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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-3565
CAPSURE HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 34-1010356
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
TWO NORTH RIVERSIDE PLAZA, CHICAGO, ILLINOIS 60606
(Address of principal executive offices) (Zip Code)
(312) 879-1900
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.05 PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates was
$172.1 million based upon the closing price of $16.75 on March 1, 1996, using
beneficial ownership of stock rules adopted pursuant to Section 13 of the
Securities Exchange Act of 1934 to exclude voting stock owned by Directors and
Officers, some of whom may not be held to be affiliates upon judicial
determination.
At March 1, 1996, 15,409,123 shares of the Registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III incorporates by reference the Registrant's Proxy Statement
relating to the Annual Meeting of Shareholders to be held May 23, 1996.
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CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
PART I. ----
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Summary of Insurance Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
A.M. Best Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Surety and Fidelity Bond Operations . . . . . . . . . . . . . . . . . . . . . . . . . 5
Excess and Surplus Lines Operations . . . . . . . . . . . . . . . . . . . . . . . . . 10
Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Unpaid Losses and Loss Adjustment Expenses. . . . . . . . . . . . . . . . . . . . . . 15
Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Net Operating Tax Loss Carryforwards . . . . . . . . . . . . . . . . . . . . . . . . 18
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . 19
PART II.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters . . . . . . . . 20
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . 22
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . 33
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . 33
PART III.
Item 10. Directors and Executive Officers of the Registrant. . . . . . . . . . . . . . . . . . . . 33
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Item 12. Security Ownership of Certain Beneficial Owners and Management. . . . . . . . . . . . . . 33
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . 33
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. . . . . . . . . . . . . 34
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CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
PART I
ITEM 1. BUSINESS
GENERAL
Capsure Holdings Corp. and its subsidiaries ("Capsure" or the "Company")
are engaged in the property and casualty insurance business. Capsure's
principal property and casualty insurance entities are Western Surety Company
("Western Surety"), acquired in August 1992, United Capitol Insurance Company
("United Capitol"), acquired in February 1990, and Universal Surety of America
("Universal Surety"), acquired in September 1994. Western Surety writes small
fidelity and noncontract surety bonds, referred to as "miscellaneous" bonds,
and errors and omissions ("E&O") liability insurance, as a licensed insurer in
all 50 states and the District of Columbia. Western Surety's sister company,
Surety Bonding Company of America ("SBCA"), writes similar business and is
licensed in 11 states. United Capitol writes specialty property and casualty
insurance, primarily as an excess and surplus ("E&S") lines insurer. United
Capitol is licensed in Wisconsin and Arizona and conducts business on a
nonadmitted basis in all other states, the District of Columbia, Puerto Rico
and the U.S. Virgin Islands. Universal Surety specializes in the underwriting
of small contract and miscellaneous surety bonds. Universal Surety is licensed
in 21 states and the District of Columbia with most of its business generated
in Texas.
The Company's business strategy with respect to its existing insurance
operations is to emphasize the underwriting of risks where reasonable
expectations of underwriting profits exist. At Western Surety, whose business
is relatively low risk and relatively insensitive to industry pricing cycles,
delivery of excellent service to its vast network of agents is emphasized. At
Universal Surety, whose business includes both miscellaneous surety and the
comparatively more risky contract surety, responsiveness to agents coupled with
sound, conservative underwriting are the guiding principles. Contract bonds
are more affected by prevailing market and general economic conditions than are
noncontract bonds. At United Capitol, whose business is relatively high risk
and extremely cyclical, strict underwriting discipline has been a critical
factor affecting underwriting profitability during soft market periods.
The Company's primary growth strategy is to expand its operations in the
specialty insurance and financial services industries by capitalizing on
Western Surety's licenses, distribution system and A+ rating by A.M. Best
Company, Inc. ("A.M. Best") and the combined Capsure organization's
underwriting expertise and management resources, and by acquiring profitable,
well-managed businesses with established market positions in the insurance or
financial services industry. The 1994 acquisition of Universal Surety was an
example of this strategy.
Universal Surety has been a highly successful regional underwriter of
small- to medium-sized contract surety bonds in Texas and adjacent states. The
alliance of Universal Surety and Western Surety represents a unique opportunity
for Capsure to capitalize on Western Surety's vast distribution network and
national prominence and Universal Surety's contract bond underwriting expertise
to (1) increase Universal Surety's geographic penetration and growth and (2)
provide Western Surety agents with a more complete and competitive line of
surety products.
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This joint venture of Capsure's surety companies has been named
USA\Western. USA\Western acts as the contract bond division of Western Surety.
Universal Surety personnel underwrite contract surety bonds submitted by
Western Surety agents on Western Surety's bond forms. Contract bonds written
through the USA\Western program are generally reinsured 100% by Universal
Surety.
The USA\Western program has shown steady growth in 1995 as the program is
gradually introduced to Western Surety agents across the country. Gross
written premiums for the program have grown from approximately $0.1 million in
the first quarter of 1995 to $0.7 million in the fourth quarter of 1995 and
totaled approximately $1.6 million for the full year. The USA\Western program
was marketed to Western Surety agents in 21 states as of December 31, 1995.
The expansion of Universal Surety's contract bond business through Western
Surety's broad distribution network will be dependent on Universal Surety's
ability to attract qualified underwriting and claims personnel and maintain
distinctive service to agents.
Western Surety's vast agency force is also being leveraged by the gradual
expansion of an insurance agents' and brokers' E&O product. This product is
marketed directly to Western Surety agents without third-party commissions and,
as a result, provides a significant competitive advantage. Gross written
premiums for this product in 1995 totaled $0.8 million. This product offering
was expanded to 30 states as of December 31, 1995. Currently, Western Surety
cedes 90% of this business to a third-party reinsurer.
On February 29, 1996, the Company announced that it had signed an
agreement to sell United Capitol Holding Company ("UCHC") and its subsidiaries,
United Capitol, United Capitol Managers, Inc. ("Managers") and Fischer
Underwriting Group, Incorporated ("Fischer"), to a subsidiary of Frontier
Insurance Group, Inc. Estimated net proceeds to Capsure will be approximately
$75 million, which includes the purchase price for the capital stock of UCHC
and the release of United Capitol's excess statutory surplus on or before
closing. The agreement is subject to several conditions including approval by
insurance regulatory authorities and other governmental authorities. The
transaction is expected to close in the second quarter of 1996.
Capsure is exiting the E&S marketplace in order to focus on its surety
operations and other admitted lines. Management has concluded that United
Capitol's prospects can be best enhanced and realized by ownership under a
larger company than Capsure. The sale of United Capitol will liberate
approximately $75 million of Capsure's capital. Capsure is considering
alternative uses of this capital including funding of acquisitions, stock
repurchases, payment of stockholder dividends and some combination of the
foregoing.
SUMMARY OF INSURANCE OPERATIONS
Capsure's insurance companies operate in two principal markets within the
property and casualty insurance industry - surety and fidelity and excess and
surplus lines. The principal lines of business of Western Surety and Universal
Surety are surety and fidelity. United Capitol underwrites principally other
liability, product liability and commercial property, primarily on an E&S
basis.
On August 14, 1992, the Company acquired Western Surety. Founded in
1900, Western Surety is one of the largest writers of miscellaneous bonds in
the United States. Bonds underwritten by Western Surety are relatively
low-risk, low-premium products where prompt service, easy-to-use forms and
availability of an extensive array of bond products are emphasized. Western
Surety's success is attributable to its product specialization, underwriting
expertise and broad distribution network. Substantially all of Western
Surety's bonds are mandated by various state statutes and local ordinances.
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On September 22, 1994, the Company acquired Universal Surety. Founded in
1984, Universal Surety specializes in writing miscellaneous and small- to
medium-sized contract surety bonds primarily in the southern United States.
Contract bonds underwritten by Universal Surety, including those underwritten
on behalf of Western Surety under the USA\Western program, are primarily
contractor performance and payment bonds in amounts under $3.0 million for
which underwriting expertise and distinctive service to agents are emphasized.
Universal Surety underwrites primarily standard and some specialty accounts for
which it will utilize supplemental collateral arrangements and excess rates for
contractors not qualified for standard surety rates. Universal Surety also
reduces its exposure through participation in the Small Business Administration
("SBA") Surety Bond Guarantee Program. Under this program, the SBA will
generally reimburse Universal Surety for between 80% and 90% of losses and loss
adjustment expenses incurred on any SBA guaranteed bond in exchange for 20% of
the premium. In addition, a significant portion of the Company's premiums
consist of miscellaneous bonds underwritten in the same geographic area.
On February 20, 1990, the Company acquired United Capitol, a specialty
property and casualty insurer. United Capitol provides principally general
liability insurance, including directors' and officers' liability ("D&O"),
product liability and other liability, to businesses which have hazardous,
unique or unusual risk characteristics and which require individual risk
underwriting and pricing expertise. Policies underwritten by United Capitol
are relatively high-risk, high-premium products. Since its founding in 1986,
United Capitol has been able to consistently achieve its primary objective of
generating underwriting profits by adhering to a strategy of strict
underwriting discipline. The Company believes this strategy has been a
critical factor affecting underwriting profitability during soft market
conditions, which have prevailed in the property and casualty insurance
industry since 1987. United Capitol has experienced significant declines in
premium volume since 1987 as it has exercised underwriting discipline and has
declined to write what it believes to be underpriced business.
A.M. BEST RATINGS
Western Surety, Universal Surety and United Capitol are currently rated A+
(Superior), A (Excellent) and A (Excellent), respectively, by A.M. Best. A.M.
Best's letter ratings range from A++ (Superior) to C- (Fair) with A++ being
highest. An A+ (Superior) rating is assigned to those companies which A.M.
Best believes have achieved superior overall performance when compared to the
norms of the property and casualty insurance industry. A+ (Superior) rated
insurers have been shown to be among the strongest in ability to meet
policyholder and other contractual obligations. A rating of A (Excellent) is
assigned to those companies which A.M. Best believes have achieved excellent
overall performance when compared to the norms of the property and casualty
insurance industry and generally have demonstrated a strong ability to meet
their respective policyholder and other contractual obligations. A.M. Best
reviews its ratings at least annually and reaffirmed each company's rating in
1995. There can be no assurance that these ratings will continue to be
reaffirmed.
SURETY AND FIDELITY BOND OPERATIONS
According to 1994 statistics published by the Surety Association of
America ("SAA"), the surety and fidelity bond market had direct written
premiums of approximately $2.9 billion, of which the miscellaneous and contract
bond segments accounted for approximately $0.9 billion and $1.3 billion,
respectively. Capsure targets subsets of the miscellaneous bond segment and
contract bond segment of the surety and fidelity market because of their
favorable risk characteristics.
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PRODUCTS AND POLICIES
Surety and fidelity bonds differ in some respects from conventional
insurance policies. A surety bond is a three-party arrangement wherein the
issuer of the bond (the surety) guarantees to a third party (the obligee) an
obligation made by another entity (the principal). The surety is the party
who guarantees fulfillment of the principal's obligation to the obligee. In
addition, sureties are generally entitled to recover from the principal any
losses and expenses paid to third parties. The surety's responsibility is to
evaluate the risk and determine if the principal meets the underwriting
requirements for the bond. Accordingly, surety bond premiums primarily
reflect the type and class of risk and related costs associated with both
processing the bond transaction and investigating the applicant including, if
necessary, an analysis of the applicant's creditworthiness and ability to
perform.
Capsure issues thousands of different bond forms representing the many
types of noncontract and contract bonds available in each of the
jurisdictions in which it operates. The terms of such bonds in many cases
are prescribed by state and local laws or regulations. The principal types
of surety and fidelity bonds underwritten are as follows:
License and Permit - Bonds required by statutes or ordinances for a
number of purposes including guaranteeing the payment of certain taxes and
fees and providing consumer protection as a condition to granting licenses
related to selling real estate or motor vehicles and contracting services.
Judicial and Fiduciary - Bonds required by statutes, courts or legal
documents for the protection of those on whose behalf a fiduciary acts.
Examples of such fiduciaries include executors and administrators of estates,
and guardians of minors and incompetents.
Fidelity - Bonds which cover losses arising from employee dishonesty.
Examples of purchasers of fidelity bonds are law firms, insurance agencies
and janitorial service companies.
Public Official - Bonds required by statutes and ordinances to guarantee
the lawful and faithful performance of the duties of office by public
officials.
Notary Public - Bonds required by statutes to protect against losses
resulting from the improper actions of notaries public.
Contract - Bonds which secure the payment and/or performance of an
obligation under a written contract.
Capsure also writes E&O policies for three classes of insureds:
notaries public, tax preparers and insurance agents and brokers. The notary
public E&O policy is marketed as a companion product to the notary public
bond and the tax preparer E&O policy is marketed to small tax return
preparation firms. Western Surety introduced an insurance agents' and
brokers' E&O insurance product in 1994 and expanded this product to 30 states
as of December 31, 1995.
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The following tables set forth, for each principal class of bonds,
combined Western Surety/SBCA and Universal Surety gross written premiums, net
written premiums, net earned premiums and number of bonds and policies in force
and the respective percentages of the total for the past three years. All
tables in this section contain information reflecting the operations of
Universal Surety prior to its acquisition by Capsure. As such, the financial
information is not necessarily indicative of the financial results that would
have occurred under the ownership and management of Capsure (dollars in
thousands, except average bond amounts):
GROSS WRITTEN PREMIUMS
------------------------------------------------------------
% of % of % of
1995 Total 1994 Total 1993 Total
------- ------ ----------- ------------- ------- ------
Surety and fidelity bonds:
License and permit ...... $28,742 31.7% $28,160 32.5% $27,934 32.5%
Judicial and fiduciary .. 13,007 14.4 13,116 15.2 13,493 15.7
Fidelity ................ 14,357 15.9 13,821 16.0 13,111 15.3
Public official ......... 7,351 8.1 6,874 7.9 7,628 8.9
Notary public ........... 7,770 8.6 7,989 9.2 8,804 10.3
Contract ................ 12,448 13.7 10,393 12.0 9,111 10.6
Other ................... 1,905 2.1 1,935 2.3 1,723 2.0
------- ------ ------- ----- ------- ------
85,580 94.5 82,288 95.1 81,804 95.3
E&O policies .............. 4,984 5.5 4,261 4.9 4,031 4.7
------- ------ ------- ----- ------- ------
$90,564 100.0% $86,549 100.0% $85,835 100.0%
======= ====== ======= ===== ======= ======
Premiums by company:
Western Surety/SBCA ..... $73,703 81.4% $71,286 82.4% $72,064 84.0%
Universal Surety ........ 16,861 18.6 15,263 17.6 13,771 16.0
------- ------ ------- ----- ------- ------
$90,564 100.0% $86,549 100.0% $85,835 100.0%
======= ====== ======= ===== ======= ======
Premiums generated by
largest agency:
Western Surety .......... 1.2% 1.2% 1.3%
======= ======= ======
Universal Surety ........ 4.1% 4.0% 6.0%
======= ======= ======
Percentage of premiums
in the top five states:
Western Surety .......... 26.2% 26.5% 26.9%
======= ======= ======
Universal Surety ........ 93.1% 92.0% 95.0%
======= ======= ======
NET WRITTEN PREMIUMS
-------------------------------------------------------
% of % of % of
1995 Total 1994 Total 1993 Total
------- ------ ------- ------ ------- ------
Surety and fidelity bonds:
License and permit ...... $28,588 33.0% $28,003 33.3% $27,796 33.3%
Judicial and fiduciary .. 12,329 14.2 12,379 14.7 12,715 15.2
Fidelity ................ 14,322 16.5 13,786 16.4 13,061 5.7
Public official ......... 7,204 8.3 6,731 8.0 7,422 8.9
Notary public ........... 7,683 8.8 7,922 9.4 8,718 10.4
Contract ................ 11,148 12.9 9,623 11.5 8,382 10.0
Other ................... 1,244 1.4 1,421 1.7 1,343 1.6
------- ----- ------- ----- ------- -----
82,518 95.1 79,865 95.0 79,437 95.1
E&O policies .............. 4,228 4.9 4,186 5.0 4,031 4.9
------- ----- ------- ----- ------- -----
$86,746 100.0% $84,051 100.0% $83,468 100.0%
======= ===== ======= ===== ======= =====
Premiums by company:
Western Surety/SBCA ..... $71,069 81.9% $69,738 83.0% $70,598 85.0%
Universal Surety ........ 15,677 18.1 14,313 17.0 12,870 15.0
------- ----- ------- ----- ------- -----
$86,746 100.0% $84,051 100.0% $83,468 100.0%
======= ===== ======= ===== ======= =====
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NET EARNED PREMIUMS
-----------------------------------------------------------
% of % of % of
1995 Total 1994 Total 1993 Total
-------- ------ -------- -------- --------- -------
Surety and fidelity bonds:
License and permit ...... $ 28,039 33.0% $ 27,692 33.4% $ 26,941 34.2%
Judicial and fiduciary .. 12,396 14.6 12,476 15.1 12,603 16.0
Fidelity ................ 14,082 16.6 13,402 16.2 12,618 16.0
Public official ......... 7,045 8.3 7,017 8.5 7,059 9.0
Notary public ........... 7,883 9.3 7,561 9.1 6,949 8.8
Contract ................ 10,228 12.0 9,331 11.3 7,720 9.8
Other ................... 1,191 1.4 1,426 1.7 1,218 1.5
-------- ------ -------- -------- --------- ------
80,864 95.2 78,905 95.3 75,108 95.3
E&O policies .............. 4,119 4.8 3,917 4.7 3,733 4.7
-------- ------ -------- -------- ------- ------
$ 84,983 100.0% $ 82,822 100.0% $ 78,841 100.0%
======== ====== ======== ======== ======== ======
Premiums by company:
Western Surety/SBCA ..... $ 70,332 82.8% $ 69,212 83.6% $ 67,941 86.2%
Universal Surety ........ 14,651 17.2 13,610 16.4 10,900 13.8
-------- ------ -------- -------- -------- ------
$ 84,983 100.0% $ 82,822 100.0% $ 78,841 100.0%
======== ====== ========= ======== ======== ======
BONDS AND POLICIES IN FORCE
-------------------------------------------------------------
% of % of % of
1995 Total 1994 Total 1993 Total
------- ------- -------- -------- ------ --------
Surety and fidelity bonds:
License and permit ............. 463 29.2% 460 29.4% 460 30.5%
Judicial and fiduciary ......... 63 4.0 64 4.1 67 4.4
Fidelity ....................... 91 5.7 88 5.6 86 5.7
Public official ................ 62 3.9 64 4.1 63 4.2
Notary public .................. 747 47.0 758 48.6 714 47.5
Contract ....................... 8 0.5 7 0.4 6 0.3
Other .......................... 11 0.7 10 0.7 11 0.8
------- ------ -------- ------ ------ -------
1,445 91.0 1,451 92.9 1,407 93.4
E&O policies ...................... 143 9.0 120 7.1 107 6.6
------- ------ -------- ------ ------ -------
1,588 100.0% 1,571 100.0% 1,514 100.0%
======= ====== ======== ===== ===== =====
Bonds/policies in force by company:
Western Surety/SBCA ............ 1,416 89.2% 1,389 88.4% 1,367 90.3%
Universal Surety ............... 172 10.8 182 11.6 147 9.7
------- ------ -------- ------ ------ -------
1,588 100.0% 1,571 100.0% 1,514 100.0%
======= ====== ======== ====== ====== =======
Average bond penalty/policy limit:
Western Surety .................. $10,030 $ 9,470 $ 9,186
======= ======== =======
Universal Surety ................ $13,317 $ 11,507 $11,197
======= ======== =======
MARKETING
Western Surety enjoys broad national distribution of its products, which
are marketed through approximately 37,000 of the approximately 45,000
independent property and casualty insurance agencies in the United States.
