1990; Chairman of the Board of Anixter, American Classic, Equity, EGI, Equity Residential, and MHC; Co-Chairman of the Board of Revco; Director of Chart House Enterprises, Inc., Quality Food Centers, Inc., Sealy, TeleTech and Ramco Energy, p.l.c.; Trustee and beneficiary of the general partner of Equity Capsure, owner of 25.6% of the Company's Common Stock. ARTHUR A. GREENBERG, age 56; Senior Vice President of the Company since January 1, 1989, and Treasurer of the Company since February 5, 1990; Chief Financial Officer of the Company from July 25, 1989 until May 27, 1993; Executive Vice President of EGI and Equity; President of Greenberg & Pociask, Ltd.; Director of American Classic. JOHN T. KNOX, JR., age 42; President and Chief Executive Officer of Universal Surety Holding Corporation since 1986 and of Universal Surety since 1983. STEPHEN T. PATE, age 50; President of Western Surety since May 1995; Executive Vice President of Western Surety from October 1994 until May 1995; employed at Continental Insurance Company from 1975 until 1994, most recently serving as President of Continental Guaranty, the surety division of Continental Insurance Company. MARY JANE ROBERTSON, age 43; Senior Vice President and Chief Financial Officer of the Company since May 27, 1993; Executive Vice President and Chief Financial Officer of United Capitol from August 20, 1991 until May 22, 1996. KELLY L. STONEBRAKER, age 42; Vice President and General Counsel of the Company since September 8, 1994; officer at Rosenberg & Liebentritt, P.C. since September 1990. 26 27 LITIGATION RELATING TO DIRECTOR On September 9, 1993, Mr. Embry and Magten, without admitting or denying the allegations in a complaint by the SEC, consented to the entry of judgments enjoining them from violating (and, in the case of Mr. Embry, aiding and abetting violations of) anti-fraud and other provisions of the Securities Exchange Act of 1934, as amended, the Investment Advisers Act of 1940, as amended, and the Investment Company Act of 1940, as amended. The SEC's complaint alleged principally that Mr. Embry failed to advise clients of certain personal trades relevant to the clients' holdings, to obtain certain consents required under applicable law in connection therewith and to comply with certain reporting requirements. The complaint did not involve the securities of the Company. As part of the settlement, Mr. Embry made a $1 million payment for the benefit of certain of Magten's clients. BOARD AND COMMITTEE MEETINGS The Board has an Executive Committee which consists of Messrs. Dyer, Esselborn and Zell. The Executive Committee did not hold any meetings in 1996. The Executive Committee possesses and may exercise the full and complete authority of the Board in the management and business affairs of the Company during the intervals between the meetings of the Board. All action by the Executive Committee is reported to the Board at its next meeting and such action is subject to revision and alteration by the Board, provided that no rights of third persons can be prejudicially affected by the subsequent action of the Board. Vacancies on the Executive Committee are filled by the Board. However, during the temporary absence of a member of the Executive Committee, due to illness or inability to attend a meeting or for other cause, the remaining member(s) of the Executive Committee may appoint a member of the Board to act in the place and with all the authority of such absent member. The current members of the Executive Committee will continue in office until the Committee is dissolved, terminated or reorganized, or if such members are replaced. The Company also has an Audit Committee which consists of Messrs. Denton, Embry and Schafran. During 1996, the Audit Committee held two (2) meetings. The Audit Committee has the power to (i) recommend to the Board the independent certified public accountants to be selected to serve the Company, (ii) review with the independent certified public accountants the planned scope and results of the annual audit, their reports and recommendations, (iii) review with the independent certified public accountants matters relating to the Company's system of internal controls, and (iv) review the Company's policies with respect to corporate governance, including policies relating to compliance with laws and regulations and conflicts of interest. The Company also has a Compensation Committee which consists of Messrs. Dammeyer, Denton and Schafran. During 1996, the Compensation Committee held one (1) meeting. The Compensation Committee reviews and makes recommendations concerning proposals by management with respect to compensation, bonuses, stock option grants, employment agreements and other benefits and policies regarding such matters for the Company. The Company also has an Investment Committee which consists of Messrs. Dyer, Embry, Esselborn and Phillips. During 1996, the Investment Committee held four (4) meetings. The Investment Committee establishes investment policies and oversees the management of the Company's investment portfolio. During 1996, six (6) meetings of the Board were held. All directors were present at least for 75% of the meetings of the Board and the committees that they were eligible to attend. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Under the rules of the SEC, the Company is required to report, based on its review of reports to the SEC about transactions in its Common Stock furnished to the Company and written representations of its directors, executive officers and 10% stockholders, that for 1996: 1) Arthur A. Greenberg filed a Form 4 late for December 1996 on January 13, 1997 which reported the contribution of shares of Common Stock to Equity Capsure by Equity Capsure's partners; and 2) Bruce A. Esselborn filed a Form 4 late for December 1996 on 27 28 February 13, 1997 which reported the exercise by Mr. Esselborn's wife of options to purchase 5,000 shares of Common Stock. ITEM 11. EXECUTIVE COMPENSATION The following tables show information with respect to the annual compensation (including option grants) for services rendered to the Company for the years ended December 31, 1996, 1995 and 1994 by the chief executive officer and those persons who were, at December 31, 1996, the other four most highly compensated executive officers of the Company. SUMMARY COMPENSATION TABLE
OTHER ANNUAL ALL OTHER SALARY BONUS COMPENSATION OPTIONS COMPENSATION NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) (#) ($) --------------------------- ---- ------- ------- ------------ ------- ------------ Samuel Zell 1996 0 0 150,000(1) 5,000 0 Chairman of the Board 1995 0 0 150,000(1) 5,000 0 and Chief Executive 1994 0 0 150,000(1) 25,000 0 Officer of the Company Bruce A. Esselborn 1996 387,500 751,250(2) 9,699(3) 0 767,105(4) President of the Company 1995 387,500 300,000 441(3) 30,000 27,835(4) 1994 387,500 112,500 854(3) 5,000 24,828(4) Mary Jane Robertson 1996 225,000 424,500(2) 0 0 149,331(5) Senior Vice President and 1995 225,000 150,000 0 15,000 14,888(5) Chief Financial Officer of 1994 200,000 30,000 0 8,500 14,914(5) the Company Dan L. Kirby 1996 250,000 125,000 432(6) 0 40,352(7) Executive Vice President, 1995 250,000 125,000 420(6) 5,000 9,000(7) General Counsel and 1994 250,000 250,000 408(6) 5,000 9,000(7) Secretary of Western Surety Joe P. Kirby 1996 250,000 125,000 372(8) 0 40,352(9) President and Chief 1995 250,000 125,000 360(8) 5,000 9,000(9) Executive Officer of 1994 250,000 250,000 0 5,000 9,000(9) Western Surety
- --------------- (1) Mr. Zell received $150,000 in 1996, 1995 and 1994 for his services as Chairman of the Board, Chief Executive Officer and Chairman of the Executive Committee. (2) Included a bonus related to the pending business combination negotiations of $581,250 and $337,500 for Mr. Esselborn and Ms. Robertson, respectively. (3) Included $9,699 in 1996, $441 in 1995 and $854 in 1994 of reimbursements of personal investment advisory fees. (4) Included (i) $8,724 in 1996, $13,700 in 1995 and $11,760 in 1994 of Company-paid premiums on a life insurance policy owned by him; (ii) $4,500 in 1996, 1995 and 1994 of 401(k) plan Company matching contributions; (iii) $8,881 in 1996, $9,635 in 1995 and $8,568 in 1994 of Company contributions under a defined contribution retirement plan; (iv) $495,000 in 1996 paid in connection with stock option repricing; and (v) $250,000 in 1996 paid in consideration for signing a non-compete agreement with Frontier Insurance Group, Inc. ("Frontier") related to the sale of United Capitol. (5) Included (i) $4,500 in 1996, 1995 and 1994 of 401(k) plan Company matching contributions; (ii) $10,323 in 1996, $10,388 in 1995 and $10,414 in 1994 of Company contributions under a defined contribution retirement plan; and (iii) $134,508 in 1996 paid in connection with stock option repricing. (6) Included $432 in 1996, $420 in 1995 and $408 in 1994 of reimbursements of health club dues. (7) Included (i) $9,000 in 1996, 1995 and 1994 of 401(k) plan Company matching and profit-sharing contributions; and (ii) $31,352 in 1996 paid in connection with stock option repricing. (8) Included $372 in 1996 and $360 in 1995 of reimbursements of health club fees. (9) Included (i) $9,000 in 1996, 1995 and 1994 of 401(k) plan Company matching and profit-sharing contributions; and (ii) $31,352 in 1996 paid in connection with stock option repricing. 28 29 OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS ------------------------- % OF POTENTIAL REALIZABLE TOTAL VALUE AT ASSUMED NUMBER GRANTED ANNUAL RATES OF STOCK OF SECURITIES TO PRICE APPRECIATION UNDERLYING EMPLOYEES EXERCISE OR FOR OPTION TERM OPTIONS FISCAL BASE PRICE EXPIRATION -------------------------- NAME GRANTED(#)(1) YEAR (2) ($/SH) DATE 5%($)(3)(5) 10%($)(4)(5) ---- ------------- --------- ----------- ---------- ----------- ------------ Samuel Zell............... 5,000 N/A 18.00(5) 5/23/06 28,971 67,924 Bruce A. Esselborn........ 0 -- -- -- -- 0 Mary Jane Robertson....... 0 -- -- -- -- 0 Dan L. Kirby.............. 0 -- -- -- -- 0 Joe P. Kirby.............. 0 -- -- -- -- 0
- --------------- (1) The Options granted during 1996 were exercisable after May 23, 1996. (2) No employees were granted options in 1996. (3) Assumes a price of $13.79 at the end of ten years. (4) Assumes a price of $21.58 at the end of ten years. (5) Option was repriced on October 7, 1996 to $8.00 per share as part of Company-wide repricing of options as a result of the $10.00 per share special distribution. The calculation for Potential Realizable Value is based upon such repriced amount. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUE
VALUE OF UNEXERCISED NUMBER OF IN-THE-MONEY OPTIONS UNEXERCISED OPTIONS AT AT FY-END(#) FY-END($) SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/ NAME ON EXERCISE (#) REALIZED($) UNEXERCISABLE UNEXERCISABLE ---- ---------------- ----------- ------------------- -------------------- Samuel Zell....................... 0 0 50,000/15,000 389,750/125,000 Bruce A. Esselborn................ 0 0 176,250/18,750 1,937,094/157,031 Mary Jane Robertson............... 67,240 772,791 40,760/15,500 466,702/130,344 Dan L. Kirby...................... 10,810 97,290 54,190/0 558,726/0 Joe P. Kirby...................... 10,810 97,290 54,190/0 558,726/0
COMPENSATION OF DIRECTORS Samuel Zell, Chairman of the Board and Chief Executive Officer of the Company, was compensated at the annual rate of $150,000 for his services as a Director, Chairman of the Board, Chief Executive Officer and Member of the Executive Committee during 1996. Such amount has been included in the Summary Compensation Table. Other Directors, except for employees of the Company or its subsidiaries, were compensated at the annual rate of $15,000 and received $500 for each meeting of the Board and committees of the Board of the Company which they attended. Additionally, as of the date of the first Directors' meeting following each Annual Meeting, each non-employee Director receives options to purchase 5,000 shares at the fair market value as of the grant date. Western Surety Company pays its non-Company or subsidiary employee directors an annual retainer of $12,000. Mr. Greenberg and Mrs. Rosenberg, who are members of such Board, each were compensated pursuant to this policy for 1996. 29 30 EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS The Company and Mr. Esselborn have an agreement providing for the continuation of Mr. Esselborn's employment on a rolling, two-year basis commencing September 30, 1995, and continuing for a minimum period of two years thereafter subject to automatic extension. On October 1, 1995 and on each day thereafter, the employment period shall be extended automatically by one day unless the Company or Mr. Esselborn notifies the other party that the employment period will not be further extended. 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 agreement provides for a minimum salary of $387,500 with annual salary adjustments determined by the Company, an annual bonus that is mutually agreed upon by Mr. Esselborn and the Company and Company-paid premiums for a $2,000,000 life insurance policy with Mr. Esselborn designating the beneficiary and certain other employee benefits. The Company and Mr. Esselborn had another agreement which paid Mr. Esselborn $250,000 upon the consummation of the sale of UCHC and its subsidiaries to Frontier. The Company and Mr. Esselborn entered into this agreement as an inducement for Mr. Esselborn to personally enter into a two-year non-competition and five-year employee non-solicitation agreement with Frontier. Such amount is included in the "All Other Compensation" column of the Summary Compensation Table. The Company and United Capitol entered into an executive change in control and termination benefits agreement with Lorraine Esselborn, the wife of Mr. Esselborn and an employee of United Capitol from 1986 until its sale to Frontier, which provided Mrs. Esselborn with certain payments upon the sale of United Capitol. Mrs. Esselborn received a severance payment of $64,500 which was equal to 150% of the sum of her 1996 base salary and 1995 bonus. In 1996, the Company paid Mr. Esselborn $581,250, as a bonus in recognition of his efforts in negotiating and executing the definitive Reorganization Agreement and related transactions with certain subsidiaries of CNAF. Such amount is included in the "Bonus" column of the Summary Compensation Table. The Company and Ms. Robertson have an agreement providing for the continuation of Ms. Robertson's employment on a rolling, two-year basis commencing September 30, 1995, and continuing for a minimum period of two years thereafter subject to automatic extension. On October 1, 1995 and on each day thereafter, the employment period shall be extended automatically by one day unless the Company or Ms. Robertson notifies the other party that the employment period will not be further extended. Thus, after October 1, 1995, until written notice is received by either party, the employment period at any point shall be two years. The agreement provides for a minimum salary of $225,000 with annual salary adjustments determined by the Company, an annual bonus that is mutually agreed upon by Ms. Robertson and the Company and certain other employee benefits. In 1996, the Company paid Ms. Robertson $337,500, as a bonus in recognition of her efforts in negotiating and executing the definitive Reorganization Agreement and related transactions with certain subsidiaries of CNAF. Such amount is included in the "Bonus" column of the Summary Compensation Table. 30 31 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The members of the Company's Compensation Committee are Messrs. Dammeyer, Denton and Schafran. The following relationships existed during 1996: Mrs. Rosenberg and Mr. Zell are executive officers and directors of the Company and Mrs. Rosenberg is a director and member of the Compensation Committee of Anixter, and Mr. Zell is an executive officer and director of Anixter. Mr. Dammeyer is an executive officer and director of Anixter and is a director and member of the Compensation Committee of the Company. Mrs. Rosenberg is an executive officer and director of the Company and is a trustee and member of the Compensation Committee of Equity Residential. Mr. Zell is an executive officer and trustee of Equity Residential and an executive officer and director of the Company. For the year ended December 31, 1996, the Company paid approximately $106,000 in fees for legal services to the law firm of Rosenberg & Liebentritt, P.C. of which Mrs. Rosenberg and Mr. Stonebraker are members. For the year ended December 31, 1996, the Company paid Seyfarth Shaw Fairweather & Geraldson ("Seyfarth") approximately $276,000. Mrs. Rosenberg's husband is a partner at Seyfarth. Additionally, see "Certain Relationships and Related Transactions." COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The compensation policy of the Company for its executive officers (including those named in the Summary Compensation Table) has been to pay base salaries and annual bonuses that are both competitive and recognize the accomplishment of the Company's stated goals of building a financial services business primarily focusing on insurance. In addition, the Company established the 1990 Stock Option Plan to provide long-term incentive opportunities for employees, officers and directors of the Company. The Chairman of the Board and Chief Executive Officer of the Company received a $150,000 fee for serving in such capacities. This fee is not directly tied to the performance of the Company but rather reflects the commencement of the Company's strategic plan, the initial implementation of this plan and Mr. Zell's contributions to it. During 1995, the Company entered into new employment agreements with Mr. Esselborn and Ms. Robertson. See "Employment Contracts and Termination of Employment and Change-In-Control Arrangements" for a description of the agreements. The Company entered into these agreements after the Company began pursuing the sale of UCHC and its subsidiaries. The Company wanted to incentivize Mr. Esselborn and Ms. Robertson to remain with the Company both during the sale's process and after the sale was completed and to insure the stability and efficient operation of the Company. During 1996, the Company paid Mr. Esselborn and Ms. Robertson bonuses equal to 18 months of their base salary in recognition of their efforts in negotiating and executing the definitive Reorganization Agreement and related transactions with certain subsidiaries of CNAF. Additionally, in connection with the possible sale or merger of the Company, a plan was adopted pursuant to which the Company will provide severance benefits and transaction or retention bonuses to be paid, under certain circumstances, to certain other officers and employees. This plan was designed to (i) incentivize key employees to effectuate the consummation of the merger with CNA Surety; (ii) keep employees in place during the failure or completion of the merger with CNA Surety; and (iii) compensate employees for the loss of their employment. Long-term incentive opportunities were made available to each of the executive officers (other than the Chief Executive Officer) in the form of significant grants of stock options at the time of the Company's respective acquisitions of United Capitol and Western Surety. These options were designed to promote the long-term interests between such individuals and the Company's stockholders and to assist in the retention of 31 32 such officers. During 1996, given the sale discussions underway at the Company, no options were granted to any employees. Also, during 1996, the Board of Directors authorized the repricing of all outstanding stock options due to the $10.00 per share special cash distribution paid to stockholders. Options with exercise prices less than $10.00 per share were repriced to $.05 per share, the par value of the Common Stock, and the optionee received a cash payment for the difference. The Board of Directors authorized the repricing of all of the options because it felt the reduction in the stock price caused by the distribution would be a permanent reduction and would reduce the value of the options to the optionees. For tax purposes, over 90% of the distribution was return of capital. On Friday, October 4, 1996, the date of the distribution, the Common Stock closed at $18.00 per share. On Monday, October 7, 1996, the Common Stock opened for trading at $8.00 per share. It is the policy of the Company to structure its compensation in a manner which will avoid the limitations imposed by the Omnibus Budget Reconciliation Act of 1993 on the deductibility of executive compensation under Section 162 (m) of the Internal Revenue Code of 1986, as amended, to the extent it can reasonably do so consistent with its goal of retaining and motivating its executives in a cost effective manner. Rod F. Dammeyer Herbert A. Denton L.G. Schafran 32 33 PERFORMANCE GRAPH Below is a graph comparing total stockholder return on the Company's Common Stock over the last five years with a broad equity market index, the S&P Property and Casualty Insurance Index, and a published industry index, the S&P 500, as required by the rules of the SEC.
