1
THIS DOCUMENT IS A COPY OF THE ANNUAL REPORT ON FORM 10-K FILED ON MARCH 30,
1995 PURSUANT TO A RULE 202 CONTINUING HARDSHIP EXEMPTION
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-3565
CAPSURE HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 34-1010356
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
TWO NORTH RIVERSIDE PLAZA, CHICAGO, ILLINOIS 60606
(Address of principal executive offices) (Zip Code)
(312) 879-1900
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.05 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates was $132.8
million based upon the closing price of $12.63 on March 24, 1995, using
beneficial ownership of stock rules adopted pursuant to Section 13 of the
Securities Exchange Act of 1934 to exclude voting stock owned by Directors and
Officers, some of whom may not be held to be affiliates upon judicial
determination.
At March 24, 1995, 15,394,149 shares of the Registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III incorporates by reference the Registrant's Proxy Statement relating
to the Annual Meeting of Shareholders to be held May 24, 1995.
2
CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
----
PART I.
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Summary of Insurance Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
A.M. Best Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Surety and Fidelity Bond Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Excess and Surplus Lines Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Unpaid Losses and Loss Adjustment Expenses . . . . . . . . . . . . . . . . . . . . . . . . . 13
Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Net Operating Tax Loss Carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . 17
PART II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters . . . . . . . . 18
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . 27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
PART III.
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . 29
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . 29
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . 29
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . . 30
-2-
3
CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
PART I
ITEM 1. BUSINESS
GENERAL
Capsure Holdings Corp. and its subsidiaries ("Capsure" or the "Company")
are engaged in the property and casualty insurance business. Capsure's
principal property and casualty insurance entities are Western Surety Company
("Western Surety"), acquired in August 1992, United Capitol Insurance Company
("United Capitol"), acquired in February 1990, and Universal Surety of America
("Universal Surety"), acquired on September 22, 1994. Western Surety writes
small fidelity and noncontract surety bonds, referred to as "miscellaneous"
bonds, and errors and omissions ("E&O") liability insurance, as a licensed
insurer in all 50 states and the District of Columbia. United Capitol writes
specialty property and casualty insurance, primarily as an excess and surplus
("E&S") lines insurer. United Capitol is licensed in Wisconsin and Arizona and
conducts business on a nonadmitted basis in all other states, the District of
Columbia, Puerto Rico and the U.S. Virgin Islands. Universal Surety
specializes in the underwriting of small contract and miscellaneous surety
bonds. Universal Surety is licensed in 16 states with most of its business
generated in Texas.
The Company's business strategy with respect to its existing insurance
operations is to emphasize the underwriting of risks where reasonable
expectations of underwriting profits exist. At Western Surety, whose business
is relatively low risk and relatively insensitive to industry pricing cycles,
delivery of excellent service to its vast network of agents is emphasized. At
Universal Surety, whose business includes both miscellaneous surety and the
comparatively more risky contract surety, responsiveness to agents coupled with
sound conservative underwriting are the guiding principles. Contract bonds are
more affected by prevailing market and general economic conditions than are
noncontract bonds. At United Capitol, whose business is relatively high risk
and extremely cyclical, strict underwriting discipline is the critical factor
in effecting underwriting profitability during soft market periods.
The Company's primary growth strategy is to expand its operations in the
specialty insurance and financial services industries by capitalizing on
Western Surety's licenses, distribution system and A+ rating by A.M. Best
Company, Inc. ("A.M. Best") and United Capitol's underwriting expertise and
management resources, and by acquiring profitable, well-managed businesses with
established market positions in the insurance or financial services industry.
The September 22, 1994 acquisition of Universal Surety is an example of this
philosophy. Universal Surety has been a highly successful regional underwriter
of miscellaneous and small- to medium-sized contract surety bonds in Texas (75%
of 1994 gross written premiums) and adjacent southern states. Universal
Surety's preacquisition financial results have been exceptional. Gross written
premiums have grown from $5.1 million for the year ended December 31, 1990 to
$15.3 million for the year ended December 31, 1994 (including results prior to
acquisition). A weighted average combined ratio below 80% was maintained over
this same period. These results compare favorably to national contract surety
bond insurers. Universal Surety's overall growth in gross written premiums and
underwriting income during this period was attributable to its product
specialization, underwriting expertise and the strong economy in its geographic
region. Such growth was restricted by Universal Surety's ability to attract
qualified underwriting and claims personnel and maintain distinctive service to
its agents. The planned expansion of Universal Surety's contract surety
business through Western Surety's broad distribution network will be similarly
controlled. There can be no assurance, however, that Universal Surety's
preacquisition results will be indicative of future operating results under the
ownership and management of Capsure.
In addition, in 1993 the Company acquired Fischer Underwriting Group,
Incorporated ("Fischer"), a managing general agency engaged in producing and
underwriting specialty directors' and officers' ("D&O") and miscellaneous
professional liability insurance. Formerly acting on behalf of Lloyds' of
London and other insurers, Fischer commenced producing and underwriting on
behalf of United Capitol in December 1993.
-3-
4
SUMMARY OF INSURANCE OPERATIONS
Capsure's insurance companies operate in two principal markets within the
property and casualty insurance industry - surety and fidelity and excess and
surplus lines. The principal lines of business of Western Surety and Universal
Surety are surety and fidelity. United Capitol underwrites principally other
liability, product liability and commercial property, primarily on an E&S
basis.
On August 14, 1992, the Company acquired Western Surety. Founded in 1900,
Western Surety is one of the largest writers of miscellaneous bonds in the
United States. Bonds underwritten by Western Surety are relatively low-risk,
low-premium products where prompt service, easy-to-use forms and availability
of an extensive array of bond products are emphasized. Western Surety's
success is attributable to its product specialization, underwriting expertise
and broad distribution network. Substantially all of Western Surety's bonds
are mandated by various state statutes and local ordinances.
On September 22, 1994, the Company acquired Universal Surety. Founded in
1984, Universal Surety specializes in writing miscellaneous and small- to
medium-sized contract surety bonds in the southern United States. Contract
bonds underwritten by Universal Surety are primarily contractor performance and
payment bonds in amounts under $3.0 million for which underwriting expertise
and distinctive service to agents are emphasized. Universal Surety underwrites
primarily standard and some specialty accounts for which it will utilize
supplemental collateral arrangements and excess rates for contractors not
qualified for standard surety rates. Universal Surety also reduces its
exposure through participation in the Small Business Administration ("SBA")
Surety Bond Guarantee Program. Under this program, the SBA will generally
reimburse Universal Surety for 80% of losses and loss adjustment expenses
incurred on any SBA guaranteed bond in exchange for 20% of the premium. In
addition, a significant portion of the Company's premiums consist of
miscellaneous bonds underwritten in the same geographic area.
On February 20, 1990, the Company acquired United Capitol, a specialty
property and casualty insurer. United Capitol provides principally general
liability insurance, including D&O liability, product liability and other
liability, to businesses which have hazardous, unique or unusual risk
characteristics and which require individual risk underwriting and pricing
expertise. Policies underwritten by United Capitol are relatively high- risk,
high-premium products. Since its founding in 1986, United Capitol has been
able to consistently achieve its primary objective of generating underwriting
profits by adhering to a strategy of strict underwriting discipline. The
Company believes this strategy is a critical factor affecting underwriting
profitability during soft market conditions, which have prevailed in the
property and casualty industry since 1987. United Capitol has experienced
significant declines in premium volume since 1987 as it has exercised
underwriting discipline and has declined to write what it believes to be
underpriced business.
A.M. BEST RATINGS
Western Surety, Universal Surety and United Capitol are currently rated A+
(Superior), A (Excellent) and A (Excellent), respectively, by A.M. Best. A.M.
Best's letter ratings range from A++ (Superior) to C- (Fair) with A++ being
highest. An A+ (Superior) rating is assigned to those companies which A.M.
Best believes have achieved superior overall performance when compared to the
norms of the property and casualty insurance industry. A+ (Superior) rated
insurers have been shown to be among the strongest in ability to meet
policyholder and other contractual obligations. A rating of A (Excellent) is
assigned to those companies which A.M. Best believes have achieved excellent
overall performance when compared to the norms of the property and casualty
insurance industry and generally have demonstrated a strong ability to meet
their respective policyholder and other contractual obligations. A.M. Best
reviews its ratings at least annually and reaffirmed each company's rating in
June 1994. There can be no assurance that these ratings will continue to be
reaffirmed.
SURETY AND FIDELITY BOND OPERATIONS
According to 1993 statistics published by the Surety Association of America
("SAA"), the surety and fidelity bond market had direct written premiums of
approximately $2.7 billion, of which the miscellaneous bond segment accounted
for approximately $724 million. Western Surety targets a subset of the
miscellaneous bond segment of the surety and fidelity market because of its
favorable risk characteristics. Universal Surety targets both the
miscellaneous bond and small contract surety bond segments of the market.
-4-
5
PRODUCTS AND POLICIES
Surety and fidelity bonds differ in some respects from conventional
insurance policies. A surety bond is a three-party arrangement wherein the
issuer of the bond (the surety) guarantees to a third party (the obligee)
an obligation made by another entity (the principal). The surety is the
party who guarantees fulfillment of the principal's obligation to the
obligee. In addition, sureties are generally entitled to recover from the
principal any losses and expenses paid to third parties. The surety's
responsibility is to evaluate the risk and determine if the principal meets
the underwriting requirements for the bond. Accordingly, surety bond
premiums primarily reflect the type and class of risk and related costs
associated with both processing the bond transaction and investigating the
applicant including, if necessary, an analysis of the applicant's
creditworthiness and ability to perform.
Western Surety issues thousands of different noncontract bond forms
representing the many types of bonds available in each of the jurisdictions
in which it operates. Universal Surety issues both contract and
noncontract surety bonds. The terms of such bonds in many cases are
prescribed by federal, state and local laws or regulations. The principal
types of surety and fidelity bonds underwritten are as follows:
License and Permit - Bonds required by statutes or ordinances for a
number of purposes including guaranteeing the payment of certain taxes and
fees and providing consumer protection as a condition to granting licenses
related to selling real estate or motor vehicles and contracting services.
Judicial and Fiduciary - Bonds required by statutes, courts or legal
documents for the protection of those on whose behalf a fiduciary acts.
Examples of such fiduciaries include executors and administrators of
estates, and guardians of minors and incompetents.
Fidelity - Bonds which cover losses arising from employee dishonesty.
Examples of purchasers of fidelity bonds are law firms, insurance agencies
and janitorial service companies.
Public Official - Bonds required by statutes and ordinances to
guarantee the lawful and faithful performance of the duties of office by
public officials.
Notary Public - Bonds required by statutes to protect against losses
resulting from the improper actions of notaries public.
Contract - Bonds which secure the payment and/or performance of an
obligation under a written contract.
Each company also writes E&O policies for two classes of insureds:
notaries public and tax preparers. The notary public E&O policy is
marketed as a companion product to the notary public bond and the tax
preparer E&O policy is marketed to small tax return preparation firms. In
addition, Western Surety introduced an Insurance Agents & Brokers E&O
Insurance product in 1994.
The following tables set forth, for each principal class of bonds,
combined Western Surety and Universal Surety gross written premiums, net
written premiums, net earned premiums and number of bonds and policies in
force in 1994, 1993 and 1992 and the respective percentages of the total.
All tables in this section contain information reflecting the operations of
both Western Surety and Universal Surety prior to their respective
acquisitions by Capsure. As such, the financial information is not
necessarily indicative of the financial results that would have occurred
under the ownership and management of Capsure (amounts in thousands, except
percentages and average bond amounts):
-5-
6
GROSS WRITTEN PREMIUMS
-------------------------------------------------------------------------------
% of % of % of
1994 Total 1993 Total 1992 Total
----------- ----------- ---------- ----------- ---------- -----------
Surety and fidelity bonds:
License and permit . . . . . . $ 28,160 32.5% $ 27,934 32.5% $ 26,906 33.8%
Judicial and fiduciary . . . . 13,116 15.2 13,493 15.7 13,263 16.7
Fidelity . . . . . . . . . . . 13,821 16.0 13,111 15.3 12,364 15.6
Public official . . . . . . . . 6,874 7.9 7,628 8.9 7,003 8.8
Notary public . . . . . . . . . 7,989 9.2 8,804 10.3 8,203 10.3
Contract . . . . . . . . . . . 10,393 12.0 9,111 10.6 6,914 8.7
Other . . . . . . . . . . . . . 1,935 2.3 1,723 2.0 1,124 1.4
---------- ------ ---------- ------ ---------- ------
82,288 95.1 81,804 95.3 75,777 95.3
E&O policies . . . . . . . . . . 4,261 4.9 4,031 4.7 3,763 4.7
---------- ------ ---------- ------ ---------- ------
$ 86,549 100.0% $ 85,835 100.0% $ 79,540 100.0%
========== ====== ========== ====== ========== ======
Premiums by company:
Western Surety . . . . . . . . $ 71,286 82.4% $ 72,064 84.0% $ 68,552 86.2%
Universal Surety . . . . . . . 15,263 17.6 13,771 16.0 10,988 13.8
---------- ------ ---------- ------ ---------- ------
$ 86,549 100.0% $ 85,835 100.0% $ 79,540 100.0%
========== ====== ========== ====== ========== ======
Premiums generated by
largest agency:
Western Surety . . . . . . . . 1.2% 1.3% 1.6%
========== ========== ==========
Universal Surety . . . . . . . 4.0% 6.0% 6.0%
========== ========== ==========
Percentage of premiums
in the top five states:
Western Surety . . . . . . . . 26.5% 26.9% 25.9%
========== ========== ==========
Universal Surety . . . . . . . 92.0% 95.0% 97.0%
========== ========== ==========
NET WRITTEN PREMIUMS
-------------------------------------------------------------------------------
% of % of % of
1994 Total 1993 Total 1992 Total
----------- ----------- ---------- ----------- ---------- -----------
Surety and fidelity bonds:
License and permit . . . . . . $ 28,003 33.3% $ 27,796 33.3% $ 26,757 34.5%
Judicial and fiduciary . . . . 12,379 14.7 12,715 15.2 12,428 16.0
Fidelity . . . . . . . . . . . 13,786 16.4 13,061 15.7 12,306 15.9
Public official . . . . . . . . 6,731 8.0 7,422 8.9 6,776 8.7
Notary public . . . . . . . . . 7,922 9.4 8,718 10.4 8,117 10.5
Contract . . . . . . . . . . . 9,623 11.5 8,382 10.0 6,352 8.2
Other . . . . . . . . . . . . . 1,421 1.7 1,343 1.6 1,093 1.4
----------- -------- ---------- --------- ---------- ---------
79,865 95.0 79,437 95.1 73,829 95.2
E&O policies . . . . . . . . . . 4,186 5.0 4,031 4.9 3,764 4.8
----------- -------- ---------- -------- ---------- --------
$ 84,051 100.0% $ 83,468 100.0% $ 77,593 100.0%
=========== ======== ========== ======== ========== ========
Premiums by company:
Western Surety . . . . . . . . $ 69,738 83.0% $ 70,598 85.0% $ 67,333 86.9%
Universal Surety . . . . . . . 14,313 17.0 12,870 15.0 10,260 13.1
----------- -------- ---------- -------- ---------- --------
$ 84,051 100.0% $ 83,468 100.0% $ 77,593 100.0%
=========== ======== ========== ======== ========== ========
-6-
7
NET EARNED PREMIUMS
-------------------------------------------------------------------------------
% of % of % of
1994 Total 1993 Total 1992 Total
----------- ----------- ---------- ----------- ---------- -----------
Surety and fidelity bonds:
License and permit . . . . . . $ 27,692 33.4% $ 26,941 34.2% $ 26,117 35.3%
Judicial and fiduciary . . . . 12,476 15.1 12,603 16.0 12,274 16.6
Fidelity . . . . . . . . . . . 13,402 16.2 12,618 16.0 11,892 16.0
Public official . . . . . . . . 7,017 8.5 7,059 9.0 6,797 9.2
Notary public . . . . . . . . . 7,561 9.1 6,949 8.8 6,523 8.8
Contract . . . . . . . . . . . 9,331 11.3 7,720 9.8 5,831 7.9
Other . . . . . . . . . . . . . 1,426 1.7 1,218 1.5 1,056 1.4
----------- -------- ---------- -------- ---------- --------
78,905 95.3 75,108 95.3 70,490 95.2
E&O policies . . . . . . . . . . 3,917 4.7 3,733 4.7 3,547 4.8
----------- -------- ---------- -------- ---------- --------
$ 82,822 100.0% $ 78,841 100.0% $ 74,037 100.0%
=========== ======== ========== ======== ========== ========
Premiums by company:
Western Surety . . . . . . . . $ 69,212 83.6% $ 67,941 86.2% $ 65,540 88.5%
Universal Surety . . . . . . . 13,610 16.4 10,900 13.8 8,497 11.5
----------- -------- ---------- -------- ---------- --------
$ 82,822 100.0% $ 78,841 100.0% $ 74,037 100.0%
=========== ======== ========== ======== ========== ========
BONDS AND POLICIES IN FORCE
-------------------------------------------------------------------------------
% of % of % of
1994 Total 1993 Total 1992 Total
----------- ----------- ---------- ----------- ---------- -----------
Surety and fidelity bonds:
License and permit . . . . . . 460 29.4% 460 30.5% 436 30.7%
Judicial and fiduciary . . . . 64 4.1 67 4.4 67 4.7
Fidelity . . . . . . . . . . . 88 5.6 86 5.7 84 5.9
Public official . . . . . . . . 64 4.1 63 4.2 62 4.4
Notary public . . . . . . . . . 762 48.6 717 47.5 663 46.7
Contract . . . . . . . . . . . 6 0.4 5 0.3 5 0.3
Other . . . . . . . . . . . . . 11 0.7 12 0.8 11 0.8
----------- -------- ---------- -------- ---------- --------
1,455 92.9 1,410 93.4 1,328 93.5
E&O policies . . . . . . . . . . 112 7.1 100 6.6 93 6.5
----------- -------- ---------- -------- ---------- --------
1,567 100.0% 1,510 100.0% 1,421 100.0%
=========== ======== ========== ======== ========== ========
Bonds/policies in force by company:
Western Surety . . . . . . . . 1,389 88.6% 1,367 90.5% 1,323 93.1%
Universal Surety . . . . . . . 178 11.4 143 9.5 98 6.9
----------- -------- ---------- -------- ---------- --------
1,567 100.0% 1,510 100.0% 1,421 100.0%
=========== ======== ========== ======== ========== ========
Average bond/policy limit:
Western Surety . . . . . . . . $ 9,470 $ 9,186 $ 8,937
=========== ========== ==========
Universal Surety . . . . . . . $ 5,330 $ 5,281 $ 5,647
=========== ========== ==========
MARKETING
Western Surety enjoys broad national distribution of its products,
which are marketed through approximately 37,000 of the approximately 45,000
independent property and casualty insurance agencies in the United States.
These independent agencies are paid an average commission of approximately
30% of a miscellaneous bond's premium. Western Surety also employs
approximately 60 full-time salaried marketing representatives whose
principal duties are to continually service their producer network on a
local basis.
Since miscellaneous fidelity and surety bonds typically account for a
small portion of an independent agency's revenues and are generally applied
for under rush circumstances, Western Surety emphasizes one-day response
service, easy-to-use forms and an extensive array of miscellaneous bond
products. In addition, independent agents are provided pre-executed bond
forms and powers of attorney that allow them to issue many standard bonds in
their offices.
-7-
8
Western Surety's marketing strategy is concentrated on increasing its
share of the miscellaneous bond market. In addition, Western Surety devotes
considerable time and effort educating legislators as to the need for and
value of miscellaneous bonds and challenging attempts to repeal certain
bonding requirements.
Universal Surety markets its products through approximately 1,000
independent property and casualty insurance agencies through its
headquarters in Houston, Texas and branch offices in Austin, Dallas, Kansas
City and San Antonio. Universal Surety emphasizes innovative, flexible
underwriting, product specialization and distinctive agent service backed by
highly qualified, experienced employees.
Universal Surety's preacquisition results have been exceptional as
gross written premiums grew from $5.1 million in 1990 to $15.3 million in
1994, while maintaining a combined ratio below 80%. In addition, according
to 1993 SAA statistics, Universal Surety ranked number one in volume of
bonds written in Texas and number three in terms of direct written premiums.
Of Universal Surety's gross written premiums in 1994, 68% related to
contract bonds, including 12% that qualified for the SBA guarantee. The
remaining 32% related to noncontract bonds, including 11% for notary public
bonds.
Universal Surety has concentrated its marketing efforts in expanding
its share of the small contract bond market. Contract bonds underwritten by
Universal Surety are primarily contractor performance and payment bonds in
amounts under $3.0 million. Universal Surety underwrites principally
standard accounts and some specialty accounts for which it will utilize
supplemental collateral arrangements and excess rates or SBA guarantees for
contractors not generally considered standard risks. The Company intends to
utilize Western Surety's existing diverse agency relationships to expand the
geographic and agency distribution of Universal Surety's contract surety
business. The Company has initially targeted marketing activities towards
Western Surety agents in 13 southern states, including Texas. Western
Surety will generally cede 100% of each such contract surety bond written on
Western paper to Universal Surety pursuant to a Surety Bond Quota
Reinsurance Agreement. In 1994, these activities were not material.
In addition, Western Surety is gradually expanding its product line by
offering Insurance Agents & Brokers E&O Insurance directly to a majority of
its vast agency force. Western Surety cedes 90% of each policy to a
reinsurer pursuant to a treaty reinsurance arrangement. In 1994, these
activities were not material.
UNDERWRITING
Western Surety and Universal Surety target various products in the
surety and fidelity bond market which are characterized by relatively
low-risk exposure and small bond amounts. Its underwriting criteria,
including the extent of bonding authority granted to independent agents,
vary depending on the class of business and the type of bond. For example,
relatively little underwriting information is required of certain
low-exposure risks such as notary bonds. Other bonds, such as fiduciary or
probate bonds, are subjected to greater individual risk scrutiny, including
verification of the credit history and financial resources of an applicant.
Contract bonds underwritten by Universal Surety, which have higher bond
amounts and inherent risk, are subject to stringent financial analysis and
credit review. Both companies grant authority to independent agents to
issue certain low-risk bonds subject to underwriting guidelines.