These independent agencies are paid an average commission of approximately 30%
of a miscellaneous bond's premium. Western Surety also employs approximately
60 full-time salaried marketing representatives whose principal duties are to
continually service their producer network on a local basis.
Since miscellaneous fidelity and surety bonds typically account for a
small portion of an independent agency's revenues and are generally applied
for under rush circumstances, Western Surety emphasizes one-day response
service, easy-to-use forms and an extensive array of miscellaneous bond
products. In addition, independent agents are provided pre-executed bond
forms, powers of attorney, and facsimile authorizations that allow them to
issue many standard bonds in their offices.
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Western Surety's marketing strategy is concentrated on increasing its
share of the miscellaneous bond market. In addition, Western Surety devotes
considerable time and effort educating legislators as to the need for and
value of miscellaneous bonds and challenging attempts to repeal certain
bonding requirements.
Universal Surety markets its products through approximately 1,000
independent property and casualty insurance agencies through its headquarters
in Houston, Texas, and branch offices in Austin, Dallas, San Antonio and
Overland Park, Kansas. Universal Surety emphasizes innovative, flexible
underwriting, product specialization and distinctive agent service backed by
highly qualified, experienced employees.
Of Universal Surety's gross written premiums in 1995, 71% related to
contract bonds, including 10% that qualified for the SBA guarantee. The
remaining 29% related to noncontract bonds, including 10% for notary public
bonds. According to 1994 SAA statistics, Capsure ranked number one in volume
of bonds and direct written premiums written in Texas, based on the combined
results of Universal Surety and Western Surety.
Universal Surety has concentrated its marketing efforts in expanding its
share of the small contract bond market. Contract bonds underwritten by
Universal Surety, including those underwritten on behalf of Western Surety
under the USA\Western program, are primarily contractor performance and
payment bonds in amounts under $3.0 million. Universal Surety underwrites
principally standard accounts and some specialty accounts for which it will
utilize supplemental collateral arrangements and excess rates or SBA
guarantees for contractors not generally considered standard risks. The
Company intends to utilize Western Surety's existing diverse agency
relationships to expand the geographic and agency distribution of Universal
Surety's contract surety business under the USA\Western joint venture. The
USA\Western program was marketed to Western Surety agents in 21 states as of
December 31, 1995. Western Surety will generally cede 100% of each such
contract surety bond written on Western bond forms to Universal Surety
pursuant to a Surety Bond Quota Share Reinsurance Agreement. Gross written
premiums for this coverage were $1.6 million in 1995. In 1994, these
activities were not material.
In addition, Western Surety is gradually expanding its product line by
offering insurance agents' and brokers' E&O insurance directly to a majority
of its vast agency force. Western Surety cedes 90% of each policy to a
reinsurer pursuant to a treaty reinsurance arrangement. Gross written
premiums for this coverage were $0.8 million in 1995. In 1994, these
activities were not material.
UNDERWRITING
Western Surety and Universal Surety target various products in the
surety and fidelity bond market which are characterized by relatively
low-risk exposure and small bond amounts. Its underwriting criteria,
including the extent of bonding authority granted to independent agents, vary
depending on the class of business and the type of bond. For example,
relatively little underwriting information is required of certain
low-exposure risks such as notary bonds. Other bonds, such as fiduciary or
probate bonds, are subjected to greater individual risk scrutiny, including
verification of the credit history and financial resources of an applicant.
Contract bonds underwritten by Universal Surety, which have higher bond
amounts and inherent risk, are subject to stringent financial analysis and
credit review. Both companies grant authority to independent agents to issue
certain low-risk bonds subject to underwriting guidelines.
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COMPETITION
The surety and fidelity market is highly competitive. The largest market
shares are held by large diversified insurance companies; however, the
single largest writer nationally in 1994, according to the SAA, controlled
only 7% of the $2.9 billion market. The small fidelity and noncontract
surety or miscellaneous segment of this market is competitive on the basis
of service, price, and commissions paid to producers. No single
competitor has a significant market position in the broad geographic range
and lines of business in which Western Surety conducts its operations.
Certain of Western Surety's existing and potential competitors are larger
and have greater financial and other resources than Western Surety. The
Company believes that Western Surety's principal competitive strengths
include its expertise in writing miscellaneous bonds, distribution network
of independent agencies, timely customer response and service, and
admitted status in every state and the District of Columbia.
The market in which Universal Surety competes, primarily small contract
bonds, has seen additional competition as both large and small insurance
companies are competing and expanding in this area. Certain of Universal
Surety's existing and potential competitors are larger and have greater
financial resources than Universal Surety. Universal Surety believes that
its principal competitive strengths include its underwriting expertise in
both contract and miscellaneous bonds, its distinctive service and its
strong relationship with its agents.
EXCESS AND SURPLUS LINES OPERATIONS
For regulatory purposes, the commercial property and casualty insurance
market is essentially divided into three segments: the admitted or licensed
market, commonly referred to as the "standard" market; the alternate risk
mechanism market, which includes captive insurance companies, risk retention
groups and risk purchasing groups; and the E&S market. The largest provider
group is the licensed or admitted insurers. The alternate risk market may
operate on an admitted or E&S basis.
The E&S segment was created to provide a source of insurance to those
insureds who are unable to purchase coverage in the standard market. Admitted
insurers are subject to extensive state regulation of rates, policy forms and
operational conduct, are required to participate in assigned risk pools, and
must pay premium taxes and other state assessments. These companies, however,
exert a dominant influence over pricing in the commercial market. By contrast,
E&S insurers are subject to comparatively less state regulation, affording them
more pricing and form flexibility and lower operating expenses. E&S insurers
may only insure those risks which the standard market cannot or chooses not to
insure.
The commercial property and casualty insurance market is intensely
competitive as to price and terms. The size and composition of the E&S market
historically have fluctuated with industry cycles. The cycles have been
characterized by conditions known as hard markets and soft markets. Hard
markets have been characterized by varying periods of relatively higher
premiums and more restrictive coverages. As more insurers have been attracted
to those conditions, competition has intensified. Over time, this has resulted
in depressed premiums, broader coverages and underwriting losses in the
industry, which are referred to as soft markets, and have been characterized by
an oversupply of underwriting capacity. E&S insurers are generally more
vulnerable to these cycles, which is reflected by their volatile writings,
since E&S insurers typically only underwrite classes of risks which standard
market insurers cannot or choose not to insure. The commercial property and
casualty insurance market has been operating under soft market conditions since
1987 and there can be no assurance as to the timing or extent of hard market
conditions returning to the property and casualty insurance industry.
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PRODUCTS AND POLICIES
The following tables set forth for each of United Capitol's principal
lines of business, gross written premiums, net written premiums and net
earned premiums for the past three years (dollars in thousands):
GROSS WRITTEN PREMIUMS
------------------------
% of % of % of
1995 Total 1994 Total 1993 Total
------- ------ ----------- --------- ------- ------
General liability:
Product liability ........ $ 5,252 25.2% $ 6,797 25.2% $ 7,992 27.8%
D&O ...................... 4,336 20.8 5,582 20.6 714 2.5
Asbestos abatement ....... 1,730 8.3 4,633 17.1 7,481 26.1
Other general liability .. 3,481 16.7 6,033 22.3 8,207 28.6
------- ------ ----------- --------- ------- ------
14,799 71.0 23,045 85.2 24,394 85.0
Property .................. 6,030 29.0 3,912 14.5 4,117 14.3
Surety .................... 5 0.0 75 .3 200 .7
------- ------ ----------- --------- ------- ------
$20,834 100.0% $27,032 100.0% $28,711 100.0%
======= ====== =========== ========= ======= ======
NET WRITTEN PREMIUMS
----------------------
% of % of % of
1995 Total 1994 Total 1993 Total
------- ------ ---------- ---------- ------- ------
General liability:
Product liability ........ $ 2,977 27.1% $ 4,361 25.6% $ 4,905 27.7%
D&O ...................... 2,431 22.1 3,298 19.3 498 2.8
Asbestos abatement ....... 1,444 13.2 3,358 19.7 5,994 33.9
Other general liability .. 3,317 30.2 5,100 29.9 5,439 30.7
------- ------ ---------- -------- ------- ------
10,169 92.6 16,117 94.5 16,836 95.1
Property .................. 600 5.5 670 3.9 515 2.9
Surety .................... 213 1.9 264 1.6 357 2.0
------- ------ ---------- -------- ------- ------
$10,982 100.0% $17,051 100.0% $17,708 100.0%
======= ====== ========== ======== ======= ======
NET EARNED PREMIUMS
----------------------
% of % of % of
1995 Total 1994 Total 1993 Total
------- ------ ---------- -------- ------- ------
General liability:
Product liability ........ $ 3,796 27.6% $ 5,138 26.7% $ 5,087 28.1%
D&O ...................... 2,996 21.9 2,045 10.6 12 0.1
Asbestos abatement ....... 2,291 16.7 4,786 24.9 6,844 37.9
Other general liability .. 3,750 27.4 6,419 33.4 5,374 29.7
------- ------ ---------- -------- ------- ------
12,833 93.6 18,388 95.6 17,317 95.8
Property .................. 673 4.9 547 2.9 420 2.3
Surety .................... 203 1.5 291 1.5 351 1.9
------- ------ ---------- -------- ------- ------
$13,709 100.0% $19,226 100.0% $18,088 100.0%
======= ====== ========== ======== ======= ======
PRODUCT LIABILITY AND OTHER PRIMARY GENERAL LIABILITY
United Capitol provides primary general liability insurance, including
product liability coverage, on both a claims-made and an occurrence basis to
hazardous, unique or unusual classes of commercial insureds that require
specialized underwriting. These policies provide coverage to the insured
against third-party claims of bodily injury or property damage arising from
negligent acts of the insured.
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Except as discussed below, claims for bodily injury or property damage caused
by exposure to asbestos are excluded from product liability and other primary
general liability policies sold by United Capitol.
Many of United Capitol's general liability policies specifically provide
product liability coverage for liabilities arising from the manufacture
and/or distribution of goods by an insured. Classes of insureds include
manufacturers and distributors of industrial machinery, equipment and
chemicals, sporting goods, toys and trailers; bridge building, pile driving
and other artisan contractors; operators of carnivals, circuses, water and
amusement parks; and fireworks exhibitors.
Most of United Capitol's non-asbestos primary general liability policies
have been issued on the occurrence form (57% in 1995, 63% in 1994 and 66% in
1993); however, classes considered to be particularly susceptible to late
reporting ("long tail" classes) are generally written on a claims-made form.
Examples of these classes include pharmaceuticals and chemicals manufacturers
and distributors, and hazardous waste remediation contractors.
In 1992, United Capitol commenced offering pollution liability coverage,
on a claims-made only basis, to contractors involved in the remediation of
preexisting pollution. United Capitol does not provide pollution coverage to
those parties who are likely to create or be the source of pollution. United
Capitol's gross limit of liability for this coverage is generally $1.0
million, but higher limits are available through the use of reinsurance.
Total gross written premiums for this coverage were $0.2 million, $0.5
million and $0.6 million in 1995, 1994 and 1993, respectively.
For the primary general liability insurance line of business, United
Capitol generally offers gross limits of liability of approximately $1.0
million to $3.0 million. United Capitol's average gross annual premium per
policy in 1995, 1994 and 1993 was approximately $113,000, $116,000 and
$98,000, respectively, and the average gross limits of liability were $2.2
million, $2.0 million and $1.8 million, respectively.
D&O AND MISCELLANEOUS PROFESSIONAL LIABILITY
In December 1993, United Capitol commenced writing specialty D&O and
miscellaneous professional liability insurance on a claims-made basis through
its managing general agency subsidiary, Fischer. D&O insurance is designed
to protect directors and officers from liabilities arising while acting in
their official capacities and typically covers both liabilities of the
officer or director and reimbursement of a corporation that has lawfully
agreed to indemnify their officers or directors. Miscellaneous professional
liability insurance, also known as E&O, covers claims by third parties who
allege damage as a result of negligent actions by insured professionals. The
gross limit of liability for these policies is generally $1.0 million, though
gross limits up to $5.0 million are available through the use of reinsurance.
The average gross annual premium per policy for these classes of business
was $10,000 in 1995, $11,000 in 1994 and $9,000 in 1993. United Capitol
targets businesses with hard-to-place D&O risks such as new companies,
research and development companies, and companies with past bankruptcies as
well as not-for-profit businesses. Types of entities considered for
professional liability coverage by United Capitol include insurance agents,
real estate brokers, title agents, collection agents and certain legal
professionals. Fischer, to a lesser degree, also places certain D&O and E&O
insurance with insurers other than United Capitol and receives commissions
for such services. This business placed with other insurers was not material
to the Company.
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ASBESTOS ABATEMENT
United Capitol provides general liability insurance for asbestos
abatement contractors, as well as professional liability insurance for
architects, engineers and others in their capacity as asbestos abatement or
environmental consultants. Asbestos abatement generally involves removal or
containment of asbestos and asbestos-containing materials from buildings and
other structures. United Capitol's asbestos abatement policy forms exclude
coverage for employees of an insured and others required to be in the area
during the asbestos abatement process.
United Capitol generally provides gross limits of liability of $1.0
million to $3.0 million to asbestos abatement contractors and professional
liability coverage to asbestos abatement and environmental consultants.
Higher gross limits can be provided through the use of reinsurance. In 1995,
1994 and 1993, the average gross annual premium per policy for this class of
business was approximately $46,000, $76,000 and $76,000, respectively. The
average gross limit of liability was $3.0 million in 1995, $2.8 million in
1994 and $2.5 million in 1993.
From 1986 through 1990, substantially all of United Capitol's general
liability policies for asbestos abatement contractors and environmental
consultants were written on a claims-made basis. Because of highly favorable
loss experience with the product, and in response to changing market
conditions as more insurers have entered the market, United Capitol commenced
writing these policies on an occurrence basis in late 1990. In 1995, 1994
and 1993, asbestos abatement general liability policies written on an
occurrence basis represented approximately 74%, 79% and 69% of the total,
respectively. Since 1989, United Capitol has experienced a significant
decline in asbestos abatement-related insurance premiums in absolute terms as
well as relative to its total business because of intense competition and
decreased demand for this product. Management anticipates a continuing
decline in this business.