Measurement Period Capsure Holdings S&P 500 ($) S&P Property & (Fiscal Year Covered) Corp. ($) Casualty ($) 1991 100.00 100.00 100.00 1992 191.23 107.62 117.11 1993 189.47 118.46 115.04 1994 205.26 120.03 120.67 1995 247.37 165.13 165.39 1996 340.74 203.05 198.53
33 34 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of March 7, 1997, except as noted, certain information with respect to each person or entity who is known by the management of the Company to be the beneficial owner of more than 5% of the outstanding shares of the Company's Common Stock:
NAME AND ADDRESS OF AMOUNT AND NATURE PERCENT BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP(1) OF CLASS ------------------- -------------------------- -------- Equity Capsure Limited Partnership(2)........... 4,039,622(3) 25.6% Two N. Riverside Plaza Chicago, IL 60606 Shapiro Capital Management Company Inc.(4)...... 1,253,698(4) 7.9% 3060 Peachtree Road N.L.P. Atlanta, GA 30305
- --------------- (1) The number of shares of the Company's Common Stock indicated as beneficially owned is reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. (2) Equity Capsure Limited Partnership, an Illinois limited partnership ("Equity Capsure"), is comprised of five partners: the Samuel Zell Revocable Trust with Samuel Zell as Trustee; the Ann Lurie Revocable Trust with Ann Lurie and Mark Slezak as Co-Trustees; LFT Partnership; Alphabet Partners and ZFT Partnership. The Samuel Zell Revocable Trust, of which Samuel Zell, Chairman of the Board and Chief Executive Officer of the Company, is trustee and beneficiary, is the sole general partner of Equity Capsure. Sheli Z. Rosenberg is the sole trustee of the 10 trusts which are the partners of ZFT Partnership and Arthur A. Greenberg is the sole trustee of the 15 trusts which are the partners of Alphabet Partners. Messrs. Zell and Greenberg and Ms. Rosenberg may be deemed to be the beneficial owner of the shares of the Company's Common Stock owned by Equity Capsure but they each disclaim beneficial ownership of these shares. (3) The shares are held by three institutions as collateral for loans to Equity Capsure. Under the loan agreements, the institutions cannot vote or exercise any ownership rights relating to the pledged shares unless there is an event of default thereunder. (4) Pursuant to a Schedule 13G filed with the SEC for calendar year 1996, Shapiro Capital Management Company, Inc. ("Shapiro") is a registered investment advisor. One or more of Shapiro's advisory clients is the legal owner of 861,998 shares of Common Stock. Pursuant to the investment advisory agreements with its clients, Shapiro has the authority to direct the investments of its advisory clients. Samuel R. Shapiro is the president, director and majority shareholder of Shapiro. Mr. Shapiro's wife was also the beneficial owner of 38,000 shares of Common Stock. Additionally, the Kaleidoscope Fund, L.P. ("Kaleidoscope") was the beneficial owner of 353,700 shares of Common Stock. Shapiro is the general partner of Kaleidoscope. 34 35 SECURITY OWNERSHIP OF MANAGEMENT The following information is furnished as of March 7, 1997, with respect to the shares of the Company's Common Stock beneficially owned by each director and by those executive officers named in the Summary Compensation Table and by all directors and executive officers (17 persons) as a group. Information concerning the directors and officers and their security holdings has been furnished by them to the Company.
SHARES UPON NAME OF SHARES OF EXERCISE OF STOCK PERCENT OF BENEFICIAL OWNER COMMON STOCK OPTIONS(1) TOTAL(2) CLASS ---------------- ------------ ----------------- --------- ---------- Rod F. Dammeyer.................. 0 20,000 20,000 * Herbert A. Denton................ 27,860 20,000 47,860 * Bradbury Dyer, III............... 546,158(3) 40,000 586,158 3.7% Talton R. Embry.................. 32,175(4) 40,000 72,175 * Bruce A. Esselborn............... 83,507(5) 182,500 266,007 1.7% Dan L. Kirby..................... 66,365 54,190 120,555 * Joe P. Kirby..................... 51,885 54,190 106,075 * Donald W. Phillips............... 0 40,000 40,000 * Mary Jane Robertson.............. 68,740 52,510 121,250 * Sheli Z. Rosenberg............... 4,062,328(6) 40,000 4,102,328 26.0% L.G. Schafran.................... 13,768(7) 40,000 53,768 * Richard I. Weingarten............ 0 15,000 15,000 * Samuel Zell...................... 4,039,622(6) 50,000 4,089,622 25.9% All directors and executive officers as a group (17 persons) including the above-named persons............ 5,272,881 678,608 5,951,489 37.6%
- --------------- * Less than 1% (1) Represents beneficial ownership of shares that may be acquired by the exercise of stock options which are currently exercisable or exercisable within sixty days of the date of this table. (2) The amounts of the Company's Common Stock and stock options beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. (3) Includes 544,258 shares of the Company's Common Stock owned by Paragon Joint Venture ("Paragon"). Paragon is a joint venture formed by Paragon Associates and Paragon Associates II, both Texas limited partnerships. Mr. Dyer is the sole general partner of Paragon Associates and Paragon Associates II. Under the terms of the joint venture agreement of Paragon, each partner has beneficial ownership in proportion to its respective account in Paragon. Mr. Dyer does not have full direct ownership; however, as the general partner of the partners of Paragon, he may be deemed to have beneficial ownership. (4) The 32,175 shares are owned as follows: 300 shares are owned by Mr. Embry; 14,400 shares are owned by the Magten Asset Management Corp. Pension Plan & Trust; 1,675 shares are owned by Mr. Embry's minor children; 300 shares are owned by Mr. Embry's wife; and 15,500 shares are owned by the Magten Asset Management Profit Sharing Plan. (5) Includes 8,500 shares beneficially owned by Mr. Esselborn's wife. (6) Includes 4,039,622 shares of the Company's Common Stock owned by Equity Capsure. Under regulations of the SEC, Mr. Zell and Mrs. Rosenberg may be deemed to be the beneficial owners of the shares of the Company's Common Stock owned by Equity Capsure (see notes (2) and (3) under "Security Ownership of Certain Beneficial Owners"), but they each disclaim beneficial ownership of these shares. (7) Shares are beneficially owned by Mr. Schafran's spouse. Mr. Schafran disclaims beneficial ownership of such shares. 35 36 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company subleases office space from EGI, a company affiliated with Equity Capsure, at Two North Riverside Plaza, Chicago, Illinois 60606. In addition, EGI provides the Company with certain administrative and office facility services and charges for such services are included in the rent. The Company paid approximately $86,000 during 1996 for such services. Various affiliates of Equity Capsure have provided services with respect to certain aspects of the Company's business including, but not limited to, financial and accounting services, tax services, computer services, investor relations services and support services and expenses. During 1996, the Company paid or was billed approximately $189,000 for such services. The Company also provides financial management services to various affiliates of Equity Capsure. During 1996, the Company received approximately $20,000 for such services which also included reimbursement of overhead charges. The executive officers listed below were indebted to the Company in 1996 as a result of the Company lending the executive officers money to exercise incentive stock options. The loans, which were outstanding from September 25 to October 4, 1996, bore imputed interest only at 6.02% which was the applicable federal rate, as defined in the Code, at the time the loans were made.
LARGEST PRINCIPAL AMOUNT OWED PRINCIPAL BALANCE AT NAME IN 1996 DECEMBER 31, 1996 ---- ----------------- -------------------- Mary Jane Robertson..................... $504,338.75 $0 Dan L. Kirby............................ 99,992.50 0 Joe P. Kirby............................ 99,992.50 0
36 37 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
PAGE ---- (a)(1) FINANCIAL: Report of Independent Accountants........................... 38 Consolidated Balance Sheets as of December 31, 1996 and 1995...................................................... 39 Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and 1994.......................... 40 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1996, 1995 and 1994...... 41 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994.......................... 42 Notes to Consolidated Financial Statements.................. 43 (a)(2) FINANCIAL STATEMENT SCHEDULES: Schedule I -- Summary of Investments...................... 60 Schedule II -- Condensed Financial Information of Registrant................................................ 61 Schedule III -- Supplementary Insurance Information......... 65 Schedule IV -- Reinsurance................................. 66 Schedule V -- Valuation and Qualifying Accounts............ 67 Schedule VI -- Supplemental Information Concerning Property -- Casualty Insurance Operations................. 68 (a)(3) EXHIBITS.................................................... 69 (b) REPORTS ON FORM 8-K: December 27, 1996: Capsure and certain direct and indirect subsidiaries of CNA Financial Corporation entered into a definitive Reorganization Agreement to merge Capsure with a wholly-owned subsidiary of CNA Surety Corporation.