COMPETITION
The surety and fidelity market is highly competitive. The largest
market shares are held by large diversified insurance companies; however,
the single largest writer nationally in 1993, according to the SAA,
controlled only 6% of the $2.7 billion market. The small fidelity and
noncontract surety or miscellaneous segment of this market is competitive
on the basis of service, price, and commissions paid to producers. No
single competitor has a significant market position in the broad geographic
range and lines of business in which Western Surety conducts its
operations. Certain of Western Surety's existing and potential competitors
are larger and have greater financial and other resources than Western
Surety. The Company believes that Western Surety's principal competitive
strengths include its expertise in writing miscellaneous bonds,
distribution network of independent agencies, timely customer response and
service, and admitted status in every state and the District of Columbia.
-8-
9
The market in which Universal Surety competes, primarily small
contract bonds, has seen additional competition as both large and small
insurance companies are competing and expanding in this area. Certain of
Universal Surety's existing and potential competitors are larger and have
greater financial resources than Universal Surety. Universal Surety
believes that its principal competitive strengths include its underwriting
expertise in both contract and miscellaneous bonds, its distinctive service
and its strong relationship with its agents.
EXCESS AND SURPLUS LINES OPERATIONS
For regulatory purposes, the commercial property and casualty insurance
market is essentially divided into three segments: the admitted or licensed
market, commonly referred to as the "standard" market; the alternate risk
mechanism market, which includes captive insurance companies, risk retention
groups and risk purchasing groups; and, the E&S market. The largest provider
group is the licensed or admitted insurers. The alternate risk market may
operate on an admitted or E&S basis.
The E&S segment was created to provide a source of insurance to those
insureds who are unable to purchase coverage in the standard market. Admitted
insurers are subject to extensive state regulation of rates, policy forms and
operational conduct, are required to participate in assigned risk pools and
must pay premium taxes and other state assessments. These companies, however,
exert a dominant influence over pricing in the commercial market. By contrast,
E&S insurers are subject to comparatively less state regulation, affording them
more pricing and form flexibility and lower operating expenses. E&S insurers
may only insure those risks which the standard market cannot or chooses not to
insure.
The commercial property and casualty insurance market is highly cyclical
and intensely competitive as to price and terms. The size and composition of
the E&S market historically have fluctuated with industry cycles. The cycles
have been characterized by conditions known as hard markets and soft markets.
Hard markets have been characterized by varying periods of relatively higher
premiums and more restrictive coverages. As more insurers have been attracted
to those conditions, competition has intensified. Over time, this has resulted
in depressed premiums, broader coverages and underwriting losses in the
industry, which are referred to as soft markets, and have been characterized by
an oversupply of underwriting capacity. E&S insurers are generally more
vulnerable to these cycles, which is reflected by their volatile writings,
since E&S insurers typically only underwrite classes of risks which standard
market insurers cannot or choose not to insure. The commercial property and
casualty insurance market has been operating under soft market conditions since
1987 and there can be no assurance as to the timing or extent of hard market
conditions returning to the property and casualty insurance industry.
PRODUCTS AND POLICIES
The following tables set forth for each of United Capitol's principal
lines of business, gross written premiums, net written premiums and net
earned premiums in 1994, 1993 and 1992 (dollars in thousands):
GROSS WRITTEN PREMIUMS
-------------------------------------------------------------------------------
% of % of % of
1994 Total 1993 Total 1992 Total
----------- ----------- ---------- ----------- ---------- -----------
General liability:
Product liability . . . . . . . $ 6,797 25.2% $ 7,992 27.8% $ 7,558 27.9%
D&O . . . . . . . . . . . . . . 5,582 20.6 714 2.5 -- --
Asbestos abatement . . . . . . 4,633 17.1 7,481 26.1 9,579 35.4
Other general liability . . . . 6,033 22.3 8,207 28.6 6,695 24.7
----------- --------- ---------- -------- ---------- --------
23,045 85.2 24,394 85.0 23,832 88.0
Property . . . . . . . . . . . . 3,912 14.5 4,117 14.3 2,647 9.8
Surety . . . . . . . . . . . . . 75 .3 200 .7 587 2.2
----------- --------- ---------- --------- ---------- --------
$ 27,032 100.0% $ 28,711 100.0% $ 27,066 100.0%
=========== ========= ========== ========= ========== =========
-9-
10
NET WRITTEN PREMIUMS
-------------------------------------------------------------------------------
% of % of % of
1994 Total 1993 Total 1992 Total
----------- ----------- ---------- ----------- ---------- -----------
General liability:
Product liability . . . . . . . $ 4,361 25.6% $ 4,905 27.7% $ 4,642 26.3%
D&O . . . . . . . . . . . . . . 3,298 19.3 498 2.8 -- --
Asbestos abatement . . . . . . 3,358 19.7 5,994 33.9 7,882 44.7
Other general liability . . . . 5,100 29.9 5,439 30.7 4,383 24.8
----------- -------- ---------- -------- ---------- --------
16,117 94.5 16,836 95.1 16,907 95.8
Property . . . . . . . . . . . . 670 3.9 515 2.9 333 1.9
Surety . . . . . . . . . . . . . 264 1.6 357 2.0 400 2.3
----------- -------- ---------- -------- ---------- --------
$ 17,051 100.0% $ 17,708 100.0% $ 17,640 100.0%
=========== ======== ========== ======== ========== ========
NET EARNED PREMIUMS
-------------------------------------------------------------------------------
% of % of % of
1994 Total 1993 Total 1992 Total
----------- ----------- ---------- ----------- ---------- -----------
General liability:
Product liability . . . . . . . $ 5,138 26.7% $ 5,087 28.1% $ 4,757 29.5%
D&O . . . . . . . . . . . . . . 2,045 9.2 12 0.1 -- --
Asbestos abatement . . . . . . 4,786 24.9 6,844 37.9 7,170 44.4
Other general liability . . . . 6,419 33.4 5,374 29.7 3,438 21.2
----------- -------- ---------- -------- ---------- --------
18,388 94.2 17,317 95.8 15,365 95.1
Property . . . . . . . . . . . . 547 2.8 420 2.3 350 2.2
Surety . . . . . . . . . . . . . 291 3.0 351 1.9 433 2.7
----------- -------- ---------- -------- ---------- --------
$ 19,226 100.0% $ 18,088 100.0% $ 16,148 100.0%
=========== ======== ========== ======== ========== ========
PRODUCT LIABILITY AND OTHER PRIMARY GENERAL LIABILITY
United Capitol provides primary general liability insurance, including
product liability coverage, on both a claims-made and an occurrence basis
to hazardous, unique or unusual classes of commercial insureds that require
specialized underwriting. These policies provide coverage to the insured
against third-party claims of bodily injury or property damage arising from
negligent acts of the insured. Except as discussed below, claims for
bodily injury or property damage caused by exposure to asbestos are
excluded from product liability and other primary general liability
policies sold by United Capitol.
Many of United Capitol's general liability policies specifically
provide product liability coverage for liabilities arising from the
manufacture and/or distribution of goods by an insured. Classes of
insureds include manufacturers and distributors of industrial machinery,
equipment and chemicals, sporting goods, toys and trailers; bridge
building, pile driving and other artisan contractors; operators of
carnivals, circuses, water and amusement parks; and fireworks exhibitors.
Most of United Capitol's non-asbestos primary general liability
policies have been issued on the occurrence form (63% in 1994, 66% in 1993
and 71% in 1992); however, classes considered to be particularly
susceptible to late reporting ("long tail" classes) are generally written
on a claims-made form. Examples of these classes include pharmaceuticals
and chemicals manufacturers and distributors, and hazardous waste
remediation contractors.
In 1992, United Capitol commenced offering pollution liability
coverage, on a claims-made only basis, to contractors involved in the
remediation of preexisting pollution. United Capitol does not provide
pollution coverage to those parties who are likely to create or be the
source of pollution. United Capitol's gross limit of liability for this
coverage is generally $1.0 million, but higher limits are available through
the use of reinsurance. Total gross written premiums for this coverage
were $0.5 million, $0.6 million and $0.2 million in 1994, 1993 and 1992,
respectively.
For the primary general liability insurance line of business, United
Capitol generally offers gross limits of liability of approximately $1.0
million to $3.0 million. United Capitol's average gross annual premium per
policy
-10-
11
in 1994, 1993 and 1992 was approximately $116,000, $98,000 and $105,000,
respectively, and the average gross limits of liability were $2.0 million,
$1.8 million and $1.8 million, respectively.
D&O AND MISCELLANEOUS PROFESSIONAL LIABILITY
In December 1993, United Capitol commenced writing specialty D&O and
miscellaneous professional liability insurance on a claims-made basis
through Fischer. D&O insurance is designed to protect directors and
officers from liabilities arising while acting in their official capacities
and typically covers both liabilities of the officer or director and
reimbursement of a corporation that has lawfully agreed to indemnify their
officers or directors. Miscellaneous professional liability insurance,
also known as E&O, covers claims by third parties who allege damage as a
result of negligent actions by insured professionals. The gross limit of
liability for these policies is generally $1.0 million, though gross limits
up to $5.0 million are available through the use of reinsurance. The
average gross annual premium per policy for these classes of business was
$11,000 in 1994 and $9,000 in 1993. United Capitol targets businesses with
hard-to-place D&O risks such as new companies, research and development
companies, and companies with past bankruptcies as well as not-for-profit
businesses. Types of entities considered for professional liability
coverage by United Capitol include insurance agents, real estate brokers,
title agents, and collection agents and certain legal professionals.
Fischer, to a lesser degree, also places certain D&O and E&O insurance with
insurers other than United Capitol and receives commissions for such
services. This business placed with other insurers was not material to the
Company.
ASBESTOS ABATEMENT
United Capitol provides general liability insurance for asbestos
abatement contractors, as well as professional liability insurance for
architects, engineers and others in their capacity as asbestos abatement or
environmental consultants. Asbestos abatement generally involves removal
or containment of asbestos and asbestos-containing materials from buildings
and other structures. United Capitol's asbestos abatement policy forms
exclude coverage for employees of an insured and others required to be in
the area during the asbestos abatement process.
United Capitol generally provides gross limits of liability of $1.0
million to $3.0 million to asbestos abatement contractors and professional
liability coverage to asbestos abatement and environmental consultants.
Higher gross limits can be provided through the use of reinsurance. In
1994, 1993 and 1992, the average gross annual premium per policy for this
class of business was approximately $76,000, $76,000 and $67,000,
respectively. The average gross limit of liability was $2.8 million in
1994, $2.5 million in 1993 and $2.0 million in 1992.
From 1986 through 1990, substantially all of United Capitol's general
liability policies for asbestos abatement contractors and environmental
consultants were written on a claims-made basis. Because of highly
favorable loss experience with the product, and in response to changing
market conditions as more insurers have entered the market, United Capitol
commenced writing these policies on an occurrence basis in late 1990. In
1994, 1993 and 1992, asbestos abatement general liability policies written
on an occurrence basis increased to approximately 79%, 69% and 60% of the
total, respectively. Since 1989, United Capitol has experienced a
significant decline in asbestos abatement-related insurance premiums in
absolute terms as well as relative to its total business because of intense
competition for this product. Management anticipates a continuing decline
in this business.
PROPERTY, SURETY AND OTHER BUSINESS
United Capitol writes commercial property and inland marine insurance,
generally offering up to $5.0 million of gross limits per location or per
policy. The average gross annual premium per policy was $18,000 in 1994,
$25,000 in 1993 and $23,000 in 1992. In 1993, United Capitol's agency
subsidiary, United Capitol Managers, Inc. ("Managers"), entered into an
agreement under which it acts as commercial property underwriting manager
for Westport Insurance Corporation ("Westport"), a member company of the
Employers Reinsurance Group. Westport is rated A++ (Superior) by A.M. Best
and is an admitted insurer in the majority of jurisdictions. Managers
earns a commission for business underwritten on behalf of Westport and
United Capitol assumes up to $500,000 net per risk on business produced by
Managers. In 1994, Managers produced $4.3 million of gross premiums for
Westport of which $0.3 million was retroceded to United Capitol.
-11-
12
United Capitol also writes a small amount of surety bonds for asbestos
abatement and hazardous waste remediation contractors.
POLICY FORMS
United Capitol uses both claims-made and occurrence forms for its
liability lines of business, both of which are generally more restrictive
than standard industry policy forms. Since inception, approximately 90% of
United Capitol's claims-made and occurrence liability policies have
provided for an aggregate limit for all claims in a policy year. Further,
all liability policies issued since early 1987 have provided for an
aggregate limit for all claims in a policy year. In approximately 98% of
United Capitol's liability policies, defense costs and other loss
adjustment expenses are either included within the policy limits or subject
to a dollar cap. Virtually all of United Capitol's liability policies are
written subject to a self-insured retention or deductible. These
underwriting standards and percentages have remained essentially unchanged
since 1986. Except as described above, United Capitol's liability policies
exclude coverage for the insured's liability for claims related to
pollution. United Capitol's liability policies generally exclude coverage
for the insured's liability for punitive or exemplary damages.
For its property and surety lines of business, United Capitol
generally uses standard industry policy forms which it may modify in some
respects.
MARKETING
United Capitol principally markets its insurance through approximately
250 wholesale and retail insurance brokerage firms throughout the country
whose employees are specially licensed by insurance regulatory authorities
as E&S insurance brokers. These brokers submit risk proposals to United
Capitol for its review and underwriting analysis. No brokers have the
authority to bind United Capitol and United Capitol does not delegate
underwriting or claims management authority to nonaffiliated managing
general agents or other independent agents or brokers. Due to the
specialized nature of United Capitol's business, policy writings tend to be
concentrated among a small group of brokerage firms committed to United
Capitol's products. For the years ended December 31, 1994, 1993 and 1992,
United Capitol's top ten brokerage firms generated approximately 42%, 49%
and 45%, respectively, of gross written premiums in those periods. In
1994, 1993 and 1992, United Capitol's top brokerage firm produced 12%, 14%
and 12%, respectively, of its gross written premiums.
UNDERWRITING
All underwriting and pricing decisions are made by United Capitol or
its subsidiaries' employees and reviewed by senior management. Given the
hazardous, unique or unusual nature of the risks United Capitol insures,
its underwriters carefully analyze the risks associated with each
application for insurance. United Capitol's underwriters evaluate the
prior loss history, the inherent risk characteristics and the financial
condition of the applicant where appropriate. For asbestos abatement
contractors, the underwriting process also includes evaluation of the
contractor's qualifications, experience and operating procedures. For all
liability coverages, and particularly when determining whether liability
coverage will be offered on an occurrence form, United Capitol's
underwriting analysis includes evaluation of the likely "tail" period
between an insured occurrence and the time a claim is likely to be made.
COMPETITION
The excess and surplus lines market is significantly affected
by conditions in the commercial property and casualty market, which are
highly cyclical and intensely competitive as to price and terms. Many of
United Capitol's existing or potential competitors are larger, have
considerably greater financial and other resources, have greater
experience in the insurance industry, have longer relationships with
their brokers and insureds and offer a broader line of insurance products
than United Capitol. United Capitol competes with other excess and
surplus lines insurers, other forms of insurance organizations such as
risk retention groups and other alternative risk mechanisms. United
Capitol also competes with admitted insurers since a risk may not be
offered to an excess and surplus lines insurer if an admitted insurer is
willing to insure the risk. The property and casualty industry is
particularly competitive with respect to price and terms, and United Capitol
will compete on that basis only when there remains reasonable expectation of
underwriting profits. United Capitol believes its competitive strengths are
its underwriting discipline, quality service and effective claims
administration.
-12-
13
REINSURANCE
The Company's insurance subsidiaries, in the ordinary course of business,
cede reinsurance to other insurance companies to limit their exposure to loss
and to provide greater diversification of risk. The reinsurance coverages and
terms are tailored to the specific risk characteristics of the underlying
product line. Reinsurance contracts do not relieve the Company of its primary
obligations to claimants. A contingent liability exists with respect to
reinsurance ceded to the extent that any reinsurer is unable to meet the
obligations assumed under the reinsurance agreements. Capsure places
reinsurance with other carriers only after careful review of the nature of the
contract and a thorough assessment of the reinsurers' credit quality and claim
settlement performance. At December 31, 1994, Capsure's largest reinsurance
receivable, including prepaid reinsurance premiums of $1.3 million and
estimated ceded incurred but not reported ("IBNR") losses of $12.0 million, was
approximately $18.9 million with Generali - U.S. Branch. Generali - U.S.
Branch is rated A (Excellent), XV by A.M. Best. No other receivable from a
single reinsurer exceeded 10% of total reinsurance receivables.
UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The liability for unpaid losses and loss adjustment expenses ("LAE") is
based on estimates of (a) the ultimate settlement value of reported claims, (b)
IBNR claims, (c) future expenses to be incurred in the settlement of claims and
(d) claim recoveries. These estimates are determined based on Company and
industry loss experience as well as consideration of current trends and
conditions. The liability for unpaid losses and LAE is an accounting estimate
and, similar to other accounting estimates, there is the potential that actual
future loss payments will differ from the initial estimate. The methods of
determining such estimates and the resulting estimated liability are
continually reviewed and updated. Changes in the estimated liability are
reflected in operating income in the year in which such changes are determined.
Each of Capsure's insurance subsidiaries employs prudent reserving
approaches in establishing the estimated liability for unpaid loss and LAE due
to the inherent difficulty and variability in the estimation process. In
addition, Capsure utilizes independent actuarial firms of national standing to
conduct periodic reviews of claim procedures and loss reserving practices, and
annually obtains actuarial certification as to the reasonableness of actuarial
assumptions used and the sufficiency of year-end reserves for each of its
principal insurance subsidiaries.
A table is included in both Management's Discussion and Analysis and Note 7
to the Consolidated Financial Statements which presents a reconciliation of
beginning and ending consolidated loss reserve balances for the three years
ended December 31, 1994. Such tables highlight the impact of favorable
revisions to the estimated liability established in prior years.
A reconciliation of the consolidated loss reserves reported in accordance
with generally accepted accounting principles ("GAAP"), and the reserves
reported to state insurance regulatory authorities in accordance with statutory
accounting principles ("SAP") follows (dollars in thousands):
Years Ended December 31,
---------------------------------------
1994 1993 1992
---------- ---------- ----------
(Restated)
Reserves at end of year, GAAP basis . . . . . . . . . . . . . . . . . . $ 149,041 $ 135,825 $ 128,122
Estimated salvage and subrogation recoverable,
not anticipated under SAP . . . . . . . . . . . . . . . . . . . . . 6,881 6,465 6,479
Estimated reinsurance recoverable netted against
gross reserves for SAP . . . . . . . . . . . . . . . . . . . . . . . (38,606) (33,829) (30,977)
---------- ---------- ----------
Reserves at end of year, SAP basis . . . . . . . . . . . . . . . . . . $ 117,316 $ 108,461 $ 103,624
========== ========== ==========
The following table presents the development under GAAP of combined balance
sheet reserves for 1985 through 1994, including periods prior to Capsure's
ownership. The top line of the table shows the combined reserves at the
balance sheet date for each of the indicated periods. The amount of the
reserves represents the estimated amount of losses and LAE arising in all prior
years that are unpaid at the balance sheet date, including IBNR reserves. The
upper portion of the table shows the reestimated amount of the previously
recorded reserves based on experience as of the end of each succeeding year.
The estimates change as more information becomes known about the frequency and
severity of claims
-13-
14
for individual periods. The cumulative redundancy (deficiency) represents the
aggregate change in the estimates over all prior years. It should be noted
that the table presents a "run off" of balance sheet reserves rather than
accident or policy year loss development. Therefore, each amount in the table
includes the effects of changes in reserves for all prior years (dollars in
thousands):
AS OF DECEMBER 31,
-------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
Reserves for unpaid
losses and LAE . . . . . . $149,041 $138,347 $130,435 $130,596 $124,708
Reserves re-estimated as of:
One year later . . . . . -- 122,657 113,941 120,481 126,544
Two years later . . . . . -- -- 100,088 103,560 115,759
Three years later . . . . -- -- -- 89,984 101,381
Four years later . . . . -- -- -- -- 90,377
Five years later . . . . -- -- -- -- --
Six years later . . . . . -- -- -- -- --
Seven years later . . . . -- -- -- -- --
Eight years later . . . . -- -- -- -- --
Nine years later . . . . . -- -- -- -- --
Cumulative redundancy
(deficiency) . . . . . . . $ -- $ 15,690 $ 30,347 $ 40,612 $ 34,331
======== ======= ======== ======== ========
Cumulative redundancy
(deficiency) as a percentage
of original estimate . . . -- 11.3% 23.3% 31.1% 27.5%
======== ======= ======== ======== ========
Cumulative amount of
liability paid through:
One year later . . . . . $ -- $ 19,084 $ 16,201 $ 21,280 $ 20,982
Two years later . . . . . -- -- 30,370 34,650 37,279
Three years later . . . . -- -- -- 44,610 47,676
Four years later . . . . -- -- -- -- 55,701
Five years later . . . . -- -- -- -- --
Six years later . . . . . -- -- -- -- --
Seven years later . . . . -- -- -- -- --
Eight years later . . . . -- -- -- -- --
Nine years later . . . . . -- -- -- -- --
AS OF DECEMBER 31,
------------------------------------------------
1989 1988 1987 1986 1985
-------- ------- ------- ------- -------
Reserves for unpaid
losses and LAE . . . . . . $116,565 $83,733 $63,537 $22,483 $14,906
Reserves re-estimated as of:
One year later . . . . . 114,911 89,453 54,856 19,796 17,184
Two years later . . . . . 117,260 89,513 55,991 19,697 16,152
Three years later . . . . 107,322 89,728 54,011 18,352 15,950
Four years later . . . . 97,016 81,957 54,329 18,230 14,958
Five years later . . . . 89,067 75,375 47,991 17,072 15,362
Six years later . . . . . -- 70,944 46,629 16,825 14,813
Seven years later . . . . -- -- 43,991 17,057 15,181
Eight years later . . . . -- -- -- 16,742 16,092
Nine years later . . . . . -- -- -- -- 15,629
Cumulative redundancy
(deficiency) . . . . . . . $ 27,498 $12,789 $19,546 $ 5,741 $ (723)
======== ======= ======= ======= =======
Cumulative redundancy
(deficiency) as a percentag
of original estimate . . . 23.6% 15.3% 30.8% 25.5% (4.9)%
======== ======= ======= ======= =======
Cumulative amount of
liability paid through:
One year later . . . . . $ 19,737 $15,787 $10,398 $ 5,379 $ 5,800
Two years later . . . . . 35,736 25,446 18,079 9,487 8,831
Three years later . . . . 48,580 37,387 23,232 11,916 10,905
Four years later . . . . 56,648 44,973 27,772 12,872 12,507
Five years later . . . . 63,911 49,070 32,905 13,687 12,983
Six years later . . . . . -- 55,183 34,281 15,129 13,479
Seven years later . . . . -- -- 36,841 15,406 14,750
Eight years later . . . . -- -- -- 15,874 14,898
Nine years later . . . . . -- -- -- -- 15,293
REGULATION
Capsure's insurance subsidiaries are subject to varying degrees of
regulation and supervision in the jurisdictions in which they transact business
under statutes which delegate regulatory, supervisory and administrative powers
to state insurance regulators. In general, an insurer's state of domicile has
principal responsibility for such regulation which is designed generally to
protect policyholders rather than investors and relates to matters such as the
standards of solvency which must be maintained; the licensing of insurers and
their agents; the examination of the affairs of insurance companies, including
periodic financial and market conduct examinations; the filing of annual and
other reports, prepared on a statutory basis, on the financial condition of
insurers or for other purposes; establishment and maintenance of reserves for
unearned premiums and losses; and requirements regarding numerous other
matters. Licensed or admitted insurers generally must file with the insurance
regulators of such states, or have filed on its behalf, the premium rates and
bond and policy forms used within each state. In some states, approval of such
rates and forms must be received from the insurance regulators in advance of
their use.