PROPERTY, SURETY AND OTHER BUSINESS
United Capitol writes commercial property and inland marine insurance,
generally offering up to $5.0 million of gross limits per location or per
policy. The average gross annual premium per policy was $19,000 in 1995,
$18,000 in 1994 and $25,000 in 1993. In 1993, United Capitol's agency
subsidiary, Managers, entered into an agreement under which it acts as
commercial property underwriting manager for Westport Insurance Corporation
("Westport"), a member company of the Employers Reinsurance Group. Westport
is rated A++ (Superior) by A.M. Best and is an admitted insurer in the
majority of jurisdictions. Managers earns a commission for business
underwritten on behalf of Westport and United Capitol assumes up to $500,000
net per risk on business produced by Managers. In 1995 and 1994, Managers
produced $3.2 million and $4.3 million, respectively, of gross premiums for
Westport of which $0.1 million and $0.3 million, respectively, was retroceded
to United Capitol.
United Capitol also writes a small amount of surety bonds for asbestos
abatement and hazardous waste remediation contractors.
POLICY FORMS
United Capitol uses both claims-made and occurrence forms for its
liability lines of business, both of which are generally more restrictive
than standard industry policy forms. Since inception, approximately 90% of
United Capitol's claims-made and occurrence liability policies have provided
for an aggregate limit for all claims in a policy year. In approximately 98%
of United Capitol's liability policies, defense costs and other loss
adjustment expenses are either included within the policy
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limits or subject to a dollar cap. Virtually all of United Capitol's
liability policies are written subject to a self-insured retention or
deductible. These underwriting standards and percentages have remained
essentially unchanged since 1986. Except as described above, United
Capitol's liability policies exclude coverage for the insured's liability for
claims related to pollution. United Capitol's liability policies generally
exclude coverage for the insured's liability for punitive or exemplary
damages.
For its property and surety lines of business, United Capitol generally
uses standard industry policy forms which it may modify in some respects.
MARKETING
United Capitol principally markets its insurance through approximately
250 wholesale and retail insurance brokerage firms throughout the country
whose employees are specially licensed by insurance regulatory authorities as
E&S insurance brokers. These brokers submit risk proposals to United Capitol
for its review and underwriting analysis. No brokers have the authority to
bind United Capitol and United Capitol does not delegate underwriting or
claims management authority to nonaffiliated managing general agents or other
independent agents or brokers. Due to the specialized nature of United
Capitol's business, policy writings tend to be concentrated among a small
group of brokerage firms committed to United Capitol's products. For the
years ended December 31, 1995, 1994 and 1993, United Capitol's top ten
brokerage firms generated approximately 40%, 42% and 49%, respectively, of
gross written premiums in those periods. In 1995, 1994 and 1993, United
Capitol's top brokerage firm produced 10%, 12% and 14%, respectively, of its
gross written premiums.
UNDERWRITING
All underwriting and pricing decisions are made by United Capitol or its
subsidiaries' employees and reviewed by senior management. Given the
hazardous, unique or unusual nature of the risks United Capitol insures, its
underwriters carefully analyze the risks associated with each application for
insurance. United Capitol's underwriters evaluate the prior loss history,
the inherent risk characteristics and the financial condition of the
applicant where appropriate. For asbestos abatement contractors, the
underwriting process also includes evaluation of the contractor's
qualifications, experience and operating procedures. For all liability
coverages, and particularly when determining whether liability coverage will
be offered on an occurrence form, United Capitol's underwriting analysis
includes evaluation of the likely "tail" period between an insured occurrence
and the time a claim is likely to be made.
COMPETITION
The excess and surplus lines market is significantly affected by
conditions in the commercial property and casualty market, which are highly
cyclical and intensely competitive as to price and terms. Many of United
Capitol's existing or potential competitors are larger, have considerably
greater financial and other resources, have greater experience in the
insurance industry, have longer relationships with their brokers and insureds
and offer a broader line of insurance products than United Capitol. United
Capitol competes with other excess and surplus lines insurers, other forms of
insurance organizations such as risk retention groups and other alternative
risk mechanisms. United Capitol also competes with admitted insurers since a
risk may not be offered to an excess and surplus lines insurer if an admitted
insurer is willing to insure the risk. The property and casualty insurance
industry is particularly competitive with respect to price and terms, and
United Capitol will compete on that basis only when there remains reasonable
expectation of underwriting profits.
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REINSURANCE
The Company's insurance subsidiaries, in the ordinary course of business,
cede reinsurance to other insurance companies to limit their exposure to loss.
The reinsurance coverages and terms are tailored to the specific risk
characteristics of the underlying product line. Reinsurance contracts do not
relieve the Company of its primary obligations to claimants. A contingent
liability exists with respect to reinsurance ceded to the extent that any
reinsurer is unable to meet the obligations assumed under the reinsurance
agreements. Capsure places reinsurance with other carriers only after careful
review of the nature of the contract and a thorough assessment of the
reinsurers' credit quality and claim settlement performance. At December 31,
1995, Capsure's largest reinsurance receivable, including prepaid reinsurance
premiums of $1.2 million and estimated ceded incurred but not reported ("IBNR")
losses of $11.8 million, was approximately $19.8 million with Generali - U.S.
Branch. Generali - U.S. Branch is rated A (Excellent), XV by A.M. Best. No
other receivable from a single reinsurer exceeded 10% of total reinsurance
receivables.
UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The liability for unpaid losses and loss adjustment expenses ("LAE") is
based on estimates of (a) the ultimate settlement value of reported claims, (b)
IBNR claims, (c) future expenses to be incurred in the settlement of claims and
(d) claim recoveries. These estimates are determined based on the Company's
and industry loss experience as well as consideration of current trends and
conditions. The liability for unpaid losses and LAE is an accounting estimate
and, similar to other accounting estimates, there is the potential that actual
future loss payments will differ from the initial estimate. The methods of
determining such estimates and the resulting estimated liability are
continually reviewed and updated. Changes in the estimated liability are
reflected in operating income in the year in which such changes are determined.
Each of Capsure's insurance subsidiaries employs prudent reserving
approaches in establishing the estimated liability for unpaid loss and LAE due
to the inherent difficulty and variability in the estimation process. In
addition, Capsure utilizes independent actuarial firms of national standing to
conduct periodic reviews of claim procedures and loss reserving practices, and
annually obtains actuarial certification as to the reasonableness of actuarial
assumptions used and the sufficiency of year-end reserves for each of its
principal insurance subsidiaries.
A table is included in both Management's Discussion and Analysis of
Financial Condition and Results of Operations and Note 6 to the Consolidated
Financial Statements which presents a reconciliation of beginning and ending
consolidated loss reserve balances for the three years ended December 31, 1995.
Such tables highlight the impact of favorable development of the estimated
liability established in prior years.
A reconciliation of the consolidated loss reserves reported in accordance
with generally accepted accounting principles ("GAAP"), and the reserves
reported to state insurance regulatory authorities in accordance with statutory
accounting principles ("SAP") follows (dollars in thousands):
Years Ended December 31,
----------------------------
1995 1994 1993
-------- -------- --------
Reserves at end of year, GAAP basis ................... $126,061 $149,041 $135,825
Estimated salvage and subrogation recoverable (gross of
reinsurance), not anticipated under SAP .............. 7,141 6,881 6,465
Estimated reinsurance recoverable netted against
gross reserves for SAP ............................... (39,735) (38,606) (33,829)
-------- -------- --------
Reserves at end of year, SAP basis .................... $93,467 $117,316 $108,461
======== ======== ========
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United Capitol's claims development through December 31, 1995 has been
favorable relative to expectations based on industry experience. Due to the
limited prior operating experience of United Capitol and the long-tail nature
of its business, management previously relied principally upon industry
development patterns and expected loss ratios in estimating IBNR. Given the
availability of nine full years of experience and the growing evidence of
favorable loss trends relative to industry indications, management concluded in
the fourth quarter of 1995 that it was appropriate to place greater reliance on
United Capitol's own development patterns and emerging loss ratios in
estimating IBNR. United Capitol reduced loss and loss adjustment expenses by
$23.2 million in 1995 for net favorable development related to prior years
($28.1 million favorable development, gross of reinsurance), substantially all
of which pertains to this change in estimate. This loss reserve reduction
increased Capsure's consolidated income before taxes by $23.2 million, and net
income by $15.1 million, or $.98 per share.
The following table presents the development under GAAP of combined
balance sheet reserves for 1986 through 1995, including periods prior to
Capsure's ownership. The top line of the table shows the combined reserves at
the balance sheet date for each of the indicated periods. The amount of the
reserves represents the estimated amount of losses and LAE arising in all prior
years that are unpaid at the balance sheet date, including IBNR reserves. The
upper portion of the table shows the reestimated amount of the previously
recorded reserves based on experience as of the end of each succeeding year.
The estimates change as more information becomes known about the frequency and
severity of claims for individual periods. The cumulative redundancy
(deficiency) represents the aggregate change in the estimates over all prior
years. It should be noted that the table presents a "run off" of balance sheet
reserves rather than accident or policy year loss development. Therefore, each
amount in the table includes the effects of changes in reserves for all prior
years (dollars in thousands):
AS OF DECEMBER 31,
------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
-------- --------- -------- -------- -------- -------- ------- ------- ------- -------
Reserves for unpaid
losses and LAE ............. $126,061 $149,041 $138,347 $130,435 $130,596 $124,708 $116,565 $83,733 $63,537 $22,483
Reserves re-estimated as of:
One year later ............. -- 114,482 122,657 113,941 120,481 126,544 114,911 89,453 54,856 19,796
Two years later ............ -- -- 99,629 100,088 103,560 115,759 117,260 89,513 55,991 19,697
Three years later .......... -- -- -- 84,100 89,984 101,381 107,322 89,728 54,011 18,352
Four years later ........... -- -- -- -- 74,590 90,377 97,016 81,957 54,329 18,230
Five years later ........... -- -- -- -- -- 77,930 89,067 75,375 47,991 17,072
Six years later ............ -- -- -- -- -- -- 80,962 70,944 46,629 16,825
Seven years later .......... -- -- -- -- -- -- -- 67,547 43,991 17,057
Eight years later .......... -- -- -- -- -- -- -- -- 43,400 16,742
Nine years later ........... -- -- -- -- -- -- -- -- -- 16,115
Cumulative redundancy
(deficiency) ............... $ -- $ 34,559 $ 38,718 $ 46,335 $ 56,006 $ 46,778 $ 35,603 $16,186 $20,137 $ 6,368
======== ======== ======== ======== ======== ======== ======== ======= ======= =======
Cumulative redundancy
(deficiency) as a percentage
of original estimate ....... -- 23.2% 28.0% 35.5% 42.9% 37.5% 30.5% 19.3% 31.7% 28.3%
======== ======== ======== ======== ======== ======== ======== ======= ====== =======
Cumulative amount of
liability paid through:
One year later ............. $ -- $18,344 $19,084 $16,201 $21,280 $20,982 $19,737 $15,787 $10,398 $ 5,379
Two years later ............ -- -- 32,676 30,370 34,650 37,279 35,736 25,446 18,079 9,487
Three years later .......... -- -- -- 41,314 44,610 47,676 48,580 37,387 23,232 11,916
Four years later ........... -- -- -- -- 50,102 55,701 56,648 44,973 27,772 12,872
Five years later ........... -- -- -- -- -- 59,436 63,911 49,070 32,905 13,687
Six years later ............ -- -- -- -- -- -- 66,753 55,183 34,281 15,129
Seven years later .......... -- -- -- -- -- -- -- 57,648 36,841 15,406
Eight years later .......... -- -- -- -- -- -- -- -- 37,978 15,874
Nine years later ........... -- -- -- -- -- -- -- -- -- 15,893
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REGULATION
Capsure's insurance subsidiaries are subject to varying degrees of
regulation and supervision in the jurisdictions in which they transact business
under statutes which delegate regulatory, supervisory and administrative powers
to state insurance regulators. In general, an insurer's state of domicile has
principal responsibility for such regulation which is designed generally to
protect policyholders rather than investors and relates to matters such as the
standards of solvency which must be maintained; the licensing of insurers and
their agents; the examination of the affairs of insurance companies, including
periodic financial and market conduct examinations; the filing of annual and
other reports, prepared on a statutory basis, on the financial condition of
insurers or for other purposes; establishment and maintenance of reserves for
unearned premiums and losses; and requirements regarding numerous other
matters. Licensed or admitted insurers generally must file with the insurance
regulators of such states, or have filed on its behalf, the premium rates and
bond and policy forms used within each state. In some states, approval of such
rates and forms must be received from the insurance regulators in advance of
their use.
Western Surety is domiciled in South Dakota and licensed in all other
states and the District of Columbia. SBCA is domiciled in South Dakota and
licensed in 11 states. Universal Surety is domiciled in Texas and licensed in
20 other states and the District of Columbia. United Capitol is domiciled in
Wisconsin, licensed in Arizona and approved, or not disapproved, as a
nonadmitted insurer in all other states, the District of Columbia, Puerto Rico
and the U.S. Virgin Islands. Nonadmitted insurers are generally permitted to
operate with a greater degree of freedom from various regulations. In the
future, it is likely that more extensive regulatory requirements or
restrictions may be imposed upon nonadmitted insurers, which may increase
operating costs associated with compliance.
Insurance regulations generally also require registration and periodic
disclosure of certain information concerning ownership, financial condition,
capital structure, general business operations and any material transactions or
agreements by or among affiliates. Such regulation also typically restricts
the ability of any one person to acquire 10% or more, either directly or
indirectly, of a company's stock without prior approval of the applicable
insurance regulatory authority. In addition, dividends and other distributions
to stockholders generally may be paid only out of unreserved and unrestricted
statutory earned surplus. Such distributions may be subject to prior
regulatory approval, including a review of the implication on Risk-Based
Capital requirements. A discussion of Risk-Based Capital requirements for
property and casualty insurance companies is included in both Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Note 9 to the Consolidated Financial Statements. Without prior regulatory
approval in 1996, Capsure's insurance subsidiaries may pay stockholder
dividends of $23.8 million in the aggregate. In 1995, 1994 and 1993, Capsure
received $40.9 million (including $21.6 million of dividends requiring prior
approval), $21.0 million (including $5.0 million of dividends requiring prior
approval), and $11.8 million, respectively, in dividends from its insurance
subsidiaries.
Capsure's insurance subsidiaries are subject to periodic financial and
market conduct examinations. These examinations are generally performed by the
domiciliary state insurance regulatory authorities. The South Dakota
Department of Commerce and Regulation - Division of Insurance conducted its
last triennial examination of Western Surety as of December 31, 1991. This
examination covered both financial and market conduct procedures. The Texas
Department of Insurance conducted its triennial examination of Universal Surety
as of September 30, 1992. This examination included both financial and market
conduct procedures. The Office of the Commissioner of Insurance of the State
of Wisconsin conducted a financial examination of United Capitol as of December
31, 1992. There were no significant issues noted which required corrective
action by any of Capsure's insurance subsidiaries.
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Certain states in which Capsure conducts its business require insurers to
join a guaranty association. Guaranty associations provide protection to
policyholders of insurers licensed in such states against the insolvency of
those insurers. In order to provide the associations with funds to pay certain
claims under policies issued by insolvent insurers, the guaranty associations
charge members assessments based on the amount of direct premiums written in
that state. To date, such assessments have not been material to Capsure's
results of operations.
Western Surety, Universal Surety and United Capitol each qualifies as an
acceptable surety for federal and other public works project bonds pursuant to
U.S. Department of Treasury regulations. The underwriting limitations of
Western Surety, Universal Surety and United Capitol, based on each insurer's
statutory surplus, are currently $3.7 million, $0.8 million and $6.1 million,
respectively.
Management believes that, going forward, regulation of its business will
increase both on a federal and state level, thereby increasing the costs
associated with compliance.
INVESTMENTS
Insurance company investment practices must comply with insurance laws and
regulations and must also comply with certain covenants under Capsure's $135
million revolving credit facility. Generally, insurance laws and regulations
prescribe the nature and quality of, and set limits on, the various types of
investments which may be made by Capsure's insurance companies. Capsure's
insurance companies invest funds provided by operations predominately in
high-quality, taxable, fixed income securities.
Management believes that its investment strategy is conservative, with
preservation of capital being the foremost objective. Its investment strategy
is also influenced by the terms of the insurance coverages written, its
expectations as to the timing of claim payments, debt service requirements, and
tax considerations, in particular the existence of the Company's net operating
tax loss carryforwards ("NOLs"), as described below.
A separate investment committee of the Board of Directors of each
insurance company establishes investment policy and oversees the management of
each portfolio. A professional independent investment adviser is engaged to
assist in the management of each company's investment portfolio pursuant to
established investment committee guidelines. The insurance companies pay an
advisory fee based on the market value of the assets under management.