37 38 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 consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated 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, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 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 consolidated financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Chicago, Illinois February 20, 1997 38 39 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) ASSETS
DECEMBER 31, -------------------- 1996 1995 -------- -------- Invested assets and cash: Fixed maturities, at fair value (amortized cost: $135,420; $233,276).............................................. $135,895 $235,718 Equity securities, at fair value (cost: $3,687; $27,124)............................................... 4,526 27,753 Short-term investments, at cost which approximates fair value.................................................. 19,416 37,865 Other investments, at fair value.......................... 2,695 3,219 Cash...................................................... 2,736 3,001 -------- -------- 165,268 307,556 Deferred policy acquisition costs........................... 28,523 27,057 Reinsurance receivable...................................... 5,642 40,097 Intangible assets, net of amortization...................... 14,024 15,715 Excess cost over net assets acquired, net of amortization... 61,932 68,443 Deferred income taxes, net of valuation allowance........... 16,019 29,293 Other assets................................................ 21,731 26,607 -------- -------- Total assets...................................... $313,139 $514,768 ======== ======== LIABILITIES Reserves: Unpaid losses and loss adjustment expenses................ $ 38,874 $126,061 Unearned premiums......................................... 69,570 76,781 -------- -------- 108,444 202,842 Long-term debt.............................................. 60,000 25,000 Other liabilities........................................... 22,112 29,622 -------- -------- Total liabilities................................. 190,556 257,464 -------- -------- 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 shares authorized; 15,804,749 shares issued at December 31, 1996; 15,408,749 shares issued at December 31, 1995............. 790 770 Additional paid-in capital.................................. 118,413 179,276 Retained earnings from August 1, 1986 (date of reorganization)........................................... 2,297 75,286 Unrealized gain on securities, net of deferred income taxes..................................................... 1,083 1,972 -------- -------- Total stockholders' equity........................ 122,583 257,304 -------- -------- $313,139 $514,768 ======== ========
The accompanying notes are an integral part of these financial statements. 39 40 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, -------------------------------- 1996 1995 1994 -------- -------- -------- Revenues: Net earned premiums...................................... $ 92,491 $ 98,692 $ 92,481 Net investment income.................................... 16,444 20,471 19,129 Net investment gains (losses)............................ 1,715 (1,653) 945 -------- -------- -------- 110,650 117,510 112,555 -------- -------- -------- Expenses: Net loss and loss adjustment expenses.................... 10,054 (7,451) 23,344 Net commissions, brokerage and other underwriting........ 63,204 61,312 53,904 Interest expense......................................... 1,717 4,103 4,726 Write-off of unamortized deferred loan fees.............. 700 -- 1,556 Non-recurring compensation and merger costs.............. 7,865 -- -- Amortization and impairment of goodwill and intangibles........................................... 2,761 16,853 3,365 Other expenses, net...................................... 2,789 2,442 1,881 -------- -------- -------- 89,090 77,259 88,776 -------- -------- -------- Income before income taxes................................. 21,560 40,251 23,779 Income taxes............................................... 8,181 19,721 9,401 -------- -------- -------- Net income................................................. $ 13,379 $ 20,530 $ 14,378 ======== ======== ======== Weighted average shares outstanding: Primary.................................................. 16,395 15,404 15,160 ======== ======== ======== Fully diluted............................................ 16,510 15,917 15,455 ======== ======== ======== Earnings per share: Primary.................................................. $ .82 $ 1.33 $ .95 ======== ======== ======== Fully diluted............................................ $ .81 $ 1.29 $ .93 ======== ======== ========
The accompanying notes are an integral part of these financial statements. 40 41 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED DECEMBER 31, -------------------------------- 1996 1995 1994 -------- -------- -------- Common Stock: Balance, January 1....................................... $ 770 $ 770 $ 753 Common stock issued...................................... -- -- 15 Common stock issued through exercise of warrants and options............................................... 20 -- 2 -------- -------- -------- Balance, December 31..................................... $ 790 $ 770 $ 770 ======== ======== ======== Additional Paid-In Capital: Balance, January 1....................................... $179,276 $179,250 $165,257 Common stock issued...................................... -- -- 3,985 Common stock issued through exercise of warrants and options............................................... 2,283 26 8 Return of capital distribution on common stock........... (69,880) -- -- Change in valuation allowance for deferred tax assets.... -- -- 10,000 Stock option repricing................................... 6,734 -- -- -------- -------- -------- Balance, December 31..................................... $118,413 $179,276 $179,250 ======== ======== ======== Retained Earnings: Balance, January 1....................................... $ 75,286 $ 54,756 $ 40,378 Net income............................................... 13,379 20,530 14,378 Dividend on common stock................................. (86,368) -- -- -------- -------- -------- Balance, December 31..................................... $ 2,297 $ 75,286 $ 54,756 ======== ======== ======== Unrealized Gain (Loss) on Securities, Net of Deferred Income Taxes: Balance, January 1....................................... $ 1,972 $ (9,830) $ 1,318 Impact of adopting SFAS No. 115.......................... -- -- 3,203 Transfer of held-to-maturity securities.................. -- 224 -- Change for the year...................................... (889) 11,578 (14,351) -------- -------- -------- Balance, December 31..................................... $ 1,083 $ 1,972 $ (9,830) ======== ======== ======== Treasury Stock: Balance, January 1....................................... $ -- $ (81) $ (81) Common stock reissued through exercise of options........ -- 81 -- -------- -------- -------- Balance, December 31..................................... $ -- $ -- $ (81) ======== ======== ========
COMMON STOCK ------------------------- ISSUED IN TREASURY ---------- ----------- Shares: Balance, January 1, 1994.................................. 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 -- Common stock issued through exercise of options........... 396,000 -- ---------- ------- Balance, December 31, 1996................................ 15,804,749 -- ========== =======
The accompanying notes are an integral part of these financial statements. 41 42 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
YEARS ENDED DECEMBER 31, ----------------------------------- 1996 1995 1994 --------- --------- --------- OPERATING ACTIVITIES: Net income............................................ $ 13,379 $ 20,530 $ 14,378 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization...................... 4,822 18,272 4,617 Accretion of bond discount, net.................... (409) (2,471) (3,933) Net investment (gains) losses...................... (1,715) 1,653 (945) Non-recurring compensation and merger costs........ 7,865 -- -- Changes in: Reserves for unpaid losses and loss adjustment expenses......................................... (2,364) (22,980) 10,477 Reserve for unearned premiums...................... 5,457 151 (1,160) Deferred income taxes, net......................... 7,291 18,086 8,820 Other assets and liabilities....................... (3,193) (2,502) (2,970) --------- --------- --------- Net cash provided by operating activities............... 31,133 30,739 29,284 --------- --------- --------- INVESTING ACTIVITIES: Securities available-for-sale: Purchases -- fixed maturities...................... (73,862) (108,924) (93,452) Sales -- fixed maturities.......................... 67,380 71,889 43,762 Maturities -- fixed maturities..................... 46,935 63,315 35,020 Purchases -- equity securities..................... (190) (3,165) (28,350) Sales -- equity securities......................... 22,451 6,225 8,091 Change in short-term investments...................... 855 (15,786) 47,881 Net proceeds from the sale of UCHC.................... 28,024 -- -- Acquisitions, net of cash acquired.................... -- -- (26,175) Proceeds from sale of other invested assets........... 508 1,821 1,733 Capital expenditures, net............................. (2,948) (1,351) (1,679) --------- --------- --------- Net cash provided by (used in) investing activities..... 89,153 14,024 (13,169) --------- --------- --------- FINANCING ACTIVITIES: Proceeds from long-term debt.......................... 62,000 -- 96,000 Principal payments on long-term debt.................. (27,000) (46,000) (110,214) Dividends paid........................................ (156,248) -- -- Exercise of warrants and options, net of option repricing payments................................. 1,186 107 10 Debt issuance costs................................... (489) -- (1,060) --------- --------- --------- Net cash used in financing activities................... (120,551) (45,893) (15,264) --------- --------- --------- Increase (decrease) in cash............................. (265) (1,130) 851 Cash at beginning of year............................... 3,001 4,131 3,280 --------- --------- --------- Cash at end of year..................................... $ 2,736 $ 3,001 $ 4,131 ========= ========= ========= Supplemental Disclosure of Cash Flow Information: Cash paid during the year for: Interest........................................... $ 1,426 $ 3,759 $ 4,121 Income taxes, net of refunds....................... $ 1,195 $ 658 $ 642 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. 42 43 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 provides surety and fidelity bonds in all 50 states through a combined network of 120,000 independent agents. Capsure's principal subsidiaries are Western Surety Company ("Western Surety"), acquired in August 1992, 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 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, writes similar business and is licensed in 17 states. Universal Surety specializes in the underwriting of small contract and miscellaneous surety bonds. Universal Surety is licensed in 37 states and the District of Columbia with most of its business generated in Texas. 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 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. 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. 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. 43 44 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 20 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 $6.3 million and $21.1 million (includes $13.2 million write-down in 1995) at December 31, 1996 and 1995, respectively. Intangible assets are reported net of accumulated amortization of $27.3 million and $25.7 million at December 31, 1996 and 1995, 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. 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 significantly 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. 44 45 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Income Taxes The Company uses the asset and liability method of accounting for income taxes required by SFAS No. 109, "Accounting for Income Taxes." Under the asset and liability method, deferred income taxes are established for the future tax effects of temporary differences between the tax and financial reporting bases of assets and liabilities using currently enacted tax rates. Such temporary differences primarily relate to net operating 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. In addition, deferred tax assets are valued based upon the expectation of future realization on a "more likely than not" basis. The initial recognition of the tax benefits of the NOLs resulted in a credit to additional paid-in capital for the available NOLs for which future realization was expected. Tax benefits resulting from the future utilization of such NOLs will reduce the net deferred tax asset established in accordance with SFAS No. 109. 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 1996, 1995 and 1994 were 16.5 million, 15.9 million and 15.5 million, respectively. Pending Accounting Standards In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," which is effective for both interim and annual periods ending after December 15, 1997. SFAS No. 128 replaces APB Opinion No. 15, "Earnings Per Share." APB Opinion No. 15 required that entities with simple capital structures present a single earnings per common share ("EPS") on the face of the income statement, whereas those with complex capital structures had to present both primary and fully diluted EPS. SFAS No. 128 simplifies the computation of EPS by replacing the presentation of primary EPS with a presentation of basic EPS and requires dual presentation of basic and diluted EPS by entities with complex capital structures. Basic EPS includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period, whereas primary EPS includes the dilutive effect of common stock equivalents, such as stock options. Diluted EPS reflects the potential dilution of securities that could share in the earnings of an entity, similar to fully diluted EPS. The Company intends to present basic and diluted EPS in financial statements issued after the effective date. 45 46 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. ACQUISITION AND DISPOSITION OF SUBSIDIARIES 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. 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 revolving credit facility. 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 YEAR ENDED DECEMBER 31, 1994 --------------------- Revenues......................... $122,967 Net income....................... $ 15,086 Net income per common share...... $ .98
On May 22, 1996, the Company consummated the sale of United Capitol Holding Company ("UCHC") and its subsidiaries, United Capitol Insurance Company ("United Capitol"), United Capitol Managers, Inc. and Fischer Underwriting Group, Incorporated, to a subsidiary of Frontier Insurance Group, Inc. The operating results of UCHC and its subsidiaries are reflected in Capsure's results through the closing date. Net proceeds to Capsure of $77 million, which included the purchase price for the capital stock of UCHC and the release of United Capitol's excess statutory surplus at closing, approximated Capsure's carrying value. The goodwill associated with the 1990 acquisition of United Capitol was previously reduced to estimated net realizable value as of December 31, 1995, resulting in a $13.2 million impairment of goodwill in 1995. 46 47 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. INVESTMENTS The cost and estimated fair values of investments in debt and equity securities as of December 31, 1996 and 1995 were as follows (dollars in thousands):
AMORTIZED GROSS GROSS ESTIMATED COST UNREALIZED UNREALIZED FAIR OR COST GAINS LOSSES VALUE --------- ---------- ---------- --------- AS OF DECEMBER 31, 1996: Fixed maturities: U.S. Treasury securities and obligations of U.S. Government corporations and agencies: U.S. Treasury notes........................... $ 5,030 $ 66 $ (13) $ 5,083 Collateralized mortgage obligations........... 35,565 373 (49) 35,889 Mortgage pass-through securities.............. 36,221 244 (84) 36,381 Obligations of states and political subdivisions.................................. 2,696 8 (36) 2,668 Non-agency collateralized mortgage obligations................................... 21,877 114 (59) 21,932 Asset-backed securities: Second mortgages/home equity loans............ 26,961 135 (114) 26,982 Other underlying assets....................... 7,070 22 (132) 6,960 -------- ------ ------- -------- Total fixed maturities................ 135,420 962 (487) 135,895 Equity securities............................... 3,687 839 -- 4,526 -------- ------ ------- -------- Total available-for-sale securities... $139,107 $1,801 $ (487) $140,421 ======== ====== ======= ======== AS OF DECEMBER 31, 1995: 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, 1996, virtually 100% of the Company's debt securities were considered investment grade by The Standard & Poors Corporation or Moody's Investor Services, Inc., and 93% 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. 47 48 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, 1996, fixed maturities on deposit had an aggregate carrying value of $4.8 million. Short-term investments are generally comprised of U.S. Treasury notes, maturing corporate notes, money market funds, and investment grade commercial paper equivalents. The amortized cost and estimated fair value of debt securities at December 31, 1996, 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......................................... $ 110 $ 111 Due after one year but within five years.................... 4,911 4,951 Due after five years but within ten years................... 208 224 Due after ten years......................................... 2,496 2,466 -------- -------- 7,725 7,752 Mortgage pass-through securities, collateralized mortgage obligations and asset-backed securities................... 127,695 128,143 -------- -------- $135,420 $135,895 ======== ========
Major categories of net investment income and net investment gains (losses) were as follows (dollars in thousands):
1996 1995 1994 ------- ------- ------- Investment income: Fixed maturities.......................................... $12,009 $16,964 $16,405 Equity securities......................................... 720 1,924 915 Short-term investments.................................... 3,593 1,814 1,722 Other..................................................... 519 260 532 ------- ------- ------- Total investment income................................... 16,841 20,962 19,574 Investment expenses......................................... 397 491 445 ------- ------- ------- Net investment income....................................... $16,444 $20,471 $19,129 ======= ======= ======= Gross investment gains: Fixed maturities.......................................... $ 1,109 $ 722 $ 88 Equity securities......................................... 4,220 2,505 3,762 Gross investment losses: Fixed maturities.......................................... (973) (3,757) (625) Equity securities......................................... (2,718) (2,068) (1,802) Net unrealized gains (losses) on trading securities......... -- 945 (374) Other....................................................... 77 -- (104) ------- ------- ------- Net investment gains (losses)............................... $ 1,715 $(1,653) $ 945 ======= ======= =======
48 49 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Net unrealized gain (loss) on securities included in stockholders' equity was as follows (dollars in thousands):
1996 1995 ------------------------ -------------------------- GAINS LOSSES NET GAINS LOSSES NET ------ ------ ------ ------ ------- ------- Fixed maturities..................... $ 962 $(487) $ 475 $3,153 $ (711) $ 2,442 Equity securities.................... 839 -- 839 1,303 (1,245) 58 Other................................ 352 -- 352 534 -- 534 ------ ----- ------ ------ ------- ------- $2,153 $(487) 1,666 $4,990 $(1,956) 3,034 ====== ===== ====== ======= Deferred income taxes................ (583) (1,062) ------ ------- Net unrealized gain on securities.... $1,083 $ 1,972 ====== =======