Western Surety is domiciled in South Dakota and licensed in all other
states and the District of Columbia. Universal Surety is domiciled in Texas
and licensed in 15 other states. United Capitol is domiciled in Wisconsin,
licensed in Arizona and approved, or not disapproved, as a nonadmitted insurer
in all other states, the District of Columbia, Puerto Rico and the U.S. Virgin
Islands. Nonadmitted insurers are generally permitted to operate with a
greater degree of freedom from various regulations. In the future, it is
likely that more extensive regulatory requirements or restrictions may be
imposed upon nonadmitted insurers, which may increase operating costs
associated with compliance.
Insurance regulations generally also require registration and periodic
disclosure of certain information concerning ownership, financial condition,
capital structure, general business operations and any material transactions or
agreements by or among affiliates. Such regulation also typically restricts
the ability of any one person to acquire 10% or more,
-14-
15
either directly or indirectly, of a company's stock without prior approval of
the applicable insurance regulatory authority. In addition, dividends and
other distributions to stockholders generally may be paid only out of
unreserved and unrestricted statutory earned surplus. Such distributions may
be subject to prior regulatory approval, including a review of the implication
on Risk-Based Capital requirements. A discussion of Risk-Based Capital
requirements for property/casualty insurance companies is included in both
Management's Discussion and Analysis and Note 10 to the Consolidated Financial
Statements. Without prior regulatory approval in 1995, Capsure's insurance
subsidiaries may pay stockholder dividends of $19.3 million in the aggregate.
In 1994, 1993 and 1992, Capsure received $21.0 million (including $5.0 million
of dividends requiring prior approval), $11.8 million, and $29.0 million
(including $15.1 million of dividends requiring prior approval), respectively,
in dividends from its insurance subsidiaries.
Capsure's insurance subsidiaries are subject to periodic financial and
market conduct examinations. These examinations are generally performed by the
domiciliary state insurance regulatory authorities. The South Dakota
Department of Commerce and Regulation - Division of Insurance conducted its
last triennial examination of Western Surety as of December 31, 1991. This
examination covered both financial and market conduct procedures. The Texas
Department of Insurance conducted its triennial examination of Universal Surety
as of September 30, 1992. This examination included both financial and market
conduct procedures. The Insurance Department of the State of Wisconsin
conducted a financial examination of United Capitol as of December 31, 1992.
There were no significant issues noted which required corrective action by any
of Capsure's insurance companies.
Certain states in which Capsure conducts its business require insurers to
join a guaranty association. Guaranty associations provide protection to
policyholders of insurers licensed in such states against the insolvency of
those insurers. In order to provide the associations with funds to pay certain
claims under policies issued by insolvent insurers, the guaranty associations
charge members assessments based on the amount of direct premiums written in
that state. To date, such assessments have not been material to Capsure's
results of operations.
Western Surety, United Capitol and Universal Surety each qualifies as an
acceptable surety for federal and other public works project bonds pursuant to
U.S. Department of Treasury regulations. The underwriting limitations of
Western Surety, Universal Surety and United Capitol, based on each insurer's
statutory surplus, are currently $3.5 million, $0.6 million and $6.7 million,
respectively.
Management believes that, going forward, regulation of its business will
increase rather than decrease both on a federal and state level, thereby
increasing the costs associated with compliance.
INVESTMENTS
Insurance company investment practices must comply with insurance laws and
regulations and must also comply with certain covenants under Capsure's $135
million revolving credit facility. Generally, insurance laws and regulations
prescribe the nature and quality of and set limits on the various types of
investments which may be made by Capsure's insurance companies. Capsure's
insurance companies invest funds provided by operations predominantly in
high-quality, taxable, fixed income securities.
Management believes that its investment strategy is conservative, with
preservation of capital being the foremost objective. Its investment strategy
is also influenced by the terms of the insurance coverages written, its
expectations as to the timing of claim payments, debt service requirements, and
tax considerations, in particular the existence of the Company's net operating
tax loss carryforwards ("NOLs"), as described below.
A separate investment committee of the Board of Directors of each insurance
company establishes investment policy and oversees the management of each
portfolio. A professional independent investment adviser is engaged to assist
in the management of each company's investment portfolio pursuant to
established investment committee guidelines. The insurance companies pay an
advisory fee based on the net asset value of the assets under management.
-15-
16
NET OPERATING TAX LOSS CARRYFORWARDS
In July 1986, the Company emerged from voluntary bankruptcy proceedings
under Chapter 11 of the United States Bankruptcy Code. Prior to its emergence,
the Company was primarily involved in oil and gas exploration and development
and providing supplies to the oil and gas industry. Due to a significant
downturn in the oil and gas industry in the early 1980s, the Company generated
significant losses and was unable to meet its obligations, resulting in its
voluntary bankruptcy filing. Upon the emergence from bankruptcy, the Company
had oil and gas interests and approximately $300 million in NOLs.
Approximately $226 million of these NOLs are available at December 31, 1994 to
reduce the Company's future federal taxable income.
EMPLOYEES
As of December 31, 1994, the Company employed approximately 600 persons.
Since its emergence from bankruptcy in 1986, the Company has not experienced
any work stoppages and believes its relations with its employees are good. The
Company's current operations are in newly acquired businesses unrelated to its
pre-1986 oil and gas operations.
-16-
17
ITEM 2. PROPERTIES
The Company subleases its executive offices for an annual rent of
approximately $0.1 million from Equity Group Investments, Inc. ("EGI"), a
company affiliated with certain directors, officers, and stockholders of the
Company. The executive offices are located at Two North Riverside Plaza,
Chicago, Illinois 60606. Western Surety leases office space for its executive
offices at 101 South Phillips Avenue, Sioux Falls, South Dakota 57102, under a
lease expiring in 2002. Western Surety's office space, consisting of
approximately 81,600 square feet, is leased from a partnership in which Western
Surety owns a 50% interest. The annual rent, which is subject to annual
adjustments, was $1.5 million as of December 31, 1994. Western Surety also
leases a 14,760 square foot branch office in Dallas, Texas. Annual rent for
the branch office was $0.2 million and the lease expires in 1996. United
Capitol leases office space for its executive offices at 1400 Lake Hearn Drive,
Atlanta, Georgia 30319, under a lease terminating June 30, 1997 with an annual
rent of $0.2 million. Universal Surety leases office space for its executive
offices at 950 Echo Lane, Suite 250, Houston, Texas 77478, under a lease
terminating October 31, 1997 with an annual rent of $0.1 million. Universal
Surety also leases space for branch offices in Austin, Dallas and San Antonio,
Texas and Overland Park, Kansas for an additional annual rent of approximately
$0.1 million.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to numerous lawsuits arising
in the normal course of business, some seeking material damages. The Company
believes the resolution of these lawsuits will not have a material adverse
effect on its financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-17-
18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock ("Common Stock") trades on the New York Stock
Exchange under the symbol CSH. Prior to June 16, 1993, the stock traded on the
over-the-counter market through NASDAQ under the symbol NUCO. Such
over-the-counter market quotations reflected inter-dealer prices, without
retail mark-up, mark-down or commission, and may not necessarily represent
actual transactions. On March 24, 1995, the last reported sale price for the
Common Stock was $12.63 per share. The following table shows the range of
high and low sales prices for shares of the Common Stock as reported on the New
York Stock Exchange (or as reported on NASDAQ for the periods presented prior
to June 16, 1993) for each calendar quarter from the first quarter of 1993
through the fourth quarter of 1994:
High Low
----- -----
1994
4th Quarter . . . . . . . . . . . . . . . . . . . . . . . . . $14.75 $12.13
3rd Quarter . . . . . . . . . . . . . . . . . . . . . . . . . 15.38 12.25
2nd Quarter . . . . . . . . . . . . . . . . . . . . . . . . . 16.00 12.88
1st Quarter . . . . . . . . . . . . . . . . . . . . . . . . . 15.25 13.00
1993
4th Quarter . . . . . . . . . . . . . . . . . . . . . . . . . 17.25 12.75
3rd Quarter . . . . . . . . . . . . . . . . . . . . . . . . . 19.38 14.75
2nd Quarter . . . . . . . . . . . . . . . . . . . . . . . . . 15.38 13.25
1st Quarter . . . . . . . . . . . . . . . . . . . . . . . . . 15.63 12.25
The number of stockholders of record of Common Stock on March 24, 1995 was
approximately 2,400.
The Company has not paid dividends on its Common Stock and does not
anticipate declaring any dividends on its Common Stock in the near future. The
Company's intention is to utilize its available cash to fund acquisitions to
meet its growth objectives.
18
19
ITEM 6. SELECTED FINANCIAL DATA
The following financial information has been derived from the audited
Consolidated Financial Statements and notes thereto which appear elsewhere in
this or previously issued Annual Reports on Form 10-K and should be read in
conjunction with such financial statements and related notes thereto.
The Company acquired United Capitol in February 1990, Western Surety in
August 1992 and Universal Surety in September 1994. The inclusion of the
results of United Capitol, Western Surety and Universal Surety from their
respective dates of acquisition affects the comparability of financial
information. Such results are not necessarily indicative of future results.
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 115. In 1993, the Company adopted SFAS No.
109 and No. 113 and has restated prior years' financial information. For a
more detailed description of these transactions and their effects on the
Company's financial data, see the audited Consolidated Financial Statements and
related notes thereto and Management's Discussion and Analysis of Financial
Condition and Results of Operations appearing in this or previously issued
Annual Reports on Form 10-K.
The following information for the Company is as of and for the years ended
December 31, 1994, 1993, 1992, 1991 and 1990 (amounts in thousands, except per
share data):
Years Ended December 31,
-----------------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- ---------- --------- ----------
(Restated) (Restated) (Restated)
Total revenues . . . . . . . . . . . . . . . . $ 112,662 $ 108,445 $ 59,519 $ 34,890 $ 39,034
========== ========== ========== ========= ==========
Gross written premiums . . . . . . . . . . . . $ 102,356 $ 100,775 $ 50,105 $ 23,144 $ 24,292
========== ========== ========== ========= ==========
Net written premiums . . . . . . . . . . . . . $ 90,578 $ 88,306 $ 40,310 $ 15,729 $ 17,571
========== ========== ========== ========= ==========
Net earned premiums . . . . . . . . . . . . . . $ 92,481 $ 86,029 $ 41,249 $ 15,826 $ 20,720
========== ========== ========== ========= ==========
Underwriting income . . . . . . . . . . . . . . $ 15,233 $ 15,224 $ 9,932 $ 2,484 $ 3,265
Net investment income . . . . . . . . . . . . 19,129 19,815 15,504 13,823 11,318
Net investment gains . . . . . . . . . . . . 945 2,071 380 1,119 257
Interest expense . . . . . . . . . . . . . . . (4,726) (6,280) (4,838) (4,998) (5,951)
Write-off of unamortized deferred loan fees . . (1,556) -- -- -- --
Amortization of goodwill and intangibles . . . (3,365) (3,407) (1,592) (852) (2,035)
Other (expenses) income . . . . . . . . . . . . (1,881) (1,905) (1,914) (868) 1,946
---------- ---------- ---------- --------- ----------
Income before income taxes . . . . . . . . . . 23,779 25,518 17,472 10,708 8,800
Income taxes . . . . . . . . . . . . . . . . . 9,401 9,234 6,777 3,500 3,527
---------- ---------- ---------- --------- ----------
Net income . . . . . . . . . . . . . . . . . . $ 14,378 $ 16,284 $ 10,695 $ 7,208 $ 5,273
========== ========== ========== ========= ==========
Weighted average common shares outstanding . . 15,160 15,036 12,214 10,606 10,420
========== ========== ========== ========= ==========
Earnings per common share . . . . . . . . . . . $ .95 $ 1.08 $ .88 $ .79 $ .62
========== ========== ========== ========= ==========
Book value per share . . . . . . . . . . . . . $ 14.61 $ 13.80 $ 12.25 $ 7.68 $ 6.25
========== ========== ========== ========= ==========
Loss ratio . . . . . . . . . . . . . . . . . . 25.2% 23.2% 25.8% 58.5% 59.3%
Expense ratio . . . . . . . . . . . . . . . . . 58.3% 59.1% 50.1% 25.8% 24.9%
---------- ---------- ---------- --------- ----------
Combined ratio . . . . . . . . . . . . . . . . 83.5% 82.3% 75.9% 84.3% 84.2%
========== ========== ========== ========= ==========
Invested assets and cash . . . . . . . . . . . $ 305,898 $ 317,077 $ 297,974 $ 163,027 $ 160,603
Intangible assets and goodwill, net of
amortization . . . . . . . . . . . . . . . 102,130 85,566 94,006 22,842 23,694
Total assets . . . . . . . . . . . . . . . . . 553,370 530,075 507,574 226,536 217,583
Insurance reserves . . . . . . . . . . . . . . 225,671 205,188 194,357 112,745 108,085
Long-term debt . . . . . . . . . . . . . . . . 71,000 85,214 103,214 46,352 53,352
Total liabilities . . . . . . . . . . . . . . . 328,505 322,450 323,653 169,404 171,713
Stockholders' equity . . . . . . . . . . . . . 224,865 207,625 183,921 57,132 45,870
19
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following is a discussion and analysis of Capsure Holdings Corp. and
its subsidiaries' ("Capsure" or the "Company") operating results, financial
condition, liquidity and capital resources. This discussion should be read in
conjunction with the consolidated financial statements and related notes
thereto, which contain additional information regarding the Company's operating
results and financial condition.
On July 31, 1986, the Company emerged from voluntary bankruptcy proceedings
under Chapter 11 of the United States Bankruptcy Code. As a result of
operating losses from oil and gas operations prior to the Company's bankruptcy,
the Company emerged from bankruptcy with approximately $300 million in net
operating tax loss carryforwards ("NOLs"). Approximately $226 million of these
NOLs are available at December 31, 1994 to reduce the Company's future federal
taxable income. The Company believes that an analysis of results of operation
and financial condition should include an analysis of the Company's ability to
reduce its income tax payments through the utilization of NOLs.
The Company's operations have been focused in the property and casualty
insurance business since 1990. Capsure's principal property and casualty
insurance entities are Western Surety Company ("Western Surety"), acquired in
August 1992, United Capitol Insurance Company ("United Capitol"), acquired in
February 1990, and Universal Surety of America ("Universal Surety"), acquired
on September 22, 1994.
Since 1987, soft market conditions characterized by intense competition on
rate and contract terms have prevailed in the property and casualty insurance
industry. The industry continues to be relatively well-capitalized and
underleveraged on an operating basis which exerts continued pressure on rates
and terms. Although the industry has sustained unprecedented losses from
catastrophes in 1992 through 1994, as well as the adverse impact of rising
interest rates in 1994, there has not been a meaningful improvement in market
conditions. Due to the nature of its business, these market conditions have
had little impact on Western Surety; however, United Capitol has been
significantly affected by prevailing market conditions. United Capitol has
responded to these difficult market conditions by maintaining a disciplined
underwriting approach and electing to decline business that may result in
unacceptable or inadequately compensated risk. Management believes prevailing
market conditions are likely to persist for the near and possibly long-term.
Capsure will continue to focus its resources in lines of business where it has
or can acquire the requisite underwriting and business processing experience
and for which consistent long-term underwriting profits can reasonably be
expected. The September 22, 1994 acquisition of Universal Surety, as described
below, is an example of this philosophy.
Western Surety specializes in writing small fidelity and noncontract surety
bonds, referred to as "miscellaneous" bonds, and errors and omissions ("E&O")
liability insurance and is licensed to write fidelity, surety and casualty
insurance in all 50 states and the District of Columbia. Western Surety is
rated A+ (Superior) by A.M. Best Company, Inc. ("A.M. Best"). Bonds
underwritten by Western Surety are relatively low-risk, low-premium products
where prompt service, easy-to-use forms and availability of an extensive array
of bond products are emphasized. One of the largest writers of miscellaneous
bonds in the United States, Western Surety has experienced overall growth in
gross written premiums since 1990 in spite of the soft market. This growth is
attributable to its product specialization, underwriting expertise and broad
distribution network as well as to legislatively mandated bond limit increases,
and to bonding requirements legislated by various states and municipalities.
Substantially all of Western Surety's bonds are mandated by various state
statutes and local ordinances. Such factors have largely insulated Western
Surety from the effects of prevailing market conditions in the broader
commercial property and casualty insurance industry. Management believes, with
respect to Western Surety's products, that the Company's results of operations
will not be significantly affected by new miscellaneous bond requirements or by
the repeal of any existing legislated bonding requirements.
Universal Surety specializes in the underwriting of small contract and
miscellaneous surety bonds. Universal Surety is rated A (Excellent) by A.M.
Best and is licensed in 16 southern states with most of its business generated
in Texas (75% of 1994 gross written premiums). Contract bonds underwritten by
Universal Surety are primarily contractor performance and payment bonds in
amounts under $3.0 million for which underwriting expertise and distinctive
service to agents are emphasized. Universal Surety underwrites primarily
standard accounts and some specialty accounts for
20
21
which it will utilize supplemental collateral arrangements and excess rates for
contractors not qualified for standard surety rates. Universal Surety also
reduces its exposure through participation in the Small Business Administration
("SBA") Surety Bond Guarantee Program. Under this program, the SBA will
generally reimburse Universal Surety for 80% of losses and loss adjustment
expenses incurred on any SBA guaranteed bond in exchange for 20% of the
premium. Contract bonds are more affected by prevailing market and general
economic conditions than noncontract bonds.
Universal Surety's preacquisition financial results have been exceptional.
Gross written premiums have grown from $5.1 million for the year ended December
31, 1990 to $15.3 million for the twelve months (including results prior to
acquisition) ended December 31, 1994. A weighted average combined ratio below
80.0% was maintained over this same period. These results compare favorably
to national contract surety bond insurers. Universal Surety's overall growth
in gross written premiums and underwriting income during this period was
attributable to its product specialization, underwriting expertise and the
strong economy in its geographic region. Such growth was also characterized by
measured expansion restricted by its ability to attract qualified underwriting
and claims personnel and maintain distinctive service to its agents. The
planned expansion of Universal Surety's small contract surety products through
Western Surety's broad distribution network will be similarly controlled.
However, there can be no assurance that Universal Surety's preacquisition
results will be indicative of future operating results under the ownership and
management of Capsure.
United Capitol writes specialty property and casualty insurance primarily
as an excess and surplus lines insurer. United Capitol is rated A (Excellent)
by A.M. Best. United Capitol provides principally general liability insurance,
including directors' and officers' liability ("D&O"), product liability and
other liability coverages, to businesses which have hazardous, unique or
unusual risks. Policies underwritten by United Capitol are relatively
high-risk, high-premium products which require individual risk underwriting and
pricing expertise. United Capitol has experienced significant declines in
gross written premiums as it has adhered to its strategy of strict underwriting
discipline and has declined to write what it believes to be underpriced
business.
RESULTS OF OPERATIONS
The components of income for each of the past three years are summarized as
follows (dollars in thousands):
Years Ended December 31,
--------------------------------------------
1994 1993 1992
----------- ----------- ------------
Underwriting income . . . . . . . . . . . . . . . . $ 15,233 $ 15,224 $ 9,932
Net investment income . . . . . . . . . . . . . . . 19,129 19,815 15,504
Net investment gains . . . . . . . . . . . . . . . . 945 2,071 380
Interest expense . . . . . . . . . . . . . . . . . . (4,726) (6,280) (4,838)
Write-off of unamortized deferred loan fees . . . . (1,556) -- --
Amortization of goodwill and intangibles . . . . . . (3,365) (3,407) (1,592)
Other expenses . . . . . . . . . . . . . . . . . . . (1,881) (1,905) (1,914)
------------ ----------- ------------
Income before income taxes . . . . . . . . . . . . . 23,779 25,518 17,472
Income taxes . . . . . . . . . . . . . . . . . . . . 9,401 9,234 6,777
------------ ----------- ------------
Net income . . . . . . . . . . . . . . . . . $ 14,378 $ 16,284 $ 10,695
============ =========== ============
21
22
INSURANCE UNDERWRITING
Underwriting results for the past three years are summarized in the
following table (dollars in thousands):
Surety and Fidelity Excess and Surplus Lines Consolidated
------------------------------ ----------------------------- --------------------------------------
1994 1993 1992 1994 1993 1992 1994 1993 1992
--------- --------- --------- --------- --------- --------- ------------ ----------- --------
Gross written premiums.. $ 75,324 $ 72,064 $ 23,039 $ 27,032 $ 28,711 $ 27,066 $ 102,356 $ 100,775 $ 50,105
========= ======== ========= ======== ======== ========== ============ =========== ========
Net written premiums.... $ 73,527 $ 70,598 $ 22,670 $ 17,051 $ 17,708 $ 17,640 $ 90,578 $ 88,306 $ 40,310
========== ========= ========= ======== ======== ========== ============ =========== ========
Net earned premiums..... $ 73,255 $ 67,941 $ 25,101 $ 19,226 $ 18,088 $ 16,148 $ 92,481 $ 86,029 $ 41,249
---------- --------- --------- -------- -------- ---------- ------------ ---------- --------
Net losses and
loss adjustment..... 11,592 11,367 3,651 11,752 8,590 7,010 23,344 19,957 10,661
Underwriting expenses... 49,583 46,933 17,346 4,321 3,915 3,310 53,904 50,848 20,656
---------- --------- --------- -------- -------- ---------- ------------ ---------- --------
Total losses and
expenses............. 61,175 58,300 20,997 16,073 12,505 10,320 77,248 70,805 31,317
---------- --------- --------- -------- -------- ---------- ------------ ---------- --------
Underwriting income..... $ 12,080 $ 9,641 $ 4,104 $ 3,153 $ 5,583 $ 5,828 $ 15,233 $ 15,224 $ 9,932
========== ========= ========= ======== ======== ========== ============ ========== ========
Loss ratio ............. 15.8% 16.7% 14.6% 61.1% 47.5% 43.4% 25.2% 23.2% 25.8%
Expense ratio........... 67.7% 69.1% 69.1% 22.5% 21.6% 20.5% 58.3% 59.1% 50.1%
---------- --------- --------- -------- -------- ---------- ------------ ---------- --------
Combined ratio.......... 83.5% 85.8% 83.7% 83.6% 69.1% 63.9% 83.5% 82.3% 75.9%
========== ========= ========= ======== ======== ========== ============ ========== ========
Surety and fidelity represents the combined results of Western Surety,
since its acquisition in August 1992, and Universal Surety, since its September
22, 1994 acquisition. Surety and fidelity are the principal lines of business
of Western Surety and Universal Surety. Excess and surplus lines represents
the results of United Capitol. United Capitol's principal lines of business
are other liability, product liability and commercial property primarily
written on an excess and surplus lines basis.