NET OPERATING TAX LOSS CARRYFORWARDS
In July 1986, the Company emerged from voluntary bankruptcy proceedings
under Chapter 11 of the United States Bankruptcy Code. Prior to its emergence,
the Company was primarily involved in oil and gas production, exploration and
development and providing supplies to the oil and gas industry. Due to a
significant downturn in the oil and gas industry in the early 1980s, the
Company generated significant losses and was unable to meet its obligations,
resulting in its voluntary bankruptcy filing. Upon emergence from bankruptcy,
the Company had oil and gas interests and approximately $300 million in NOLs.
Approximately $177 million of these NOLs were available at December 31, 1995,
to reduce the Company's future federal taxable income.
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EMPLOYEES
As of December 31, 1995, the Company employed approximately 600 persons.
Since its emergence from bankruptcy in 1986, the Company has not experienced
any work stoppages and believes its relations with its employees are good. The
Company's current operations are in newly acquired businesses unrelated to its
pre-1986 oil and gas operations.
ITEM 2. PROPERTIES
The Company subleases its executive offices for an annual rent of
approximately $0.1 million from Equity Group Investments, Inc. ("EGI"), a
company affiliated with certain directors, officers, and stockholders of the
Company. The executive offices are located at Two North Riverside Plaza,
Chicago, Illinois 60606. Western Surety leases office space for its executive
offices at 101 South Phillips Avenue, Sioux Falls, South Dakota 57102, under a
lease expiring in 2002. Western Surety's office space, consisting of
approximately 81,600 square feet, is leased from a partnership in which Western
Surety owns a 50% interest. The annual rent, which is subject to annual
adjustments, was $1.4 million as of December 31, 1995. Western Surety also
leases a 14,760 square foot branch office in Dallas, Texas. Annual rent for
the branch office was $0.2 million and the lease expires in 1996. United
Capitol leases office space for its executive offices at 400 Perimeter Center
Terrace, Suite 345, Atlanta, Georgia 30346, under a lease terminating June 30,
2000 with an annual rent of $0.4 million. Universal Surety leases office space
for its executive offices at 950 Echo Lane, Suite 250, Houston, Texas 77024,
under a lease terminating October 31, 1997 with an annual rent of $0.1 million.
Universal Surety also leases space for branch offices in Austin, Dallas and
San Antonio, Texas, and Overland Park, Kansas, for an additional annual rent of
approximately $0.1 million.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to numerous lawsuits arising
in the normal course of business, some seeking material damages. The Company
believes the resolution of these lawsuits will not have a material adverse
effect on its financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock ("Common Stock") trades on the New York Stock
Exchange under the symbol CSH. On March 1, 1996, the last reported sale price
for the Common Stock was $16.75 per share. The following table shows the range
of high and low sales prices for shares of the Common Stock as reported on the
New York Stock Exchange for each calendar quarter of the past two years:
High Low
1995 ---- ---
4th Quarter .................................. $17.88 $13.13
3rd Quarter .................................. 14.88 13.00
2nd Quarter .................................. 14.88 12.50
1st Quarter .................................. 14.38 12.38
1994
4th Quarter .................................. $14.75 $12.13
3rd Quarter .................................. 15.38 12.25
2nd Quarter .................................. 16.00 12.88
1st Quarter .................................. 15.25 13.00
The number of stockholders of record of Common Stock on March 1, 1996, was
approximately 2,300.
The Company has not paid dividends on its Common Stock. Capsure has
excess capital, and is considering alternative uses of this capital, including
funding of acquisitions, stock repurchases, payment of stockholder dividends
and some combination of the foregoing.
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ITEM 6. SELECTED FINANCIAL DATA
The following financial information has been derived from the audited
Consolidated Financial Statements and notes thereto which appear elsewhere in
this or previously issued Annual Reports on Form 10-K and should be read in
conjunction with such financial statements and related notes thereto.
The Company acquired United Capitol in February 1990, Western Surety in
August 1992 and Universal Surety in September 1994. The inclusion of the
results of United Capitol, Western Surety and Universal Surety from their
respective dates of acquisition affects the comparability of financial
information. Such results are not necessarily indicative of future results.
In 1993, the Company adopted Statement of Financial Accounting Standard
("SFAS") No. 109 and No. 113 and has restated prior years' financial
information for the effects of these pronouncements. Effective January 1,
1994, the Company adopted SFAS No. 115. For a more detailed description of
these transactions and their effects on the Company's financial data, see the
audited Consolidated Financial Statements and related notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations appearing in this or previously issued Annual Reports on Form 10-K.
The following information for the Company is as of and for the years ended
December 31 (dollars in thousands, except per share data):
Years Ended December 31,
--------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- ----------
(Restated) (Restated)
Total revenues ....................................... $117,516 $112,662 $108,445 $ 59,519 $ 34,890
======== ======== ======== ======== ==========
Gross written premiums ............................... $111,398 $102,356 $100,775 $ 50,105 $ 23,144
======== ======== ======== ======== ==========
Net written premiums ................................. $ 97,728 $ 90,578 $ 88,306 $ 40,310 $ 15,729
======== ======== ======== ======== ==========
Net earned premiums .................................. $ 98,692 $ 92,481 $ 86,029 $ 41,249 $ 15,826
======== ======== ======== ======== ==========
Underwriting income .................................. $ 44,831 $ 15,233 $ 15,224 $ 9,932 $ 2,484
Net investment income .............................. 20,471 19,129 19,815 15,504 13,823
Net investment gains (losses) ...................... (1,653) 945 2,071 380 1,119
Interest expense ..................................... (4,103) (4,726) (6,280) (4,838) (4,998)
Write-off of unamortized deferred loan fees .......... -- (1,556) -- -- --
Amortization and impairment of goodwill
and intangibles ................................... (16,853) (3,365) (3,407) (1,592) (852)
Other expenses ....................................... (2,442) (1,881) (1,905) (1,914) (868)
-------- -------- -------- -------- ----------
Income before income taxes ........................... 40,251 23,779 25,518 17,472 10,708
Income taxes ......................................... 19,721 9,401 9,234 6,777 3,500
-------- -------- -------- -------- ----------
Net income ........................................... $ 20,530 $ 14,378 $ 16,284 $ 10,695 $ 7,208
======== ======== ======== ======== ==========
Weighted average common shares outstanding ........... 15,404 15,160 15,036 12,214 10,606
======== ======== ======== ======== ==========
Earnings per common share ............................ $ 1.33 $ .95 $ 1.08 $ .88 $ .79
======== ======== ======== ======== ==========
Book value per share ................................. $ 16.70 $ 14.61 $ 13.80 $ 12.25 $ 7.68
======== ======== ======== ======== ==========
Loss ratio ........................................... (7.5)% 25.2% 23.2% 25.8% 58.5%
Expense ratio ........................................ 62.1 % 58.3% 59.1% 50.1% 25.8%
-------- -------- -------- -------- ----------
Combined ratio ....................................... 54.6 % 83.5% 82.3% 75.9% 84.3%
======== ======== ======== ======== ==========
Invested assets and cash ............................. $307,556 $305,898 $317,077 $297,974 $ 163,027
Intangible assets and goodwill, net of amortization .. 84,158 102,130 85,566 94,006 22,842
Total assets ......................................... 514,768 553,370 530,075 507,574 226,536
Insurance reserves ................................... 202,842 225,671 205,188 194,357 112,745
Long-term debt ....................................... 25,000 71,000 85,214 103,214 46,352
Total liabilities .................................... 257,464 328,505 322,450 323,653 169,404
Stockholders' equity ................................. 257,304 224,865 207,625 183,921 57,132
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following is a discussion and analysis of Capsure Holdings Corp. and
its subsidiaries' ("Capsure" or the "Company") operating results, financial
condition, liquidity and capital resources. This discussion should be read in
conjunction with the audited Consolidated Financial Statements and notes
thereto, which contain additional information regarding the Company's operating
results and financial condition.
On July 31, 1986, the Company emerged from voluntary bankruptcy
proceedings under Chapter 11 of the United States Bankruptcy Code. As a result
of operating losses from oil and gas operations prior to the Company's
bankruptcy, the Company emerged from bankruptcy with approximately $300 million
in net operating tax loss carryforwards ("NOLs"). Approximately $177 million
of these NOLs were available at December 31, 1995 to reduce the Company's
future federal taxable income. The Company believes that an analysis of
results of operation and financial condition should include an analysis of the
Company's ability to reduce its income tax payments through the utilization of
NOLs.
The Company's operations have been focused in the property and casualty
insurance business since 1990. Capsure's principal property and casualty
insurance entities are Western Surety Company ("Western Surety"), acquired in
August 1992, United Capitol Insurance Company ("United Capitol"), acquired in
February 1990, and Universal Surety of America ("Universal Surety"), acquired
in September 1994.
Since 1987, soft market conditions characterized by intense competition on
rate and contract terms have prevailed in the property and casualty insurance
industry. The industry continues to be relatively well-capitalized and
under-leveraged on an operating basis which exerts continued pressure on rates
and terms. Although the industry has sustained significant losses from
catastrophes in 1992 through 1995, there has not been a meaningful improvement
in market conditions. Due to the nature of its business, these market
conditions have had little impact on Capsure's surety operations; however,
United Capitol has been significantly affected by prevailing market conditions.
United Capitol has responded to these difficult market conditions by
maintaining a disciplined underwriting approach and electing to decline
business that may result in unacceptable or inadequately compensated risk.
Management believes prevailing market conditions are likely to persist for the
near- and possibly long-term. Capsure will continue to focus its resources in
lines of business where it has or can acquire the requisite underwriting and
business processing experience and for which consistent long-term underwriting
profits and acceptable returns on capital can reasonably be expected.
Western Surety specializes in writing small fidelity and noncontract
surety bonds, referred to as "miscellaneous" bonds, and errors and omissions
("E&O") liability insurance and is licensed to write fidelity, surety and
casualty insurance in all 50 states and the District of Columbia. Western
Surety is rated A+ (Superior) by A.M. Best Company, Inc. ("A.M. Best"). Bonds
underwritten by Western Surety are relatively low-risk, low-premium products
where prompt service, easy-to-use forms and availability of an extensive array
of bond products are emphasized. One of the largest writers of miscellaneous
bonds in the United States, Western Surety has experienced overall growth in
gross written premiums since 1990 in spite of the soft market. This growth is
attributable to its product specialization, including new products and
programs, underwriting expertise and broad distribution network as well as to
legislatively mandated bond limit increases, and to bonding requirements
legislated by various states and municipalities. Substantially all of Western
Surety's bonds are mandated by various state statutes and local ordinances.
Such factors have largely insulated Western Surety from the effects of
prevailing market conditions in the broader commercial property and casualty
insurance industry. Management believes, with respect to
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Western Surety's products, that the Company's results of operations will not be
significantly affected by new miscellaneous bond requirements or by the repeal
of any existing legislated bonding requirements.
Universal Surety specializes in the underwriting of small contract and
miscellaneous surety bonds. Universal Surety is rated A (Excellent) by A.M.
Best and is licensed in 21 states and the District of Columbia with most of its
business generated in Texas (77% of 1995 gross written premiums). Contract
bonds underwritten by Universal Surety, including those underwritten on behalf
of Western Surety under the USA\Western program, are primarily contractor
performance and payment bonds in amounts under $3.0 million for which
underwriting expertise and distinctive service to agents are emphasized.
Universal Surety underwrites primarily standard accounts and some specialty
accounts for which it will utilize supplemental collateral arrangements and
excess rates for contractors not qualified for standard surety rates.
Universal Surety also reduces its exposure through participation in the Small
Business Administration ("SBA") Surety Bond Guarantee Program. Under this
program, the SBA will generally reimburse Universal Surety for between 80% and
90% of losses and loss adjustment expenses incurred on any SBA guaranteed bond
in exchange for 20% of the premium. Contract bonds are more affected by
prevailing market and general economic conditions than noncontract bonds.
United Capitol writes specialty property and casualty insurance primarily
as an excess and surplus lines insurer. United Capitol is rated A (Excellent)
by A.M. Best. United Capitol provides principally general liability insurance,
including directors' and officers' liability ("D&O"), product liability and
other liability coverages, to businesses which have hazardous, unique or
unusual risks. Policies underwritten by United Capitol are relatively
high-risk, high-premium products which require individual risk underwriting and
pricing expertise. United Capitol has experienced significant declines in
gross written premiums as it has adhered to its strategy of strict underwriting
discipline and has declined to write what it believes to be underpriced
business.
On February 29, 1996, the Company announced that it had signed an
agreement to sell United Capitol Holding Company ("UCHC") and its subsidiaries,
United Capitol, United Capitol Managers, Inc. ("Managers") and Fischer
Underwriting Group, Incorporated ("Fischer") to a subsidiary of Frontier
Insurance Group, Inc. Estimated net proceeds to Capsure will be approximately
$75 million, which includes the purchase price for the capital stock of UCHC
and the release of United Capitol's excess statutory surplus on or before
closing. The agreement is subject to several conditions including approval by
insurance regulatory authorities and other governmental authorities. The
transaction is expected to close in the second quarter of 1996.
Capsure is exiting the E&S marketplace in order to focus on its surety
operations and other admitted lines. Management has concluded that United
Capitol's prospects can be best enhanced and realized by ownership under a
larger company than Capsure. The sale of United Capitol will liberate
approximately $75 million of Capsure's capital. Capsure is considering
alternative uses of this capital including funding of acquisitions, stock
repurchases, payment of stockholder dividends and some combination of the
foregoing.
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RESULTS OF OPERATIONS
The components of income are summarized as follows (dollars in thousands):
Years Ended December 31,
--------------------------
1995 1994 1993
-------- ------- -------
Underwriting income ...................................... $44,831 $15,233 $15,224
Net investment income .................................... 20,471 19,129 19,815
Net investment gains (losses) ............................ (1,653) 945 2,071
Interest expense ......................................... (4,103) (4,726) (6,280)
Write-off of unamortized deferred loan fees .............. -- (1,556) --
Amortization and impairment of goodwill and intangibles .. (16,853) (3,365) (3,407)
Other expenses ........................................... (2,442) (1,881) (1,905)
-------- ------- -------
Income before income taxes ............................... 40,251 23,779 25,518
Income taxes ............................................. 19,721 9,401 9,234
-------- ------- -------
Net income ........................................ $20,530 $14,378 $16,284
======== ======= =======
INSURANCE UNDERWRITING
Underwriting results are summarized in the following table (dollars in
thousands):
Surety and Fidelity Excess and Surplus Lines Consolidated
------------------------- ------------------------- ----------------------------
1995 1994 1993 1995 1994 1993 1995 1994 1993
------- ------- ------- ------- ------- ------- -------- -------- --------
Gross written premiums .. $90,564 $75,324 $72,064 $20,834 $27,032 $28,711 $111,398 $102,356 $100,775
======= ======= ======= ======= ======= ======= ======== ======== ========
Net written premiums .... $86,746 $73,527 $70,598 $10,982 $17,051 $17,708 $ 97,728 $90,578 $88,306
======= ======= ======= ======= ======= ======= ======== ======== ========
Net earned premiums ..... $84,983 $73,255 $67,941 $13,709 $19,226 $18,088 $ 98,692 $92,481 $86,029
------- ------- ------- ------- ------- ------- -------- -------- --------
Net losses and
loss adjustment ....... 7,579 11,592 11,367 (15,030) 11,752 8,590 (7,451) 23,344 19,957
Underwriting expenses ... 58,170 49,583 46,933 3,142 4,321 3,915 61,312 53,904 50,848
------- ------- ------- ------- ------- ------- -------- -------- --------
Total losses and
expenses .............. 65,749 61,175 58,300 (11,888) 16,073 12,505 53,861 77,248 70,805
------- ------- ------- ------- ------- ------- -------- -------- --------
Underwriting income ..... $19,234 $12,080 $ 9,641 $25,597 $ 3,153 $ 5,583 $ 44,831 $ 15,233 $ 15,224
======= ======= ======= ======= ======= ======= ======== ======== ========
Loss ratio .............. 8.9% 15.8% 16.7% (109.6)% 61.1% 47.5% (7.5)% 25.2% 23.2%
Expense ratio ........... 68.5% 67.7% 69.1% 22.9 % 22.5% 21.6% 62.1 % 58.3% 59.1%
------- ------- ------- ------- ------- ------- -------- -------- --------
Combined ratio .......... 77.4% 83.5% 85.8% (86.7)% 83.6% 69.1% 54.6 % 83.5% 82.3%
======= ======= ======= ======= ======= ======= ======== ======== ========
Surety and fidelity represents the combined results of Western Surety and
Universal Surety, since its September 1994 acquisition. Surety and fidelity
are the principal lines of business of Western Surety and Universal Surety.
Excess and surplus lines represents the results of United Capitol. United
Capitol's principal lines of business are other liability, product liability
and commercial property primarily written on an excess and surplus lines basis.