The net investment losses in 1995 reflected the $2.7 million 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. A majority of the realized investment gains and losses on equity securities resulted from sales of securities held at the parent company level. For 1996, 1995 and 1994, investment activity for the equity trading portfolio held at the parent company level included gross realized investment gains of $3.4 million, $1.9 million and $1.5 million, respectively, and gross realized investment losses of $2.6 million, $1.8 million and $1.0 million, respectively. 4. DEFERRED POLICY ACQUISITION COSTS Policy acquisition costs deferred and the related amortization charged to income were as follows (dollars in thousands):
1996 1995 1994 ------- ------- -------- Balance at January 1............................... $27,057 $25,150 $ 18,421 Balance at date of acquisition (disposition)....... (478) -- 4,369 Costs deferred during year......................... 39,449 37,666 31,750 Amortization during year........................... (37,505) (35,759) (29,390) ------- ------- -------- Balance at December 31............................. $28,523 $27,057 $ 25,150 ======= ======= ========
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, 1996, Capsure's largest reinsurance receivable, including prepaid reinsurance premiums of $0.8 million, was approximately $2.3 million with Transatlantic Reinsurance Company. Transatlantic Reinsurance Company is rated A+ (Superior) by A.M. Best Company, Inc. 49 50 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The effect of reinsurance on premiums written and earned was as follows (dollars in thousands):
1996 1995 1994 ------------------- ------------------- ------------------- WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED -------- -------- -------- -------- -------- -------- Direct............................. $107,197 $105,467 $111,305 $113,538 $102,062 $103,871 Assumed............................ 72 45 93 247 294 143 Ceded.............................. (12,160) (13,021) (13,670) (15,093) (11,778) (11,533) -------- -------- -------- -------- -------- -------- Net premiums....................... $ 95,109 $ 92,491 $ 97,728 $ 98,692 $ 90,578 $ 92,481 ======== ======== ======== ======== ======== ========
The effect of reinsurance on losses and loss adjustment expenses incurred was as follows (dollars in thousands):
1996 1995 1994 ------- ------- ------- Gross losses and loss adjustment expenses..... $13,106 $ (486) $31,684 Reinsurance recoveries........................ (3,052) (6,965) (8,340) ------- ------- ------- Net losses and loss adjustment expenses....... $10,054 $(7,451) $23,344 ======= ======= =======
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):
1996 1995 1994 -------- -------- -------- Gross balance at January 1................................. $126,061 $149,041 $135,825 Balance at date of acquisition (disposition)............... (84,823) -- 2,738 Incurred related to: Current year............................................... 23,685 34,073 46,206 Prior years................................................ (10,579) (34,559) (14,522) -------- -------- -------- Total incurred............................................. 13,106 (486) 31,684 -------- -------- -------- Paid related to: Current year............................................... 3,390 4,150 3,003 Prior years................................................ 12,080 18,344 18,203 -------- -------- -------- Total paid................................................. 15,470 22,494 21,206 -------- -------- -------- Gross balance at December 31............................... $ 38,874 $126,061 $149,041 ======== ======== ======== Balance net of reinsurance at December 31.................. $ 33,378 $ 87,078 $111,164 ======== ======== ========
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 $10.6 million ($6.9 million, net of reinsurance) in 1996, $34.6 million ($29.1 million, net of reinsurance) in 1995 and $14.5 million ($8.3 million, net of reinsurance) in 1994. United Capitol's claims development through December 31, 1995, had 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, 50 51 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. The carrying amounts and estimated fair values of financial instruments were as follows (dollars in thousands):
1996 1995 ---------------------- ---------------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE -------- ---------- -------- ---------- Debt securities......................... $135,895 $135,895 $235,718 $235,718 Equity securities....................... 4,526 4,526 27,753 27,753 Short-term investments.................. 19,416 19,416 37,865 37,865 Other investments....................... 2,695 2,695 3,219 3,219 Cash.................................... 2,736 2,736 3,001 3,001 Long-term debt.......................... 60,000 60,000 25,000 25,000
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. 51 52 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Concurrent with the sale of UCHC and its subsidiaries, Capsure and its lenders entered into an agreement to amend and restate the Credit Facility. The amendment reduced the commitment to $100 million from $135 million and permitted an initial draw of up to $70 million for a special dividend to stockholders. Transaction costs totaled approximately $0.5 million. As of December 31, 1996 and 1995, $60 million and $25 million, respectively, were outstanding under the Credit Facility. The remaining availability under the Credit Facility may be used for additional dividends, stock repurchases, acquisitions and for general corporate purposes. On September 11, 1996, the Company declared a special cash distribution in the amount of $10 per share of common stock, payable to all holders of record as of September 25, 1996. The special distribution was funded from $62 million of borrowings under the Credit Facility and approximately $94 million from available cash and marketable securities accumulated at the parent company level. 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 banks' 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 1.50% on LIBOR borrowings and 0.0% to 0.50% 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, 1996, the interest rate on outstanding borrowings was 6.56% and the applicable commitment fee was 0.25%. 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, 1996, 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, 1997 by the following amounts (dollars in thousands): March 31, 1997.............................................. $ 6,250 September 30, 1997.......................................... 6,250 March 31, 1998.............................................. 7,000 September 30, 1998.......................................... 7,000 March 31, 1999.............................................. 7,500 September 30, 1999.......................................... 7,500 March 31, 2000.............................................. 8,500 September 30, 2000.......................................... 8,500 March 31, 2001.............................................. 8,500 September 30, 2001.......................................... 8,500 March 31, 2002.............................................. 8,500 September 30, 2002.......................................... 8,500 March 31, 2003.............................................. 7,500 -------- $100,000 ========
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. 52 53 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 December 31, 1996, 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 impact on RBC. Without prior regulatory approval in 1997, Capsure's insurance subsidiaries may pay stockholder dividends of $18.0 million in the aggregate. In 1996, 1995 and 1994, Capsure received $65.7 million (including $50.2 million of dividends requiring prior approval), $40.9 million (including $21.6 million of dividends requiring prior approval), and $21.0 million (including $5.0 million of dividends requiring prior approval), respectively, in dividends from its insurance subsidiaries. Capsure received $15.6 million, $21.9 million and $9.5 million in dividends from its surety and fidelity subsidiaries in 1996, 1995 and 1994, respectively. Combined statutory surplus and net income for insurance operations, including preacquisition results, as reported to regulatory authorities were as follows (dollars in thousands):
1996 1995 1994 ------- -------- -------- Statutory surplus........................... $48,913 $113,894 $109,750 Statutory net income........................ $22,045 $ 41,717 $ 23,796
53 54 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. INCOME TAXES The components of deferred income taxes were as follows (dollars in thousands):
1996 1995 ------- ------- Deferred tax assets: Net operating losses................................... $50,122 $62,000 Loss and loss adjustment expense reserves.............. 793 5,534 Unearned premium reserves.............................. 4,673 4,791 Accrued expenses....................................... 3,738 3,768 Other.................................................. 3,626 839 ------- ------- Total gross deferred tax assets................ 62,952 76,932 Valuation allowance.................................... 30,800 30,800 ------- ------- Deferred tax asset, net of valuation allowance........... 32,152 46,132 ------- ------- Deferred tax liabilities: Intangible assets...................................... 4,894 5,477 Deferred policy acquisition costs...................... 9,983 9,470 Unrealized gain on securities.......................... 583 1,062 Other.................................................. 673 830 ------- ------- Total deferred tax liabilities................. 16,133 16,839 ------- ------- Net deferred tax asset................................... $16,019 $29,293 ======= =======
The Internal Revenue Service ("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 Internal Revenue Code of 1986, as amended (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. If the pending business combination as described in Note 16 is consummated, an ownership change of the Company under Section 382 of the Code will occur. This will result in significant restrictions of the Company's ability to utilize NOLs during all taxable periods after the date of the business combination. Capsure and its subsidiaries file a consolidated federal income tax return. As of December 31, 1996, based upon the Company's consolidated federal income tax returns, approximately $143 million of consolidated NOLs were available to offset future taxable income of the Company and its subsidiaries. Such carryforwards expire by tax year as follows: $42.4 million in 1997, $50.7 million in 1998, $39.2 million in 1999, $7.0 million in 2000, $2.4 million in 2001, $0.9 million in 2002 and $0.4 million in 2003. 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 $19.3 million of tax benefits from its available NOLs at December 31, 1996. Such estimate is based upon the earnings history of each of its insurance subsidiaries and projections of future 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, or if an ownership change under Section 382 of the Code were to occur. 54 55 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The income tax provisions consisted of the following (dollars in thousands):
1996 1995 1994 ------ ------- ------ Federal deferred................................ $7,291 $18,086 $8,820 Federal current................................. 560 1,500 305 State........................................... 330 135 276 ------ ------- ------ Total income tax expense........................ $8,181 $19,721 $9,401 ====== ======= ======
Reconciliations from the federal statutory tax rate to the effective tax rate are as follows:
1996 1995 1994 ---- ---- ---- Federal statutory rate................................. 35.0% 35.0% 35.0% Excess of cost over net assets acquired and other purchase accounting adjustments...................... 2.8 13.7 3.0 State income and environmental tax, net of federal income tax benefit................................... 1.0 .1 .8 Tax exempt interest.................................... (0.1) (.3) (.3) Other.................................................. (0.8) .5 1.0 ---- ---- ---- Effective tax rate........................... 37.9% 49.0% 39.5% ==== ==== ====
Intercompany tax sharing agreements between Capsure and its subsidiaries provide that tax sharing payments shall be determined based upon each subsidiaries' separate return liability, as calculated in accordance with the Code. Intercompany tax payments are remitted at such times as estimated tax payments would be required to be made to the IRS. Capsure received tax sharing payments from its subsidiaries of $17.3 million, $12.8 million and $12.3 million in 1996, 1995 and 1994, respectively, of which $10.8 million, $8.3 million and $7.3 million were from its surety and fidelity subsidiaries. 11. COMMITMENTS AND CONTINGENCIES At December 31, 1996, the future minimum commitment under operating leases was as follows: 1997 -- $2.5 million; 1998 -- $2.3 million; 1999 -- $1.7 million; 2000 -- $1.3 million; 2001 -- $1.1 million and 2002 and after -- $0.3 million. Total rental expense for 1996, 1995 and 1994 was $2.8 million, $2.3 million and $2.3 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. 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, 1996, 1995 and 1994, were $0.8 million, $0.7 million and $0.7 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 55 56 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (8.7% on amounts exceeding the social security wage base). Company contributions for the years ended December 31, 1996, 1995 and 1994, were $0.2 million, $0.3 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 $0.4 million, $0.3 million and $0.5 million for the years ended December 31, 1996, 1995 and 1994, respectively. The unfunded accumulated postretirement benefit obligation (for retirees and fully vested active plan participants) was $4.4 million and $4.1 million as of December 31, 1996 and 1995, respectively. 13. STOCKHOLDERS' EQUITY On September 11, 1996, the Company declared a special cash distribution in the amount of $10 per share of common stock, payable to all holders of record as of September 25, 1996. Approximately $86.4 million ($5.53 per share) of the $156.2 million total distribution was paid out of available retained earnings, with the excess of $69.8 million ($4.47 per share) charged to additional paid-in capital. The special distribution was paid on October 4, 1996 and was funded from $62 million of borrowings under Capsure's revolving credit agreement and approximately $94 million from available cash and marketable securities accumulated at the parent company level. 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, 1996, 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, non-qualified stock options and stock appreciation rights ("SARs") to be granted under the Company's Amended and Restated 1990 Stock Option Plan (the "Plan"). The most recent Plan amendments approved by stockholders at the Annual Meeting held on May 23, 1996, among other matters, increased the aggregate number of shares available for which options and SARs may be granted under the Plan to 2,250,000 shares. The Plan is administered by the Compensation Committee (the "Committee"), consisting 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. All non-qualified 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. In connection with the payment of the special distribution, the Board of Directors also authorized a corresponding repricing of all outstanding stock options. This resulted in a new measurement date for the stock options under applicable accounting pronouncements and required the Company to record in the third quarter of 1996 a non-recurring compensation charge of $4.1 million, after applicable income taxes, or 25 cents per share of which $3.6 million, or 22 cents per share, was non-cash. All repriced stock options will be treated as non-qualified stock options for tax purposes. 56 57 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Stock option activity for the three years ended December 31, 1996 was as follows:
WEIGHTED SHARES SUBJECT AVERAGE OPTION TO OPTION PRICE PER SHARE -------------- --------------- Balance at January 1, 1994...................... 905,775 $ 8.97 Options granted............................... 295,250 $13.38 Options canceled.............................. (1,876) $12.25 Options exercised............................. (1,037) $ 7.74 --------- Balance at December 31, 1994.................... 1,198,112 $10.05 Options granted............................... 190,000 $13.55 Options canceled.............................. (9,063) $13.22 Options exercised............................. (14,600) $ 7.34 --------- Balance at December 31, 1995.................... 1,364,449 $10.55 Options granted............................... 45,000 $18.00 Options canceled.............................. (30,050) $ 9.00 Options exercised............................. (216,000) $10.28 --------- Balance at October 4, 1996 (date of repricing).................................... 1,163,399 $ 2.04 Options canceled after repricing.............. (1,339) $ 3.26 Options exercised after repricing............. (180,000) $ .46 --------- Balance at December 31, 1996.................... 982,060 $ 2.32 =========
As of December 31, 1996, 754,662 shares were exercisable under the Plan. The number of shares available for granting of options under the Plan were 802,528 and 96,189 at December 31, 1996 and 1995, respectively. The weighted average fair value of options granted in 1996 was $3.22. The fair value of each option granted during 1996 was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 25.7%, (3) risk-free interest rate of 6.47%, and (4) expected life of 6 years. The following table summarizes information about stock options outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------- ------------------------ RANGE OF WGTD. AVG. WGTD. AVG. WGTD. AVG. EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE PRICES OUTSTANDING CONTR. LIFE PRICE EXERCISABLE PRICE -------- ----------- ----------- ---------- ----------- ---------- $0.05 to $8.00...................... 982,060 6.3 years $2.32 754,662 $2.10 ======= ========== ===== ======= =====
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 has continued to apply the existing accounting rules contained in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," 57 58 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) and related interpretations. Required pro forma disclosures, as if the Company had adopted the fair value-based recognition requirements under SFAS No. 123 in 1995, are presented below:
1996 1995 ----------------------- ----------------------- AS REPORTED PRO FORMA AS REPORTED PRO FORMA ----------- --------- ----------- --------- Net income (in thousands)......................... $13,379 $13,256 $20,530 $20,438 ======= ======= ======= ======= Net income per common share....................... $ .82 $ .81 $ 1.33 $ 1.32 ======= ======= ======= =======
The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. SFAS No. 123 does not apply to awards prior to 1995. 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 1996, 1995 and 1994. The Company paid $0.2 million in 1996, 1995 and 1994 for financial planning, tax, accounting, investor relations and computer support and maintenance to EGI or its affiliates. The Company paid approximately $0.1 million in 1996 and 1995 and $0.2 million in 1994 in fees for legal services to a law firm affiliated with EGI. The Company received reimbursement from affiliates of EGI for financial management services provided by employees of the Company amounting to approximately $0.1 million in 1995 and 1994, and a negligible amount in 1996. 58 59 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of the unaudited results of operations for the past two years. The Company sold United Capitol on May 22, 1996 and the consolidated results of operations shown below include the operating results of United Capitol through the date of disposition, which affects the comparability of the financial information (dollars in thousands, except per share data):