Gross written premiums increased $1.6 million for the year ended December
31, 1994. Western Surety experienced a 1.1% decrease in gross written
premiums, mainly due to a decline in public official bond premiums as compared
to 1993. This decline, which was expected, was caused by the cyclical nature
of these bonds. Writings for this product typically increase every other year,
following the November elections. Universal Surety contributed $4.0 million of
gross written premiums since its acquisition in September 1994. United
Capitol's gross written premiums decreased 5.8%, or $1.7 million in 1994.
Significant declines in the asbestos abatement and other primary casualty
business were partially offset by the addition of $5.7 million in gross written
premiums of D&O business produced by the Company's Fischer Underwriting Group,
Incorporated ("Fischer") which was acquired in November 1993 by a subsidiary of
United Capitol. United Capitol's premium volume, particularly in the
increasingly competitive asbestos abatement line, continued to be significantly
affected by prolonged soft market conditions.
Net earned premiums increased $6.5 million for the year ended December 31,
1994. Western Surety's net earned premiums increased 1.9% in 1994 compared to
1993. Universal Surety contributed net earned premiums of $4.0 million in
1994. United Capitol's net earned premiums increased 6.3%, or $1.1 million in
1994, primarily as a result of the recognition of $2.5 million of contingent
reinsurance premiums related to an excess of loss reinsurance treaty.
Excluding the recognition of the contingent premiums, net earned premiums
decreased 7.5% at United Capitol.
Gross written premiums increased $50.7 million for the year ended December
31, 1993, principally due to the inclusion of Western Surety results for a full
year. United Capitol's gross written premiums increased $1.6 million, or 6.1%,
primarily due to increases in the property and non-asbestos general liability
insurance lines of business combined with the addition of D&O insurance more
than offsetting the decline in the asbestos abatement liability business.
Net earned premiums increased $44.8 million for the year ended December 31,
1993, primarily due to the inclusion of a full year of operating results of
Western Surety. United Capitol's net earned premiums increased 12.0%, or $1.9
million in 1993, reflecting the increase in net written premiums in prior
years.
Underwriting income for the year ended December 31, 1994 was virtually
unchanged as compared to the prior year despite increased net earned premiums.
The consolidated combined ratio increased to 83.5% in 1994 from 82.3% in 1993.
The consolidated loss ratio increased to 25.2% in 1994 from 23.2% in 1993,
reflecting less favorable development of prior years' loss reserves at United
Capitol than was experienced in 1993. United Capitol's loss ratio increased to
61.1% in 1994 from 47.5% in 1993. Excluding the effects of favorable
development, United Capitol would have reported loss ratios of 98.3% and 110.3%
in 1994 and 1993, respectively. The surety and fidelity loss ratio decreased
to 15.8% in 1994 from 16.7% in 1993, primarily due to favorable development of
prior years' loss reserves and increased salvage recoveries at Western Surety.
22
23
The consolidated expense ratio decreased to 58.3% in 1994, compared to
59.1% in 1993. The surety and fidelity expense ratio decreased to 67.7% in
1994 from 69.1% in 1993. Net commissions, brokerage and other underwriting
expenses incurred at Western Surety were effectively controlled during 1994,
offsetting increased costs associated with enhancing Western Surety's computer
systems. United Capitol's expense ratio increased to 22.5% in 1994 compared to
21.6% in 1993.
Underwriting income for the year ended December 31, 1993 increased $5.3
million as compared to the prior year, principally due to the inclusion of
Western Surety results for a full year. The consolidated combined ratio
increased to 82.3% in 1993 from 75.9% in 1992. The consolidated loss ratio
decreased to 23.2% in 1993 from 25.8% in 1992, largely due to the inclusion of
Western Surety for a full year partially offset by increased losses at United
Capitol. The surety and fidelity loss ratio increased to 16.7% in 1993 from
14.6% in 1992, mainly due to increased losses on certain motor vehicle dealer
bonds. United Capitol's loss ratio increased to 47.5% in 1993 from 43.4% in
1992, reflecting the impact of competitive market conditions. Excluding the
effects of favorable development, United Capitol would have reported loss
ratios of 110.3% and 86.2% in 1993 and 1992, respectively.
The consolidated expense ratio increased to 59.1% in 1993 from 50.1% in
1992, reflecting the inclusion of full year results of operations for Western
Surety. The surety and fidelity expense ratio was 69.1% in both 1993 and 1992.
United Capitol's expense ratio increased slightly to 21.6% in 1993 from 20.5%
in 1992.
INVESTMENT INCOME
Net investment income for the years ended December 31, 1994, 1993 and 1992
was $19.1 million, $19.8 million and $15.5 million, respectively. Investment
results for each year were negatively impacted by declining interest rates
through the end of 1993. The $4.3 million increase in net investment income in
1993 over 1992 reflects the inclusion of a full year of Western Surety's
investing activity which more than offset the impact of declining investment
yields. The average pretax yields of the portfolio for the years ended
December 31, 1994, 1993 and 1992 were 6.5%, 6.8% and 7.6%, respectively.
Capsure's insurance companies invest funds provided by operations
predominantly in high-quality, short-duration, taxable fixed income securities.
Beginning in 1994, the Investment Committees of the Board of Directors of the
Company and its insurance subsidiaries have approved the investment of up to
$26 million in the aggregate by the insurance subsidiaries and at the parent
company level in publicly traded nonaffiliated real estate investment trust
("REIT") equity securities. At December 31, 1994, the carrying value of the
Company's REIT portfolio was approximately $24.3 million. The preservation of
capital and utilization of the Company's available NOLs are Capsure's principal
investment objectives.
ANALYSIS OF OTHER OPERATIONS
Net investment gains were $0.9 million, $2.1 million and $0.4 million for
the years ended December 31, 1994, 1993 and 1992, respectively. Net investment
gains of $1.9 million in 1994 and $3.1 million in 1993 resulted from the sale
of equity securities in the investment portfolio at the parent company level
which more than offset net investment losses of $0.4 million and $1.0 million,
respectively, from the insurance operations. There were no parent company
level net investment gains recognized in 1992. Included in 1994 net investment
gains were $0.5 million of net unrealized investment losses on the trading
securities portfolio held at the parent company level. The net investment
losses from the insurance operations in 1993 were primarily due to a $2.5
million write-down to fair value of two interest-only securities reflecting
lower future expected cash flows of these securities as a result of an
accelerated level of mortgage prepayments, partially offset by $1.5 million of
net investment gains from the sale of other securities.
Amortization expense was $3.4 million for the years ended December 31, 1994
and 1993 and $1.6 million in 1992. Amortization expense in 1994, 1993 and 1992
included $1.3 million, $1.8 million and $0.6 million, respectively, of
amortization of intangible assets and $2.1 million, $1.6 million and $1.0
million, respectively, of amortization of excess cost over net assets acquired
related to the acquisitions of Western Surety, Universal Surety, United Capitol
and Fischer. Excess cost over net assets acquired is amortized substantially
over 40 years. Other intangible assets are amortized over periods ranging from
three to 20 years.
Interest expense decreased 24.7%, or $1.6 million for the year ended
December 31, 1994, reflecting the effect of reduced debt. The Company's
average debt outstanding for the twelve months ended December 31, 1994 was
approximately $74.0 million compared to $96.0 million in 1993. In connection
with the early retirement of the Company's bank term loans, the Company
incurred a $1.6 million write-off of unamortized deferred loan fees in the year
ended December 31, 1994. Interest expense increased 29.8%, or $1.4 million for
the year ended December 31, 1993. The increase was attributable to increased
borrowings in connection with the acquisition of Western Surety which more than
offset the effects of lower average interest rates.
INCOME TAXES
Income taxes were $9.4 million, $9.2 million and $6.8 million for the years
ended December 31, 1994, 1993 and 1992, respectively. The effective income tax
rates were 39.5%, 36.2% and 38.8%, respectively. The increase in the 1994
effective tax rate over prior years was attributable to an increased level of
nondeductible goodwill amortization in connection with the acquisitions of
Universal Surety and Fischer as well as certain delayed provisions of the
Revenue Reconciliation Act of 1993. The Company's income tax expense does not
approximate
23
24
actual taxes paid, primarily due to the utilization of the Company's NOLs.
Actual income taxes paid were $0.6 million for the years ended December 31,
1994 and 1993, respectively, and $0.7 million for the year ended December 31,
1992.
LIQUIDITY AND CAPITAL RESOURCES
The Company's insurance subsidiaries are highly liquid. The insurance
operations derive liquidity from net premium collections, reinsurance
recoveries and investment earnings and use these funds to pay claims and
operating expenses. The operations of an insurance company generally result in
cash being collected from customers in the form of premiums in advance of cash
outlays for claims. Each insurance company invests its collected premiums,
generating investment income, until such time cash is needed to pay claims and
associated expenses.
The Company believes total invested assets, including cash and short-term
investments, are sufficient in the aggregate and have suitably scheduled
maturities to satisfy all policy claims and other operating liabilities,
including anticipated income tax sharing payments of its insurance operations.
Management believes the duration of each insurance subsidiary's portfolio is
properly matched with the expected duration of its liabilities. At December
31, 1994, the carrying value of the Company's invested assets of the insurance
operations was comprised of $246.6 million of fixed maturities (at fair value),
$20.6 million of equity securities, $17.5 million of short-term investments,
$4.1 million of other investments and $3.8 million of cash. At December 31,
1993, the carrying value of the Company's invested assets of the insurance
operations was comprised of $229.5 million of fixed maturities (at amortized
cost), $48.4 million of short-term investments, $5.5 million of other
investments and $2.2 million of cash and $0.8 million of equity securities.
Cash flow at the parent company level is derived principally from dividend
and tax sharing payments from its insurance subsidiaries. The principal
obligations at the parent company level are to service debt and pay operating
expenses. At December 31, 1994, the carrying value of the Company's invested
assets of the non-insurance operations, principally at the parent company
level, was comprised of $7.6 million of equity securities, $4.6 million of
short-term investments, $0.8 million of other investments and $0.3 million of
cash. At December 31, 1993, the carrying value of the Company's non-insurance
operations invested assets, principally at the parent company level, was
comprised of $20.8 million of short-term investments, $8.7 million of equity
securities and $1.1 million of cash.
The Company's consolidated net cash flow provided by operating activities
was $29.3 million, $32.1 million and $18.7 million for the years ended December
31, 1994, 1993 and 1992, respectively. Consolidated operating cash flow
(pretax income excluding the write-off of deferred loan fees, net investment
gains and amortization of goodwill and intangibles) for the year ended December
31, 1994, was $27.8 million as compared to $26.9 million in 1993 and $18.7
million in 1992.
On March 29, 1994, the Company formed a direct, wholly owned subsidiary,
Capsure Financial Group, Inc. ("CFG"), to which Capsure contributed
substantially all its assets and liabilities. Concurrently, CFG entered into a
senior reducing revolving credit agreement with a syndicate of banks for $135
million (the "Credit Facility"). At closing, $68 million of funds drawn under
the Credit Facility, together with a portion of the Company's cash, were used
to repay $84.6 million of previously existing bank term debt. Paydowns of $25
million and borrowings of $28 million for the acquisition of Universal Surety
have occurred since then. The remaining availability under the Credit Facility
of $64 million may be used to finance future acquisitions and for general
corporate purposes.
Principal and interest payments required under the Credit Facility are
funded principally by dividend and intercompany tax sharing payments received
from Capsure's insurance subsidiaries.
Capsure's insurance subsidiaries are subject to regulation and supervision
by the various state insurance regulatory authorities in which they conduct
business, including regulations with respect to the payment of dividends.
Without prior regulatory approval in 1995, Capsure's insurance subsidiaries may
pay stockholder dividends of $19.3 million in the aggregate. In 1994, 1993 and
1992 Capsure received $21.0 million (including $5.0 million of dividends
requiring prior approval), $11.8 million, and $29.0 million (including $15.1
million of dividends requiring prior approval), respectively, in dividends from
its insurance subsidiaries.
Intercompany tax sharing agreements between Capsure and its subsidiaries
provide that income taxes shall be allocated based upon separate return
calculations in accordance with the Internal Revenue Code of 1986, as amended.
Intercompany tax payments are remitted at such times as estimated tax payments
would be required to be made to the Internal Revenue Service. Capsure received
tax sharing payments from its subsidiaries of $12.3 million, $13.0 million and
$9.0 million in 1994, 1993 and 1992, respectively.
On September 22, 1994, Capsure, through its wholly owned subsidiary, CFG,
acquired all of the outstanding common stock of Universal Surety Holding Corp.
("USHC"). USHC is the holding company of Universal Surety. Capsure paid $28
million in cash and $4 million in Capsure stock for USHC, pursuant to a Stock
Purchase Agreement dated as of July 26, 1994. The cash portion of the purchase
price was financed with borrowings under Capsure's $135 million Credit
Facility.
24
25
The Company continues to pursue acquisitions of financial services
businesses with a particular focus on the insurance industry. Although the
emphasis is on financial services and insurance, the Company may consider other
investments that would further enhance the Company's value.
FINANCIAL CONDITION
A significant factor affecting the Company's financial condition is the
Company's policy with respect to investing insurance-related funds. The
Company's policy is to invest a substantial portion of such funds in
high-quality, short-duration mortgage pass-through instruments, collateralized
mortgage obligations ("CMOs") and other asset-backed securities. CMOs differ
from traditional fixed maturities in that they may expose the investor to yield
variability and even principal risk due to such factors as high mortgage
prepayment rates and defaults and delinquencies in the underlying asset pool.
Management believes it has reduced prepayment variability by investing only in
short tranches and by owning a substantial amount of planned amortization class
("PAC") tranches which are structured largely to insulate the investor from
prepayment risk. A PAC tranche is structured to amortize in a predictable
manner and, therefore, the risk of prepayment of the underlying collateral is
shifted to other tranches, whose owners are willing to accept such risk.
Further, management believes it has minimized credit risk primarily by
purchasing only securities rated A or better on the date of acquisition and
which are collateralized or guaranteed by U.S. Government agencies or have
substantial credit enhancement in the form of financial guarantees, mortgage
insurance, letters of credit, over- collateralization, subordinated structures
and excess servicing spreads. Management monitors the investment portfolio of
the insurance subsidiaries and the current rating of each security owned on a
monthly basis. Beginning in 1994, the Investment Committees of the Board of
Directors of the Company and its insurance subsidiaries have approved the
investment of up to $26 million in the aggregate by the insurance subsidiaries
and at the parent company level in publicly traded nonaffiliated REIT equity
securities. At December 31, 1994, the carrying value of the Company's REIT
portfolio was approximately $24.3 million.
The following table sets forth the composition by ratings assigned by The
Standard & Poors Corporation ("S&P") or Moody's Investor Services, Inc.
("Moody's") of the fixed income portfolio of the Company as of December 31,
1994 (dollars in thousands):
Amortized
Cost Percent
----------- -------
Credit Rating
-------------
AAA/Aaa . . . . . . . . . . . . . . . . . . . $ 227,751 87.5%
AA/Aa . . . . . . . . . . . . . . . . . . . . 9,291 3.6
A/A . . . . . . . . . . . . . . . . . . . . . 18,666 7.2
BBB/Baa or lower . . . . . . . . . . . . . . . 4,514 1.7
Not rated . . . . . . . . . . . . . . . . . . 74 --
------------ -------
Total . . . . . . . . . . . . . . . . . $ 260,296 100.0%
============ =======
Another critical factor affecting the Company's financial condition is the
Company's policies with respect to loss and loss adjustment expense reserves.
Each of Capsure's insurance subsidiaries employs prudent reserving approaches
in establishing the estimated liability for unpaid loss and loss adjustment
expenses due to the inherent difficulty and variability in the estimation
process. The liability for unpaid losses and loss adjustment expenses is based
on estimates of (a) the ultimate settlement value of reported claims, (b)
incurred but not reported ("IBNR") claims, (c) future expenses to be incurred
in the settlement of claims and (d) claim recoveries. The liability for unpaid
losses and loss adjustment expenses is an accounting estimate and, similar to
other accounting estimates, there is the potential that actual future loss
payments will differ from the initial estimate. The methods of determining
such estimates and the resulting estimated liability are continually reviewed
and updated. Changes in the estimated liability are reflected in operating
income in the year in which such changes are determined.
The following table presents selected loss and loss adjustment expense
information (gross of reinsurance) and highlights the impact of revisions to
the estimated liability established in prior years (dollars in thousands):
1994 1993 1992
----------- ----------- ------------
Gross balance at January 1 . . . . . . . . . . . . . $ 135,825 $ 128,122 $ 101,542
Balance at date of acquisition . . . . . . . . . . . 2,738 -- 28,516
Incurred related to:
Current year . . . . . . . . . . . . . . . . . . . . 46,206 41,398 24,428
Prior years . . . . . . . . . . . . . . . . . . . . (14,522) (14,991) (9,862)
----------- ----------- ------------
Total incurred . . . . . . . . . . . . . . . . . . . 31,684 26,407 14,566
----------- ----------- ------------
Paid related to:
Current year . . . . . . . . . . . . . . . . . . . . 3,003 2,266 1,665
Prior years . . . . . . . . . . . . . . . . . . . . 18,203 16,438 14,837
----------- ----------- ------------
Total paid . . . . . . . . . . . . . . . . . . . . . 21,206 18,704 16,502
----------- ----------- ------------
Gross balance at December 31 . . . . . . . . . . . . $ 149,041 $ 135,825 $ 128,122
=========== =========== ============
25
26
As a result of favorable claim settlements and changes in estimates of
insured events in prior years, the provision for losses and loss adjustment
expenses decreased by $14.5 million ($8.3 million, net of reinsurance) in 1994,
$15.0 million ($11.3 million, net of reinsurance) in 1993 and $9.9 million
($7.5 million, net of reinsurance) in 1992.
The National Association of Insurance Commissioners ("NAIC") has
promulgated Risk-Based Capital ("RBC") requirements for property/casualty
insurance companies to evaluate the adequacy of statutory capital and surplus
in relation to investment and insurance risks such as asset quality, asset and
liability matching, loss reserve adequacy, and other business factors. The RBC
information will be used by state insurance regulators as an early warning tool
to identify, for the purpose of initiating regulatory action, insurance
companies that potentially are inadequately capitalized. In addition, the
formula defines new minimum capital standards that will supplement the current
system of fixed minimum capital and surplus requirements on a state-by-state
basis. Regulatory compliance is determined by a ratio (the "Ratio") of the
enterprise's regulatory total adjusted capital, as defined by the NAIC, to its
authorized control level RBC, as defined by the NAIC. Generally, a Ratio in
excess of 200% of authorized control level RBC requires no corrective actions
on the behalf of the company or regulators. As of December 31, 1994, each of
Capsure's insurance subsidiaries had a Ratio that was substantially in excess
of the minimum RBC requirements.
Capsure's insurance subsidiaries require capital to support premium
writings. In accordance with industry and regulatory guidelines, the net
written premiums to surplus ratio of a property and casualty insurer should not
exceed 3 to 1 (the terms of the Credit Facility limit this ratio further to
2.75 to 1 for Western Surety and Universal Surety and 2 to 1 for United
Capitol). On December 31, 1994, Western Surety's statutory surplus was $37.1
million and its net written premiums to surplus ratio was 2 to 1. On December
31, 1994, Universal Surety's statutory surplus was $7.6 million and its net
written premiums to surplus ratio was 1.9 to 1. On December 31, 1994, United
Capitol's statutory surplus was $61.8 million and its net written premiums to
surplus ratio was 0.3 to 1. The Company believes that each insurance company's
statutory surplus is sufficient to support its current and anticipated premium
levels.
The Internal Revenue Service has not examined the Company's tax returns for
the years in which the Company reported net operating losses. Under Section
382 of the Internal Revenue Code, certain restrictions on the utilization of
NOLs will apply if there is an ownership change of a corporation entitled to
use such carryovers. The Company believes that there is currently no
restriction on the ability of the Company to utilize its NOLs. It is possible
that future transactions involving the common stock or rights to acquire such
stock could cause an ownership change of the Company resulting in restrictions
of the Company's ability to utilize the NOLs during all taxable periods after
the date of such ownership change. The Company has adopted provisions in its
Certificate of Incorporation designed to facilitate the Company's ability to
preserve and utilize its NOLs.
ENVIRONMENTAL LIABILITIES
The Company was engaged in oil and gas production, exploration and
development until mid-1993. In connection with the sale of substantially all
of the Company's oil and gas properties, the buyers assumed all material
environmental liabilities.
United Capitol, in the ordinary course of business, chooses to underwrite
accounts which have hazardous, unique or unusual risk characteristics and
applies a strict and specialized underwriting discipline to such risks. Since
United Capitol's organization in 1986, its liability policies have included an
absolute pollution coverage exclusion (except for policies offering pollution
liability coverage to contractors involved in the remediation of preexisting
pollution). In addition, except as discussed below, United Capitol's product
liability and other primary general liability policies contain exclusions,
which management believes are enforceable, for coverage of claims for bodily
injury or property damage caused by exposure to asbestos.