Gross written premiums increased 8.8%, or $9.0 million, for the year ended
December 31, 1995, primarily due to an increase of $12.8 million for the
inclusion of the full year results of Universal Surety in 1995, partially
offset by reduced premium volume at United Capitol. Universal Surety
contributed $16.9 million of gross written premiums in 1995. Western Surety
experienced a 2.0% increase in gross written premiums, primarily due to the
growth in the new agents' and brokers' E&O product introduced in 1994. United
Capitol's gross written premiums decreased 22.9%, or $6.2 million, in 1995 as
its premium volume, particularly in the increasingly competitive asbestos
abatement line, continued to be significantly affected by prolonged soft market
conditions. Significant declines in the asbestos abatement and other primary
casualty business were partially offset by an increase in property writings.
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Net earned premiums increased $6.2 million for the year ended December 31,
1995, principally due to the inclusion of the full year results of Universal
Surety in 1995. Universal Surety contributed net earned premiums of $14.7
million in 1995. Western Surety's net earned premiums increased 1.6% in 1995
compared to 1994. United Capitol's net earned premiums decreased 28.7%, or
$5.5 million in 1995, reflecting decreases in both gross written premiums and
net retentions. The lower net retentions are due primarily to the increased
use of reinsurance for primary casualty risks in an effort to limit the
potential loss volatility associated with a diminished premium base. United
Capitol's net earned premiums for the years ended December 31, 1995 and 1994
were increased by $2.6 million and $2.5 million, respectively, for contingent
premiums recognized under its reinsurance agreements.
Gross written premiums increased $1.6 million for the year ended December
31, 1994. Western Surety experienced a 1.1% decrease in gross written
premiums, mainly due to a decline in public official bond premiums as compared
to 1993. This decline, which was expected, was caused by the cyclical nature
of these bonds. Writings for this product typically increase every other year,
following the November elections. Universal Surety contributed $4.0 million of
gross written premiums since its acquisition in September 1994. United
Capitol's gross written premiums decreased 5.8%, or $1.7 million, in 1994.
Significant declines in the asbestos abatement and other primary casualty
business were partially offset by the addition of $5.7 million in gross written
premiums of D&O business produced by Fischer which was acquired in November
1993 by a subsidiary of United Capitol. United Capitol's premium volume,
particularly in the increasingly competitive asbestos abatement line, continued
to be significantly and adversely affected by prolonged soft market conditions.
Net earned premiums increased $6.5 million for the year ended December 31,
1994. Western Surety's net earned premiums increased 1.9% in 1994 compared to
1993. Universal Surety contributed net earned premiums of $4.0 million in
1994. United Capitol's net earned premiums increased 6.3%, or $1.1 million, in
1994, primarily as a result of the recognition of $2.5 million of contingent
reinsurance premiums related to an excess of loss reinsurance treaty.
Excluding the recognition of the contingent premiums, net earned premiums
decreased 7.5% at United Capitol.
Underwriting income increased $29.6 million for the year ended December
31, 1995, primarily due to significant net favorable development of prior
years' loss reserves. The consolidated combined ratio decreased to 54.6% in
1995 from 83.5% in 1994. The consolidated loss ratio decreased to (7.5)% in
1995 from 25.2% in 1994. The surety and fidelity loss ratio decreased to 8.9%
in 1995 from 15.8% in 1994, primarily due to $4.0 million in fourth quarter net
favorable development of prior years' loss reserves at Western Surety. United
Capitol's loss ratio decreased to (109.6)% in 1995 from 61.1% in 1994.
Excluding the effects of favorable development, United Capitol would have
reported loss ratios of 59.3% and 98.3% in 1995 and 1994, respectively.
United Capitol's claims development through December 31, 1995, has been
favorable relative to expectations based on industry experience. Due to the
limited prior operating experience of United Capitol and the long-tail nature
of its business, management previously relied principally upon industry
development patterns and expected loss ratios in estimating incurred but not
reported ("IBNR") losses. Given the availability of nine full years of
experience and the growing evidence of favorable loss trends relative to
industry indications, management concluded in the fourth quarter of 1995 that
it was appropriate to place greater reliance on United Capitol's own
development patterns and emerging loss ratios in estimating IBNR. United
Capitol reduced loss and loss adjustment expenses by $23.2 million in 1995 for
net favorable development related to prior years, substantially all of which
pertains to this change in estimate. This loss reserve reduction increased
Capsure's consolidated income before taxes by $23.2 million, and net income by
$15.1 million, or $0.98 per share.
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The consolidated expense ratio increased to 62.1% in 1995, compared to
58.3% in 1994. The surety and fidelity expense ratio increased slightly to
68.5% in 1995 from 67.7% in 1994, reflecting increased operating expenses,
particularly, wage and postal expense increases. United Capitol's expense
ratio increased to 22.9% in 1995 compared to 22.5% in 1994.
Underwriting income for the year ended December 31, 1994, was virtually
unchanged as compared to the prior year despite increased net earned premiums.
The consolidated combined ratio increased to 83.5% in 1994 from 82.3% in 1993.
The consolidated loss ratio increased to 25.2% in 1994 from 23.2% in 1993,
reflecting less favorable development of prior years' loss reserves at United
Capitol than was experienced in 1993. United Capitol's loss ratio increased to
61.1% in 1994 from 47.5% in 1993. Excluding the effects of favorable
development, United Capitol would have reported loss ratios of 98.3% and 110.3%
in 1994 and 1993, respectively. The surety and fidelity loss ratio decreased
to 15.8% in 1994 from 16.7% in 1993, primarily due to favorable development of
prior years' loss reserves and increased salvage recoveries at Western Surety.
The consolidated expense ratio decreased to 58.3% in 1994, compared to
59.1% in 1993. The surety and fidelity expense ratio decreased to 67.7% in
1994 from 69.1% in 1993. Net commissions, brokerage and other underwriting
expenses incurred at Western Surety were effectively controlled during 1994,
offsetting increased costs associated with enhancing Western Surety's computer
systems. United Capitol's expense ratio increased to 22.5% in 1994 compared to
21.6% in 1993.
INVESTMENT INCOME
Net investment income for the years ended December 31, 1995, 1994 and 1993
was $20.5 million, $19.1 million and $19.8 million, respectively. The average
pretax yields of the portfolio for the years ended December 31, 1995, 1994 and
1993 were 6.8%, 6.5% and 6.8%, respectively.
Capsure's insurance companies invest funds provided by operations
predominantly in high-quality, short-duration, taxable fixed income securities.
The preservation of capital and utilization of the Company's available NOLs
are Capsure's principal investment objectives. Beginning in 1994, the
Investment Committees of the Board of Directors of the Company and its
insurance subsidiaries have approved the investment of up to $26 million in the
aggregate by the insurance subsidiaries and at the parent company level in
publicly traded nonaffiliated real estate investment trust ("REIT") equity
securities. At December 31, 1995 and 1994, the carrying value of the Company's
REIT portfolio was approximately $20.4 million and $24.3 million, respectively.
ANALYSIS OF OTHER OPERATIONS
Net investment gains (losses) were $(1.7) million, $0.9 million and $2.1
million for the years ended December 31, 1995, 1994 and 1993, respectively.
Net investment gains on securities held at the parent company level were $1.0
million in 1995, $1.3 million in 1994 and $3.1 million in 1993. Net investment
losses were $(2.7) million, $(0.4) million and $(1.0) million, respectively,
from the insurance operations. The net investment losses from the insurance
operations in 1995 reflect the write-down of the carrying value for two
asset-backed securities from the same issuer which experienced an other than
temporary decline in fair value. The net investment losses from the insurance
operations in 1993 were primarily due to a $2.5 million write-down to fair
value of two interest-only securities reflecting lower future expected cash
flows of these securities as a result of an accelerated level of mortgage
prepayments, partially offset by $1.5 million of net investment gains from the
sale of other securities.
Amortization expense was $16.9 million for the year ended December 31,
1995, and $3.4 million in 1994 and 1993. Amortization expense in 1995, 1994
and 1993 included $1.2 million, $1.3 million and
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$1.8 million, respectively, of amortization of intangible assets and $15.7
million, $2.1 million and $1.6 million, respectively, of amortization of excess
cost over net assets acquired related to the acquisitions of Western Surety,
Universal Surety, United Capitol and Fischer. Amortization expense for 1995
included a $13.2 million write-down of goodwill associated with the 1990 United
Capitol acquisition to reflect the estimated net realizable value on the sale
of those operations. Excess cost over net assets acquired is amortized
substantially over 40 years. Other intangible assets are amortized over
periods ranging from three to 20 years.
Interest expense decreased by 13.2%, or $0.6 million, to $4.1 million for
the year ended December 31, 1995, reflecting the effect of reduced debt. The
Company's average debt outstanding for the year ended December 31, 1995, was
approximately $49.6 million compared to $70.5 million in 1994. The weighted
average interest rates were 6.9% and 5.7% for the years ended December 31, 1995
and 1994, respectively. In connection with the early retirement of the
Company's bank term loans in 1994, the Company incurred a $1.6 million
write-off of unamortized deferred loan fees in the year ended December 31,
1994. Interest expense decreased 24.7%, or $1.6 million, for the year ended
December 31, 1994, reflecting the effect of reduced debt. The Company's
average debt outstanding for the year ended December 31, 1994, was
approximately $70.5 million compared to $96.0 million in 1993. The weighted
average interest rate was 5.7% for the year ended December 31, 1993.
INCOME TAXES
Income taxes were $19.7 million, $9.4 million and $9.2 million for the
years ended December 31, 1995, 1994 and 1993, respectively. The effective
income tax rates were 49.0%, 39.5% and 36.2%, respectively. The increase in
the 1995 effective tax rate over 1994 was primarily due to the $13.2 million
write-down of nondeductible goodwill associated with the 1990 United Capitol
acquisition. The increase in the 1994 effective tax rate over the prior year
was attributable to an increased level of nondeductible goodwill amortization
in connection with the acquisitions of Universal Surety and Fischer as well as
certain delayed provisions of the Revenue Reconciliation Act of 1993. The
Company's income tax expense does not approximate actual taxes paid, primarily
due to the utilization of the Company's NOLs. Actual income taxes paid were
$0.7 million for the year ended December 31, 1995 and $0.6 million for each of
the years ended December 31, 1994 and 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company's insurance subsidiaries are highly liquid. The insurance
operations derive liquidity from net premium collections, reinsurance
recoveries and investment earnings and use these funds to pay claims and
operating expenses. The operations of an insurance company generally result in
cash being collected from customers in the form of premiums in advance of cash
outlays for claims. Each insurance company invests its collected premiums,
generating investment income, until such time cash is needed to pay claims and
associated expenses.
The Company believes total invested assets, including cash and short-term
investments, are sufficient in the aggregate and have suitably scheduled
maturities to satisfy all policy claims and other operating liabilities,
including anticipated income tax sharing payments of its insurance operations.
Management believes the duration of each insurance subsidiary's portfolio is
properly matched with the expected duration of its liabilities. At December
31, 1995, the carrying value of the Company's invested assets of the insurance
operations was comprised of $235.7 million of fixed maturities, $33.1 million
of short-term investments, $16.2 million of equity securities, $3.2 million of
other investments and $2.7 million of cash. At December 31, 1994, the carrying
value of the Company's invested assets of the insurance operations was
comprised of $246.6 million of fixed maturities, $20.6 million of equity
securities, $17.5 million of short-term investments, $4.1 million of other
investments and $3.8 million of cash. The increase in short-
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term investments at December 31, 1995 compared to the prior year primarily
related to investments held at United Capitol.
Cash flow at the parent company level is derived principally from dividend
and tax sharing payments from its insurance subsidiaries. The principal
obligations at the parent company level are to service debt and pay operating
expenses. At December 31, 1995, the carrying value of the Company's invested
assets of the non-insurance operations, principally at the parent company
level, was comprised of $11.6 million of equity securities, $4.7 million of
short-term investments and $0.3 million of cash. At December 31, 1994, the
carrying value of the Company's invested assets of the non-insurance
operations, principally at the parent company level, was comprised of $7.6
million of equity securities, $4.6 million of short-term investments, $0.8
million of other investments and $0.3 million of cash.
The Company's consolidated net cash flow provided by operating activities
was $30.7 million, $29.3 million and $32.1 million for the years ended December
31, 1995, 1994 and 1993, respectively. Consolidated operating cash flow
(pretax income excluding the write-off of deferred loan fees, net investment
gains and amortization and impairment of goodwill and intangibles) for the year
ended December 31, 1995, was $58.8 million as compared to $27.8 million in 1994
and $26.9 million in 1993.
On March 29, 1994, the Company formed a direct, wholly owned subsidiary,
Capsure Financial Group, Inc. ("CFG"), to which Capsure contributed
substantially all its assets and liabilities. Concurrently, CFG entered into a
senior reducing revolving credit agreement with a syndicate of banks for the
principal amount of $135 million (the "Credit Facility"). At closing, $68
million of funds drawn under the Credit Facility, together with a portion of
the Company's cash, were used to repay $84.6 million of previously existing
bank term debt. Paydowns of $71 million and borrowings of $28 million for the
acquisition of Universal Surety have occurred since then. The remaining
availability under the Credit Facility of $110 million may be used to finance
future acquisitions and for general corporate purposes.
Principal and interest payments required under the Credit Facility are
funded principally by dividend and intercompany tax sharing payments received
from Capsure's insurance subsidiaries.
Capsure's insurance subsidiaries are subject to regulation and supervision
by the various state insurance regulatory authorities in which they conduct
business, including regulations with respect to the payment of dividends.
Without prior regulatory approval in 1996, Capsure's insurance subsidiaries may
pay stockholder dividends of $23.8 million in the aggregate. In 1995, 1994 and
1993 Capsure received $40.9 million (including $21.6 million of dividends
requiring prior approval), $21.0 million (including $5.0 million of dividends
requiring prior approval) and $11.8 million, respectively, in dividends from
its insurance subsidiaries.
On May 24, 1995, the Board of Directors of the Company approved a stock
repurchase plan. The plan authorizes the Company to repurchase up to 500,000
shares of its common stock. These shares may be purchased from time to time in
the public market or through privately negotiated transactions. As of December
31, 1995, no shares have been repurchased under this plan.
On February 29, 1996, the Company announced that it had signed an
agreement to sell United Capitol Holding Company ("UCHC") and its subsidiaries,
United Capitol, Managers and Fischer, to a subsidiary of Frontier Insurance
Group, Inc. Estimated net proceeds to Capsure will be approximately $75
million, which includes the purchase price for the capital stock of UCHC and
the release of United Capitol's excess statutory surplus on or before closing.
The agreement is subject to several conditions including approval by insurance
regulatory authorities and other governmental authorities. The transaction
-28-
29
is expected to close in the second quarter of 1996. Prior to closing, the
Company must obtain a waiver from the lenders under the Credit Facility or
otherwise amend the agreement to permit the sale of United Capitol. The sale
of United Capitol will liberate approximately $75 million of Capsure's capital.
Capsure is considering alternative uses of this capital including funding of
acquisitions, stock repurchases, payment of stockholder dividends and some
combination of the foregoing.
Intercompany tax sharing agreements between Capsure and its subsidiaries
provide that income taxes shall be allocated based upon separate return
calculations in accordance with the Internal Revenue Code of 1986, as amended
(the "Code"). Intercompany tax payments are remitted at such times as
estimated tax payments would be required to be made to the Internal Revenue
Service ("IRS"). Capsure received tax sharing payments from its subsidiaries
of $12.8 million, $12.3 million and $13.0 million in 1995, 1994 and 1993,
respectively.
The Company continues to pursue acquisitions of financial services
businesses with a particular focus on the insurance industry. Although the
emphasis has been on acquisitions in financial services and insurance, the
Company may consider other alternatives that would further enhance shareholder
value.
FINANCIAL CONDITION
A significant factor affecting the Company's financial condition is the
Company's policy with respect to investing insurance-related funds. The
Company's policy is to invest a substantial portion of such funds in
high-quality, short-duration mortgage pass-through instruments, collateralized
mortgage obligations ("CMOs") and other asset-backed securities. CMOs differ
from traditional fixed maturities in that they may expose the investor to yield
variability and even principal risk due to such factors as high mortgage
prepayment rates and defaults and delinquencies in the underlying asset pool.
Management believes it has reduced prepayment variability by investing only in
short tranches and by owning a substantial amount of planned amortization class
("PAC") tranches which are structured largely to insulate the investor from
prepayment risk. A PAC tranche is structured to amortize in a predictable
manner and, therefore, the risk of prepayment of the underlying collateral is
shifted to other tranches, whose owners are willing to accept such risk.
Further, management believes it has minimized credit risk primarily by
purchasing only securities rated A or better on the date of acquisition and
which are collateralized or guaranteed by U.S. Government agencies or have
substantial credit enhancement in the form of financial guarantees, mortgage
insurance, letters of credit, over-collateralization, subordinated structures
and excess servicing spreads. Management monitors the investment portfolio of
the insurance subsidiaries and the current rating of each security owned on a
monthly basis. Beginning in 1994, the Investment Committees of the Board of
Directors of the Company and its insurance subsidiaries have approved the
investment of up to $26 million in the aggregate by the insurance subsidiaries
and at the parent company level in publicly traded nonaffiliated REIT equity
securities. At December 31, 1995 and 1994, the carrying value of the Company's
REIT portfolio was approximately $20.4 million and $24.3 million, respectively.