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- 1996 Revenues............................................ $28,906 $28,828 $26,878 $26,038 ======= ======= ======= ======= Income before income taxes........................ $ 8,917 $ 8,062 $ 899 $ 3,682 Income taxes...................................... 3,397 3,057 342 1,385 ------- ------- ------- ------- Net income........................................ $ 5,520 $ 5,005 $ 557 $ 2,297 ======= ======= ======= ======= Earnings per common and common equivalent share..... $ .35 $ .31 $ .02 $ .14 ======= ======= ======= ======= 1995 Revenues.......................................... $29,535 $29,485 $29,431 $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 ======= ======= ======= =======
16. PENDING BUSINESS COMBINATION On December 19, 1996, Capsure and certain direct and indirect subsidiaries of CNA Financial Corporation ("CNAF") entered into a definitive Reorganization Agreement pursuant to which Capsure will merge with a wholly-owned subsidiary of CNA Surety Corporation ("CNA Surety"). CNAF, through its subsidiaries, will be the majority stockholder of CNA Surety, owning 61.75 percent of the shares on a fully diluted basis. The remaining shares will be issued to the existing Capsure stockholders (a portion of these shares will be reserved for issuance to the existing holders of Capsure options who will receive CNA Surety options in the merger) in a tax-free exchange for their Capsure shares on a one-for-one basis. The CNA Surety shares are expected to be traded on the New York Stock Exchange. Equity Capsure Limited Partnership ("Equity Capsure"), Capsure's largest stockholder with a 25.6 percent ownership interest, and certain other directors of the Company have agreed to vote their shares in favor of the merger. The agreement and the transactions contemplated thereby are subject to several conditions, including ratification by the affirmative vote of Capsure stockholders and approval by governmental and insurance regulatory authorities. The completion of the merger pursuant to the Reorganization Agreement will cause an ownership change under Section 382 of the Code and significantly limit the future utilization of Capsure's NOLs. If the Reorganization Agreement and transactions contemplated thereby are approved, Capsure shareholders will be asked to approve an amendment to its Certificate of Incorporation to delete a provision designed to facilitate the Company's ability to preserve and utilize its NOLs. 59 60 SCHEDULE I CAPSURE HOLDINGS CORP. AND SUBSIDIARIES SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES AS OF DECEMBER 31, 1996 (AMOUNTS IN THOUSANDS)
FAIR CARRYING COST VALUE VALUE -------- -------- -------- FIXED MATURITIES: Bonds: U.S. Government and government agencies and authorities........................................... $ 76,816 $ 77,353 $ 77,353 States, municipalities and political subdivisions........ 2,696 2,668 2,668 All other corporate bonds................................ 55,908 55,874 55,874 -------- -------- -------- Total fixed maturities........................... 135,420 135,895 135,895 -------- -------- -------- EQUITY SECURITIES: Real estate investment trusts.............................. 3,687 4,526 4,526 -------- -------- -------- Total equity securities.......................... 3,687 4,526 4,526 -------- -------- -------- Short-term investments..................................... 19,416 19,416 Other investments.......................................... 2,343 2,695 -------- -------- Total investments................................ $160,866 $162,532 ======== ========
60 61 SCHEDULE II CAPSURE HOLDINGS CORP. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY) BALANCE SHEETS (AMOUNTS IN THOUSANDS)
DECEMBER 31, -------------------- 1996 1995 -------- -------- ASSETS Investment in and advances to Capsure Financial Group, Inc....................................................... $ 93,695 $221,552 Deferred income taxes, net of valuation allowance........... 31,647 37,275 -------- -------- $125,342 $258,827 ======== ======== LIABILITIES Other liabilities........................................... $ 2,759 $ 1,523 -------- -------- STOCKHOLDERS' EQUITY Common stock................................................ 790 770 Additional paid-in capital.................................. 118,413 179,276 Retained earnings from August 1, 1986 (date of reorganization)........................................... 2,297 75,286 Unrealized gain on securities, net of deferred income taxes..................................................... 1,083 1,972 -------- -------- Total stockholders' equity.................................. 122,583 257,304 -------- -------- $125,342 $258,827 ======== ========
61 62 SCHEDULE II CAPSURE HOLDINGS CORP. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY) -- (CONTINUED) STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS)
YEARS ENDED DECEMBER 31, ----------------------------- 1996 1995 1994 ------- ------- ------- Revenues: Net investment income..................................... $ -- $ -- $ 17 Net investment gains...................................... -- -- 444 Other income.............................................. -- -- -- ------- ------- ------- -- -- 461 Expenses: Non-recurring compensation and merger costs............... 7,865 -- -- Corporate expense......................................... -- -- 355 ------- ------- ------- 7,865 -- 355 ------- ------- ------- Income (loss) from operations before income taxes and equity in net income of subsidiaries............................... (7,865) -- 106 Income taxes................................................ (2,632) -- 37 ------- ------- ------- Income (loss) before equity in net income of subsidiaries... (5,233) -- 69 Equity in net income of subsidiaries, less cash dividends... 18,612 20,530 14,309 ------- ------- ------- Net income.................................................. $13,379 $20,530 $14,378 ======= ======= =======
See Notes to Condensed Financial Information and Notes to Consolidated Financial Statements 62 63 SCHEDULE II CAPSURE HOLDINGS CORP. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY) -- (CONTINUED) STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
YEARS ENDED DECEMBER 31, --------------------------------- 1996 1995 1994 --------- -------- -------- OPERATING ACTIVITIES: Net income.............................................. $ 13,379 $ 20,530 $ 14,378 Adjustments to reconcile net income to net cash provided by operating activities: Equity in net income of subsidiaries, less cash dividends.......................................... (18,612) (20,530) (14,309) Net investment gains................................. -- -- (444) Non-recurring compensation and merger costs.......... 7,865 Changes in: Deferred income taxes, net........................... 5,628 18,341 1,217 Other assets and liabilities......................... (279) -- 2,406 --------- -------- -------- Net cash provided by operating activities................. 7,981 18,341 3,248 --------- -------- -------- INVESTING ACTIVITIES: Available-for-sale equity securities purchased.......... -- -- (209) Change in short-term investments........................ -- -- 5,451 Change in investments in and advances to subsidiaries... 147,081 (18,448) (8,981) --------- -------- -------- Net cash provided by (used in) investing activities....... 147,081 (18,448) (3,739) --------- -------- -------- FINANCING ACTIVITIES: Dividends paid.......................................... (156,248) -- -- Exercise of warrants and options, net of repricing payments............................................. 1,186 107 10 --------- -------- -------- Net cash (used in) provided by financing activities....... (155,062) 107 10 --------- -------- -------- Increase (decrease) in cash............................... -- -- (481) Cash at beginning of year................................. -- -- 481 --------- -------- -------- Cash at end of year....................................... $ -- $ -- $ -- ========= ======== ========
See Notes to Condensed Financial Information and Notes to Consolidated Financial Statements 63 64 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. (former parent company of United Capitol) and Pin Oak Petroleum, Inc. 64 65 SCHEDULE III CAPSURE HOLDINGS CORP. AND SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (AMOUNTS IN THOUSANDS)
PROPERTY AND CASUALTY INSURANCE ------------------------------- 1996 1995 1994 ------- -------- -------- Deferred policy acquisition costs........................... $28,523 $ 27,057 $ 25,150 ======= ======== ======== Future policy benefits, losses, claims and loss expenses.... $38,874 $126,061 $149,041 ======= ======== ======== Unearned premiums........................................... $69,570 $ 76,781 $ 76,630 ======= ======== ======== Other policy claims and benefits payable.................... $ -- $ -- $ -- ======= ======== ======== Net premium revenue......................................... $92,491 $ 98,692 $ 92,481 ======= ======== ======== Net investment income....................................... $14,195 $ 19,773 $ 18,597 ======= ======== ======== Benefits, claims, losses and settlement expenses............ $10,054 $ (7,451) $ 23,344 ======= ======== ======== Amortization of deferred policy acquisition costs........... $37,505 $ 35,759 $ 29,390 ======= ======== ======== Other operating expenses.................................... $25,699 $ 25,553 $ 24,514 ======= ======== ======== Net premiums written........................................ $95,109 $ 97,728 $ 90,578 ======= ======== ========
65 66 SCHEDULE IV CAPSURE HOLDINGS CORP. AND SUBSIDIARIES REINSURANCE FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (AMOUNTS IN THOUSANDS)
PERCENTAGE CEDED TO ASSUMED OF AMOUNT GROSS OTHER FROM OTHER NET ASSUMED AMOUNT COMPANIES COMPANIES AMOUNT TO NET -------- --------- ---------- ------- ---------- 1996 Premiums: Property and casualty insurance.... $105,467 $13,021 $ 45 $92,491 -- -------- ------- ---- ------- --- Total premiums.................. $105,467 $13,021 $ 45 $92,491 -- ======== ======= ==== ======= === 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% ======== ======= ==== ======= ===
66 67 SCHEDULE V CAPSURE HOLDINGS CORP. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (AMOUNTS IN THOUSANDS)
ADDITIONS ------------------------ BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING OF COSTS AND OTHER END OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS(1) PERIOD ------------ ---------- ---------- ------------- ---------- Year ended December 31, 1996 Allowance for possible losses on premiums receivable........... $ 768 $423 $ -- $329 $862 ====== ==== ==== ==== ==== Allowance for possible losses on reinsurance receivable........ $ 70 $ -- $ -- $ 70 $ -- ====== ==== ==== ==== ==== 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........... $1,276 $190 $ -- $568 $898 ====== ==== ==== ==== ==== Allowance for possible losses on reinsurance receivable........ $ 2 $ 3 $ -- $ -- $ 5 ====== ==== ==== ==== ====
- --------------- (1) Accounts charged against allowance. 67 68 SCHEDULE VI CAPSURE HOLDINGS CORP. AND SUBSIDIARIES SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (AMOUNTS IN THOUSANDS)
1996 1995 1994 ------- -------- -------- Deferred policy acquisition costs........................... $28,523 $ 27,057 $ 25,150 ======= ======== ======== Reserves for unpaid claims and claim adjustment expenses.... $38,874 $126,061 $149,041 ======= ======== ======== Discount (if any) deducted.................................. $ -- $ -- $ -- ======= ======== ======== Unearned premiums........................................... $69,570 $ 76,781 $ 76,630 ======= ======== ======== Net earned premiums......................................... $92,491 $ 98,692 $ 92,481 ======= ======== ======== Net investment income....................................... $14,195 $ 19,773 $ 18,597 ======= ======== ======== Net claims and claim adjustment expenses incurred related to: Current year.............................................. $16,909 $ 21,631 $ 31,688 ======= ======== ======== Prior years............................................... $(6,855) $(29,082) $ (8,344) ======= ======== ======== Amortization of deferred policy acquisition costs........... $37,505 $ 35,759 $ 29,390 ======= ======== ======== Net paid claims and claim adjustment expenses............... $11,039 $ 16,636 $ 16,719 ======= ======== ======== Net premiums written........................................ $95,109 $ 97,728 $ 90,578 ======= ======== ========
68 69 (a)(3) EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2 Reorganization Agreement dated as of December 19, 1996 among Capsure Holdings Corp., Continental Casualty Company, CNA Surety Corporation, Surety Acquisition Company and certain affiliates of Continental Casualty Corporation (filed on December 27, 1996 as Exhibit 2 to Capsure Holdings Corp.'s Form 8-K, and incorporated herein by reference). 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 (filed on March 27, 1996 as Exhibit 3.2 to Capsure Holdings Corp.'s Form 10-K, and incorporated herein by reference). 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 (filed on March 27, 1996 as Exhibit 10.1 to Capsure Holdings Corp.'s Form 10-K, and incorporated herein by reference). 10(2) First Amendment dated as of February 20, 1997 to the Employment Agreement dated as of September 30, 1995 by and between Capsure Holdings Corp., a Delaware corporation, and Bruce A. Esselborn, an individual. 10(3) Employment Agreement dated as of September 30, 1995 by and between Capsure Holdings Corp., a Delaware corporation, and Mary Jane Robertson, an individual (filed on March 27, 1996 as Exhibit 10.2 to Capsure Holdings Corp.'s Form 10-K, and incorporated herein by reference). 10(4) First Amendment dated as of February 20, 1997 to the Employment Agreement dated as of September 30, 1995 by and between Capsure Holdings Corp., a Delaware corporation, and Mary Jane Robertson, an individual. 10(5) Employment Agreement dated as of September 22, 1994 by and among Universal Surety Holdings Corp., Universal Surety of America, Capsure Financial Group, Inc., Capsure Holdings Corp. and John Knox, Jr. 10(6) Employment Agreement dated as of April 26, 1996 (effective as of April 15, 1996) by and Between Western Surety Company and Steven T. Pate. 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).
69 70
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, as amended and restated as of May 22, 1996, among Capsure Financial Group, Inc., Capsure Holdings Corp., the Lenders named therein and Chemical Bank, as Administrative Agent (filed on June 3, 1996 as Exhibit 2.2 to Capsure Holdings Corp's Form 8-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) Amended and Restated 1990 Stock Option Plan (filed on April 16, 1996 as part of Capsure Holdings Corp.'s Proxy Statement for the Annual Meeting of Shareholders on May 23, 1996, and incorporated herein by reference). 10(13) Non-Competition and Non-Solicitation Agreement between Capsure Holdings Corp. and Frontier Insurance Company, dated as of May 22, 1996. 10(14) 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(15) 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). 10(16) 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 (filed on March 27, 1996 as Exhibit 10.19 to Capsure Holdings Corp.'s Form 10-K, and incorporated herein by reference.) 10(17) Stock Purchase Agreement dated as of February 29, 1996 among Capsure Holdings Corp., NI Acquisition Corp. and Frontier Insurance Company (Filed on June 3, 1996 as Exhibit 2.1 to Capsure Holdings Corp.'s Form 8-K, and incorporated herein by reference). 11 Earnings per share computation. 12 Not applicable. 13 Not applicable. 16 Not applicable. 18 Not applicable. 21 Subsidiaries of the Registrant.
70 71
EXHIBIT NUMBER DESCRIPTION ------- ----------- 22 Not applicable. 23 Consent of Coopers & Lybrand dated March 12, 1997. 24(1) Power of Attorney for Herbert A. Denton dated February 26, 1997. 24(2) Power of Attorney for Bradbury Dyer, III dated February 26, 1997. 24(3) Power of Attorney for Talton R. Embry dated February 26, 1997. 24(4) Power of Attorney for Dan L. Kirby dated February 26, 1997. 24(5) Power of Attorney for Joe P. Kirby dated February 26, 1997. 24(6) Power of Attorney for L.G. Schafran dated February 27, 1997. 27 Financial Data Schedule.
"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. 71 72 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 21, 1997 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.
SIGNATURE TITLE DATE --------- ----- ---- /s/ SAMUEL ZELL Chairman of the Board and Chief March 21, 1997 - ----------------------------------------------------- Executive Officer Samuel Zell /s/ ROD F. DAMMEYER Director March 21, 1997 - ----------------------------------------------------- Rod F. Dammeyer *HERBERT A. DENTON Director March 21, 1997 - ----------------------------------------------------- *Herbert A. Denton *BRADBURY DYER, III Director March 21, 1997 - ----------------------------------------------------- *Bradbury Dyer, III *TALTON R. EMBRY Director March 21, 1997 - ----------------------------------------------------- *Talton R. Embry /s/ BRUCE A. ESSELBORN Director March 21, 1997 - ----------------------------------------------------- *Bruce A. Esselborn *DAN L. KIRBY Director March 21, 1997 - ----------------------------------------------------- *Dan L. Kirby *JOE P. KIRBY Director March 21, 1997 - ----------------------------------------------------- *Joe P. Kirby /s/ DONALD W. PHILLIPS Director March 21, 1997 - ----------------------------------------------------- Donald W. Phillips /s/ SHELI Z. ROSENBERG Director and March 21, 1997 - ----------------------------------------------------- *Attorney-in-Fact Sheli Z. Rosenberg *L. G. SCHAFRAN Director March 21, 1997 - ----------------------------------------------------- *L. G. Schafran /s/ RICHARD I. WEINGARTEN Director March 21, 1997 - ----------------------------------------------------- Richard I. Weingarten
72 73 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES EXHIBIT INDEX
Exhibit Page Number Description No. - ------ ----------- --- 10(2) First Amendment dated as of February 20, 1997 to the Employment Agreement dated as of September 30, 1995 by and between Capsure Holdings Corp., a Delaware corporation, and Bruce A. Esselborn, an individual. 10(4) First Amendment dated as of February 20, 1997 to the Employment Agreement dated as of September 30, 1995 by and between Capsure Holdings Corp., a Delaware corporation, and Mary Jane Robertson, an individual. 10(5) Employment Agreement dated as of September 22, 1994 by and among Universal Surety Holdings Corp., Universal Surety of America, Capsure Financial Group, Inc., Capsure Holdings Corp. and John Knox, Jr..................................................... 10(6) Employment Agreement dated as of April 26, 1996 (effective as of April 15, 1996) by and between Western Surety Company and Steven T. Pate.................................... 10(13) Non-Competition and Non-Solicitation Agreement between Capsure Holdings Corp. and Frontier Insurance Company, dated as of May 22, 1996................................. 11 Earnings per share computation....................................................... 21 Subsidiaries of the Registrant....................................................... 23 Consent of Coopers & Lybrand dated March 12, 1997.................................... 24(1) Power of Attorney for Herbert A. Denton dated February 26, 1997...................... 24(2) Power of Attorney for Bradbury Dyer, III dated February 26, 1997..................... 24(3) Power of Attorney for Talton R. Embry dated February 26, 1997........................ 24(4) Power of Attorney for Dan L. Kirby dated February 26, 1997........................... 24(5) Power of Attorney for Joe P. Kirby dated February 26, 1997........................... 24(6) Power of Attorney for L.G. Schafran dated February 27, 1997.......................... 27 Financial Data Schedule..............................................................