United Capitol provides coverage to asbestos abatement contractors against
third parties who have alleged bodily injury or property damage as a result of
exposure to asbestos. Employees of the insured contractor and others required
to be in the abatement area are not intended to be covered by United Capitol's
policies and management believes such coverage exclusions are enforceable.
Through the date hereof, there have been no valid claims against United
Capitol's asbestos abatement liability policies alleging bodily injury arising
from exposure to asbestos. Management believes that none of the other
insurance products offered by Capsure's insurance subsidiaries creates any
potential material environmental exposure.
Management believes that Capsure is adequately reserved for risks
associated with environmental liabilities although there can be no assurance
that legal or other developments will not increase the Company's exposure to
environmental liabilities.
IMPACT OF ADOPTING STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS ("SFAS")
As discussed in Note 2 to the consolidated financial statements, the
Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" effective January 1, 1994 and SFAS No. 109, "Accounting for
Income Taxes" and SFAS No. 113, "Accounting and Reporting for Reinsurance of
Short-duration and Long-duration Contracts" effective January 1, 1993.
26
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
FINANCIAL:
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Consolidated Balance Sheets as of December 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Consolidated Statements of Income for the Years Ended December 31, 1994,
1993 and 1992 (Restated) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1994, 1993 and 1992 (Restated) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994,
1993 and 1992 (Restated) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
FINANCIAL STATEMENT SCHEDULES:
Schedule I -- Summary of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Schedule III -- Condensed Financial Information of Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Schedule V -- Supplemental Insurance Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Schedule VI -- Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Schedule VIII -- Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Schedule X -- Supplemental Information Concerning Property - Casualty
Insurance Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
All other schedules and historical information are omitted because they are not
applicable or the required information is shown in the financial statements or
the notes thereto.
27
28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
28
29
PART III
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT, EXECUTIVE COMPENSATION, SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
The Company will file a definitive proxy statement with the Securities and
Exchange Commission pursuant to Regulation 14A under the Securities Exchange
Act of 1934 (the "Proxy Statement") relating to the Company's Annual Meeting of
Stockholders to be held on May 24, 1995, not later than 120 days after the end
of the fiscal year covered by this Annual Report on Form 10-K. Information
required by Items 10 through 13 will appear in the Proxy Statement and is
incorporated herein by reference.
29
30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Page
----
(a)(1) Financial:
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Consolidated Balance Sheets as of December 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Consolidated Statements of Income for the Years Ended December 31, 1994,
1993 and 1992 (Restated) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1994, 1993 and 1992 (Restated) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994,
1993 and 1992 (Restated) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
(a)(2) Financial Statement Schedules:
Schedule I -- Summary of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Schedule III -- Condensed Financial Information of Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Schedule V -- Supplemental Insurance Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Schedule VI -- Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Schedule VIII - Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Schedule X -- Supplemental Information Concerning Property - Casualty
Insurance Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
All other schedules and historical information are omitted because they are
not applicable or the required information is shown in the financial statements
or the notes thereto.
(a)(3) Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
(b) Reports on Form 8-K
Report on Form 8-K dated October 6, 1994, announcing the acquisition of Universal Surety Holding Corp. including its
subsidiary, Universal Surety of America, by Capsure Financial Group, Inc., a wholly owned subsidiary of Capsure Holdings Corp.
Report on Form 8-K/A dated October 17, 1994, submitting financial statements of Universal Surety Holding Corp. and
Subsidiaries including Audited Consolidated Financial Statements as of December 31, 1993 and 1992 and Unaudited Interim
Condensed Consolidated Financial Statements as of June 30, 1994.
Report on Form 8-K/A-1 dated November 10, 1994, submitting financial statements of Capsure Holdings Corp. and Subsidiaries
including Unaudited Pro Forma Condensed Consolidated Statements of Income for the Year Ended December 31, 1993 and Six Months
Ended June 30, 1994, Balance Sheet as of June 30, 1994 and the Notes thereto.
30
31
REPORT OF INDEPENDENT ACCOUNTANTS
We have audited the accompanying consolidated financial statements and
financial statement schedules of Capsure Holdings Corp. and Subsidiaries listed
in the index on page 27 of this Form 10-K. These financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and the significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Capsure Holdings
Corp. and Subsidiaries as of December 31, 1994 and 1993, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1994 in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedules referred to above, when considered in relations to the basic
financial statements taken as a whole, present fairly, in all material
respects, the information required to be included therein.
As discussed in Note 2 to the Consolidated Financial Statements, the Company
has changed its methods of accounting for investments in 1994, and income taxes
and reinsurance in 1993.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
February 24, 1995
31
32
CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
December 31,
---------------------------
1994 1993
----------- ------------
ASSETS
Invested assets and cash:
Fixed maturities:
At fair value (amortized cost: $249,328) . . . . . . . . . . . . . . . . . . . . $ 235,625 $ --
At amortized cost (fair value: 1994 - $10,326; 1993 - $234,675) . . . . . . . . . 10,968 229,501
Equity securities, at fair value (cost: 1994 - $29,774; 1993 - $7,426) . . . . . . . . 28,205 9,533
Short-term investments, at cost which approximates fair value . . . . . . . . . . . . 22,079 69,215
Other investments, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,890 5,548
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,131 3,280
----------- ------------
305,898 317,077
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,150 18,421
Reinsurance receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,582 34,780
Intangible assets, net of amortization . . . . . . . . . . . . . . . . . . . . . . . . . 18,031 21,907
Excess cost over net assets acquired, net of amortization . . . . . . . . . . . . . . . . 84,099 63,659
Deferred income taxes, net of valuation allowance . . . . . . . . . . . . . . . . . . . . 54,205 48,350
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,405 25,881
----------- ------------
$ 553,370 $ 530,075
=========== ============
LIABILITIES
Reserves:
Unpaid losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . . . $ 149,041 $ 135,825
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,630 69,363
----------- ------------
225,671 205,188
Reinsurance payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,373 6,139
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71,000 85,214
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,461 25,909
----------- ------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 328,505 322,450
----------- ------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share, 5,000,000 shares authorized;
none issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Common stock, par value $.05 per share, 20,000,000 shares authorized;
15,407,815 shares issued at December 31, 1994;
15,055,231 shares issued at December 31, 1993 . . . . . . . . . . . . . . . . . . . . 770 753
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179,250 165,257
Retained earnings from August 1, 1986 (date of reorganization) . . . . . . . . . . . . . 54,756 40,378
Unrealized (loss) gain on securities, net of deferred income taxes . . . . . . . . . . . (9,830) 1,318
Treasury stock, at cost (13,666 shares in 1994 and 1993) . . . . . . . . . . . . . . . . (81) (81)
----------- -----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . 224,865 207,625
----------- ------------
$ 553,370 $ 530,075
=========== ============
The accompanying notes are an integral part of these financial statements.
-32-
33
CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended December 31,
-----------------------------------------
1994 1993 1992
----------- ----------- -----------
(Restated)
Revenues:
Net earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . $ 92,481 $ 86,029 $ 41,249
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . 19,129 19,815 15,504
Net investment gains . . . . . . . . . . . . . . . . . . . . . . . . . . 945 2,071 380
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 530 2,386
----------- ----------- -----------
112,662 108,445 59,519
----------- ----------- -----------
Expenses:
Net losses and loss adjustment expenses . . . . . . . . . . . . . . . . 23,344 19,957 10,661
Net commissions, brokerage and other underwriting . . . . . . . . . . . 53,904 50,848 20,656
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,726 6,280 4,838
Write-off of unamortized deferred loan fees . . . . . . . . . . . . . . 1,556 -- --
Amortization of goodwill and intangibles . . . . . . . . . . . . . . . . 3,365 3,407 1,592
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,988 2,435 4,300
----------- ----------- -----------
88,883 82,927 42,047
----------- ----------- -----------
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . 23,779 25,518 17,472
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,401 9,234 6,777
----------- ----------- -----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,378 $ 16,284 $ 10,695
=========== =========== ===========
Weighted average common and common equivalent
shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,160 15,036 11,733
=========== =========== ===========
Weighted average common and common equivalent shares
outstanding - assuming full dilution . . . . . . . . . . . . . . . . . . 15,160 15,036 12,214
=========== =========== ===========
Earnings per common and common equivalent share . . . . . . . . . . . . . . $ .95 $ 1.08 $ .91
=========== =========== ===========
Earnings per common share - assuming full dilution . . . . . . . . . . . . $ .95 $ 1.08 $ .88
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
-33-
34
CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Years Ended December 31,
-------------------------------------------
1994 1993 1992
------------- ------------ ------------
(Restated)
Common Stock:
Balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . $ 753 $ 753 $ 374
Common stock issued . . . . . . . . . . . . . . . . . . . . . . . . 15 -- 176
Common stock issued through exercise of warrants and options . . . 2 -- 203
------------- ------------ -------------
Balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . $ 770 $ 753 $ 753
============= ============ =============
Additional Paid-In Capital:
Balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . $ 165,257 $ 159,263 $ 43,543
Common stock issued . . . . . . . . . . . . . . . . . . . . . . . . 3,985 -- 29,638
Common stock issued through exercise of warrants and options . . . 8 47 26,750
Repurchase of outstanding warrants . . . . . . . . . . . . . . . . -- (42) --
Recognition of deferred tax asset, net of valuation allowance . . . 10,000 6,000 60,160
Deferred issuance and offering costs . . . . . . . . . . . . . . . -- (11) (828)
------------- ------------ -------------
Balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . $ 179,250 $ 165,257 $ 159,263
============= ============ =============
Retained Earnings:
Balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . $ 40,378 $ 24,094 $ 13,399
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,378 16,284 10,695
------------- ------------ -------------
Balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . $ 54,756 $ 40,378 $ 24,094
============= ============ =============
Unrealized (Loss) Gain on Securities, Net of Deferred Income Taxes:
Balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . $ 1,318 $ 32 $ 51
Impact of adopting SFAS No. 115 . . . . . . . . . . . . . . . . . . 3,203 -- --
Change for the year . . . . . . . . . . . . . . . . . . . . . . . . (14,351) 1,286 (19)
------------ ------------ -------------
Balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . $ (9,830) $ 1,318 $ 32
============= ============ =============
Treasury Stock:
Balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . $ (81) $ (221) $ (235)
Common stock reissued through exercise of warrants and options . . -- 140 14
------------- ------------ -------------
Balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . $ (81) $ (81) $ (221)
============= ============ =============
Common Stock
------------------------------
Issued In Treasury
------------- ------------
Shares:
Balance, January 1, 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,480,338 (39,751)
Common stock issued through exercise of warrants and options . . . . . . . . . . 4,056,064 --
Common stock issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,407,719 --
Common stock issued in connection with Surewest Financial Corp. acquisition . . . 111,110 --
Common stock reissued from treasury through exercise of warrants and options . . -- 2,250
------------- -------------
Balance, December 31, 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,055,231 (37,501)
Common stock reissued from treasury through exercise of warrants and options . . -- 23,835
------------- -------------
Balance, December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,055,231 (13,666)
Common stock issued through exercise of warrants and options . . . . . . . . . . 45,481 --
Common stock issued in connection with Universal Surety
Holding Corp. acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . 307,103 --
------------- -------------
Balance, December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,407,815 (13,666)
============= =============
The accompanying notes are an integral part of these financial statements.
-34-
35
CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
Years Ended December 31,
-----------------------------------------
1994 1993 1992
----------- ----------- ------------
OPERATING ACTIVITIES: (Restated)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,378 $ 16,284 $ 10,695
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 4,617 4,476 2,009
Accretion of bond discount, net . . . . . . . . . . . . . . . . . . . . . (3,933) (3,024) (1,785)
Net investment gains . . . . . . . . . . . . . . . . . . . . . . . . . . (945) (2,071) (380)
Gain on sale of oil and gas assets, net . . . . . . . . . . . . . . . . . -- (258) (243)
Changes in:
Reserve for unpaid losses and loss adjustment expenses . . . . . . . . . 10,477 7,703 (2,439)
Reserve for unearned premiums . . . . . . . . . . . . . . . . . . . . . . (1,160) 3,128 484
Deferred income taxes, net . . . . . . . . . . . . . . . . . . . . . . . 3,412 9,184 9,800
Other assets and liabilities . . . . . . . . . . . . . . . . . . . . . . 2,438 (3,309) 561
----------- ----------- ------------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . 29,284 32,113 18,702
----------- ----------- ------------
INVESTING ACTIVITIES:
Securities available-for-sale:
Purchases - fixed maturities . . . . . . . . . . . . . . . . . . . . . . (92,342) (181,486) (124,215)
Sales - fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . 43,762 17,503 44,265
Maturities - fixed maturities . . . . . . . . . . . . . . . . . . . . . . 35,020 126,781 61,197
Purchases - equity securities . . . . . . . . . . . . . . . . . . . . . . (28,350) (534) (10,673)
Sales - equity securities . . . . . . . . . . . . . . . . . . . . . . . . 8,091 3,310 18,168
Securities held-to-maturity:
Purchases - fixed maturities . . . . . . . . . . . . . . . . . . . . . . (1,110) -- --
Change in short-term investments . . . . . . . . . . . . . . . . . . . . . 47,881 24,533 (5,282)
Acquisitions, net of cash acquired . . . . . . . . . . . . . . . . . . . . (26,175) (1,375) (115,828)
Proceeds from sale of other invested assets . . . . . . . . . . . . . . . 1,733 1,159 5,017
Capital expenditures, net . . . . . . . . . . . . . . . . . . . . . . . . (1,679) (2,802) (766)
---------- ---------- -----------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . (13,169) (12,911) (128,117)
---------- ---------- -----------
FINANCING ACTIVITIES:
Proceeds from long-term debt . . . . . . . . . . . . . . . . . . . . . . . 96,000 -- 65,000
Principal payments on long-term debt . . . . . . . . . . . . . . . . . . . (110,214) (18,000) (8,138)
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . -- -- 29,814
Exercise of warrants and options . . . . . . . . . . . . . . . . . . . . . 10 47 26,953
Repurchase of outstanding warrants . . . . . . . . . . . . . . . . . . . . -- (42) --
Issuance of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . -- 140 14
Debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,060) -- (1,724)
Stock issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (11) (828)
----------- ----------- ------------
Net cash (used in) provided by financing activities . . . . . . . . . . . . . (15,264) (17,866) 111,091
---------- ---------- ------------
Increase in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 851 1,336 1,676
Cash at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . 3,280 1,944 268
----------- ----------- ------------
Cash at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,131 $ 3,280 $ 1,944
=========== =========== ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,121 $ 5,761 $ 4,403
Income taxes, net of refunds . . . . . . . . . . . . . . . . . . . . . . $ 642 $ 597 $ 687
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Common stock issued in connection with acquisitions . . . . . . . . . . . $ 4,000 $ -- $ 1,000
The accompanying notes are an integral part of these financial statements.
-35-
36
CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Capsure
Holdings Corp. and all significant majority-owned subsidiaries ("Capsure" or
the "Company"). Capsure is engaged principally in the property and casualty
insurance business. The Company's principal insurance operating entities are
Western Surety Company ("Western Surety"), United Capitol Insurance Company
("United Capitol") and Universal Surety of America ("Universal Surety"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Certain balances in the prior years'
financial statements have been reclassified to conform to current presentation.
INVESTMENTS
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The Company has the ability to hold all debt
securities to maturity. However, the Company may dispose of securities prior
to their scheduled maturity due to changes in interest rates, prepayments, tax
and credit considerations, liquidity or regulatory capital requirements, or
other similar factors. As a result, the Company considers substantially all of
its debt (bonds and redeemable preferred stocks) and equity securities as
available-for-sale. Certain equity securities at the parent company level that
are held principally for the purpose of selling them in the near term are
considered trading securities. Certain debt securities, principally deposited
with state insurance regulatory authorities, are considered held to maturity
since the Company has both the positive intent and ability to hold these
securities to maturity. The accounting policies for each category are as
follows:
Available-for-Sale Securities -- These securities are reported at fair
value, with unrealized gains and losses, net of deferred income taxes, reported
as a separate component of stockholders' equity until realized. Cash flows
from purchases, sales and maturities are reported gross in the investing
activities section of the cash flow statement.
Trading Securities -- These securities are reported on the balance sheet
at fair value, with any unrealized gains and losses included in earnings. Cash
flows from purchases, sales and maturities are included in the operating
activities section of the cash flow statement.
Held-to-Maturity Securities -- These securities are reported at
amortized cost on the balance sheet. Cash flows from purchases, sales and
maturities are reported gross in the investing activities section of the cash
flow statement.
Previously, all debt securities were carried at amortized cost and all
equity securities reported at fair value, with unrealized gains and losses, net
of deferred income taxes, reflected in stockholders' equity.
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is included
in investment income. For mortgage-backed and certain asset-backed securities,
Capsure recognizes income using a constant effective yield based on estimated
cash flows including anticipated prepayments. Significant variances in actual
cash flows from expected cash flows are accounted for prospectively. Any
related adjustment is reflected in investment income. Investment gains or
losses are determined using the specific
-36-
37
identification method. Investments with an other than temporary decline in
value are written down to fair value, resulting in losses that are included in
investment gains and losses.
Short-term investments are carried at amortized cost which approximates
fair value.
DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs, consisting of commissions and other
underwriting expenses which vary with, and are directly related to, the
production of business, net of reinsurance commission income, are deferred and
amortized to income as the related premiums are earned. Deferred policy
acquisition costs are subject to a limitation representing the excess of
anticipated net earned premiums over anticipated losses, loss adjustment
expenses and maintenance costs. The ultimate recoverability of policy
acquisition costs is determined without regard to investment income.
EXCESS COST OVER NET ASSETS ACQUIRED AND INTANGIBLE ASSETS
The excess cost over the fair value of the net assets acquired is
amortized substantially over 40 years. Other intangible assets are amortized
over periods ranging from three to 20 years, a substantial portion of which is
amortized over three years. Other intangible assets primarily relate to the
estimated value of the acquired insurance in force and the producing agency
force as of the acquisition date. Excess cost over net assets acquired is
reported net of accumulated amortization of $5.4 million and $3.4 million at
December 31, 1994 and 1993, respectively. Intangible assets are reported net
of accumulated amortization of $23.3 million and $19.5 million at December 31,
1994 and 1993, respectively.
UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The liability for unpaid losses and loss adjustment expenses is based on
estimates of (a) the ultimate settlement value of reported claims, (b) incurred
but not reported ("IBNR") claims, (c) future expenses to be incurred in the
settlement of claims and (d) claim recoveries. These estimates are determined
based on Company and industry loss experience as well as consideration of
current trends and conditions. The liability for unpaid losses and loss
adjustment expenses is an accounting estimate and, similar to other accounting
estimates, there is the potential that actual future loss payments will differ
from the initial estimate. The methods of determining such estimates and the
resulting estimated liability are continually reviewed and updated. Changes in
the estimated liability are reflected in operating income in the year in which
such changes are determined.
INSURANCE PREMIUMS
Insurance premiums are recognized as revenue ratably over the terms of
the related policies. Unearned premiums represent the portion of premiums
written applicable to the unexpired terms of policies in force calculated on a
daily pro rata basis. Premium revenues are reported net of amounts ceded to
reinsurers.
REINSURANCE
Amounts recoverable from reinsurers are estimated in a manner consistent
with the claim liability associated with the reinsured policy and are reported
as reinsurance receivable rather than netted against the liability for unpaid
losses and loss adjustment expenses. Losses and loss adjustment expenses
incurred are reported net of estimated recoveries under reinsurance contracts.
INCOME TAXES
The provision for income taxes includes deferred taxes resulting from
temporary differences between the financial reporting and tax bases of assets
and liabilities, using the asset and liability method required by SFAS No. 109,
"Accounting for Income Taxes." Under the asset and liability method, deferred
income taxes are established for the future tax effects of temporary
differences between the tax and financial reporting bases of assets and
liabilities using currently enacted tax rates. Such temporary differences
primarily relate to net operating loss carryforwards ("NOLs"), loss reserve
discounting, deferred policy acquisition costs and intangible assets. The
measurement of deferred tax assets is subject to a valuation allowance based
upon the expectation of future realization. Under SFAS No. 109, the effect on
deferred taxes of a change in tax rates is recognized in income in the period
of enactment.
-37-
38
REORGANIZATION PROCEEDINGS
On July 31, 1986, the Company emerged from voluntary bankruptcy
proceedings under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code"). After the requisite acceptances were obtained and the
Bankruptcy Court determined that the Second Amended Joint Plan of
Reorganization, as amended (the "Plan of Reorganization"), satisfied applicable
requirements of the Bankruptcy Code, the Bankruptcy Court confirmed the Plan of
Reorganization on December 20, 1985, and the Plan of Reorganization was
consummated on July 31, 1986 (the "Reorganization Date"). The Company emerged
from bankruptcy with approximately $300 million of NOLs resulting from oil and
gas operations prior to the reorganization.
In accordance with accounting principles applicable to reorganizations,
the net assets of the Company were adjusted to fair value, the accumulated
deficit in retained earnings at the date of reorganization was eliminated and
the excess of the fair values of the net assets over the stated value of
outstanding capital stock was assigned to additional paid-in capital. In the
1992 financial statements as restated under SFAS No. 109, the Company
established a deferred tax asset, net of a valuation allowance, with a
corresponding credit to additional paid-in capital equal to the amount of
available NOLs for which future realization is expected. Tax benefits
resulting from the future utilization of such NOLs will reduce the net deferred
tax asset established in accordance with SFAS No. 109.
EARNINGS PER SHARE
Earnings per share of common and common equivalent shares outstanding
are computed using the treasury stock method. Weighted average shares
outstanding including additive common equivalent shares (assuming full
dilution) for 1994, 1993 and 1992 were 15.2 million, 15.0 million and 12.2
million, respectively.
2. ADOPTION OF NEW ACCOUNTING STANDARDS
INVESTMENTS
Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Although Capsure has
the ability to hold all debt securities to maturity, the Company may dispose of
securities prior to their scheduled maturity. Accordingly, the Company has
classified substantially all of its debt and equity securities as securities
available-for-sale. These securities are reported at fair value, with
unrealized gains and losses, net of deferred income taxes, reported as a
separate component of stockholders' equity until realized. In addition,
certain equity securities at the parent company level were classified as
trading securities in accordance with SFAS No. 115. Previously all debt
securities were considered held-to-maturity and carried at amortized cost, and
all equity securities were reported at fair value, with unrealized gains and
losses, net of deferred income taxes, reflected in stockholders' equity.