-29-
30
The following table sets forth the composition by ratings assigned by The
Standard & Poors Corporation ("S&P") or Moody's Investor Services, Inc.
("Moody's") of the fixed income portfolio of the Company as of December 31,
1995 (dollars in thousands):
Amortized
Cost Percent
--------- -------
Credit Rating
-------------
AAA/Aaa ....................... $203,933 87.4%
AA/Aa ......................... 5,732 2.5
A/A ........................... 23,516 10.1
BBB/Baa or lower .............. 90 --
Not rated ..................... 5 --
-------- ------
Total ........................ $233,276 100.0%
======== =======
Another critical factor affecting the Company's financial condition is the
Company's policies with respect to loss and loss adjustment expense reserves.
Each of Capsure's insurance subsidiaries employs prudent reserving approaches
in establishing the estimated liability for unpaid loss and loss adjustment
expenses due to the inherent difficulty and variability in the estimation
process. The liability for unpaid losses and loss adjustment expenses is based
on estimates of (a) the ultimate settlement value of reported claims, (b) IBNR
claims, (c) future expenses to be incurred in the settlement of claims and (d)
claim recoveries. The liability for unpaid losses and loss adjustment expenses
is an accounting estimate and, similar to other accounting estimates, there is
the potential that actual future loss payments will differ from the initial
estimate. The methods of determining such estimates and the resulting
estimated liability are continually reviewed and updated. Changes in the
estimated liability are reflected in operating income in the year in which such
changes are determined.
The following table presents selected loss and loss adjustment expense
information and highlights the impact of revisions to the estimated liability
established in prior years (dollars in thousands):
1995 1994 1993
-------- -------- --------
Gross balance at January 1 ................. $149,041 $135,825 $128,122
Balance at date of acquisition ............. -- 2,738 --
Incurred related to:
Current year ............................... 34,073 46,206 41,398
Prior years ................................ (34,559) (14,522) (14,991)
-------- -------- --------
Total incurred ............................. (486) 31,684 26,407
-------- -------- --------
Paid related to:
Current year ............................... 4,150 3,003 2,266
Prior years ................................ 18,344 18,203 16,438
-------- -------- --------
Total paid ................................. 22,494 21,206 18,704
-------- -------- --------
Gross balance at December 31 ............... $126,061 $149,041 $135,825
======== ======== ========
Balance net of reinsurance at December 31 .. $ 87,078 $111,164 $102,688
======== ======== ========
As a result of favorable claim settlements and changes in estimates of
insured events in prior years, the provision for losses and loss adjustment
expenses decreased by $34.6 million ($29.1 million, net of reinsurance) in
1995, $14.5 million ($8.3 million, net of reinsurance) in 1994 and $15.0
million ($11.3 million, net of reinsurance) in 1993. As described within
Results of Operations - Insurance Underwriting, United Capitol reduced loss and
loss adjustment expenses by $23.2 million in 1995 for net favorable development
related to prior years.
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31
The National Association of Insurance Commissioners ("NAIC") has
promulgated Risk-Based Capital ("RBC") requirements for property and casualty
insurance companies to evaluate the adequacy of statutory capital and surplus
in relation to investment and insurance risks such as asset quality, asset and
liability matching, loss reserve adequacy, and other business factors. The RBC
information will be used by state insurance regulators as an early warning tool
to identify, for the purpose of initiating regulatory action, insurance
companies that potentially are inadequately capitalized. In addition, the
formula defines new minimum capital standards that will supplement the current
system of fixed minimum capital and surplus requirements on a state-by-state
basis. Regulatory compliance is determined by a ratio (the "Ratio") of the
enterprise's regulatory total adjusted capital, as defined by the NAIC, to its
authorized control level RBC, as defined by the NAIC. Generally, a Ratio in
excess of 200% of authorized control level RBC requires no corrective actions
on the behalf of the company or regulators. As of December 31, 1995, each of
Capsure's insurance subsidiaries had a Ratio that was substantially in excess
of the minimum RBC requirements.
Capsure's insurance subsidiaries require capital to support premium
writings. In accordance with industry and regulatory guidelines, the net
written premiums to surplus ratio of a property and casualty insurer should not
exceed 3 to 1 (the terms of the Credit Facility limit this ratio further to
2.75 to 1 for Western Surety and Universal Surety and 2 to 1 for United
Capitol). On December 31, 1995, Western Surety's statutory surplus was $33.3
million and its net written premiums to surplus ratio was 2.1 to 1. On
December 31, 1995, Universal Surety's statutory surplus was $9.2 million and
its net written premiums to surplus ratio was 1.7 to 1. On December 31, 1995,
United Capitol's statutory surplus was $68.0 million and its net written
premiums to surplus ratio was 0.2 to 1. The Company believes that each
insurance company's statutory surplus is sufficient to support its current and
anticipated premium levels.
The IRS has not examined the Company's tax returns for the years in which
the Company reported net operating losses. Under Section 382 of the Code,
certain restrictions on the utilization of NOLs will apply if there is an
ownership change of a corporation entitled to use such carryovers. The Company
believes that there is currently no restriction on the ability of the Company
to utilize its NOLs. It is possible that future transactions involving the
common stock or rights to acquire such stock could cause an ownership change of
the Company resulting in restrictions of the Company's ability to utilize the
NOLs during all taxable periods after the date of such ownership change. The
Company has adopted provisions in its Certificate of Incorporation designed to
facilitate the Company's ability to preserve and utilize its NOLs.
ENVIRONMENTAL LIABILITIES
The Company was engaged in oil and gas production, exploration and
development until mid-1993. In connection with the sale of substantially all
of the Company's oil and gas properties, the buyers assumed all material
environmental liabilities.
United Capitol, in the ordinary course of business, chooses to underwrite
accounts which have hazardous, unique or unusual risk characteristics and
applies a strict and specialized underwriting discipline to such risks. Since
United Capitol's organization in 1986, its liability policies have included an
absolute pollution coverage exclusion (except for policies offering pollution
liability coverage to contractors involved in the remediation of preexisting
pollution). In addition, except as discussed below, United Capitol's product
liability and other primary general liability policies contain exclusions for
coverage of claims for bodily injury or property damage caused by exposure to
asbestos.
United Capitol provides coverage to asbestos abatement contractors against
third parties who have alleged bodily injury or property damage as a result of
exposure to asbestos. Employees of the insured
-31-
32
contractor and others required to be in the abatement area are not intended to
be covered by United Capitol's policies. Through the date hereof, there have
been no valid claims against United Capitol's asbestos abatement liability
policies alleging bodily injury arising from exposure to asbestos. Management
believes that none of the other insurance products offered by Capsure's
insurance subsidiaries creates any potential material environmental exposure.
Management believes that Capsure is adequately reserved for risks
associated with environmental liabilities although there can be no assurance
that legal or other developments will not increase the Company's exposure to
environmental liabilities.
IMPACT OF ADOPTING STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS ("SFAS")
As discussed in Note 1 to the consolidated financial statements, the
Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," effective January 1, 1994, and SFAS No. 109, "Accounting
for Income Taxes," effective January 1, 1993.
IMPACT OF ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 is effective for
fiscal years beginning after December 15, 1995. SFAS No. 123 introduces a
preferable fair value-based method of accounting for stock-based compensation.
SFAS No. 123 encourages, but does not require, companies to recognize
compensation expense for grants of stock, stock options, and other equity
instruments to employees based on the new fair value-based method of
accounting. As permitted under SFAS No. 123, the Company intends to continue
applying the existing accounting rules contained in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and to disclose net
income and earnings per share on a pro forma basis, based on the new fair
value-based method of accounting.
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33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
FINANCIAL:
Report of Independent Accountants ................................................. 35
Consolidated Balance Sheets as of December 31, 1995 and 1994 ...................... 36
Consolidated Statements of Income for the Years Ended December 31, 1995,
1994 and 1993 ................................................................. 37
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1995, 1994 and 1993 ............................................... 38
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995,
1994 and 1993 .................................................................. 39
Notes to Consolidated Financial Statements ........................................ 40
FINANCIAL STATEMENT SCHEDULES:
Schedule I -- Summary of Investments .............................................. 58
Schedule II -- Condensed Financial Information of Registrant ...................... 59
Schedule III -- Supplementary Insurance Information ............................... 63
Schedule IV -- Reinsurance ........................................................ 64
Schedule V -- Valuation and Qualifying Accounts ................................... 65
Schedule VI -- Supplemental Information Concerning Property - Casualty
Insurance Operations ........................................................... 66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT,
EXECUTIVE COMPENSATION, SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT, AND CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
The Company will file a definitive proxy statement with the Securities and
Exchange Commission pursuant to Regulation 14A under the Securities Exchange
Act of 1934 (the "Proxy Statement") relating to the Company's Annual Meeting of
Stockholders to be held on May 23, 1996, not later than 120 days after the end
of the fiscal year covered by this Annual Report on Form 10-K. Information
required by Items 10 through 13 will appear in the Proxy Statement and is
incorporated herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Page
----
(a)(1) Financial:
Report of Independent Accountants....................................... 35
Consolidated Balance Sheets as of December 31, 1995 and 1994............ 36
Consolidated Statements of Income for the Years Ended December 31, 1995,
1994 and 1993......................................................... 37
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1995, 1994 and 1993.......................... 38
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995, 1994 and 1993................................................... 39
Notes to Consolidated Financial Statements.............................. 40
(a)(2) Financial Statement Schedules:
Schedule I -- Summary of Investments.................................... 58
Schedule II -- Condensed Financial Information of Registrant............ 59
Schedule III -- Supplementary Insurance Information..................... 63
Schedule IV -- Reinsurance.............................................. 64
Schedule V -- Valuation and Qualifying Accounts......................... 65
Schedule VI -- Supplemental Information Concerning Property - Casualty
Insurance Operations.................................................. 66
(a)(3) Exhibits................................................................ 67
(b) Reports on Form 8-K
None.
-34-
35
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Capsure Holdings Corp.
We have audited the accompanying consolidated financial statements and
financial statement schedules of Capsure Holdings Corp. and Subsidiaries listed
in the index contained in Item 8 of this Form 10-K. These financial statements
and financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and the significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Capsure Holdings
Corp. and Subsidiaries as of December 31, 1995 and 1994, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995 in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedules referred to above, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects, the
information required to be included therein.
As discussed in Note 1 to the Consolidated Financial Statements, the Company
has changed its methods of accounting for investments in 1994, and income taxes
in 1993.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
March 1, 1996
-35-
36
CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
December 31,
------------------
1995 1994
-------- --------
ASSETS
Invested assets and cash:
Fixed maturities:
At fair value (amortized cost: 1995 - $233,276; 1994 - $249,328) ...... $235,718 $235,625
At amortized cost (fair value: $10,326) ............................... -- 10,968
Equity securities, at fair value (cost: 1995 - $27,124; 1994 - $29,774) .. 27,753 28,205
Short-term investments, at cost which approximates fair value ............ 37,865 22,079
Other investments, at fair value ......................................... 3,219 4,890
Cash ..................................................................... 3,001 4,131
-------- --------
307,556 305,898
Deferred policy acquisition costs ........................................... 27,057 25,150
Reinsurance receivable ...................................................... 40,097 39,582
Intangible assets, net of amortization ...................................... 15,715 18,031
Excess cost over net assets acquired, net of amortization ................... 68,443 84,099
Deferred income taxes, net of valuation allowance ........................... 29,293 54,205
Other assets ................................................................ 26,607 26,405
-------- --------
Total assets .......................................................... $514,768 $553,370
======== ========
LIABILITIES
Reserves:
Unpaid losses and loss adjustment expenses ............................... $126,061 $149,041
Unearned premiums ........................................................ 76,781 76,630
-------- --------
202,842 225,671
Reinsurance payable ......................................................... 773 3,373
Long-term debt .............................................................. 25,000 71,000
Other liabilities ........................................................... 28,849 28,461
-------- --------
Total liabilities ..................................................... 257,464 328,505
-------- --------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share, 5,000,000 shares authorized;
none issued and outstanding .............................................. -- --
Common stock, par value $.05 per share,
25,000,000 and 20,000,000 shares authorized in 1995 and 1994;
15,408,749 shares issued at December 31, 1995;
15,407,815 shares issued at December 31, 1994 ............................ 770 770
Additional paid-in capital .................................................. 179,276 179,250
Retained earnings from August 1, 1986 (date of reorganization) .............. 75,286 54,756
Unrealized gain (loss) on securities, net of deferred income taxes .......... 1,972 (9,830)
Treasury stock, at cost (-0- shares in 1995 and 13,666 shares in 1994) ...... -- (81)
-------- --------
Total stockholders' equity ............................................ 257,304 224,865
-------- --------
$514,768 $553,370
======== ========
The accompanying notes are an integral part of these financial statements.
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37
CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended December 31,
----------------------------
1995 1994 1993
-------- -------- --------
Revenues:
Net earned premiums ...................................... $ 98,692 $ 92,481 $ 86,029
Net investment income .................................... 20,471 19,129 19,815
Net investment gains (losses) ............................ (1,653) 945 2,071
Other income ............................................. 6 107 530
-------- -------- --------
117,516 112,662 108,445
-------- -------- --------
Expenses:
Net losses and loss adjustment expenses .................. (7,451) 23,344 19,957
Net commissions, brokerage and other underwriting ........ 61,312 53,904 50,848
Interest expense ......................................... 4,103 4,726 6,280
Write-off of unamortized deferred loan fees .............. -- 1,556 --
Amortization and impairment of goodwill and intangibles .. 16,853 3,365 3,407
Other .................................................... 2,448 1,988 2,435
-------- -------- --------
77,265 88,883 82,927
-------- -------- --------
Income before income taxes ................................. 40,251 23,779 25,518
Income taxes ............................................... 19,721 9,401 9,234
-------- -------- --------
Net income ................................................. $ 20,530 $ 14,378 $ 16,284
======== ======== ========
Weighted average common and common equivalent
shares outstanding ........................................ 15,404 15,160 15,036
======== ======== ========
Weighted average common and common equivalent shares
outstanding - assuming full dilution ...................... 15,917 15,455 15,361
======== ======== ========
Earnings per common and common equivalent share ............ $ 1.33 $ .95 $ 1.08
======== ======== ========
Earnings per common share - assuming full dilution ......... $ 1.29 $ .93 $ 1.06
======== ======== ========
The accompanying notes are an integral part of these financial statements.
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38
CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Years Ended December 31,
--------------------------------
1995 1994 1993
-------- ------- -------
Common Stock:
Balance, January 1 .............................................. $ 770 $ 753 $ 753
Common stock issued ............................................. -- 15 --
Common stock issued through exercise of warrants and options .... -- 2 --
-------- -------- --------
Balance, December 31 ............................................ $ 770 $ 770 $ 753
======== ======== ========
Additional Paid-In Capital:
Balance, January 1 .............................................. $179,250 $165,257 $159,263
Common stock issued ............................................. -- 3,985 --
Common stock issued through exercise of warrants and options .... 26 8 47
Repurchase of outstanding warrants .............................. -- -- (42)
Change in valuation allowance for deferred tax asset ............ -- 10,000 6,000
Deferred issuance and offering costs ............................ -- -- (11)
-------- -------- --------
Balance, December 31 ............................................ $179,276 $179,250 $165,257
======== ======== ========
Retained Earnings:
Balance, January 1 .............................................. $ 54,756 $ 40,378 $ 24,094
Net income ...................................................... 20,530 14,378 16,284
-------- -------- --------
Balance, December 31 ............................................ $ 75,286 $ 54,756 $ 40,378
======== ======== ========
Unrealized Gain (Loss) on Securities, Net of Deferred Income Taxes:
Balance, January 1 .............................................. $ (9,830) $ 1,318 $ 32
Impact of adopting SFAS No. 115 ................................. -- 3,203 --
Transfer of held-to-maturity securities ......................... 224 -- --
Change for the year ............................................. 11,578 (14,351) 1,286
-------- -------- --------
Balance, December 31 ............................................ $ 1,972 $ (9,830) $ 1,318
======== ======== ========
Treasury Stock:
Balance, January 1 .............................................. $ (81) $ (81) $ (221)
Common stock reissued through exercise of warrants and options .. 81 -- 140
-------- -------- ---
Balance, December 31 ............................................ $ -- $ (81) $ (81)
======== ======== ========
Common Stock
-----------------------------
Issued In Treasury
---------- -----------
Shares:
Balance, January 1, 1993 ......................................... 15,055,231 (37,501)
Common stock reissued from treasury through exercise of warrants
and options .................................................... -- 23,835
---------- -----------
Balance, December 31, 1993 ....................................... 15,055,231 (13,666)
Common stock issued through exercise of warrants and options ..... 45,481 --
Common stock issued in connection with Universal Surety
Holding Corp. acquisition ...................................... 307,103 --
---------- -----------
Balance, December 31, 1994 ....................................... 15,407,815 (13,666)
Common stock reissued from treasury through exercise of options .. -- 13,666
Common stock issued through exercise of options .................. 934 --
---------- -----------
Balance, December 31, 1995 ....................................... 15,408,749 --
========== ===========
The accompanying notes are an integral part of these financial statements.