EX-10.(2) 2 AMEND #1 TO EMPLOYMENT AGREE. 1 EXHIBIT 10(2) AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT This Amendment No. 1 (this "Amendment") is entered into as of the 20th day of February, 1997, by and between CAPSURE HOLDINGS CORP., a Delaware corporation ("Capsure"), and BRUCE A. ESSELBORN, an individual (the "Employee"). W I T N E S S E T H WHEREAS, Capsure and the Employee are parties to that certain Employment Agreement entered into as of September 30, 1995 (the "Employment Agreement"); WHEREAS, Capsure and the Employee have agreed to amend the Employment Agreement as provided herein; NOW, THEREFORE, in consideration of the foregoing, and other good and valuable consideration, the parties agree as follows: 1. Capsure and the Employee hereby agree that Article Seven, Section A shall be deleted in its entirety and amended to read as follows: "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 paid pursuant to pension, retirement or stock option or stock incentive plans and excluding amounts paid to the Employee in consideration of Employee's execution and delivery of any non-competition or similar agreements and further excluding amounts paid to the Employee as a transaction bonus with respect to the negotiation or consummation of any transaction involving Capsure or its subsidiaries). 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." 1 2 2. Except as amended herein, the Employment Agreement remains in full force and effect. IN WITNESS WHEREOF, the parties have executed this New Agreement effective February 20 , 1997. "Capsure" "The Employee" Capsure Holdings Corp. Bruce A. Esselborn By: /s/ Rod Dammeyer By: /s/ Bruce A. Esselborn ------------------------------------ ------------------------------------ Its: Compensation Committee Chair Bruce A. Esselborn dated this 20th day of February, 1997 dated this 10th day of February, 1997 at Chicago, Illinois at Atlanta, Georgia Witness: /s/ Kelly L. Stonebraker Witness: /s/ Victoria E. Hicks ------------------------------- --------------------------------
2 EX-10.(4) 3 AMEND #1 TO EMPLOYMENT AGREE. 1 EXHIBIT 10(4) AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT This Amendment No. 1 (this "Amendment") is entered into as of the 20th day of February, 1997, by and between CAPSURE HOLDINGS CORP., a Delaware corporation ("Capsure"), and MARY JANE ROBERTSON, an individual (the "Employee"). W I T N E S S E T H WHEREAS, Capsure and the Employee are parties to that certain Employment Agreement entered into as of September 30, 1995 (the "Employment Agreement"); WHEREAS, Capsure and the Employee have agreed to amend the Employment Agreement as provided herein; NOW, THEREFORE, in consideration of the foregoing, and other good and valuable consideration, the parties agree as follows: 1. Capsure and the Employee hereby agree that Article Seven, Section A shall be deleted in its entirety and amended to read as follows: "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 paid pursuant to pension, retirement or stock option or stock incentive plans and excluding amounts paid to the Employee in consideration of Employee's execution and delivery of any non-competition or similar agreements and further excluding amounts paid to the Employee as a transaction bonus with respect to the negotiation or consummation of any transaction involving Capsure or its subsidiaries). 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." 1 2 2. Except as amended herein, the Employment Agreement remains in full force and effect. IN WITNESS WHEREOF, the parties have executed this New Agreement effective February 20 , 1997. "Capsure" "The Employee" Capsure Holdings Corp. Mary Jane Robertson By: /s/ Rod Dammeyer By: /s/ Mary Jane Robertson ------------------------------------ ------------------------------------ Its: Compensation Committee Chair Mary Jane Robertson dated this 20th day of February, 1997 dated this 10th day of February, 1997 at Chicago, Illinois at Atlanta, Georgia Witness: /s/ Kelly L. Stonebraker Witness: /s/ Victoria E. Hicks ------------------------------- -------------------------------
2 EX-10.(5) 4 EMPLOYMENT AGREEMENT 1 EXHIBIT 10(5) EMPLOYMENT AGREEMENT This Employment Agreement is entered into as of this 22nd day of September, 1994, by and among UNIVERSAL SURETY HOLDING CORP. (the "Parent") a Texas corporation, UNIVERSAL SURETY OF AMERICA (the "Company" or the "Employer"), a Texas insurance corporation, CAPSURE FINANCIAL GROUP, INC. ("CFG"), an Oklahoma corporation, CAPSURE HOLDINGS CORP. ("Capsure"), a Delaware corporation, and JOHN KNOX, JR. (the "Employee"). RECITALS 1. CFG, as Buyer, entered into a Stock Purchase Agreement dated July 26, 1994 (the "Purchase Agreement"), with the Parent and the Employee, as Seller, pursuant to which CFG agreed to purchase, and Employee agreed to sell, all of his authorized, issued and outstanding shares of stock of Parent. 2. The Purchase Agreement provides for the Employee to enter into this Agreement, and all parties hereto acknowledge that this Agreement fulfills their respective obligations with respect to the requirement for this Agreement under the Purchase Agreement. 3. The Company, as Employer, desires to employ the Employee and the Employee, as Employee, desires to be employed under the terms of the Agreement. NOW, THEREFORE, in consideration of the foregoing Recitals, the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Employment. (a) For the term indicated in Section 2 hereof, the Company employs the Employee, and the Employee accepts such employment and agrees to act as an employee of the Company, all in accordance with the terms provided herein. (b) The Employee is hereby employed as President and Chief Executive Officer, and he agrees to perform such duties as are commensurate with such office and as are consistent with past practice, subject at all times to the direction, approval and control of the Board of Directors of the Company. During the term of this Agreement, the Employee shall continue to serve as President and Chief Executive Officer of the Company. In such capacity, subject to such direction, approval and control of the Board of Directors of the Company at all times the Employee shall be in complete charge of all of the day to day operations and management of the Company, as well as any of its direct or indirect subsidiaries, and shall have full authority and responsibility for setting strategic direction, formulating and carrying out the business plans, administration and policies of the Company. In general, but subject to such direction, approval or control, the Employee shall continue to perform the duties previously performed by him commensurate with the past practices of the Employee and the 2 2 Company. In this connection, the Employee's responsibilities, duties and powers shall include, but are not limited to: (i) developing, establishing and implementing strategic plans and policies; (ii) maintaining an effective organization of the Company, and in this connection, he may select (subject to the election of officers by the Board of Directors of the Company), control, supervise and terminate, directly or through delegation, the employees of the Company, and set their salaries and bonuses; (iii) leading the operational planning process of the Company; (iv) setting and maintaining the underwriting and marketing philosophies of the Company; (v) maintaining current knowledge of developments in the fidelity and surety bond industry and liaison with reinsurers; and (vi) representing the Company periodically at select industry gatherings and in Company activities. (c) The Employee agrees that during the term of his employment hereunder he shall serve the Company diligently and faithfully and will devote substantially all of his work time, skill, effort and energy, during normal business hours, during the first three (3) years of this Agreement to the conduct of the business of the Company and substantial amounts of time thereafter as required to operate the business of the Company. The determination of "substantially all" of the Employee's work time, skill, effort and energy shall be made with respect to an annual period of employment. (d) The Parent agrees that, so long as the Employee is employed under this Agreement, all voting rights held, directly or indirectly, by the Parent, its nominees or assignees, shall all be voted in favor of the Employee to be nominated to the Board of Directors of the Company, to be elected to such Board at each meeting of its stockholders at which the class of Directors to which the Employee is assigned is to be elected. (e) The Parent and the Employee agree that the Board of Directors of the Company shall consist of at least seven (7) members. The Parent shall have the right to nominate and elect all but one (1) of the Directors for the Company and the Employee shall have the right to be a Director of the Company. The Parent agrees to vote all its shares of the Company in favor of the election of the Employee to the Board of the Company. (f) The Parent and the Company agree that, so long as the Employee is employed under this Agreement, the Parent's nominees and assignees constituting the Board of 3 3 Directors of the Company shall all vote in favor of the election of Employee as President and Chief Executive Officer of the Company, the appointment of Employee to any Executive or similar Committee of the Board of Directors of the Company and the Board of Directors of the Company shall also consider any potential officers of the Company nominated by Employee, subject, in all cases to the ultimate responsibility of the Board of Directors under the law. 2. Term of Employment. (a) The term of the Employee's employment hereunder shall commence on the day first written above and continue for a period of six (6) years from the date hereof, unless sooner terminated as provided below. Upon the expiration of the original term, Employee's employment by Employer shall thereafter continue from month to month on the same terms and conditions, with either party then having the right to terminate said employment upon ninety (90) days prior written notice to the other. (b) The employment of Employee pursuant to this Agreement may be terminated upon the occurrence of any of the following: (i) at any time by mutual written agreement between Employee and the Company; (ii) immediately upon the death of Employee; (iii) by either the Company or Employee due to the disability of Employee. Disability shall mean that Employee has been unable to perform his duties by reason of illness or incapacity for six (6) months in the aggregate during any twelve (12) month period; (iv) upon a good faith determination by a majority vote of the Board of Directors of the Company that the termination of this Agreement is necessary by reason of a final determination by the Commissioner of Insurance of the State of Texas (or by any other insurance department having jurisdiction over the Company or any subsidiary or affiliate) that Employee must be removed or disqualified from acting as an officer of the Company; or (v) by the Company at any time for "cause" determined by a majority vote of the Board of Directors of the Company upon the giving of notice to Employee setting forth the basis of such termination. The Board of Directors shall give written notice to Employee setting forth the basis of such termination and shall provide Employee an opportunity to appear before the Board of Directors either before or after such termination is effective, as the Board may elect. For the purposes of this Agreement, the term "cause" shall be limited to: 4 4 (A) the engaging of Employee in conduct materially injurious to the Company unless Employee engaged in such conduct (i) in good faith and reasonably believed such conduct to be in or not opposed to the best interests of the Company or (ii) at the request or direction of the Board of Directors of the Company; (B) the habitual absence of the Employee or the continued and wilful inattention and neglect by Employee of the material duties to be performed by him (other than by reason of illness or engaging in activities otherwise permitted or required under this Agreement) and which inattention and neglect does not cease within thirty (30) days after written notice thereof, specifying the details of such conduct, is given to Employee; and (C) the conviction of Employee of, or plea of nolo contendere to, a felony or of a crime involving moral turpitude under state or federal law. Upon a termination for cause pursuant to this Section 2(b)(v), the Company shall pay to the Employee his base salary through the date of termination and shall have no other obligation to provide compensation or benefits to the Employee pursuant to this Agreement. (c) The employment of the Employee pursuant to this Agreement may also be terminated at any time by the Employer, without good and sufficient cause, in which case if such termination shall occur prior to December 31, 1999, the Employer shall pay the Employee, within thirty (30) days of said termination, one lump sum payment representing the discounted present value (using an interest rate equal to that offered at the U.S. Treasury auction, first preceding the date of termination of the Employee's employment, of Treasury Notes or Bills with a maturity date closest to December 31, 1999) of the balance of the base salary that Employer would have paid the Employee from the date of such termination through December 31, 1999 as if the Employee's employment had not been so terminated assuming the base salary paid to the Employee in the twelve (12) months preceding such termination remained constant for the remainder of the period prior to December 31, 1999. (d) The Employee's obligation to render services hereunder may be terminated by the Employee if the Employee's "circumstances of employment shall have changed" (as hereinafter defined), such termination to be known also as termination for "good reason". In such event the Employee shall specify by written notice to the Company the event or reason relied on for such termination, and if such event or reason shall not have been cured within thirty (30) days thereafter, the Employee's employment hereunder shall be deemed terminated. Within thirty (30) days after the Employee's employment is terminated following a termination for "good reason", the Company shall pay Employee a lump sum payment 5 5 representing the discounted (discounted at the rate existing as of such termination for Treasury Bills/Notes having a maturity concurrent with the sixth anniversary of the date of this Agreement) balance of the base salary that the Employer had paid the Employee from the date of such termination through the sixth anniversary of the date of this Agreement assuming the base salary paid to the Employee in the twelve (12) months preceding such termination remained constant for the remainder of the term of this Agreement. The parties agree that the Employee shall not be under any duty to mitigate damages under this Agreement and such defense shall not be interposed in any legal proceedings among the parties. Provided the Employee has not violated and is not violating the terms and conditions of Sections 6 and 7 hereof, compensation or other income earned by the Employee after termination of the Employee's employment hereunder shall not reduce payments to be made to the Employee under this Section 2(d). (e) The Employee's "circumstances of employment shall have changed" shall mean any of the following: (i) Notice by the Board of Directors of the Parent or the Company to the Employee of termination of his employment, or this Agreement for any reason whatsoever, other than pursuant to Section 2(b) or 2(c); (ii) failure of the Parent to nominate and vote for the Employee in the position as provided in Section 1(d) and 1(e) above; (iii) reduction in the base salary being paid to the Employee by the Company, or withdrawal from him of any material fringe benefits or perquisites (including participation in current or future stock option or stock appreciation plans) provided to him under this Agreement or otherwise available to other senior corporate officers of the Company; (iv) a change in the Employee's place of employment without his written consent as above described in Section 5(b) below, or requirements or demands of Employee to perform services which would make the continuance of his principal residence and home life in Houston, Texas unreasonably difficult or inconvenient for him; and (v) other material and adverse changes in Employee's conditions of employment imposed on him by the Parent or the Company (including, without limitation, a material and adverse change in the duties of the Employee as described herein) or any material breach by the Company of the provisions of this Agreement; provided, however, that it shall not be considered or deemed to be a material adverse change in the duties of the Employee for the Company to appoint an interim chief executive officer (with all duties and responsibilities held by the Employee pursuant to this Agreement), in the event that the Employee is unable to perform his duties as a result of any disability. For purposes of this Section 2(e)(v), disability shall mean the Employee's inability 6 6 to perform his duties by reason of illness and incapacity, but without regard to the period of time of such inability to perform or incapacity. (f) The Employee's obligation to render services hereunder may be terminated by the Employee following an event of a Change in Control (as hereinafter defined). Upon a termination by the Employee following a Change in Control pursuant to this Section 2(f), the Company shall pay to the Employee his base salary through the date of termination and shall have no other obligation to provide compensation or benefits to the Employee pursuant to this Agreement. For the purposes of this Agreement, a Change in Control shall mean the sale or transfer of at least 51% of the voting power of the Company to any person or entity not owned or controlled by Capsure or any affiliate of Capsure; provided, however, that a public offering of any securities of the Company shall not be included within the definition of a Change in Control 3. Compensation. (a) The Company shall pay Employee a base salary at the rate of Two Hundred Fifty Thousand Dollars ($250,000.00) for each 12-month period hereunder, payable according to the Company's regular payroll policy. The Company, through its Board of Directors, will confer with the Employee in good faith, at least annually, to review the base salary to be paid the Employee for the then fiscal year with a view to increasing (but not decreasing) the base salary based upon the performance of the Employee in relationship to the goals and performance of the Company and prevailing business and competitive conditions. To the extent that the Employee's base salary is increased, the new amount shall become the Employee's base salary and shall not thereafter be reduced. The base salary excludes any bonus or other employee benefits or perquisites to which the Employee is entitled and, when adjusting the Employee's salary, the Board of Directors, or any other body or group of persons responsible for setting the Employee's base salary, shall not take into consideration the value of any employee benefits, or Contingent Payment (as defined in Section 2.2 of the Purchase Agreement). The Company's obligation to pay the Employee the base salary during the term hereof may be extinguished only upon a termination of the Employee's employment in accordance herewith, and subject to the provisions of this Agreement. (b) The Company shall consider, and may pay to Employee, a bonus annually, such bonus to be determined by, and at the sole discretion of, the Compensation Committee of the Board of Directors of Capsure. (c) The compensation payable hereunder shall be subject to all applicable withholding taxes, other normal payroll deductions and any other amounts required by law to be withheld. (d) Capsure shall deliver to Employee concurrently with its execution and delivery of this Agreement an option agreement providing for the purchase of 75,000 shares of Capsure Holdings Corp. common stock in the form attached hereto as Exhibit A. 7 7 4. Expenses. Employer will reimburse Employee in accordance with Employer's standard policy guidelines for the reasonable and necessary expenses incurred by Employee in the normal course of Employer's business. 