At January 1, 1994, net unrealized gains on investments which were
classified as securities available-for-sale were approximately $7.0 million
($4.6 million, net of deferred income taxes). Approximately $4.9 million of
the $7.0 million net unrealized gains on available-for-sale securities related
to fixed maturities which were carried at amortized cost at December 31, 1993.
At January 1, 1994, unrealized gains and losses on the trading securities were
not material to the Company's results of operations.
INCOME TAXES
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting
for Income Taxes." SFAS No. 109 requires the asset and liability method of
accounting for income taxes rather than the deferred method, as specified by
Accounting Principles Board ("APB") No. 11. The adoption of SFAS No. 109
permitted the Company to recognize as a deferred tax asset the benefits of
certain NOLs that were previously prohibited under APB No. 11. Under the new
standard, deferred tax assets are valued based upon the expectation of future
realization on a "more likely than not" basis. Upon adoption of SFAS No. 109,
the Company restated its 1992 financial statements. As of January 1, 1992, a
deferred tax asset of $60.2 million, net of a valuation allowance of $45.2
million, with a corresponding credit to additional paid-in capital was recorded
related to available NOLs for which future realization is expected. Such
restatement did not have a material effect on the Company's 1992 results of
operations.
-38-
39
In addition, the adoption of SFAS No. 109 also resulted in: (i) certain
assets and liabilities previously recorded net of tax in connection with
purchase accounting to be recorded on a gross basis, resulting in increases in
the balance of certain assets and liabilities with a corresponding increase in
deferred tax assets and liabilities; (ii) an increase in certain revenues and
expenses (primarily the amortization of intangible assets) which were
previously recorded net of tax; and (iii) a more normalized effective tax rate,
reflecting the tax-effecting of certain revenues and expenses which had
previously been shown net of tax.
REINSURANCE
Effective January 1, 1993, the Company adopted SFAS No. 113, "Accounting
and Reporting for Reinsurance of Short-duration and Long-duration Contracts"
and restated its prior years' balance sheets in accordance with SFAS No. 113.
SFAS No. 113 requires reinsurance receivables on paid and unpaid losses and
loss adjustment expenses and prepaid reinsurance premiums to be reported as
assets rather than netted against the corresponding liability for such items on
the balance sheet.
3. ACQUISITIONS
On September 22, 1994, Capsure, through its wholly owned subsidiary,
Capsure Financial Group, Inc. ("CFG"), acquired all of the outstanding common
stock of Universal Surety Holding Corp. ("USHC"). USHC is the holding company
of Universal Surety. Universal Surety specializes in the underwriting of small
contract and miscellaneous surety bonds and is licensed to write fidelity,
surety and casualty insurance in 16 states. Capsure paid $28 million in cash
and $4 million in Capsure common stock for USHC, pursuant to a Stock Purchase
Agreement dated as of July 26, 1994. The cash portion of the purchase price
was financed with borrowings under Capsure's $135 million revolving credit
facility.
On August 14, 1992, Capsure acquired all of the outstanding common stock
of Surewest Financial Corp. ("Surewest"). Surewest is the holding company for
Western Surety. Western Surety specializes in writing small fidelity and
noncontract surety bonds and is licensed to write fidelity, surety and casualty
insurance in all 50 states and the District of Columbia. The aggregate
purchase price for the stock of Surewest was approximately $103.5 million,
consisting of $99 million in cash and $1 million in Capsure common stock, plus
$3.5 million of acquisition costs and $14.4 million of additional capital
contributed to pay down Surewest's existing indebtedness. Funding for the
acquisition was derived in part from a $65.0 million bank term loan. The
remaining funds were derived from available cash of the Company obtained
principally through the offering of 3.4 million shares of Capsure common stock,
dividends paid by United Capitol and through the exercise of warrants.
Each acquisition has been accounted for as a purchase and, accordingly,
the acquired assets and liabilities have been recorded at their estimated fair
values. The operating results of USHC are included in the consolidated
statements of income and cash flows from the September 22, 1994 acquisition
date. The operating results of Surewest are included in the consolidated
statements of income and cash flows from the August 14, 1992 acquisition date.
The excess of the purchase price over the fair value of net assets acquired is
recorded as excess cost over net assets acquired in the consolidated balance
sheets.
The USHC Stock Purchase Agreement provides for a contingent payment to
certain of the selling shareholders. Such payment shall be in cash or an
equivalent amount of Capsure common stock, at the Company's option, in the year
2000, equal to twenty percent of the excess of the after-tax fair market value
of Universal Surety at December 31, 1999, over an assumed fifteen percent
return, compounded annually, on Capsure's invested capital. The contingent
consideration, if any, shall be allocated to excess cost over net assets
acquired when the additional consideration is payable and amortized
prospectively over its remaining useful life.
The following table of unaudited pro forma information has been prepared
as if the acquisition of USHC had been consummated on January 1, 1993 and the
acquisition of Surewest had been consummated on January 1, 1991, at the same
purchase price, with adjustments to the consolidated results of operations for
the effects of the acquisition in the same manner as subsequent to the
acquisition. Such adjustments include: (i) decreased net investment income
and realized investment gains at USHC and Surewest; (ii) decreased corporate
investment income; (iii) decreased operating
-39-
40
expenses at USHC and Surewest; and (iv) increased interest and amortization
expense. In management's opinion, the pro forma financial information is not
indicative of consolidated results of operations that may have occurred had the
acquisitions taken place on January 1 of each respective year, or of future
results of operations of the combined companies under the ownership and
operation of Capsure. In the following table, the dollars are in thousands,
except per share amounts:
Pro Forma (Unaudited)
for the Years Ended December 31,
-----------------------------------------------------
1994 1993 1992
------------ ------------- ------------
Revenues . . . . . . . . . . . . . . . . . . . . $ 122,967 $ 120,141 $ 107,054
Net income . . . . . . . . . . . . . . . . . . . $ 15,086 $ 17,339 $ 15,153
Net income per common share . . . . . . . . . . $ .98 $ 1.13 $ .99
On November 10, 1993, the Company acquired all of the outstanding common
stock of Fischer Underwriting Group, Incorporated ("Fischer") for an aggregate
purchase price of $3.5 million. Fischer is a managing general agency engaged
in producing and underwriting specialty directors' and officers' and
miscellaneous professional liability insurance. The acquisition of Fischer was
not material to the Company's financial condition or results of operations for
the year ended December 31, 1993 and, therefore, is not included in the 1993
and 1992 pro forma financial information above.
4. INVESTMENTS
The cost and estimated fair values of investments in debt and equity
securities as of December 31, 1994 were as follows (dollars in thousands):
Amortized Gross Gross Estimated
Cost Unrealized Unrealized Fair
or Cost Gains Losses Value
----------- ---------- ------------ -----------
Available-For-Sale Securities
- -----------------------------
Fixed maturities:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies:
U.S. Treasury notes . . . . . . . . . . . . . . . $ 1,990 $ -- $ (10) $ 1,980
Collateralized mortgage obligations . . . . . . . 116,408 7 (8,572) 107,843
Mortgage pass-through securities . . . . . . . . . 44,832 62 (2,168) 42,726
Debt securities of foreign governments . . . . . . . . 5 -- -- 5
Obligations of states and political subdivisions . . . 16,019 6 (424) 15,601
Corporate bonds . . . . . . . . . . . . . . . . . . . . 1,865 25 (88) 1,802
Non-agency collateralized mortgage obligations . . . . 6,159 -- (159) 6,000
Asset-backed securities:
Second mortgages/home equity loans . . . . . . . . 37,927 38 (969) 36,996
Credit card receivables . . . . . . . . . . . . . 4,000 44 -- 4,044
Automobile loans . . . . . . . . . . . . . . . . . 8,020 25 (1,058) 6,987
Other underlying assets . . . . . . . . . . . . . 12,103 -- (462) 11,641
----------- ---------- ----------- -----------
Total fixed maturities . . . . . . . . . . . . 249,328 207 (13,910) 235,625
Equity securities . . . . . . . . . . . . . . . . . . . 27,476 208 (1,403) 26,281
----------- ---------- ----------- -----------
Total available-for-sale securities . . . . . . $ 276,804 $ 415 $ (15,313) $ 261,906
=========== ========== =========== ===========
Held-To-Maturity Securities
- ---------------------------
Fixed maturities - U.S. Government treasury
securities . . . . . . . . . . . . . . . . . . . . . $ 10,968 $ 19 $ (661) $ 10,326
=========== ========== =========== ===========
Trading Securities
- ------------------
Equity securities . . . . . . . . . . . . . . . . . . . $ 2,298 $ 59 $ (433) $ 1,924
=========== ========== =========== ===========
-40-
41
The cost and estimated fair values of investments in debt and equity
securities as of December 31, 1993 were as follows (dollars in thousands):
Amortized Gross Gross Estimated
Cost Unrealized Unrealized Fair
or Cost Gains Losses Value
----------- ---------- ------------ -----------
Fixed maturities:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies:
U.S. Treasury notes . . . . . . . . . . . . . . . $ 9,310 $ 247 $ (1) $ 9,556
Collateralized mortgage obligations . . . . . . . 95,086 1,353 (195) 96,244
Mortgage pass-through securities . . . . . . . . . 52,881 1,881 (3) 54,759
Debt securities of foreign governments . . . . . . . . 5 -- -- 5
Obligations of states and political subdivisions . . . 9,601 41 (39) 9,603
Non-agency collateralized mortgage obligations . . . . 3,798 58 -- 3,856
Asset-backed securities:
Second mortgages/home equity loans . . . . . . . . 36,234 1,148 (31) 37,351
Credit card receivables . . . . . . . . . . . . . 7,020 389 -- 7,409
Automobile loans . . . . . . . . . . . . . . . . . 6,242 120 -- 6,362
Other underlying assets . . . . . . . . . . . . . 9,324 220 (14) 9,530
----------- ---------- ----------- -----------
Total fixed maturities . . . . . . . . . . . . 229,501 5,457 (283) 234,675
Equity securities . . . . . . . . . . . . . . . . . . . 7,426 2,416 (309) 9,533
----------- ---------- ----------- -----------
Total debt and equity securities . . . . . . . $ 236,927 $ 7,873 $ (592) $ 244,208
=========== ========== =========== ===========
As of December 31, 1994, 99% of the Company's debt securities were
considered investment grade by The Standard & Poors Corporation or Moody's
Investor Services, Inc., and 91% were rated at least AA by those agencies. In
addition, the Company's investments in debt securities did not contain any
significant geographic or industry concentration of credit risk.
The U.S. Treasury notes and mortgage pass-through securities are backed by
the full faith and credit of the U.S. Government. The U.S. Government
collateralized mortgage obligations consist of securities collateralized by
first mortgages issued by the Federal National Mortgage Association, and the
Federal Home Loan Mortgage Corporation, or guaranteed by the Government
National Mortgage Association.
The Company's insurance subsidiaries, as required by state law, deposit
certain securities with state insurance regulatory authorities. At December
31, 1994, fixed maturities on deposit had an aggregate carrying value of $11.0
million.
During 1994, the Company shifted a portion of its available-for-sale
portfolio to equity securities, principally higher yielding nonaffiliated real
estate investment trusts ("REITs"). At December 31, 1994, the carrying value
of the Company's REIT portfolio was $24.3 million.
Short-term investments are comprised of U.S. Treasury notes, maturing
corporate notes, money market and mutual funds, and investment grade
commercial paper equivalents.
-41-
42
The amortized cost and estimated fair value of debt securities at December
31, 1994, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities as borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties (dollars in
thousands):
Estimated
Amortized Fair
Cost Value
------------ ------------
Available-For-Sale Securities
- -----------------------------
Due within one year . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,890 $ 2,887
Due after one year but within five years . . . . . . . . . . . . . . . 11,326 11,060
Due after five years but within ten years . . . . . . . . . . . . . . . 1,343 1,298
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . 4,320 4,143
------------ ------------
19,879 19,388
Mortgage pass-through securities, collateralized
mortgage obligations and asset-backed securities . . . . . . . . . . 229,449 216,237
------------ ------------
$ 249,328 $ 235,625
============ ============
Held-To-Maturity Securities
- ---------------------------
Due within one year . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,212 $ 4,231
Due after one year but within five years . . . . . . . . . . . . . . . 746 727
Due after five years but within ten years . . . . . . . . . . . . . . . 6,010 5,368
------------ ------------
$ 10,968 $ 10,326
============ ============
Major categories of net investment income and net investment gains were as
follows (dollars in thousands):
1994 1993 1992
---------- ---------- ----------
Investment income:
Fixed maturities . . . . . . . . . . . . . . $ 16,405 $ 16,282 $ 13,346
Equity securities . . . . . . . . . . . . . 915 143 185
Short-term investments . . . . . . . . . . . 1,722 2,820 2,058
Other . . . . . . . . . . . . . . . . . . . 532 990 218
---------- ---------- ----------
Total investment income . . . . . . . . . . 19,574 20,235 15,807
Investment expenses . . . . . . . . . . . . . . 445 420 303
---------- ---------- ----------
Net investment income . . . . . . . . . . . . . $ 19,129 $ 19,815 $ 15,504
========== ========== ==========
Gross investment gains:
Fixed maturities . . . . . . . . . . . . . . $ 88 $ 1,821 $ 1,015
Equity securities . . . . . . . . . . . . . 3,762 3,430 --
Unrealized gains on trading securities . . . 59 -- --
Gross investment losses:
Fixed maturities . . . . . . . . . . . . . . (625) (2,911) (635)
Equity securities . . . . . . . . . . . . . (1,802) (269) --
Unrealized losses on trading securities . . (433) -- --
Other . . . . . . . . . . . . . . . . . . . (104) -- --
---------- ---------- ----------
Net investment gains . . . . . . . . . . . . . . $ 945 $ 2,071 $ 380
========== ========== ==========
-42-
43
Net unrealized gain (loss) on securities included in stockholders' equity
for December 31, 1994 and 1993 was as follows (dollars in thousands):
1994 1993
-------------------------------------- -------------------------------------
Gains Losses Net Gains Losses Net
----------- ----------- ----------- ----------- ----------- -----------
Fixed maturities . . . . . . . . . . . $ 207 $ (13,910) $ (13,703) $ -- $ -- $ --
Equity securities . . . . . . . . . . . 208 (1,403) (1,195) 2,416 (309) 2,107
Other . . . . . . . . . . . . . . . . . -- (225) (225) -- (79) (79)
----------- ----------- ----------- ----------- ----------- -----------
$ 415 $ (15,538) (15,123) $ 2,416 $ (388) 2,028
=========== =========== =========== ===========
Deferred income taxes . . . . . . . . . 5,293 (710)
----------- -----------
Net unrealized gain (loss) on securities $ (9,830) $ 1,318
=========== ===========
At December 31, 1994 and 1993, the carrying value of debt securities on
non-accrual status was $1.9 million and $2.6 million, respectively, related to
two interest-only U.S. Government collateralized mortgage obligations. The
gross realized investment losses on fixed maturities in 1993 were primarily due
to a $2.5 million write-down to fair value on these two interest-only
securities, reflecting lower future expected cash flows of these securities as
a result of an accelerated level of mortgage prepayments.
A majority of the realized investment gains and losses on equity
securities resulted from sales of securities held at the parent company level.
For 1994, investment activity for the equity trading portfolio held at the
parent company level included gross realized investment gains of $1.5 million
and gross realized investment losses of $1.0 million.
5. DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs deferred and the related amortization charged to
income were as follows (dollars in thousands):
1994 1993 1992
---------- ---------- -----------
(Restated)
Balance, beginning of year . . . . . . . . . . . . . . $ 18,421 $ 9,428 $ 948
Balance at date of acquisition . . . . . . . . . . . . 4,369 -- --
Costs deferred during year . . . . . . . . . . . . . . 31,750 30,157 10,635
Amortization during year . . . . . . . . . . . . . . . (29,390) (21,164) (2,155)
---------- ---------- -----------
Balance, end of year . . . . . . . . . . . . . . . . . $ 25,150 $ 18,421 $ 9,428
========== ========== ===========
6. REINSURANCE
The Company's insurance subsidiaries, in the ordinary course of business,
cede reinsurance to other insurance companies to limit their exposure to loss
and to provide greater diversification of risk. Reinsurance contracts do not
relieve the Company of its primary obligations to claimants. A contingent
liability exists with respect to reinsurance ceded to the extent that any
reinsurer is unable to meet the obligations assumed under the reinsurance
agreements. The Company evaluates the financial condition of its reinsurers,
establishes allowances for uncollectible amounts and monitors concentrations of
credit risk. At December 31, 1994, Capsure's largest reinsurance receivable,
including prepaid reinsurance premiums of $1.3 million and estimated ceded IBNR
of $12.0 million, was approximately $18.9 million with Generali - U.S. Branch.
Generali - U.S. Branch is rated A (Excellent), XV by A.M. Best Company, Inc.
No other receivable from a single reinsurer exceeded 10% of total reinsurance
receivables.
-43-
44
The effect of reinsurance on premiums written and earned for the years
ended December 31, 1994, 1993 and 1992 was as follows (dollars in thousands):
1994 1993 1992
-------------------------- -------------------------- ---------------------------
Written Earned Written Earned Written Earned
---------- ----------- ---------- ----------- ---------- -----------
Direct . . . . . . $ 102,062 $ 103,346 $ 100,355 $ 97,359 $ 50,008 $ 50,015
Assumed . . . . . . 294 668 420 639 97 39
Ceded . . . . . . . (11,778) (11,533) (12,469) (11,969) (9,795) (8,805)
---------- ----------- ---------- ----------- ----------- -----------
Net premiums . . . $ 90,578 $ 92,481 $ 88,306 $ 86,029 $ 40,310 $ 41,249
========== =========== ========== =========== ========== ===========
The effect of reinsurance on losses and loss adjustment expenses incurred
for the years ended December 31, 1994, 1993 and 1992 was as follows (dollars in
thousands):
1994 1993 1992
----------- ----------- -----------
Gross losses and loss adjustment expenses . . . . . . $ 31,684 $ 26,407 $ 14,566
Reinsurance recoveries . . . . . . . . . . . . . . . . (8,340) (6,450) (3,905)
----------- ----------- -----------
Net losses and loss adjustment expenses . . . . . . . $ 23,344 $ 19,957 $ 10,661
=========== =========== ===========
7. LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Activity in the liability for unpaid losses and loss adjustment expenses
was as follows (dollars in thousands):
1994 1993 1992
------------ ------------ ------------
Gross balance at January 1 . . . . . . . . . . . . . . . . $ 135,825 $ 128,122 $ 101,542
Balance at date of acquisition . . . . . . . . . . . . . . 2,738 -- 28,516
Incurred related to:
Current year . . . . . . . . . . . . . . . . . . . . . . . 46,206 41,398 24,428
Prior years . . . . . . . . . . . . . . . . . . . . . . . . (14,522) (14,991) (9,862)
------------ ------------ ------------
Total incurred . . . . . . . . . . . . . . . . . . . . . . 31,684 26,407 14,566
------------ ------------ ------------
Paid related to:
Current year . . . . . . . . . . . . . . . . . . . . . . . 3,003 2,266 1,665
Prior years . . . . . . . . . . . . . . . . . . . . . . . . 18,203 16,438 14,837
------------ ------------ ------------
Total paid . . . . . . . . . . . . . . . . . . . . . . . . 21,206 18,704 16,502
------------ ------------ ------------
Gross balance at December 31 . . . . . . . . . . . . . . . $ 149,041 $ 135,825 $ 128,122
============ ============ ============
As a result of favorable claim settlements and changes in estimates of
insured events in prior years, the provision for losses and loss adjustment
expenses decreased by $14.5 million ($8.3 million, net of reinsurance) in 1994,
$15.0 million ($11.3 million, net of reinsurance) in 1993 and $9.9 million
($7.5 million, net of reinsurance) in 1992.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table summarizes disclosure of fair value information of
financial instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value. In cases where quoted market
prices are not available, fair values may be based on estimates using present
value or other valuation techniques. These techniques are significantly
affected by the assumptions used, including the discount rates and estimates of
future cash flows. Accordingly, the estimates presented herein are subjective
in nature and are not necessarily indicative of the amounts that Capsure could
realize in a current market exchange. This information excludes certain
financial instruments and all nonfinancial instruments such as insurance
contracts from fair value disclosure. Thus, the following fair value amounts
cannot be aggregated to determine the underlying economic value of Capsure.
-44-
45
The carrying amounts and estimated fair values of financial instruments
for the years ended December 31, 1994 and 1993 were as follows (dollars in
thousands):
1994 1993
------------------------------ -------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------- ---------- ----------- ----------
Fixed maturities . . . . . . . . . . . . $ 246,593 $ 245,951 $ 229,501 $ 234,675
Equity securities . . . . . . . . . . . . 28,205 28,205 9,533 9,533
Short-term investments . . . . . . . . . 22,079 22,079 69,215 69,215
Other investments . . . . . . . . . . . . 4,890 4,890 5,548 5,548
Cash . . . . . . . . . . . . . . . . . . 4,131 4,131 3,280 3,280
Long-term debt . . . . . . . . . . . . . 71,000 71,000 85,214 85,214
The following methods and assumptions were used by Capsure in estimating
fair values of financial instruments:
Investment Securities -- The estimated fair values for debt securities
(including redeemable preferred stock) are based upon quoted market prices,
where available. For debt securities not actively traded, the estimated fair
values are determined using values obtained from independent pricing services
or, in the case of private placements, by discounting expected future cash
flows using a current market rate applicable to the yield, credit quality and
maturity of the investments. The estimated fair values for equity securities
are based on quoted market prices.
Cash, Short-Term Investments and Other Investments -- The carrying amount
for these instruments approximates their estimated fair value.
Long-Term Debt -- The estimated fair value of Capsure's long-term debt is
based on the quoted market prices for the same or similar issues or on the
current rates offered to the Company for debt of the same remaining maturities.
9. LONG-TERM DEBT
On March 29, 1994, the Company formed a direct, wholly owned subsidiary,
CFG, to which Capsure contributed substantially all its assets and liabilities.
Concurrently, CFG entered into a senior reducing revolving credit agreement
with a syndicate of banks for $135 million (the "Credit Facility"). The common
stock of substantially all of Capsure's subsidiaries and substantially all
assets of Capsure's non-insurance operations have been pledged under the Credit
Facility. As of December 31, 1994, $71 million was outstanding under the
Credit Facility. The remaining availability under the Credit Facility may be
used to finance future acquisitions and for general corporate purposes.