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39
CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
Years Ended December 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
OPERATING ACTIVITIES:
Net income .......................................................... $ 20,530 $ 14,378 $ 16,284
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization .................................... 18,272 4,617 4,476
Accretion of bond discount, net .................................. (2,471) (3,933) (3,024)
Net investment (gains) losses .................................... 1,653 (945) (2,071)
Gain on sale of oil and gas assets, net .......................... -- -- (258)
Changes in:
Reserve for unpaid losses and loss adjustment expenses ........... (22,980) 10,477 7,703
Reserve for unearned premiums .................................... 151 (1,160) 3,128
Deferred income taxes, net ....................................... 18,086 8,820 8,696
Other assets and liabilities ..................................... (2,502) (2,970) (2,821)
--------- --------- ---------
Net cash provided by operating activities ............................ 30,739 29,284 32,113
--------- --------- ---------
INVESTING ACTIVITIES:
Securities available-for-sale:
Purchases - fixed maturities ..................................... (103,943) (92,342) (181,486)
Sales - fixed maturities ......................................... 71,889 43,762 17,503
Maturities - fixed maturities .................................... 59,115 35,020 126,781
Purchases - equity securities .................................... (3,165) (28,350) (534)
Sales - equity securities ........................................ 6,225 8,091 3,310
Securities held-to-maturity:
Maturities - fixed maturities .................................... 4,200 -- --
Purchases - fixed maturities ..................................... (4,981) (1,110) --
Change in short-term investments .................................... (15,786) 47,881 24,533
Acquisitions, net of cash acquired .................................. -- (26,175) (1,375)
Proceeds from sale of other invested assets ......................... 1,821 1,733 1,159
Capital expenditures, net ........................................... (1,351) (1,679) (2,802)
--------- --------- ---------
Net cash provided by (used in) investing activities .................. 14,024 (13,169) (12,911)
--------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from long-term debt ........................................ -- 96,000 --
Principal payments on long-term debt ................................ (46,000) (110,214) (18,000)
Exercise of warrants and options .................................... 107 10 187
Repurchase of outstanding warrants .................................. -- -- (42)
Debt issuance costs ................................................. -- (1,060) --
Stock issuance costs ................................................ -- -- (11)
--------- --------- ---------
Net cash used in financing activities ................................ (45,893) (15,264) (17,866)
--------- --------- ---------
Increase (decrease) in cash .......................................... (1,130) 851 1,336
Cash at beginning of year ............................................ 4,131 3,280 1,944
--------- --------- ---------
Cash at end of year .................................................. $ 3,001 $ 4,131 $ 3,280
========= ========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest ......................................................... $ 3,759 $ 4,121 $ 5,761
Income taxes, net of refunds ..................................... $ 658 $ 642 $ 597
Supplemental Disclosure of Non-Cash Investing and Financing Activities
Common stock issued in connection with acquisitions .............. $ -- $ 4,000 $ --
The accompanying notes are an integral part of these financial statements.
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CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Capsure
Holdings Corp. and all significant majority-owned subsidiaries ("Capsure" or
the "Company"). Capsure is engaged in the property and casualty insurance
business. The Company's principal insurance operating entities are Western
Surety Company ("Western Surety"), United Capitol Insurance Company ("United
Capitol") and Universal Surety of America ("Universal Surety"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Certain balances in the prior years'
financial statements have been reclassified to conform to current presentation.
INVESTMENTS
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." At January 1, 1994, net unrealized gains on
investments which were classified as securities available-for-sale were
approximately $7.0 million ($4.6 million, net of deferred income taxes).
Approximately $4.9 million of the $7.0 million net unrealized gains on
available-for-sale securities related to fixed maturities which were carried at
amortized cost at December 31, 1993. At January 1, 1994, unrealized gains and
losses on the trading securities were not material to the Company's results of
operations. Prior to the adoption of SFAS No. 115, all debt securities were
carried at amortized cost and all equity securities reported at fair value,
with unrealized gains and losses, net of deferred income taxes, reflected in
stockholders' equity.
The Company has the ability to hold all debt securities to maturity.
However, the Company may dispose of securities prior to their scheduled
maturity due to changes in interest rates, prepayments, tax and credit
considerations, liquidity or regulatory capital requirements, or other similar
factors. As a result, the Company considers substantially all of its debt
(bonds and redeemable preferred stocks) and equity securities as
available-for-sale. Certain equity securities at the parent company level that
are held principally for the purpose of selling them in the near term are
considered trading securities.
The accounting policies for each investment category are as follows:
Available-for-Sale Securities -- These securities are reported at fair
value, with unrealized gains and losses, net of deferred income taxes, reported
as a separate component of stockholders' equity until realized. Cash flows
from purchases, sales and maturities are reported gross in the investing
activities section of the cash flow statement.
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Trading Securities -- These securities are reported on the balance sheet
at fair value, with any unrealized gains and losses included in earnings. Cash
flows from purchases, sales and maturities are included in the operating
activities section of the cash flow statement.
Held-to-Maturity Securities -- In 1994, certain debt securities,
principally deposited with state insurance regulatory authorities, were
considered held-to-maturity and reported at amortized cost.
Effective December 31, 1995, the Company implemented the one-time
reassessment provision contained in the FASB Special Report, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities," and, accordingly, reclassified all held-to-maturity
securities to the available-for-sale category as of December 31, 1995. The
amortized cost and fair value of these transferred securities were $11.7
million and $12.0 million, respectively. Net unrealized gains on such
securities, net of deferred income taxes, of $0.2 million have been reflected
in stockholders' equity.
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is included
in investment income. For mortgage-backed and certain asset-backed securities,
Capsure recognizes income using a constant effective yield based on estimated
cash flows including anticipated prepayments. Significant variances in actual
cash flows from expected cash flows are accounted for prospectively. Any
related adjustment is reflected in investment income. Investment gains or
losses are determined using the specific identification method. Investments
with an other than temporary decline in value are written down to fair value,
resulting in losses that are included in investment gains and losses.
Short-term investments are carried at amortized cost which approximates
fair value.
DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs, consisting of commissions and other underwriting
expenses which vary with, and are directly related to, the production of
business, net of reinsurance commission income, are deferred and amortized to
income as the related premiums are earned. Deferred policy acquisition costs
are subject to a limitation representing the excess of anticipated net earned
premiums over anticipated losses, loss adjustment expenses and maintenance
costs. The ultimate recoverability of policy acquisition costs is determined
without regard to investment income.
EXCESS COST OVER NET ASSETS ACQUIRED AND INTANGIBLE ASSETS
The excess cost over the fair value of the net assets acquired is
amortized substantially over 40 years. Other intangible assets are amortized
over periods ranging from three to 20 years, a substantial portion of which is
amortized over three years. Other intangible assets primarily relate to the
estimated value of the acquired insurance in force and the producing agency
force as of the acquisition date. Excess cost over net assets acquired is
reported net of accumulated amortization of $21.1 million (includes $13.2
million write-down in 1995) and $5.4 million at December 31, 1995 and 1994,
respectively. Intangible assets are reported net of accumulated amortization
of $25.7 million and $23.3 million at December 31, 1995 and 1994, respectively.
Management assesses the recoverability of goodwill and intangible assets
based upon estimates of undiscounted future operating cash flows whenever
significant events or changes in circumstances suggest that the carrying amount
of an asset may not be recoverable. As described in Note 16, the operations of
United Capitol are expected to be sold. Accordingly, the goodwill associated
with such operations held for sale has been reduced by $13.2 million to
estimated net realizable value.
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UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The liability for unpaid losses and loss adjustment expenses is based on
estimates of (a) the ultimate settlement value of reported claims, (b) incurred
but not reported ("IBNR") claims, (c) future expenses to be incurred in the
settlement of claims and (d) claim recoveries. These estimates are determined
based on the Company's and industry loss experience as well as consideration of
current trends and conditions. The liability for unpaid losses and loss
adjustment expenses is an accounting estimate and, similar to other accounting
estimates, there is the potential that actual future loss payments will differ
from initial estimates. The methods of determining such estimates and the
resulting estimated liability are continually reviewed and updated. Changes in
the estimated liability are reflected in operating income in the year in which
such changes are determined. As described in Note 6, the Company's incurred
losses and loss adjustment expenses in 1995 were reduced by $29.1 million, net
of reinsurance, as a result of favorable claim settlements and certain changes
in estimates relating to insured events of prior years.
INSURANCE PREMIUMS
Insurance premiums are recognized as revenue ratably over the terms of the
related policies. Unearned premiums represent the portion of premiums written
applicable to the unexpired terms of policies in force calculated on a daily
pro rata basis. Premium revenues are reported net of amounts ceded to
reinsurers.
REINSURANCE
Amounts recoverable from reinsurers are estimated in a manner consistent
with the claim liability associated with the reinsured policy and are reported
as reinsurance receivable rather than netted against the liability for unpaid
losses and loss adjustment expenses. Losses and loss adjustment expenses
incurred are reported net of estimated recoveries under reinsurance contracts.
CONTINGENT REINSURANCE PREMIUMS AND COMMISSIONS
Contingent reinsurance premiums and commissions are earned in accordance
with the applicable reinsurance agreement and are based on the estimated level
of profitability relating to such reinsured business. Such estimates are
continually reviewed and any adjustments are reflected in current operations.
The Company's net earned premiums on the income statement were increased by
$2.6 million and $2.5 million in 1995 and 1994, respectively, as a result of
contingent reinsurance premium adjustments under its reinsurance agreements.
The Company did not recognize any such contingent reinsurance premium
adjustment in 1993.
INCOME TAXES
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting
for Income Taxes." SFAS No. 109 requires the asset and liability method of
accounting for income taxes rather than the deferred method, as specified by
Accounting Principles Board ("APB") No. 11. Under the asset and liability
method, deferred income taxes are established for the future tax effects of
temporary differences between the tax and financial reporting bases of assets
and liabilities using currently enacted tax rates. Such temporary differences
primarily relate to net operating tax loss carryforwards ("NOLs"), loss reserve
discounting, deferred policy acquisition costs and intangible assets. Under
SFAS No. 109, the effect on deferred taxes of a change in tax rates is
recognized in income in the period of enactment.
The adoption of SFAS No. 109 permitted the Company to recognize as a
deferred tax asset the benefits of certain NOLs that were previously prohibited
under APB No. 11. Under the new standard, deferred tax assets are valued based
upon the expectation of future realization on a "more likely than not" basis.
Upon adoption of SFAS No. 109, the Company restated its 1992 financial
statements. As of
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January 1, 1992, a deferred tax asset of $60.2 million, net of a valuation
allowance of $45.2 million, with a corresponding credit to additional paid-in
capital was recorded related to available NOLs for which future realization is
expected. The amount of the deferred tax assets considered realizable,
however, could be reduced in the near term if estimates of future taxable
income during the carryforward period are reduced. Tax benefits resulting from
the future utilization of such NOLs will reduce the net deferred tax asset
established in accordance with SFAS No. 109.
REORGANIZATION PROCEEDINGS
On July 31, 1986, the Company emerged from voluntary bankruptcy
proceedings under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code"). After the requisite acceptances were obtained and the
Bankruptcy Court determined that the Second Amended Joint Plan of
Reorganization, as amended (the "Plan of Reorganization"), satisfied applicable
requirements of the Bankruptcy Code, the Bankruptcy Court confirmed the Plan of
Reorganization on December 20, 1985, and the Plan of Reorganization was
consummated on July 31, 1986 (the "Reorganization Date"). The Company emerged
from bankruptcy with approximately $300 million of NOLs resulting from oil and
gas operations prior to the reorganization.
In accordance with accounting principles applicable to reorganizations,
the net assets of the Company were adjusted to fair value, the accumulated
deficit in retained earnings at the date of reorganization was eliminated and
the excess of the fair values of the net assets over the stated value of
outstanding capital stock was assigned to additional paid-in capital.
EARNINGS PER SHARE
Earnings per common and common equivalent shares outstanding are computed
using the treasury stock method. Weighted average shares outstanding assuming
full dilution for 1995, 1994 and 1993 were 15.9 million, 15.5 million and 15.4
million, respectively.
PENDING ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 is effective for
fiscal years beginning after December 15, 1995. SFAS No. 123 introduces a
preferable fair value-based method of accounting for stock-based compensation.
SFAS No. 123 encourages, but does not require, companies to recognize
compensation expense for grants of stock, stock options, and other equity
instruments to employees based on the new fair value-based method of
accounting. The Company intends to continue applying the existing accounting
rules contained in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and to disclose net income and earnings per share
on a pro forma basis, based on the new fair value-based method of accounting.
2. ACQUISITIONS
On September 22, 1994, Capsure, through its wholly owned subsidiary,
Capsure Financial Group, Inc. ("CFG"), acquired all of the outstanding common
stock of Universal Surety Holding Corp. ("USHC"). USHC is the holding company
of Universal Surety. Universal Surety specializes in the underwriting of small
contract and miscellaneous surety bonds. Capsure paid $28 million in cash and
$4 million in Capsure common stock for USHC, pursuant to a Stock Purchase
Agreement dated as of July 26, 1994. The cash portion of the purchase price
was financed with borrowings under Capsure's $135 million revolving credit
facility.
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The acquisition has been accounted for as a purchase and, accordingly, the
acquired assets and liabilities have been recorded at their estimated fair
values. The operating results of USHC are included in the consolidated
statements of income and cash flows from the September 22, 1994 acquisition
date. The excess of the purchase price over the fair value of net assets
acquired is recorded as excess cost over net assets acquired in the
consolidated balance sheets.
The USHC Stock Purchase Agreement provides for a contingent payment to
certain of the selling shareholders. Such payment shall be in cash or an
equivalent amount of Capsure common stock, at the Company's option, in the year
2000, equal to twenty percent of the excess of the after-tax fair market value
of Universal Surety at December 31, 1999, over an assumed fifteen percent
return, compounded annually, on Capsure's invested capital.
The following table of unaudited pro forma information has been prepared
as if the acquisition of USHC had been consummated on January 1, 1993, at the
same purchase price, with adjustments to the consolidated results of operations
for the effects of the acquisition in the same manner as subsequent to the
acquisition. Such adjustments include: (i) decreased net investment income
and realized investment gains at USHC; (ii) decreased operating expenses at
USHC; and (iii) increased interest and amortization expense. In management's
opinion, the pro forma financial information is not indicative of consolidated
results of operations that may have occurred had the acquisition taken place on
January 1, 1993, or of future results of operations of USHC under the ownership
and operation of Capsure. In the following table, the dollars are in
thousands, except per share amounts:
Pro Forma (Unaudited)
for the Years Ended December 31,
----------------------------------
1994 1993
---------------- ----------------
Revenues ..................... $ 122,967 $ 120,141
Net income ................... $ 15,086 $ 17,339
Net income per common share .. $ .98 $ 1.13
On November 10, 1993, the Company acquired all of the outstanding common
stock of Fischer Underwriting Group, Incorporated ("Fischer") for an aggregate
purchase price of $3.5 million. Fischer is a managing general agency engaged
in producing and underwriting specialty directors' and officers' and
miscellaneous professional liability insurance. The acquisition of Fischer was
not material to the Company's financial condition or results of operations for
the year ended December 31, 1993 and, therefore, is not included in the 1993
pro forma financial information above.