5. Benefits. (a) During the term of this Agreement, the Employee shall be entitled to participate in all employee benefit programs, including health insurance programs, which are established for the Employer's employees similarly situated to the Employee. The Employee shall also be entitled to paid annual vacation time commensurate with past practices of the Employee and the Company. During the term of this Agreement, the Employee covenants and agrees to cooperate with the Company in order that the Company, or any of its affiliates, may obtain key man life insurance in an amount acceptable to the Company or such affiliate. In addition to any and all other benefits and vacation provided to the Employee hereunder, in accordance with the past practices between the Employee and the Company, the Company shall continue to provide the Employee with such additional benefits and perquisites previously provided to him by the Company (including, without limitation, participation in any fringe or employee benefit program provided generally to senior executive officers of the Company, or otherwise presently provided to the Employee, and medical, life and disability insurance, including payment of the premiums of a $500,000 "split dollar" life insurance policy issued on the Employee's life, first class travel and accommodations, sick pay plans, and continued use of the Company owned automobile currently provided to the Employee, including maintenance, insurance and related costs, (provided that the Company shall have no obligation to provide a replacement thereof) and payment or reimbursement for other expenses in furtherance of the Company's business). (b) During the term of this Agreement, the Employee's office shall be customary to his position and shall be located in the principal executive offices of the Company, both of which shall be located in, Houston, Texas. In connection with his employment by the Company, the Employee shall not be required to directly or indirectly relocate or transfer his principal residence from Houston, Texas. (c) Each of CFG, the Parent and the Company will indemnify, defend and hold harmless the Employee, and his personal or legal representatives or other successors, to the fullest extent permitted by the laws of their respective states of incorporation, and the Employee shall be entitled to the protection of all insurance policies which CFG, the Parent and the Company may acquire and maintain generally for the benefit of their directors and officers, against all costs, charges and expenses (including, but not limited to, attorneys' fees and other legal expenses) whatsoever incurred or sustained by the Employee or his personal or legal representatives in connection with any action, suit or proceeding to which he (or his personal or legal representatives or other successors) may be made a party by reason of his being or having been a director, employee or officer of any of Capsure, the Parent or the Company and their respective subsidiaries and affiliates, or those acts or omissions relating thereto, all during the term hereof, to the extent permitted by the laws of the respective states. If the existing certificates of incorporation and bylaws of CFG, the Parent and the Company 8 8 do not at any time during the term of this Agreement provide for indemnity of the Employee to the fullest extent permitted by the laws of its state of incorporation, CFG, the Parent and the Company will use reasonable efforts to amend such certificates of incorporation and bylaws so as to provide indemnification to the fullest extent permitted by applicable law. 6. Non-Competition. The Employee acknowledges that the services he will render to the Company are special, unique, of high quality and of unusual character and therefore are of peculiar value to the Company. In addition, the Employee acknowledges that the Company's business is highly competitive, and through his employment by the Company he is given access to, and will use, unique and confidential information which must be available exclusively to the Company in order to preserve the value of its business. Accordingly, the Employee agrees that during the term of employment under this Agreement and for a five (5) year period from the date of termination hereunder (the "Non-Compete Period"), he will not, anywhere in the United States of America, either separately, jointly or in association with others, directly or indirectly, as an officer, director, consultant, agent, employee, owner, partner, stockholder (except for a minority stockholding of a publicly traded company in which the Employee shall not participate in management) or otherwise: (a) establish, engage in, become economically interested in or work on behalf of any business in fidelity, surety, errors and omissions liability or other lines of insurance underwritten by the Company or any of the affiliates of the Company and which competes with the business of the Company or such affiliates; or (b) solicit or service any party who is or was a customer, agent or supplier of the Company or any affiliates of the Company for any purpose relating to, and in competition with, the lines of insurance underwritten by the Company or any of the affiliates of the Company; or (c) solicit for employment any person who is or was an employee of the Company. Notwithstanding the foregoing, the Non-Compete Period shall be reduced to a period of two (2) years following termination of the Employee's employment hereunder in the event the Employee (i) is terminated without cause pursuant to Section 2(c) hereof, (ii) terminates his employment in the event "circumstances of employment shall have changed" pursuant to Section 2(d) hereof, or (iii) terminates his employment pursuant to Section 2(f) hereof following a Change in Control of the Company. 7. Nondisclosure. (a) The Employee acknowledges that business information and techniques developed or acquired by the Company are among its most valuable assets and that the Employee heretofore has and during the term hereof will have access to such information and techniques. Consequently, in order to further protect the legitimate interests of the Company, the Employee hereby agrees that he will not at any time, without the express written consent 9 9 of the Company: (i) disclose, directly or indirectly, any Confidential Information to anyone outside the employ of the Company and its affiliates; or (ii) use, directly or indirectly, any Confidential Information for the benefit of anyone other than the Company and its affiliates. (b) The term "Confidential Information" as used herein means all information of a business or technical nature disclosed to, learned or developed by the Employee, in the course of his employment by the Company, which information relates to the business of the Company, the business of any customer or supplier of the Company, or the business of any other person, firm or corporation which consults with or is in any way affiliated with the Company. (c) The Employee's obligations under this section 7 shall survive his employment by the Company and shall terminate with regard to any Confidential Information only when it ceases to be Confidential Information. 8. Remedies. Both parties recognize that the services to be rendered by the Employee are unique in character and that a breach by the Employee of the terms and conditions of this Agreement would irreparably harm the Company and that the remedies at law would not be adequate compensation to the Company for such breach. Accordingly, in the event of any such breach, in addition to all other remedies available to it in law, the Company shall be entitled to have an injunction issued by any court of competent jurisdiction enjoining and restraining the Employee and each and every party concerned therewith from doing any act in violation of any provisions of this Agreement. For purposes of this Section and Sections 6 and 7 hereof, the term "Company" shall include the Company, its subsidiaries and other affiliates and their respective successors and assigns. The term "affiliate" as used herein includes any entity controlling, controlled by or under common control with the Company. 9. Miscellaneous. (a) The parties hereto agree that the time period, the geographical area and the scope of the restrictions contained in Section 6 hereof are reasonable, but are also divisible and severable; and further, in the event any of said provisions are held to be invalid or unenforceable by a court of competent jurisdiction, such invalidity or unenforceability shall have no effect on the validity or enforceability of any other provision hereof and such provisions as are held invalid or unenforceable shall be deemed modified to the extent necessary to make them valid and enforceable. (b) In any court proceeding brought to enforce this Agreement, the prevailing party shall be reimbursed by the non-prevailing party for his or its reasonable attorneys' fees and the other expenses of such proceeding. (c) This Agreement constitutes the entire agreement of the parties hereto with respect to the subject matter hereof. 10 10 (d) The provisions and terms of this Agreement shall be governed and construed according to the laws of the State of Delaware. The parties irrevocably consent to the personal jurisdiction of and the propriety of venue in the courts located in the State of Delaware and of any state or federal court located in Delaware in connection with any permitted action or proceeding arising out of or related to this Agreement. (e) If any dispute, claim or controversy shall arise between the Employee, on the one hand, and any one or more of the other parties, on the other hand, as to any issue whatsoever, other than the determination of disability, the same shall be referred to and settled by the following "arbitration" procedure which may be requested upon the application of any interested party: It is agreed the arbitration hearings, if any, shall be held in the State of Texas, or such other place as may be agreed upon by the parties, and any such dispute, claim or controversy shall be referred to and settled by such arbitration in accordance with, but not under the auspices of, the Commercial Arbitration Rules ("Rules") of the American Arbitration Association ("AAA") then in effect (which Rules are incorporated herein by reference as though set forth at length herein other than those with respect to the number of arbitrators) and any decision or order or finding rendered by a panel of three (3) arbitrators ("arbitrators"), of whom one is chosen by Capsure, one is chosen by the Employee and the third is chosen by the arbitrators chosen by Capsure and the Employee, shall be final and conclusive upon the parties hereto and judgement upon the award, finding or decision rendered may be entered in the Court of the forum, state or federal, having jurisdiction. It is expressly agreed between the parties hereto that whether or not the Rules of the AAA shall provide for a discovery procedure, such discovery procedure is hereby granted and permitted in the said arbitration proceedings and the parties may apply to the arbitrators for the enforcement of any form of discovery which would be permitted by the laws of the State of Texas and their award or decision in respect of such discovery shall be final and binding. The arbitrators, if they deem that the matter requires it, are authorized to award to the party whose contention is sustained such sums as they or a majority of them shall deem proper to compensate it or him for the time and expense incident to the proceedings and, if the arbitration was demanded without reasonable cause, then they may also award damages for delay, if any. The arbitrators shall determine their own reasonable compensation in accordance with such AAA Rules, and, unless otherwise provided by agreement, shall assess the cost and charges of the proceedings equally to both parties unless the arbitrators shall find an issue raised by either party was unreasonable or frivolous and that therefore the costs of the arbitration or any portion thereof shall be borne by the said party. (f) Any notices required or permitted hereunder shall be in writing and shall be deemed to have been given when (i) personally delivered, or (ii) forty-eight (48) hours after deposit in the U.S. mail, postage prepaid, certified or registered mail, or (iii) the next business day when sent by overnight courier (such as Federal Express, or (iv) when confirmed by the sender by telephone when sent by facsimile transmission, and sent to the following addresses: 11 11 If to the Employee: John Knox, Jr. 950 Echo Lane, Suite 250 Houston, Texas 77024 Facsimile No.: 713/722-4601 with a copy to: Thompson, Coe, Cousins & Irons L.L.P. 200 Crescent Court 11th Floor Dallas, Texas 75201-1840 Facsimile No.: 214/871-8209 Attention: Emory L. White, Jr. If to the Company, Parent, CFG or Capsure: c/o Capsure Financial Group, Inc. 1400 Lake Hearn Drive, Suite 130 Atlanta, Georgia 30319 Facsimile No.: 404/843-5598 Attention: Bruce A. Esselborn With a copy to: Rosenberg & Liebentritt, P.C. Two North Riverside Plaza Suite 1600 Chicago, Illinois 60606 Facsimile No.: 312/454-0335 Attention: Kelly L. Stonebraker or to such other address or addresses as the parties may from time to time specify by notice in writing to the other parties, given in the manner provided in this Section. (g) The rights and obligations of the Company under this Agreement may be assigned by the Company to any affiliate of or successor in interest to the Company with the consent of the Employee, which consent shall not be unreasonably withheld. This Agreement shall not be assignable by the Employee. Subject to the foregoing, this Agreement shall inure to the benefit of, and shall be binding upon, the parties hereto and upon their respective heirs, personal representative, successors and assigns. 12 12 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. COMPANY: UNIVERSAL SURETY OF AMERICA By: / s / John Knox, Jr. ------------------------------------- Its: President ------------------------------------- PARENT: UNIVERSAL SURETY HOLDING CORP. By: / s / John Knox, Jr ------------------------------------- Title: President ------------------------------------- CAPSURE FINANCIAL GROUP, INC. By: / s / Bruce A. Esselborn ------------------------------------- Title: President ------------------------------------- CAPSURE HOLDINGS CORP. By: / s / Bruce A. Esselborn ------------------------------------- Title: President ------------------------------------- EMPLOYEE: / s / John Knox, Jr. ----------------------------------------- JOHN KNOX, JR. EX-10.(6) 5 EMPLOYMENT AGREEMENT 1 EXHIBIT 10(6) EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") is executed this 25 day of April , 1996 and dated as of and effective as of the 15th day of April, 1996, by and between Western Surety Company (the "Company"), a South Dakota Corporation, and Stephen T. Pate (the "Employee"). RECITALS 1. Employment. (a) For the term indicated in Section 2 hereof, the Company engages and employs Employee, and Employee accepts such employment and agrees to act as an employee of the Company, all in accordance with the terms provided herein. (b) The Employee is hereby employed as President and Chief Operating Officer, and he agrees to perform such duties as are commensurate with such office, subject to the direction, approval and control of the Chief Executive Officer of the Company and its Board of Directors. The Company agrees that, so long as the Employee is employed under this Agreement, all voting rights held, directly or indirectly, by them, their nominees or assignees, shall all be voted in favor of the Employee to be nominated to the Board of any subsidiaries of the Company, and to be elected to such Boards at each meeting of their respective stockholders at which the class of Directors to which the Employee is assigned is to be elected. (c) The Employee agrees that during the term hereof he shall serve the Company diligently and faithfully and will devote all of his work time, skill, effort and energy to the conduct of the business of the Company. 2. Term of Employment. (a) The term of the Employee's employment hereunder shall commence April 15, 1996 and continue until April 14, 1998 (the "Term"), unless sooner terminated as provided below. Upon the expiration of the original Term, Employee's employment by the Company shall thereafter continue from month to month on the same terms and conditions, with either party then having the right to terminate said employment upon thirty (30) days prior written notice to the other. (b) This Agreement shall be terminated upon the occurrence of any of the following: (i) the mutual agreement of the Company and the Employee; (ii) the death of Employee; (iii) if Employee shall be unable to perform his duties hereunder by reason of illness or incapacity for any consecutive two (2) month period or for three (3) months in the aggregate during any twelve (12) month period, upon written notice from the Company; 1 2 (iv) for good and sufficient cause, upon written notice from the Company; or (v) a determination by the Board of Directors of the Company that the termination of this Agreement is necessary by reason of a determination of the Director of Insurance of the State of South Dakota (or by any other insurance department having jurisdiction over the Company or any subsidiary or affiliate) that the Employee must be removed or disqualified from acting as an officer or director of the Company. (c) This Agreement may also be terminated at any time by the Company, without good and sufficient cause, in which case the Company shall pay the Employee, within thirty (30) days of said termination, one lump sum payment representing the discounted present value (using a eight percent (8%) interest rate) of the balance of the salary that the Company would have paid Employee during the Term of this Agreement, if Employee's employment had not been so terminated. 3. Compensation. (a) The Company shall pay Employee a base salary at the annual rate of $262,500.00 for the first 12-months hereunder, payable according to the Company's regular payroll policy. The base salary paid hereunder shall be reviewed by the Company after the first 12-months hereunder (however in no event shall base salary be decreased as a result of such review). (b) The compensation payable hereunder shall be subject to all applicable withholding taxes, other normal payroll deductions and any other amounts required by law to be withheld. (c) In addition to the base salary hereunder, the Company shall determine and pay to Employee a discretionary performance bonus after each full calendar year during the Term of this Agreement, such bonus to be in the amount not less than $0 and not more than $50,000.00. 4. Expenses. The Company will reimburse Employee in accordance with the Company's standard policy guidelines for the reasonable and necessary expenses incurred by Employee in the normal course of the Company's business. 5. Benefits. During the term of this Agreement, Employee shall be entitled to participate in all customary employee benefit programs, including health insurance programs, the 401(k) retirement program and health club membership, which are established for the Company's employees similarly situated to Employee, all to the extent he satisfies the eligibility requirements thereof. Employee shall also be entitled to paid annual vacation time of up to four weeks in accordance with the Company's standard policy guidelines as to prior notice and approval thereof. In addition, the Company shall reimburse the Employee for the initiation fees, regular monthly assessments, special assessments and other charges incurred by Employee to join and maintain a membership at the Minnehaha Country Club during the Term of this Agreement. 6. Non-Competition. The Company has, since 1900, developed a unique and successful approach to the miscellaneous bond business. The miscellaneous bond business is a unique and 2 3 highly specialized segment of the American property and casualty insurance industry. The Company actively markets its products in all 50 states of the United States of America and in the District of Columbia. The Company's products are marketed to and through the independent insurance agency network and the continued goodwill of agents is essential to the Company. In the course of the Employee's employment, Employee will acquire confidential information in both written and non-written form of a special and unique nature and value relating to the Company's business and such information shall be considered by the parties to be trade secrets owned by the Company. This information shall include, but is not limited to, the names and addresses of customers (agents) and potential customers, records concerning customer contacts and customer purchases, the identity of customers' key employees, information concerning Company systems, policies, methods of operations, procedures, manuals, pricing and all other non-public information acquired by the Employee as a result of or during the course of employment. Due to the unique nature of its forms, procedures and sales techniques and the training it provides to its employees, the Company is susceptible to significant and material injury from former employees utilizing their Company training and knowledge to the Company's competitive disadvantage. Therefore, the Employee hereby agrees that upon the termination of this Agreement, for any reason, the Employee shall: (a) Return to the Company any equipment, records, lists or other business related materials (including originals and all copies) acquired by the Employee in the course of employment with the Company; and (b) Not at any time or in any manner, either directly or indirectly, divulge or disclose the Company's trade secrets to any other person or entity; and (c) For two (2) years thereafter refrain from (i) hiring any person who was an employee of the Company at any time during the term of this Agreement, and (ii) calling upon or otherwise contacting any of the top 200 customers (agents) of the Company for the previous calendar year, for the purpose of soliciting small, miscellaneous fidelity and surety bonds, which is the Company's main business. Employee's obligations under this paragraph 6 shall survive the termination of this Agreement and his employment by the Company and shall terminate with regard to any confidential information only when it ceases to be confidential information. 