The interest rate on borrowings under the Credit Facility may be fixed, at
the Company's option, for a period of one to six months and is based on a
margin over either the London Interbank Offered Rate ("LIBOR") or the greatest
of the agent bank's prime rate, certificate of deposit rate plus 1.0% and the
Federal Funds Effective Rate plus 0.5%. The margin varies based on a leverage
ratio and ranges from 0.75% to 1.75% on LIBOR borrowings and 0.0% to 0.75% on
non-LIBOR borrowings. The Credit Facility provides for a commitment fee on the
unused availability which also varies based on leverage. At December 31, 1994,
the weighted average interest rate on outstanding borrowings was 7.125% and the
applicable commitment fee was 0.375%.
The Credit Facility limits the Company with respect to the incurrence of
additional indebtedness and the payment of dividends, imposes certain
restrictions on investments and requires the maintenance of certain financial
ratios and levels of Risk-Based Capital ("RBC"). As of December 31, 1994, the
Company was in compliance with all material restrictions or covenants contained
in the Credit Facility agreement. The use of the Credit Facility for
acquisition purposes is subject to certain conditions with respect to the
business and historical financial results of the target company, the
maintenance of certain financial ratios on a prospective and pro forma basis,
and the structure of the acquisition transaction.
-45-
46
Total borrowings available under the Credit Facility reduce semi-annually
commencing March 31, 1996 by the following amounts (dollars in thousands):
March 31, 1996 $ 12,500
September 30, 1996 12,500
March 31, 1997 12,500
September 30, 1997 12,500
March 31, 1998 15,000
September 30, 1998 15,000
March 31, 1999 17,500
September 30, 1999 17,500
March 31, 2000 20,000
------------
$ 135,000
============
Principal and interest payments required under the Credit Facility are
funded principally by dividend and intercompany tax sharing payments received
from Capsure's insurance subsidiaries.
10. STATUTORY FINANCIAL DATA
Capsure's insurance subsidiaries file annual financial statements prepared
in accordance with statutory accounting practices prescribed or permitted by
applicable insurance regulatory authorities. Prescribed statutory accounting
practices include state laws, regulations and general administrative rules, as
well as guidance provided in a variety of publications of the National
Association of Insurance Commissioners ("NAIC"). Permitted statutory
accounting practices encompass all accounting practices that are not
prescribed. Such practices may differ from state to state, may differ from
company to company within a state, and may change in the future. The permitted
statutory accounting practices of Capsure's insurance subsidiaries did not have
a material effect on reported statutory surplus. The principal differences
between statutory financial statements and financial statements prepared in
accordance with generally accepted accounting principles are that statutory
financial statements do not reflect deferred policy acquisition costs and
deferred income taxes and debt securities are generally carried at amortized
cost in statutory financial statements.
The NAIC has promulgated RBC requirements for property/casualty insurance
companies to evaluate the adequacy of statutory capital and surplus in relation
to investment and insurance risks such as asset quality, asset and liability
matching, loss reserve adequacy, and other business factors. The RBC
information will be used by state insurance regulators as an early warning tool
to identify, for the purpose of initiating regulatory action, insurance
companies that potentially are inadequately capitalized. In addition, the
formula defines new minimum capital standards that will supplement the current
system of fixed minimum capital and surplus requirements on a state-by-state
basis. Regulatory compliance is determined by a ratio (the "Ratio") of the
enterprise's regulatory total adjusted capital, as defined by the NAIC, to its
authorized control level RBC, as defined by the NAIC. Generally, a Ratio in
excess of 200% of authorized control level RBC requires no corrective actions
on the behalf of the company or regulators. As of December 31, 1994, each of
Capsure's insurance subsidiaries had a Ratio that was substantially in excess
of the minimum RBC requirements.
Capsure's insurance subsidiaries are subject to regulation and supervision
by the various state insurance regulatory authorities in which they conduct
business. Such regulation is generally designed to protect policyholders and
includes such matters as maintenance of minimum statutory surplus and
restrictions on the payments of dividends. Generally, statutory surplus of
each insurance subsidiary in excess of statutorily prescribed minimum is
available for transfer to the parent company. However, such distributions as
dividends may be subject to prior regulatory approval, including a review of
the implication on RBC. Without prior regulatory approval in 1995, Capsure's
insurance subsidiaries may pay stockholder dividends of $19.3 million in the
aggregate. In 1994, 1993 and 1992, Capsure received $21.0 million (including
$5.0 million of dividends requiring prior approval), $11.8 million, and $29.0
million (including $15.1 million of dividends requiring prior approval),
respectively, in dividends from its insurance subsidiaries.
-46-
47
Combined statutory surplus and net income for insurance operations,
including preacquisition results, as reported to regulatory authorities were as
follows (dollars in thousands):
1994 1993 1992
----------- ----------- ------------
Statutory surplus . . . . . . . . . . . . $ 109,750 $ 104,343 $ 94,080
Statutory net income . . . . . . . . . . . $ 23,796 $ 19,308 $ 23,934
11. INCOME TAXES
The components of deferred income taxes as of December 31, 1994 and 1993
were as follows (dollars in thousands):
1994 1993
------------- -------------
Deferred tax assets:
Net operating losses . . . . . . . . . . . . . . . . . . . . . . . . $ 79,100 $ 86,500
Loss and loss adjustment expense reserves . . . . . . . . . . . . . 7,913 7,606
Unearned premium reserves . . . . . . . . . . . . . . . . . . . . . 5,302 4,856
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 3,755 3,750
Unrealized loss on securities . . . . . . . . . . . . . . . . . . . 5,293 --
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,537 3,984
------------- -------------
Total gross deferred tax assets . . . . . . . . . . . . . . . . 102,900 106,696
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . 30,800 40.800
------------- -------------
Deferred tax asset, net of valuation allowance . . . . . . . . . . . . . 72,100 65,896
------------- -------------
Deferred tax liabilities:
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . 6,278 7,625
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . 8,803 6,447
Unrealized gain on securities . . . . . . . . . . . . . . . . . . . -- 710
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,814 2,764
------------- -------------
Total deferred tax liabilities . . . . . . . . . . . . . . . . 17,895 17,546
------------- -------------
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . $ 54,205 $ 48,350
============= =============
Capsure and its subsidiaries file a consolidated federal income tax
return. As of December 31, 1994, based upon the Company's consolidated federal
income tax returns, approximately $226.0 million of consolidated NOLs were
available to offset future taxable income of the Company and its subsidiaries.
The majority of such carryforwards expire in 1997, 1998 and 1999. Although
realization is not assured, management believes that it is more likely than not
that Capsure will generate sufficient taxable income to utilize at least $48.3
million of tax benefits from its available NOLs at December 31, 1994. Such
estimate is based upon the earnings history of each of its insurance
subsidiaries and projections of future taxable income. The reduction in the
valuation allowance for deferred tax assets of $10.0 million in 1994 related
primarily to the September 22, 1994, acquisition of Universal Surety and
projections of future taxable income of this newly acquired entity.
The income tax provisions consisted of the following (dollars in
thousands):
1994 1993 1992
--------- --------- ---------
(Restated)
Federal deferred . . . . . . $ 8,820 $ 8,696 $ 6,457
Federal current . . . . . . . 305 338 208
State . . . . . . . . . . . . 276 200 112
--------- --------- ----------
Total income tax expense . . $ 9,401 $ 9,234 $ 6,777
========= ========= ==========
-47-
48
Reconciliations from the federal statutory tax rate to the effective tax
rate are as follows:
1994 1993 1992
--------- --------- --------
Federal statutory rate . . . . . . . . . . . . . . . . . . . . . . 35.0% 35.0% 34.0%
Excess of cost over net assets acquired and other
purchase accounting adjustments . . . . . . . . . . . . . . . . 3.0 2.2 2.0
State income and environmental tax, net of federal
income tax benefit . . . . . . . . . . . . . . . . . . . . . . . .8 .6 .9
Tax exempt interest . . . . . . . . . . . . . . . . . . . . . . . . (.3) (.2) (.8)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0 (1.4) 2.7
--------- --------- ---------
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . 39.5% 36.2% 38.8%
========= ========= =========
Intercompany tax sharing agreements between Capsure and its subsidiaries
provide that income taxes shall be allocated based upon separate return
calculations in accordance with the Internal Revenue Code of 1986, as amended
(the "Code"). Intercompany tax payments are remitted at such times as
estimated tax payments would be required to be made to the Internal Revenue
Service. Capsure received tax sharing payments from its subsidiaries of $12.3
million, $13.0 million and $9.0 million in 1994, 1993 and 1992, respectively.
The Internal Revenue Service has not examined the Company's tax returns
for the years in which the Company reported net operating losses. Under
Section 382 of the Code, certain restrictions on the utilization of NOLs will
apply if there is an ownership change of a corporation entitled to use such
carryovers. The Company believes that there is currently no restriction on the
ability of the Company to utilize its NOLs. It is possible that future
transactions involving the Company's common stock or rights to acquire such
stock could cause an ownership change of the Company resulting in restrictions
of the Company's ability to utilize the NOLs during all taxable periods after
the date of such ownership change. The Company has adopted provisions in its
Certificate of Incorporation designed to facilitate the Company's ability to
preserve and utilize its NOLs.
12. COMMITMENTS AND CONTINGENCIES
On November 8, 1988, California voters enacted Proposition 103, an
initiative which required a rollback in insurance rates for products written or
renewed after November 8, 1988, and provided that rate changes must thereafter
be submitted for approval to the Department of Insurance prior to
implementation. While the proposition had the most significant impact on
automobile insurance, its provisions were written broadly and may also apply to
other property and casualty insurance, including surety bonds. The
applicability of Proposition 103 to surety bonds has been litigated in the
California courts and is currently under review by the California Supreme
Court. Management believes that an unfavorable resolution of this matter would
not have a material adverse impact on the Company's results of operations or
financial position.
The Company was engaged in oil and gas production, exploration and
development until mid-1993. In connection with the sale of substantially all
of the Company's oil and gas properties, the buyers assumed all material
environmental liabilities.
United Capitol, in the ordinary course of business, chooses to underwrite
accounts which have hazardous, unique or unusual risk characteristics and
applies a strict and specialized underwriting discipline to such risks. Since
United Capitol's organization in 1986, its liability policies have included an
absolute pollution coverage exclusion (except for policies offering pollution
liability coverage to contractors involved in the remediation of preexisting
pollution). In addition, except as discussed below, United Capitol's product
liability and other general liability policies contain exclusions, which
management believes are enforceable, for coverage of claims for bodily injury
or property damage caused by exposure to asbestos.
United Capitol provides coverage to asbestos abatement contractors against
third parties who have alleged bodily injury or property damage as a result of
exposure to asbestos. Employees of the insured contractor and others required
to be in the abatement area are not intended to be covered by United Capitol's
policies and management believes such coverage exclusions are enforceable.
Through the date hereof, there have been no valid claims against United
Capitol's
-48-
49
asbestos abatement liability policies alleging bodily injury arising from
exposure to asbestos. Management believes that none of the other insurance
products offered by Capsure's insurance subsidiaries creates any potential
material environmental exposure.
Management believes that Capsure is adequately reserved for risks
associated with environmental liabilities although there can be no assurance
that legal or other developments will not increase the Company's exposure to
environmental liabilities.
Capsure and its subsidiaries are subject to litigation in the ordinary
course of business. In the opinion of management, the outcome of such
litigation will not have a material effect on the results of operations or
financial position of Capsure.
13. WARRANTS
In January 1989, the Company distributed warrants to purchase shares of
its common stock to its stockholders of record on January 9, 1989, whereby for
each share of common stock held on such date, one Series A Warrant, one Series
B Warrant and one Series C Warrant ("ABC Warrants") were distributed. Each
Series A Warrant, each Series B Warrant and each two Series C Warrants entitled
the holder to purchase one share of the Company's common stock. In the
aggregate, 9,825,378 ABC Warrants were distributed to purchase 8,187,815 shares
of the Company's common stock. The original exercise price per share of common
stock, issuable upon exercise of any ABC Warrant, was $5.50 per share. The
Company utilized substantially all of the proceeds received from the exercise
of ABC Warrants in 1992 to purchase the capital stock of Surewest. The Company
also issued 8,580 warrants to directors of the Company to purchase a like
number of shares of common stock for $5.60 per share ("Other Warrants"). In
conjunction with the financing of the 1990 acquisition of United Capitol, the
Company issued 44,444 warrants to a bank to purchase a like number of shares of
Common Stock at $0.05 per share ("Bank Warrants"). All warrants had stated
exercise and expiration periods. As of December 31, 1994, there were no
warrants of any series outstanding.
Warrant activity for the years ended December 31, 1994, 1993 and 1992 was
as follows (dollars in thousands):
Number of
Warrants
Exercised Proceeds
---------- ----------
1994
----
Bank Warrants . . . . . . . . . . . . . 44,444 $ 2
=========== ===========
1993
----
Other Warrants . . . . . . . . . . . . . 2,860 $ 16
=========== ===========
1992
----
Series B Warrants . . . . . . . . . . . 2,500,323 $ 17,126
Series C Warrants . . . . . . . . . . . 1,555,741 9,823
----------- ----------
4,056,064 $ 26,949
=========== ==========
14. STOCK OPTIONS
The Company has reserved 1,500,000 shares of its common stock for issuance
to directors, officers, key employees and consultants of the Company through
incentive stock options, nonqualified stock options and stock appreciation
rights to be granted under the Company's 1990 Stock Option Plan (the "Plan").
On March 2, 1994, the Board of Directors of the Company approved an amendment
to the Plan to increase by 500,000 the aggregate number of shares available for
which options may be granted under the Plan to 1,500,000 shares. This
amendment was approved by the stockholders at the Annual Meeting held on May
19, 1994. The Plan is administered by the Compensation Committee (the
"Committee"), consisting of certain members of the Board of Directors. The
option price is determined by the Committee, but cannot be less than the fair
market value of the common stock of the Company at the date of grant for
incentive stock options, and cannot be less than the par value of the common
stock of the Company for non-qualified stock options.
-49-
50
The Plan provides for the granting of incentive options as defined under
the Code. Under the Plan, all nonqualified stock options and incentive stock
options expire ten years after the date of grant. All options in 1993 and 1994
were granted at an option price equal to fair market value at the date of
grant. In 1992, all options were granted at an option price equal to fair
market value, except for 2,500 nonqualified stock options which were granted at
$8.50.
Stock option activity for the three years ended December 31, 1994 was as
follows:
Shares Subject Average Option
to Option Price Per Share
----------- --------------------
Balance at January 1, 1992 . . . . . . . . . . . . . . . 547,500 $ 6.75 to $ 8.50
Options granted . . . . . . . . . . . . . . . . . . . 168,500 $ 8.50 to $ 9.75
Options cancelled . . . . . . . . . . . . . . . . . . (2,250) $ 6.75
Options exercised . . . . . . . . . . . . . . . . . . . (2,750) $ 6.75
--------- -------------------
Balance at December 31, 1992 . . . . . . . . . . . . . . 711,000 $ 6.75 to $ 9.75
Options granted . . . . . . . . . . . . . . . . . . . 222,500 $ 12.25 to $ 14.88
Options cancelled . . . . . . . . . . . . . . . . . . (6,750) $ 12.25 to $ 13.50
Options exercised . . . . . . . . . . . . . . . . . . (20,975) $ 6.75 to $ 9.75
--------- -------------------
Balance at December 31, 1993 . . . . . . . . . . . . . . 905,775 $ 6.75 to $ 14.88
Options granted . . . . . . . . . . . . . . . . . . 295,250 $ 12.88 to $ 14.75
Options cancelled . . . . . . . . . . . . . . . . . (1,876) $ 12.25
Options exercised . . . . . . . . . . . . . . . . . (1,037) $ 6.75 to $ 12.25
--------- -------------------
Balance at December 31, 1994 . . . . . . . . . . . . . . 1,198,112 $ 6.75 to $ 14.88
========== ===================
As of December 31, 1994, 858,973 shares were exercisable under the Plan.
The number of shares available for granting of options under the Plan were
277,126 and 67,500 at December 31, 1994 and 1993, respectively.
15. RELATED PARTY TRANSACTIONS
Equity Group Investments, Inc. ("EGI"), a company affiliated with certain
directors, officers and stockholders of the Company; other affiliated entities;
and individuals affiliated with certain directors and officers of the Company
perform or provide services to the Company and its subsidiaries. These
services relate to acquisition consulting, financial planning, legal and tax
advice, and investor relations, as well as leasing office space and providing
certain computer equipment, operations and maintenance services to the Company.
Related party agreements are generally for a term of one year and are approved
by the independent members of the Board of Directors. The Company's corporate
office space is leased pursuant to a facilities sharing agreement with EGI.
The Company paid rent, administrative services, and office facility
services to EGI or its affiliates of $0.1 million in 1994, 1993 and 1992. The
Company paid $0.2 million in 1994 and 1993 and $0.1 million in 1992 for
financial planning, tax, accounting, investor relations and computer support
and maintenance to EGI or its affiliates. The Company paid $0.2 million, $0.1
million and $0.4 million in fees for legal services to a law firm affiliated
with EGI in 1994, 1993 and 1992, respectively. The Company received
reimbursement from affiliates of EGI for financial management services provided
by employees of the Company amounting to $0.1 million in 1994 and 1993 and $0.2
million in 1992.
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited results of operations for the
years ended December 31, 1994 and 1993. The Company acquired Universal Surety
in September 1994 and the consolidated results of operations shown below
include the operating results of Universal Surety from the date of acquisition,
which affects the comparability of the financial information (dollars in
thousands, except per share data):
-50-
51
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ------------ ---------- ----------
1994
- ----
Revenues . . . . . . . . . . . . . . . . . . . . $ 27,167 $ 27,809 $ 27,176 $ 30,510
============ ============ =========== ===========
Income before income taxes . . . . . . . . . . . $ 4,607 $ 6,872 $ 5,903 $ 6,397
Income taxes . . . . . . . . . . . . . . . . . . 1,778 2,774 2,191 2,658
------------ ------------ ----------- -----------
Net income . . . . . . . . . . . . . . . . . . . $ 2,829 $ 4,098 $ 3,712 $ 3,739
============ ============ =========== ===========
Earnings per common and common
equivalent share . . . . . . . . . . . . . . $ .19 $ .27 $ .25 $ .24
============ ============ =========== ===========
1993
- ----
Revenues . . . . . . . . . . . . . . . . . . . . $ 26,540 $ 27,419 $ 27,761 $ 26,725
============ ============ =========== ===========
Income before income taxes . . . . . . . . . . . $ 5,531 $ 6,311 $ 7,756 $ 5,920
Income taxes . . . . . . . . . . . . . . . . . . 2,117 2,263 3,126 1,728
------------ ------------ ----------- -----------
Net income . . . . . . . . . . . . . . . . . . . $ 3,414 $ 4,048 $ 4,630 $ 4,192
============ ============ =========== ===========
Earnings per common and common
equivalent share . . . . . . . . . . . . . . $ .22 $ .27 $ .29 $ .30
============ ============ =========== ===========
-51-
52
SCHEDULE I
CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
AS OF DECEMBER 31, 1994
(AMOUNTS IN THOUSANDS)
Fair Carrying
Cost Value Value
----------- ----------- -----------
FIXED MATURITIES:
Bonds:
U.S. government and government agencies and authorities . . . . . . $ 163,230 $ 152,549 $ 152,549
Foreign governments . . . . . . . . . . . . . . . . . . . . . . . . 5 5 5
All other corporate bonds . . . . . . . . . . . . . . . . . . . . . 97,061 93,397 94,039
----------- ----------- -----------
Total fixed maturities. . . . . . . . . . . . . . . . . . . . . . . 260,296 245,951 246,593
----------- ----------- -----------
EQUITY SECURITIES:
Common stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,683 27,173 27,173
Non-redeemable preferred stocks . . . . . . . . . . . . . . . . . . . . 1,091 1,032 1,032
----------- ----------- -----------
Total equity securities . . . . . . . . . . . . . . . . . . . . . . 29,774 28,205 28,205
----------- ----------- -----------
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . 22,079 22,079
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,123 4,890
----------- -----------
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . $ 317,272 $ 301,767
=========== ===========
-52-
53
SCHEDULE III
CAPSURE HOLDINGS CORP.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
December 31,
------------------------------
1994 1993
----------- -----------
ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ -- $ 481
Short-term investments, at cost which approximates fair value . . . . . . . . . -- 5,451
Equity securities, at fair value (cost: $6,453) . . . . . . . . . . . . . . . -- 8,703
Investment in and advances to Capsure Financial Group, Inc. . . . . . . . . . . 170,772 --
Investment in and advances to SI Acquisition Corp. . . . . . . . . . . . . . . -- 71,009
Investment in and advances to NI Acquisition Corp. . . . . . . . . . . . . . . -- 60,429
Investment in and advances to Pin Oak Petroleum, Inc. . . . . . . . . . . . . . -- 8,569
Deferred income taxes, net of valuation allowance . . . . . . . . . . . . . . . 55,616 56,833
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 257
----------- -----------
$ 226,388 $ 211,732
=========== ===========
LIABILITIES
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,523 $ 4,107
----------- -----------
STOCKHOLDERS' EQUITY
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 770 753
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . 179,250 165,257
Retained earnings from August 1, 1986 (date of reorganization) . . . . . . . . 54,756 40,378
Unrealized (loss) gain on securities, net of deferred income taxes . . . . . . (9,830) 1,318
Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . (81) (81)
----------- ----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . 224,865 207,625
----------- -----------
$ 226,388 $ 211,732
=========== ===========
See Notes to Condensed Financial Information and Notes to Consolidated
Financial Statements
-53-
54
SCHEDULE III
CAPSURE HOLDINGS CORP.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY) - (CONTINUED)
STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS)
Years Ended December 31,
-------------------------------------------
1994 1993 1992
--------- --------- ----------
(Restated)
Revenues:
Net investment income . . . . . . . . . . . . . . . . . . . $ 17 $ 1,897 $ 1,705
Net investment gains . . . . . . . . . . . . . . . . . . . . 444 3,103 --
Other income . . . . . . . . . . . . . . . . . . . . . . . . -- 10 40
--------- --------- ----------
461 5,010 1,745
Expenses:
Corporate expense . . . . . . . . . . . . . . . . . . . . . 355 2,251 2,011
--------- --------- ----------
Income (loss) from operations before income taxes
and equity in net income of subsidiaries . . . . . . . . . . 106 2,759 (266)
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 37 690 (90)
--------- --------- --------
Income (loss) before equity in net income
of subsidiaries . . . . . . . . . . . . . . . . . . . . . . 69 2,069 (176)
Cash dividends from subsidiaries . . . . . . . . . . . . . . . . -- 1,500 10,000
Equity in net income of subsidiaries, less cash dividends . . . . 14,309 12,715 871
--------- --------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,378 $ 16,284 $ 10,695
========= ========= ==========
See Notes to Condensed Financial Information and Notes to Consolidated
Financial Statements
-54-
55
SCHEDULE III
CAPSURE HOLDINGS CORP.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY) - (CONTINUED)
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
Years Ended December 31,
--------------------------------------
1994 1993 1992
--------- --------- ----------
(Restated)
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,378 $ 16,284 $ 10,695
Adjustments to reconcile net income to net cash provided
by operating activities:
Depletion, depreciation, and amortization . . . . . . . . . . . . . . -- 3 3
Equity in net income of subsidiaries, less cash dividends . . . . . . (14,309) (12,715) (871)
Net investment gains. . . . . . . . . . . . . . . . . . . . . . . . . (444) (3,103) --
Changes in:
Other assets and liabilities. . . . . . . . . . . . . . . . . . . . . 3,623 680 (2,796)
-------- -------- --------
Net cash provided by operating activities. . . . . . . . . . . . . . . . . . . 3,248 1,149 7,031
-------- -------- --------
INVESTING ACTIVITIES:
Available-for-sale equity securities purchased . . . . . . . . . . . . . . . (209) (30,512) (3,885)
Available-for-sale equity securities sold. . . . . . . . . . . . . . . . . . -- 31,048 --
Change in short-term investments . . . . . . . . . . . . . . . . . . . . . . 5,451 2,846 (7,492)
Change in investments in and advances to subsidiaries. . . . . . . . . . . . (8,981) (4,389) (51,537)
Capital expenditures, net. . . . . . . . . . . . . . . . . . . . . . . . . . -- (13) --
-------- -------- --------
Net cash used in investing activities. . . . . . . . . . . . . . . . . . . . . (3,739) (1,020) (62,914)
-------- -------- --------
FINANCING ACTIVITIES:
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- 29,814
Exercise of warrants and options . . . . . . . . . . . . . . . . . . . . . . 10 47 26,953
Repurchase of outstanding warrants . . . . . . . . . . . . . . . . . . . . . -- (42) --
Issuance of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . -- 140 14
Stock issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (11) (828)
-------- --------- --------
Net cash provided by financing activities. . . . . . . . . . . . . . . . . . . 10 134 55,953
-------- --------- --------
Increase (decrease) in cash. . . . . . . . . . . . . . . . . . . . . . . . . . (481) 263 70
Cash at beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . 481 218 148
-------- --------- --------
Cash at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ -- $ 481 $ 218
======== ========= ========
See Notes to Condensed Financial Information and Notes to Consolidated
Financial Statements
-55-
56
SCHEDULE III
CAPSURE HOLDINGS CORP.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY) - (CONTINUED)
NOTES TO CONDENSED FINANCIAL INFORMATION
1. BASIS OF PRESENTATION
The condensed financial information of the parent company includes the
accounts of Capsure Holdings Corp. ("Capsure"). On March 29, 1994, Capsure
formed Capsure Financial Group, Inc., a direct wholly owned subsidiary, to
which Capsure contributed substantially all its assets and liabilities,
including its investments in SI Acquisition Corp., NI Acquisition Corp. and Pin
Oak Petroleum, Inc.