7. Remedies. Both parties recognize that the services to be rendered by Employee are unique in character and that a breach by Employee of the terms and conditions of this Agreement would irreparably harm the Company. Accordingly, in the event of any such breach, in addition to all other remedies available to it in law, the Company shall be entitled to have an injunction issued by any court of competent jurisdiction enjoining and restraining Employee and each and every party concerned therewith from doing any act in violation of any provisions of this Agreement. For purposes of this paragraph and paragraph 6 hereof, the term "Company" shall include the Company, its subsidiaries and other affiliates and their respective successors and assigns. The term "affiliate" as used herein includes any entity controlling, controlled by or under common control with the Company. 3 4 8. Miscellaneous. (a) The parties hereto agree that the time period, the geographical area and the scope of the restrictions contained in paragraph 6 hereof are divisible and severable; and further, in the event any of said provisions are held to be invalid or unenforceable by a court of competent jurisdiction, such invalidity or unenforceability shall have no effect on the validity or enforceability of any other provision hereof and such provisions as are held invalid or unenforceable shall be deemed modified to the extent necessary to make them valid and enforceable. (b) In any court proceeding brought to enforce this Agreement, the prevailing party shall be awarded his or its reasonable attorneys' fees and the other expenses of such proceeding. (c) This Agreement constitutes the entire agreement of the parties hereto with respect to the subject matter hereof. (d) The provisions and terms of this Agreement shall be governed and construed according to the laws of the State of South Dakota without regard to its choice of law provisions. The parties hereto agree that the state circuit court situated in Minnehaha County, South Dakota shall be the exclusive jurisdiction of any disputes relating to this Agreement and that said court shall have personal jurisdiction over the parties. By initialling this paragraph, Employee consents to the personal jurisdiction of said court. STP (initial) (e) Any notices required or permitted hereunder shall be in writing and shall be deemed to have been given when personally delivered or forty-eight (48) hours after deposit in the U.S. mail, postage prepaid, certified or registered mail, and sent to the following addresses: If to Employee: Stephen T. Pate 4804 Caraway Circle Sioux Falls, So. Dakota 57106 If to Company: Western Surety Company 101 South Phillps Avenue Sioux Falls, South Dakota 57102 Attention: Dan Kirby With a copy to: Rosenberg & Liebentritt, P.C. Two North Riverside Plaza Suite 1600 Chicago, Illinois 60606 Attention: Kelly L. Stonebraker (f) The obligations of the Company under this Agreement may be assigned by the Company to any affiliate of or successor in interest to the Company. This Agreement shall not be assignable by Employee. Subject to the foregoing, this Agreement shall inure to the benefit of, and shall be binding upon, the parties hereto and upon their respective heirs, personal representative, successors and assigns. 4 5 (g) This Agreement supersedes the Employment Agreement by and between the Company and the Employee which was effective as of October 24, 1994, and such prior Employment Agreement is hereby terminated effective as of April 15, 1996. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. COMPANY: WESTERN SURETY COMPANY By: / s / Joe P. Kirby ------------------------------------- Title: CEO ------------------------------------- EMPLOYEE: / s / Stephen T. Pate ------------------------------------------ STEPHEN T. PATE 5 6 JOINDER Surewest Financial Corp. ("Surewest") hereby executes this Joinder to that certain Employment Agreement dated as of April 15, 1996 by and between Western Surety Company and Stephen T. Pate ("Employee") in order to agree to and be bound by the following provisions: BOARD OF DIRECTORS. SUREWEST COVENANTS AND AGREES THAT, SO LONG AS THE EMPLOYEE IS EMPLOYED UNDER SAID EMPLOYMENT AGREEMENT, ALL VOTING RIGHTS HELD, DIRECTLY OR INDIRECTLY, BY SUREWEST, OR ITS NOMINEES, SHALL BE VOTED IN FAVOR OF THE EMPLOYEE TO BE NOMINATED TO THE BOARD OF DIRECTORS OF WESTERN SURETY COMPANY (AND ALL OF ITS SUBSIDIARIES), AND TO BE ELECTED TO SUCH BOARDS AT EACH MEETING OF THEIR RESPECTIVE STOCKHOLDERS AT WHICH THE CLASS OF DIRECTORS TO WHICH THE EMPLOYEE IS ASSIGNED IS TO BE ELECTED. IN WITNESS WHEREOF, the undersigned has executed this Joinder as of the day and year below. SUREWEST FINANCIAL CORP. By: / s / Joe P. Kirby ------------------------------------- Title: CEO Dated: April 25, 1996 / s / Stephen T. Pate ----------------------------------------- STEPHEN T. PATE 1 EX-10.(13) 6 NON-COMPLETION & NON-SOLICITATION AGREE. 1 EXHIBIT 10(13) NON-COMPETITION AND NON-SOLICITATION AGREEMENT THIS AGREEMENT between Frontier Insurance Company, a New York corporation ("Frontier") and Capsure Holdings Corp., a Delaware corporation ("Capsure"), dated as of the 22nd day of May, 1996. WITNESSETH: WHEREAS, Capsure is a holding company owning insurance companies underwriting specialty property and casualty insurance and is the ultimate parent of United Capitol Holding Company ("UCIC"), United Capitol Managers, Inc. and Fischer Underwriting Group, Incorporated ("Fischer"), collectively hereinafter called the "United Capitol Companies"; and WHEREAS, Capsure has determined it is in the best interest of Capsure and its stockholders to sell the United Capitol Companies; and WHEREAS, Frontier is desirous of purchasing the United Capitol Companies on terms and conditions set forth in that certain Stock Purchase Agreement dated February 29, 1996; and WHEREAS, in order to induce Frontier to consummate such purchase, Capsure has agreed to enter into this non-competition and non-solicitation agreement (the "Agreement"); NOW, THEREFORE, Capsure and Frontier hereby agree as follows: 1. Definitions: The following terms, as used herein, have the meanings indicated below: "In force" shall have its customary meaning as respects insurance policies underwritten by the property and casualty insurance industry. "Person" means an individual, corporation, partnership, association, trust, limited liability company, limited liability partnership or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Restricted Insurance" means the following types of general liability insurance policies covering any risk (except as provided in this paragraph) located in the United States and its possessions: directors' and officers' (with a risk profile and characteristics substantially similar to the majority of such business written by Fischer during calendar year 1995), asbestos abatement, contractors environmental remediation, demolition contractors, pest control, crane operations, security guards, or errors and omissions (excluding errors and omissions for tax preparers, notaries and insurance agents, and errors and omissions with a risk profile and characteristics not historically written by UCIC). Notwithstanding the foregoing, Capsure and its subsidiaries shall not be restricted from selling underwriting, placing or writing surety bonds, notary bonds or fidelity bonds. 2 2. Non-Competition: For the period ending on the third anniversary of the date hereof, Capsure will not, and will not cause its subsidiaries not to, in the United States and its possessions, without the prior written consent of Frontier, (a) directly or indirectly, sell, underwrite, place or write any Restricted Insurance; provided, however, that nothing herein shall prohibit Capsure or its subsidiaries from owning not more than 5% of the stock or other securities of any corporation whose securities are publicly traded over-the-counter or on a national securities exchange, or (b) acquire any insurance business in which 40% or more of the gross written premiums during the most recent calendar year was from Restricted Insurance; provided, however, that Capsure or its subsidiaries may acquire a group of insurance businesses in which not more than 40% of the gross written premiums of such group are from Restricted Insurance. 3. Non-Solicitation of Policies: For the period ending on the third anniversary of the date hereof, Capsure will not, and will cause its subsidiaries not to (a) solicit, directly or indirectly, for placement, brokerage or sale, for itself and/or any other Person, any insurance policy of UCIC or Fischer which was "in force" with UCIC or administered by Fischer on the date hereof or (b) accept or place (through renewals or otherwise) for itself or any other Person, any insurance policy which was "in force" with UCIC or administered by Fischer on the date hereof. 4. Non-Solicitation of Employees: (a) For the period ending on the third anniversary of the date hereof, Capsure will not, and will cause its subsidiaries not to, without the prior written consent of Frontier, solicit to hire in any capacity any of the individuals listed on Schedule A hereto (comprising all employees of the United Capitol Companies at the date hereof), except those employees whose employment is terminated by the United Capitol Companies after the date hereof. (b) For the period ending on the third anniversary of the date hereof, Frontier will not, and will cause its subsidiaries not to, without the prior written consent of Capsure, solicit to hire in any capacity any employees of Capsure or its subsidiaries at the date hereof, except those employees whose employment is terminated by Capsure or its subsidiaries after the date hereof. 5. Confidentiality: Except as required by law or if such information becomes known to the public through no breach of this Agreement, Capsure agrees to treat, and cause its subsidiaries to treat, as strictly secret and confidential all information relating to the United Capitol Companies, including financial information and customer lists, divulged or made known to them or to which they had access prior to the date hereof. 6. 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 Illinois and of any federal court located in such State in connection with any action or proceeding arising out of or relating to this Agreement, any document 3 or instrument delivered pursuant to, in connection with, or simultaneously with this Agreement, or a breach of this Agreement or any such document or instrument. 7. Law: This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regarding to principles of conflicts in law. 8. Notices: All notices hereunder shall be in writing and shall be, (1) sent by registered or certified mail, return receipt request, or (2) served by personal service. If intended for Frontier, such notice shall be addressed to Frontier, attention of its President at Frontier's most current address for its executive offices, or to such other address as Frontier shall give notice to Capsure in the manner herein provided; and if intended for Capsure, such notice shall be addressed to Capsure, attention of its President at Capsure's most current address for its executive offices, or at such other address as Capsure shall give notice to Frontier 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. 9. Severability: Capsure and Frontier agree that if any provision of this Agreement is held to be invalid or unenforceable by a court of competent jurisdiction due to its geographic scope, period of duration, or any other provision, such provision shall be interpreted in a manner that is valid and enforceable while coming closest to effectuating the intent of the parties as expressed in this Agreement. 10. Assignment: Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by either of the parties hereto without the prior written consent of the other party. 11. Headings: The headings contained in this Agreement are inserted for convenience only and do not constitute part of this Agreement. 12. Entire Agreement: This Agreement constitutes the entire understanding between 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. 13. Counterparts: This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and each of which shall be deemed an original. 4 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day and year first above written. CAPSURE HOLDINGS CORP. By: / s / Bruce A. Esselborn ------------------------------------- Name: Bruce A. Esselborn Title: President FRONTIER INSURANCE COMPANY By: / s / Walter A. Rhulen ------------------------------------- Name: Walter A. Rhulen Title: President 5 CAPSURE HOLDINGS CORP. SCHEDULE A Kathy Aurand Bob Quarles Vera Blumthal Karen Remsey - p/t Mark Brown Ned Rand Peggy Brown Gary Resman Don Browne Bobbie Richardson Paul Bunone Linda Rickerson Gloria Burgess Dubba Schulenburg Janice Callwood Hamida Thawer Vicki Carroll Tim Tomas Sujitra Chaisangsukkul Kelly Thrift Bill Coggin Emily Wheeler Roberta Coleman Steve Zeitman Ken Crease Delores Zizitski Linda Den Bleyker Debra DeLaTorre Debbie Dunford Glenn Ficklin Donald Fischer Elizabeth Fitzgerald Karen Foster Elizabeth Frey Susan Godard Carlie Groover Kristin Henriksen Linda Hope Rick King Bill Knight Tanya Knowles Juanita Leavell Jane Lowendick Jim Marcello Carol Meng - p/t Fred Miehe Charlotte Miller Tiffany Miller Jackie Montoulieu
EX-11 7 EARNINGS COMPUTATION 1 EXHIBIT 11 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES EARNINGS PER SHARE COMPUTATION (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended December 31, --------------------------- 1996 1995 1994 ------- ------- ------- Net income .................................................... $13,379 $20,530 $14,378 ======= ======= ======= Shares: Weighted average shares outstanding ........................... 15,496 15,404 15,160 Additional shares from assumed warrants and options exercised . 899 298 256 ------- ------- ------- Total shares outstanding for calculation ...................... 16,395 15,702 15,416 Additional shares from assumed warrants and options exercised - assuming full dilution .................................... 115 215 39 ------- ------- ------- Total shares outstanding - assuming full dilution ............. 16,510 15,917 15,455 ======= ======= ======= Earnings per share based on: Weighted average common shares outstanding ................ $ .86 $ 1.33 $ .95 ======= ======= ======= Weighted average common and common equivalent shares outstanding(1) ........................................ $ .82 $ 1.31 $ .93 ======= ======= ======= Weighted average common and common equivalent shares outstanding - assuming full dilution(1) ............... $ .81 $ 1.29 $ .93 ======= ======= =======
- ----------------- (1) The dilutive effect of common stock equivalents was less than 3% for 1995 and 1994. EX-21 8 LIST OF SUBSIDIARIES 1 EXHIBIT 21 CAPSURE HOLDINGS CORP. AND SUBSIDIARIES AS OF DECEMBER 31, 1996
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.) NI Acquisition Corp....................................................................... Texas 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 Universal Surety Holding Corp............................................................. Texas Universal Surety of America.......................................................... Texas
EX-23 9 CONSENT OF INDEPENDENT ACCNTS. 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Capsure Holdings Corp. and Subsidiaries on Form S-8 (File No. 33-87048) of our report dated February 20, 1997, on our audits of the consolidated financial statements and financial statement schedules of Capsure Holdings Corp. and Subsidiaries as of December 31, 1996 and 1995, and for the years ended December 31, 1996, 1995, and 1994, which report is included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Chicago, Illinois March 12, 1997 EX-24.(1) 10 POWER OF ATTORNEY - DENTON 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 26th day of February, 1997. /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 26th day of February, 1997. /s/ Laurie A. Jelenek ------------------------------ (Notary Public) My Commission Expires: 12/27/97 EX-24.(2) 11 POWER OF ATTORNEY - DYER III 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 26th day of February, 1997. /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 26th day of February, 1997. /s/ Sheila Slayton --------------------------------- (Notary Public) My Commission Expires: 3/15/97 EX-24.(3) 12 POWER OF ATTORNEY - EMBRY 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 26th day of February, 1997. /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 26th day of February, 1997. /s/ Jean C. Valitutto ---------------------------- (Notary Public) My Commission Expires: 3/30/98 EX-24.(4) 13 POWER OF ATTORNEY - KIRBY 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 26th day of February , 1997. /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 26th day of February, 1997. /s/ Barbara Jo Claus ------------------------------ (Notary Public) My Commission Expires: 1/29/98 EX-24.(5) 14 POWER OF ATTORNEY - KIRBY 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 26th day of February, 1997. /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 26th day of February, 1997. /s/ Barbara Jo Claus ----------------------------- (Notary Public) My Commission Expires: 1/29/98 EX-24.(6) 15 POWER OF ATTORNEY - SCHAFRAN 1 EXHIBIT 24(6) POWER OF ATTORNEY STATE OF MARYLAND ) ) SS COUNTY OF PRINCE GEORGES ) KNOW ALL MEN BY THESE PRESENTS that L.G. Schafran, having an address at Dart Group, 3300 75th Avenue, Landover, Maryland 20785, has made, constituted and appointed and BY THESE PRESENTS, does make, constitute and appoint SHELI Z. ROSENBERG, having an address at Rosenberg & Liebentritt, Two North Riverside Plaza, Chicago, Illinois 60606, his true and lawful Attorney-in-Fact for him and in his name, place and stead to sign and execute in any and all capacities this Annual Report on Form 10-K and any or all amendments to this Annual Report on Form 10-K, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, giving and granting unto Sheli Z. Rosenberg, said Attorney-in-Fact, full power and authority to do and perform each and every act and thing, requisite and necessary to be done in and about the premises, as fully, to all intents and purposes as he might or could do if personally present at the doing thereof, with full power of substitution and revocation, hereby ratifying and confirming all that said Attorney-in-Fact or her substitutes shall lawfully do or cause to be done by virtue hereof. This Power of Attorney shall remain in full force and effect until terminated by the undersigned through the instrumentality of a signed writing. IN WITNESS WHEREOF, L.G. Schafran, has hereunto set his hand this 27th day of February, 1997. / s / L.G. Schafran ------------------------------- L.G. Schafran I, Jane S. Van Fleet, a Notary Public in and for said County in the State aforesaid, do hereby certify that L.G. Schafran , personally known to me to be the same person whose name is subscribed to the foregoing instrument appeared before me this day in person and acknowledged that he signed and delivered said instrument as his own free and voluntary act for the uses and purposes therein set forth. Given under my hand and notarial seal this 27th day of February, 1997. / s / Jane S. Van Fleet --------------------------------- (Notary Public) My Commission Expires: 4/1/99 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-31-1996 DEC-31-1996 135,895 0 0 4,526 0 0 162,532 2,736 5,642 28,523 313,139 38,874 69,570 0 0 60,000 0 0 790 121,793 313,139 92,491 16,444 1,715 0 10,054 37,505 25,699 21,560 8,181 13,379 0 0 0 13,379 0.82 0.81 126,061 23,685 (10,579) 3,390 12,080 38,874 7,353
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