-56-
57
SCHEDULE V
CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
SUPPLEMENTAL INSURANCE INFORMATION
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(AMOUNTS IN THOUSANDS)
Property and Casualty Insurance
--------------------------------------------
1994 1993 1992
----------- ----------- -----------
(Restated)
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . $ 25,150 $ 18,421 $ 9,428
=========== =========== ===========
Future policy benefits, losses, claims and loss expenses . . . . . . . $ 149,041 $ 135,825 $ 128,122
=========== =========== ===========
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 76,630 $ 69,363 $ 66,235
=========== =========== ===========
Other policy claims and benefits payable . . . . . . . . . . . . . . . $ -- $ -- $ --
=========== =========== ===========
Net premium revenue . . . . . . . . . . . . . . . . . . . . . . . . . . $ 92,481 $ 86,029 $ 41,249
=========== =========== ===========
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,597 $ 18,753 $ 14,636
=========== =========== ===========
Benefits, claims, losses and settlement expenses . . . . . . . . . . . $ 23,344 $ 19,957 $ 10,661
=========== =========== ===========
Amortization of deferred policy acquisition costs . . . . . . . . . . . $ 29,390 $ 21,164 $ 2,155
=========== =========== ===========
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . $ 24,514 $ 29,684 $ 18,501
=========== =========== ===========
Net premiums written . . . . . . . . . . . . . . . . . . . . . . . . . $ 90,578 $ 88,306 $ 40,310
=========== =========== ===========
-57-
58
SCHEDULE VI
CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(AMOUNTS IN THOUSANDS)
Percentage
Ceded to Assumed of Amount
Gross Other from Other Net Assumed
Amount Companies Companies Amount To Net
------------ ----------- ---------- ------------ ------------
1994
- ----
Premiums:
Property and casualty insurance . . . $ 103,346 $ 11,533 $ 668 $ 92,481 0.7%
------------ ------------ ----------- ------------ ------------
Total premiums. . . . . . . . . . . $ 103,346 $ 11,533 $ 668 $ 92,481 0.7%
============ ============ =========== ============ ============
1993
- ----
Premiums:
Property and casualty insurance . . . $ 97,359 $ 11,969 $ 639 $ 86,029 0.7%
------------ ------------ ----------- ------------ ------------
Total premiums. . . . . . . . . . . $ 97,359 $ 11,969 $ 639 $ 86,029 0.7%
============ ============ =========== ============ ============
1992
- ----
Premiums:
Property and casualty insurance . . . $ 50,015 $ 8,805 $ 39 $ 41,249 0.1%
------------ ------------ ----------- ------------ ------------
Total premiums. . . . . . . . . . . $ 50,015 $ 8,805 $ 39 $ 41,249 0.1%
============ ============ =========== ============ ============
-58-
59
SCHEDULE VIII
CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(AMOUNTS IN THOUSANDS)
Additions
-------------------------
Balance at Charged to Charged to Balance
Beginning of Costs and Other at End of
Period Expenses Accounts Deductions(1) Period
---------- ---------- ---------- ------------- ----------
Year ended December 31, 1994
Allowance for possible losses
on premiums receivable(2). . . . . . . . $ 1,276 $ 190 $ -- $ 568 $ 898
========== ========== ========== ========== ==========
Allowance for possible losses
on reinsurance recoverable . . . . . . . $ 2 $ 3 $ -- $ -- $ 5
========== ========== ========== ========== ==========
Year ended December 31, 1993
Allowance for possible losses
on premiums receivable . . . . . . . . . $ 951 $ 690 $ -- $ 417 $ 1,224
========== ========== ========== ========== ==========
Allowance for possible losses
on reinsurance recoverable . . . . . . . $ -- $ 2 $ -- $ -- $ 2
========== ========== ========== ========== ==========
Year ended December 31, 1992
Allowance for possible losses
on premiums receivable . . . . . . . . . $ 937 $ 372 $ -- $ 358 $ 951
========== ========== ========== ========== ==========
Allowance for possible losses
on reinsurance recoverable . . . . . . . $ -- $ -- $ -- $ -- $ --
========== ========== ========== ========== ==========
- ---------------
(1) Accounts charged against allowance.
(2) Includes balance at acquisition date of Universal Surety of $52.
-59-
60
SCHEDULE X
CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY
INSURANCE OPERATIONS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
(AMOUNTS IN THOUSANDS)
1994 1993 1992
------------ ------------ ------------
(Restated)
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . $ 25,150 $ 18,421 $ 9,428
============ ============ ============
Reserves for unpaid claims and claim adjustment expenses . . . . . $ 149,041 $ 135,825 $ 128,122
============ ============ ============
Discount (if any) deducted . . . . . . . . . . . . . . . . . . . . $ -- $ -- $ --
============ ============ ============
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . $ 76,630 $ 69,363 $ 66,235
============ ============ ============
Net earned premiums . . . . . . . . . . . . . . . . . . . . . . . . $ 92,481 $ 86,029 $ 41,249
============ ============ ============
Net investment income . . . . . . . . . . . . . . . . . . . . . . . $ 18,597 $ 18,753 $ 14,636
============ ============ ============
Net claims and claim adjustment expenses incurred related to:
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,688 $ 31,250 $ 18,141
============ ============ ============
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . $ (8,344) $ (11,293) $ (7,480)
============ ============ ============
Amortization of deferred policy acquisition costs . . . . . . . . . $ 29,390 $ 21,164 $ 2,155
============ ============ ============
Paid claims and claim adjustment expenses . . . . . . . . . . . . . $ 16,719 $ 15,455 $ 13,215
============ ============ ============
Net premiums written . . . . . . . . . . . . . . . . . . . . . . . $ 90,578 $ 88,306 $ 40,310
============ ============ ============
-60-
61
(A)(3) EXHIBITS
Exhibit
Number Description
2 Not applicable.
3(i) The Certificate of Incorporation of Nucorp, Inc. dated May 6, 1988
together with the Certificate of Merger of Nucorp Energy, Inc. with
and into Nucorp, Inc. dated August 12, 1988 (filed on August 15, 1988
as Exhibit 3.1 to Nucorp, Inc.'s Quarterly Report on Form 10-Q for
the Period March 31, 1988 through June 30, 1988, and incorporated
herein by reference).
3(ii) Bylaws of Nucorp, Inc. (filed on August 15, 1988 as Exhibit 3.2 to
Nucorp, Inc.'s Quarterly Report on Form 10-Q for the Period March 31,
1988 through June 30, 1988, and incorporated herein by reference).
4 Specimen of Capsure Holdings Corp. Common Stock Certificate.
9 Not applicable.
10(1) Employment Agreement dated as of February 20, 1990 among Nucorp,
Inc., United Capitol Holding Company, United Capitol Insurance
Company, Equity Holdings and Bruce A. Esselborn (filed on August 2,
1990 as Exhibit 10.7 to Post-Effective Amendment No. 1 to Nucorp,
Inc.'s Registration Statement on Form S-1, and incorporated herein by
reference).
10(2) Employment Agreement dated as of February 20, 1990 among Nucorp,
Inc., United Capitol Holding Company, United Capitol Insurance
Company and Mary Jane Robertson (filed on July 16, 1992 as Exhibit
10(iii)(A)(2) to Amendment No. 1 to Nucorp, Inc.'s Registration
Statement on Form S-2, and incorporated herein by reference).
10(3) Employment Agreement dated as of February 20, 1990 among Nucorp,
Inc., United Capitol Holding Company, United Capitol Insurance
Company and Steven S. Zeitman (filed on July 16, 1992 as Exhibit
10(iii)(A)(3) to Amendment No. 1 to Nucorp, Inc.'s Registration
Statement on Form S-2, and incorporated herein by reference).
10(4) Employment Agreement dated as of February 20, 1995 by and between
Capsure Holdings Corp., a Delaware corporation, and Bruce A.
Esselborn, an individual.
10(5) Employment Agreement dated as of February 20, 1995 by and among
Capsure Holdings Corp., a Delaware corporation, United Capitol
Insurance Company, a Wisconsin corporation, and Mary Jane Robertson,
an individual.
10(6) Employment Agreement dated as of February 20, 1995 by and between
Capsure Holdings Corp., a Delaware corporation, and Steven S.
Zeitman, an individual.
10(7) Executive Employment Agreement dated as of August 14, 1992 by and
among Nucorp, Inc., a Delaware corporation, Surewest Financial
Corp., a South Dakota corporation, SI Acquisition Corp., a Texas
corporation, Western Surety Company, a South Dakota corporation,
Equity Holdings, an Illinois partnership, and Dan L. Kirby.
10(8) Executive Employment Agreement dated as of August 14, 1992 by and
among Nucorp, Inc., a Delaware corporation, SI Acquisition Corp., a
Texas corporation, Surewest Financial Corp., a South Dakota
corporation, Western Surety Company, a South Dakota corporation,
Equity Holdings, an Illinois partnership, and Joe P. Kirby.
-61-
62
Exhibit
Number Description
10(9) Purchase Agreement dated as of December 21, 1989 among Nucorp, Inc.
and Bruce A. Esselborn (filed on August 2, 1990 as Exhibit 10.8 to
Post-Effective Amendment No. 1 to Nucorp's Registration Statement on
Form S-1, and incorporated herein by reference).
10(10) Purchase Agreement dated as of December 22, 1989 among Nucorp, Inc.
and CIP Limited Partnership (filed on September 26, 1990 as Exhibit
10.10 to Amendment No. 1 to Nucorp's Registration Statement on Form
S-1, and incorporated herein by reference).
10(11) Common Stock Purchase Warrant dated as of February 20, 1990, of
Nucorp, Inc. to Continental Bank N.A. (filed on March 2, 1993 as
Exhibit 28(e) to Nucorp, Inc.'s Registration Statement on Form S-3,
and incorporated herein by reference).
10(12) Registration Agreement dated as of February 20, 1990, between Nucorp,
Inc. and Continental Bank N.A. (filed on March 2, 1993 as Exhibit
28(f) to Nucorp, Inc.'s Registration Statement on Form S-3, and
incorporated herein by reference).
10(13) Purchase Agreement dated as of March 25, 1992 among Nucorp, Inc., SI
Acquisition Corp. and Surewest Financial Corp. (filed on March 27,
1992, as Exhibit 2 on Form 8-K, and incorporated herein by
reference).
10(14) Stock Purchase Agreement between Nucorp, Inc.; SI Acquisition Corp.;
Surewest Financial Corp.; Joe P. Kirby; Dan L. Kirby; Kevin T.
Kirby; Steven T. Kirby; First Bank of South Dakota, N.A., as Trustee
of the Dan L. Kirby Trust; First Bank of South Dakota, N.A., as
Trustee of the Kevin T. Kirby Trust; Norwest Bank South Dakota, N.A.,
as Trustee of the Joe P. Kirby Trust; and Norwest Bank South Dakota,
N.A., as Trustee of the Steven T. Kirby Trust, dated March 25, 1992
and schedules thereto (filed on March 25, 1992 as Exhibit 2 on
Nucorp, Inc.'s Form 8-K, and incorporated herein by reference).
10(15) Credit Agreement dated August 14, 1992, among SI Acquisition Corp.,
and Continental Bank N.A. (filed on March 2, 1993 as Exhibit 28(c) to
Nucorp, Inc.'s Registration Statement on Form S-3, and incorporated
herein by reference).
10(16) Compensation Agreement dated August 14, 1992 among SI Acquisition
Corp. and Continental Bank N.A. (filed on March 26, 1993 as Exhibit
10.15 on Nucorp, Inc.'s Form 10-K, and incorporated herein by
reference).
10(17) Credit Agreement dated as of March 29, 1994 among Capsure Financial
Group, Inc., Capsure Holdings Corp., the Lenders named therein and
Chemical Bank, as Administrative Agent.
10(18) Stock Purchase Agreement among John Knox, Jr., Universal Surety
Holding Corp., Capsure Financial Group, Inc. and Capsure Holdings
Corp. dated July 26, 1994 (filed on October 6, 1994 as Exhibit 2 to
Capsure Holdings Corp. Current Report on Form 8-K, and incorporated
herein by reference).
10(19) 1990 Stock Option Plan of Nucorp, Inc. (filed on April 19, 1990 as
Exhibit A to Nucorp, Inc.'s Proxy Statement for the Annual Meeting of
Shareholders on May 9, 1990, and incorporated herein by reference).
10(20) First Amendment to the Nucorp, Inc. 1990 Stock Option Plan (filed on
April 27, 1992 as part of Nucorp, Inc.'s Proxy Statement for the
Annual Meeting of Shareholders on June 9, 1992, and incorporated
herein by reference).
10(21) Managing General Agency Agreement between Western Surety Company and
United Capitol Managers, Inc. (filed on March 2, 1993 as Exhibit
28(a) to Nucorp, Inc.'s Registration Statement on Form S-3, and
incorporated herein by reference).
-62-
63
Exhibit
Number Description
10(22) Surety Bond Quota Share Reinsurance Agreement between Western Surety
Company and United Capitol Insurance Company (filed on March 2, 1993
as Exhibit 28(b) to Nucorp, Inc.'s Registration Statement on Form
S-3, and incorporated herein by reference).
10(23) Contract Surety Bond Reinsurance Agreement dated as of September 22,
1994 between Western Surety Company, a South Dakota corporation, and
Universal Surety of America, a Texas corporation.
10(24) Co-Employee Agreement dated as of September 22, 1994 between Western
Surety Company and Universal Surety of America.
11 Earnings per share computation.
12 Not applicable.
13 Not applicable.
16 Not applicable.
18 Not applicable.
21 Subsidiaries of the Registrant.
22 Not applicable.
23 Consent of Coopers & Lybrand dated March 29, 1995.
24(1) Power of Attorney for Herbert A. Denton dated March 27, 1995.
24(2) Power of Attorney for Bradbury Dyer, III dated March 17, 1995.
24(3) Power of Attorney for Talton R. Embry dated March 17, 1995.
24(4) Power of Attorney for Dan L. Kirby dated March 21, 1995.
24(5) Power of Attorney for Joe P. Kirby dated March 22, 1995.
24(6) Power of Attorney for L.G. Schafran dated March 20, 1995.
27 Financial Data Schedule.
28 Information from reports furnished to state insurance regulatory
authorities - Schedule P from 1994 Combined Annual Statement of
Capsure Holdings Corp.
-63-
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
CAPSURE HOLDINGS CORP.
/s/ Bruce A. Esselborn
Bruce A. Esselborn
President
(Principal Executive Officer)
/s/ Mary Jane Robertson
Mary Jane Robertson
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ John S. Heneghan
John S. Heneghan
Controller
(Principal Accounting Officer)
Dated: March 29, 1995
(CONTINUED)
-64-
65
CAPSURE HOLDINGS CORP. - SIGNATURES - (CONTINUED)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Title
March 21, 1995 Chairman of the Board and /s/ Samuel Zell
Chief Executive Officer --------------------------------------
Samuel Zell
March 15, 1995 Director /s/ Rod F. Dammeyer
--------------------------------------
Rod F. Dammeyer
March 28, 1995 Director * Herbert A. Denton
--------------------------------------
* Herbert A. Denton
March 28, 1995 Director * Bradbury Dyer, III
--------------------------------------
* Bradbury Dyer, III
March 28, 1995 Director * Talton R. Embry
--------------------------------------
* Talton R. Embry
March 8, 1995 Director /s/ Bruce A. Esselborn
--------------------------------------
Bruce A. Esselborn
March 28, 1995 Director * Dan L. Kirby
--------------------------------------
* Dan L. Kirby
March 28, 1995 Director * Joe P. Kirby
--------------------------------------
* Joe P. Kirby
March 20, 1995 Director /s/ Donald W. Phillips
--------------------------------------
Donald W. Phillips
March 28, 1995 Director and /s/ Sheli Z. Rosenberg
*Attorney-in-Fact --------------------------------------
Sheli Z. Rosenberg
March 28, 1995 Director * L.G. Schafran
--------------------------------------
* L.G. Schafran
March 15, 1995 Director /s/ Richard Weingarten
--------------------------------------
Richard Weingarten
-65-
66
CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Page
Number Description No.
4 Specimen of Capsure Holdings Corp. Common Stock Certificate . . . . . . . . . . . . . . . . . . . . . . . . .
10(4) Employment Agreement dated as of February 20, 1995 by and between
Capsure Holdings Corp., a Delaware corporation, and Bruce A.
Esselborn, an individual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10(5) Employment Agreement dated as of February 20, 1995 by and among
Capsure Holdings Corp., a Delaware corporation, United Capitol
Insurance Company, a Wisconsin corporation, and Mary Jane Robertson,
an individual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10(6) Employment Agreement dated as of February 20, 1995 by and between
Capsure Holdings Corp., a Delaware corporation, and Steven S. Zeitman,
an individual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10(7) Executive Employment Agreement dated as of August 14, 1992 by and
among Nucorp, Inc., a Delaware corporation, Surewest Financial Corp.,
a South Dakota corporation, SI Acquisition Corp., a Texas corporation,
Western Surety Company, a South Dakota corporation, Equity Holdings,
an Illinois partnership, and Dan L. Kirby . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10(8) Executive Employment Agreement dated as of August 14, 1992 by and
among Nucorp, Inc., a Delaware corporation, SI Acquisition Corp., a
Texas corporation, Surewest Financial Corp., a South Dakota
corporation, Western Surety Company, a South Dakota corporation,
Equity Holdings, an Illinois partnership, and Joe P. Kirby . . . . . . . . . . . . . . . . . . . . . . . . .
10(17) Credit Agreement dated as of March 29, 1994 among Capsure Financial
Group, Inc., Capsure Holdings Corp., the Lenders named therein and
Chemical Bank, as Administrative Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10(23) Contract Surety Bond Reinsurance Agreement dated as of September 22,
1994 between Western Surety Company, a South Dakota corporation, and
Universal Surety of America, a Texas corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10(24) Co-Employee Agreement dated as of September 22, 1994 between Western
Surety Company and Universal Surety of America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11 Earnings per share computation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21 Subsidiaries of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23 Consent of Coopers & Lybrand dated March 29, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24(1) Power of Attorney for Herbert A. Denton dated March 27, 1995 . . . . . . . . . . . . . . . . . . . . . . . .
24(2) Power of Attorney for Bradbury Dyer, III dated March 17, 1995 . . . . . . . . . . . . . . . . . . . . . . . .
24(3) Power of Attorney for Talton R. Embry dated March 17, 1995 . . . . . . . . . . . . . . . . . . . . . . . . .
24(4) Power of Attorney for Dan L. Kirby dated March 21, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . .
24(5) Power of Attorney for Joe P. Kirby dated March 22, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . .
24(6) Power of Attorney for L.G. Schafran dated March 20, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . .
-66-
67
EXHIBIT INDEX (CONTINUED)
Exhibit Page
Number Description No.
27 Financial Data Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28 Information from reports furnished to state insurance regulatory authorities
- Schedule P from 1994 Combined Annual Statement of Capsure Holdings Corp. . . . . . . . . . . . . . . . . .
-67-