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3. INVESTMENTS
The cost and estimated fair values of investments in debt and equity
securities as of December 31, 1995 and 1994 were as follows (dollars in
thousands):
Amortized Gross Gross Estimated
Cost Unrealized Unrealized Fair
As of December 31, 1995: or Cost Gains Losses Value
- --------------------------------------------------- --------- ---------- ---------- ---------
Fixed maturities:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies:
U.S. Treasury notes ............................ $ 15,047 $ 488 $ (1) $ 15,534
Collateralized mortgage obligations ............ 64,610 430 (349) 64,691
Mortgage pass-through securities ............... 40,313 788 (3) 41,098
Debt securities of foreign governments ............ 5 -- -- 5
Obligations of states and political subdivisions .. 5,748 10 (18) 5,740
Corporate bonds ................................... 91 -- (16) 75
Non-agency collateralized mortgage obligations .... 34,574 392 (66) 34,900
Asset-backed securities:
Second mortgages/home equity loans ............. 49,060 947 (102) 49,905
Automobile loans ............................... 8,229 1 (2) 8,228
Other underlying assets ........................ 15,599 97 (154) 15,542
--------- ---------- ---------- ---------
Total fixed maturities ....................... 233,276 3,153 (711) 235,718
Equity securities ................................. 24,758 1,303 (1,245) 24,816
--------- ---------- ---------- ---------
Total available-for-sale securities .......... $ 258,034 $ 4,456 $ (1,956) $ 260,534
========= ========== ========== =========
Equity trading securities ......................... $ 2,366 $ 593 $ (22) $ 2,937
========= ========== ========== =========
As of December 31, 1994:
- ---------------------------------------------------
Fixed maturities:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies:
U.S. Treasury notes ............................ $ 1,990 $ -- $ (10) $ 1,980
Collateralized mortgage obligations ............ 116,408 7 (8,572) 107,843
Mortgage pass-through securities ............... 44,832 62 (2,168) 42,726
Debt securities of foreign governments ............ 5 -- -- 5
Obligations of states and political subdivisions .. 16,019 6 (424) 15,601
Corporate bonds ................................... 1,865 25 (88) 1,802
Non-agency collateralized mortgage obligations .... 6,159 -- (159) 6,000
Asset-backed securities:
Second mortgages/home equity loans ............. 37,927 38 (969) 36,996
Credit card receivables ........................ 4,000 44 -- 4,044
Automobile loans ............................... 8,020 25 (1,058) 6,987
Other underlying assets ........................ 12,103 -- (462) 11,641
--------- ---------- ---------- ---------
Total fixed maturities ....................... 249,328 207 (13,910) 235,625
Equity securities ................................. 27,476 208 (1,403) 26,281
--------- ---------- ---------- ---------
Total available-for-sale securities .......... $ 276,804 $ 415 $ (15,313) $ 261,906
========= ========== ========== =========
Held-To-Maturity Securities:
Fixed maturities - U.S. Treasury securities ....... $ 10,968 $ 19 $ (661) $ 10,326
========= ========== ========== =========
Equity trading securities ......................... $ 2,298 $ 59 $ (433) $ 1,924
========= ========== ========== =========
As of December 31, 1995, 100% of the Company's debt securities were
considered investment grade by The Standard & Poors Corporation or Moody's
Investor Services, Inc., and 90% were rated at least AA by those agencies. In
addition, the Company's investments in debt securities did not contain any
significant geographic or industry concentration of credit risk.
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The U.S. Treasury notes and mortgage pass-through securities are backed by
the full faith and credit of the U.S. Government. The U.S. Government
collateralized mortgage obligations consist of securities collateralized by
first mortgages issued by the Federal National Mortgage Association and the
Federal Home Loan Mortgage Corporation, or guaranteed by the Government
National Mortgage Association.
The Company has reduced the prepayment variability commonly associated
with collateralized mortgage obligations by generally investing in planned
amortization class tranches which are structured largely to insulate the
investor from prepayment risk.
The Company's insurance subsidiaries, as required by state law, deposit
certain securities with state insurance regulatory authorities. At December
31, 1995, fixed maturities on deposit had an aggregate carrying value of $13.6
million.
During 1994, the Company shifted a portion of its available-for-sale
portfolio to equity securities, principally higher yielding nonaffiliated real
estate investment trusts ("REITs"). At December 31, 1995, the carrying value
of the Company's REIT portfolio was $20.4 million.
Short-term investments are generally comprised of U.S. Treasury notes,
maturing corporate notes, money market and mutual funds, and investment grade
commercial paper equivalents.
The amortized cost and estimated fair value of debt securities at December
31, 1995, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities as borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties (dollars in
thousands):
Estimated
Amortized Fair
Cost Value
--------- ---------
Available-For-Sale Securities
--------------------------------------------------------
Due within one year ................................. $ 3,981 $ 4,026
Due after one year but within five years ............ 6,225 6,482
Due after five years but within ten years ........... 7,444 7,602
Due after ten years ................................. 3,241 3,244
--------- ---------
20,891 21,354
Mortgage pass-through securities, collateralized
mortgage obligations and asset-backed securities .. 212,385 214,364
--------- ---------
$233,276 $235,718
========= =========
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Major categories of net investment income and net investment gains
(losses) were as follows (dollars in thousands):
1995 1994 1993
-------- ------- -------
Investment income:
Fixed maturities .................... $16,964 $16,405 $16,282
Equity securities ................... 1,924 915 143
Short-term investments .............. 1,814 1,722 2,820
Other ............................... 260 532 990
-------- ------- -------
Total investment income ............. 20,962 19,574 20,235
Investment expenses .................... 491 445 420
-------- ------- -------
Net investment income .................. $20,471 $19,129 $19,815
======== ======= =======
Gross investment gains:
Fixed maturities .................... $ 722 $ 88 $1,821
Equity securities ................... 2,505 3,762 3,430
Gross investment losses:
Fixed maturities .................... (3,757) (625) (2,911)
Equity securities ................... (2,068) (1,802) (269)
Net unrealized gains (losses) on trading
securities .......................... 945 (374) --
Other .................................. -- (104) --
-------- ------- -------
Net investment gains (losses) .......... $(1,653) $ 945 $2,071
======== ======= =======
Net unrealized gain (loss) on securities included in stockholders' equity
was as follows (dollars in thousands):
1995 1994
------------------------- ---------------------------
Gains Losses Net Gains Losses Net
------ -------- ------- ----- --------- ---------
Fixed maturities .......................... $3,153 $ (711) $2,442 $207 $(13,910) $ (13,703)
Equity securities ......................... 1,303 (1,245) 58 208 (1,403) (1,195)
Other ..................................... 534 -- 534 -- (225) (225)
------ -------- ------- ----- --------- ---------
$4,990 $(1,956) 3,034 $415 $(15,538) (15,123)
====== ======== ===== =========
Deferred income taxes ..................... (1,062) 5,293
------- ---------
Net unrealized gain (loss) on securities .. $1,972 $ (9,830)
======= =========
The net investment losses from the insurance operations in 1995 reflected
the write-down of the carrying value for two asset-backed securities from the
same issuer which experienced an other than temporary decline in fair value.
At December 31, 1994, the carrying value of debt securities on non-accrual
status was $1.9 million, related to two interest-only U.S. Government
collateralized mortgage obligations. The gross realized investment losses on
fixed maturities in 1993 were primarily due to a $2.5 million write-down to
fair value on these two interest-only securities, reflecting lower future
expected cash flows of these securities as a result of an accelerated level of
mortgage prepayments.
A majority of the realized investment gains and losses on equity
securities resulted from sales of securities held at the parent company level.
For 1995, investment activity for the equity trading portfolio held at the
parent company level included gross realized investment gains of $1.9 million
and gross realized investment losses of $1.8 million. For 1994, investment
activity for the equity trading portfolio held at the parent company level
included gross realized investment gains of $1.5 million and gross realized
investment losses of $1.0 million.
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4. DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs deferred and the related amortization charged to
income were as follows (dollars in thousands):
1995 1994 1993
-------- -------- --------
Balance at January 1 ............ $ 25,150 $ 18,421 $ 9,428
Balance at date of acquisition .. -- 4,369 --
Costs deferred during year ...... 37,666 31,750 30,157
Amortization during year ........ (35,759) (29,390) (21,164)
-------- -------- --------
Balance at December 31 .......... $ 27,057 $ 25,150 $ 18,421
======== ======== ========
5. REINSURANCE
The Company's insurance subsidiaries, in the ordinary course of business,
cede reinsurance to other insurance companies to limit their exposure to loss.
Reinsurance contracts do not relieve the Company of its primary obligations to
claimants. A contingent liability exists with respect to reinsurance ceded to
the extent that any reinsurer is unable to meet the obligations assumed under
the reinsurance agreements. The Company evaluates the financial condition of
its reinsurers, establishes allowances for uncollectible amounts and monitors
concentrations of credit risk. At December 31, 1995, Capsure's largest
reinsurance receivable, including prepaid reinsurance premiums of $1.2 million
and estimated ceded IBNR of $11.8 million, was approximately $19.8 million with
Generali - U.S. Branch. Generali - U.S. Branch is rated A (Excellent), XV by
A.M. Best Company, Inc. No other receivable from a single reinsurer exceeded
10% of total reinsurance receivables.
The effect of reinsurance on premiums written and earned was as follows
(dollars in thousands):
1995 1994 1993
------------------ ------------------ ------------------
Written Earned Written Earned Written Earned
-------- -------- -------- -------- -------- --------
Direct ........ $111,305 $113,538 $102,062 $103,871 $100,355 $ 97,543
Assumed ....... 93 247 294 143 420 455
Ceded ......... (13,670) (15,093) (11,778) (11,533) (12,469) (11,969)
-------- -------- -------- -------- -------- --------
Net premiums .. $ 97,728 $ 98,692 $ 90,578 $ 92,481 $ 88,306 $ 86,029
======== ======== ======== ======== ======== ========
The effect of reinsurance on losses and loss adjustment expenses incurred
was as follows (dollars in thousands):
1995 1994 1993
-------- ------- -------
Gross losses and loss adjustment expenses .. $ (486) $31,684 $26,407
Reinsurance recoveries ..................... (6,965) (8,340) (6,450)
-------- ------- -------
Net losses and loss adjustment expenses .... $ (7,451) $23,344 $19,957
======== ======= =======
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6. LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Activity in the liability for unpaid losses and loss adjustment expenses
was as follows (dollars in thousands):
1995 1994 1993
----------------- ------------------ ---------------
Gross balance at January 1 ................. $ 149,041 $ 135,825 $ 128,122
Balance at date of acquisition ............. -- 2,738 --
Incurred related to:
Current year ............................... 34,073 46,206 41,398
Prior years ................................ (34,559) (14,522) (14,991)
----------------- ------------------ ---------------
Total incurred ............................. (486) 31,684 26,407
----------------- ------------------ ---------------
Paid related to:
Current year ............................... 4,150 3,003 2,266
Prior years ................................ 18,344 18,203 16,438
----------------- ------------------ ---------------
Total paid ................................. 22,494 21,206 18,704
----------------- ------------------ ---------------
Gross balance at December 31 ............... $ 126,061 $ 149,041 $ 135,825
================= ================== ===============
Balance net of reinsurance at December 31 .. $ 87,078 $ 111,164 $ 102,688
================= ================== ===============
As a result of favorable claim settlements and changes in estimates of
insured events in prior years, the provision for losses and loss adjustment
expenses decreased by $34.6 million ($29.1 million, net of reinsurance) in
1995, $14.5 million ($8.3 million, net of reinsurance) in 1994 and $15.0
million ($11.3 million, net of reinsurance) in 1993.
United Capitol's claims development through December 31, 1995, has been
favorable relative to expectations based on industry experience. Due to the
limited prior operating experience of United Capitol and the long-tail nature
of its business, management previously relied principally upon industry
development patterns and expected loss ratios in estimating IBNR. Given the
availability of nine full years of experience and the growing evidence of
favorable loss trends relative to industry indications, management concluded in
the fourth quarter of 1995 that it was appropriate to place greater reliance on
United Capitol's own development patterns and emerging loss ratios in
estimating IBNR. United Capitol reduced loss and loss adjustment expenses by
$23.2 million in 1995 for net favorable development related to prior years,
substantially all of which pertains to this change in estimate. This loss
reserve reduction increased Capsure's consolidated income before taxes by $23.2
million, and net income by $15.1 million, or $0.98 per share.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table summarizes disclosure of fair value information of
financial instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value. In cases where quoted market
prices are not available, fair values may be based on estimates using present
value or other valuation techniques. These techniques are significantly
affected by the assumptions used, including the discount rates and estimates of
future cash flows. Accordingly, the estimates presented herein are subjective
in nature and are not necessarily indicative of the amounts that Capsure could
realize in a current market exchange. This information excludes certain
financial instruments and all nonfinancial instruments such as insurance
contracts from fair value disclosure. Thus, the following fair value amounts
cannot be aggregated to determine the underlying economic value of Capsure.
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The carrying amounts and estimated fair values of financial instruments
were as follows (dollars in thousands):
1995 1994
-------------------------- --------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Debt securities ......... $235,718 $235,718 $246,593 $245,951
Equity securities ....... 27,753 27,753 28,205 28,205
Short-term investments .. 37,865 37,865 22,079 22,079
Other investments ....... 3,219 3,219 4,890 4,890
Cash .................... 3,001 3,001 4,131 4,131
Long-term debt .......... 25,000 25,000 71,000 71,000
The following methods and assumptions were used by Capsure in estimating
fair values of financial instruments:
Investment Securities -- The estimated fair values for debt securities
(including redeemable preferred stock) are based upon quoted market prices,
where available. For debt securities not actively traded, the estimated fair
values are determined using values obtained from independent pricing services
or, in the case of private placements, by discounting expected future cash
flows using a current market rate applicable to the yield, credit quality and
maturity of the investments. The estimated fair values for equity securities
are based on quoted market prices.
Cash, Short-Term Investments and Other Investments -- The carrying amount
for these instruments approximates their estimated fair values.
Long-Term Debt -- The estimated fair value of Capsure's long-term debt is
based on the quoted market prices for the same or similar issues or on the
current rates offered to the Company for debt of the same remaining maturity.
8. LONG-TERM DEBT
On March 29, 1994, the Company formed a direct, wholly owned subsidiary,
CFG, to which Capsure contributed substantially all its assets and liabilities.
Concurrently, CFG entered into a senior reducing revolving credit agreement
with a syndicate of banks for the principal amount of $135 million (the "Credit
Facility"). The common stock of substantially all of Capsure's subsidiaries
and substantially all assets of Capsure's non-insurance operations have been
pledged under the Credit Facility. As of December 31, 1995 and 1994, $25
million and $71 million, respectively, were outstanding under the Credit
Facility. The remaining availability under the Credit Facility may be used to
finance future acquisitions and for general corporate purposes.
The interest rate on borrowings under the Credit Facility may be fixed, at
the Company's option, for a period of one to six months and is based on a
margin over either the London Interbank Offered Rate ("LIBOR") or the greatest
of the agent bank's prime rate, certificate of deposit rate plus 1.0% and the
Federal Funds Effective Rate plus 0.5%. The margin varies based on a leverage
ratio and ranges from 0.75% to 1.75% on LIBOR borrowings and 0.0% to 0.75% on
non-LIBOR borrowings. The Credit Facility provides for a commitment fee on the
unused availability which also varies based on leverage. At December 31, 1995,
the weighted average interest rate on outstanding borrowings was 6.57% and the
applicable commitment fee was 0.25%.
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51
The Credit Facility limits the Company with respect to the incurrence of
additional indebtedness and the payment of dividends, imposes certain
restrictions on investments and requires the maintenance of certain financial
ratios and levels of Risk-Based Capital ("RBC"). As of December 31, 1995, the
Company was in compliance with all material restrictions or covenants contained
in the Credit Facility agreement. The use of the Credit Facility for
acquisition purposes is subject to certain conditions with respect to the
business and historical financial results of the target company, the
maintenance of certain financial ratios on a prospective and pro forma basis,
and the structure of the acquisition transaction.
Total borrowings available under the Credit Facility reduce semi-annually
commencing March 31, 1996 by the following amounts (dollars in thousands):
March 31, 1996 $ 12,500
September 30, 1996 12,500
March 31, 1997 12,500
September 30, 1997 12,500
March 31, 1998 15,000
September 30, 1998 15,000
March 31, 1999 17,500
September 30, 1999 17,500
March 31, 2000 20,000
--------
$135,000
========
Principal and interest payments required under the Credit Facility are
funded principally by dividend and intercompany tax sharing payments received
from Capsure's insurance subsidiaries.
9. STATUTORY FINANCIAL DATA
Capsure's insurance subsidiaries file annual financial statements prepared
in accordance with statutory accounting practices prescribed or permitted by
applicable insurance regulatory authorities. Prescribed statutory accounting
practices include state laws, regulations and general administrative rules, as
well as guidance provided in a variety of publications of the National
Association of Insurance Commissioners ("NAIC"). Permitted statutory
accounting practices encompass all accounting practices that are not
prescribed. Such practices may differ from state to state, may differ from
company to company within a state, and may change in the future. The permitted
statutory accounting practices of Capsure's insurance subsidiaries did not have
a material effect on reported statutory surplus. The principal differences
between statutory financial statements and financial statements prepared in
accordance with generally accepted accounting principles are that statutory
financial statements do not reflect deferred policy acquisition costs and
deferred income taxes and debt securities are generally carried at amortized
cost in statutory financial statements.
The NAIC has promulgated RBC requirements for property/casualty insurance
companies to evaluate the adequacy of statutory capital and surplus in relation
to investment and insurance risks such as asset quality, asset and liability
matching, loss reserve adequacy, and other business factors. The RBC
information will be used by state insurance regulators as an early warning tool
to identify, for the purpose of initiating regulatory action, insurance
companies that potentially are inadequately capitalized. In addition, the
formula defines new minimum capital standards that will supplement the current
system of fixed minimum capital and surplus requirements on a state-by-state
basis. Regulatory compliance is determined by a ratio (the "Ratio") of the
enterprise's regulatory total adjusted capital, as defined by the NAIC, to its
authorized control level RBC, as defined by the NAIC. Generally, a Ratio in
excess of 200% of authorized control level RBC requires no corrective actions
by the company or regulators. As of
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52
December 31, 1995, each of Capsure's insurance subsidiaries had a Ratio that
was substantially in excess of the minimum RBC requirements.
Capsure's insurance subsidiaries are subject to regulation and supervision
by the various state insurance regulatory authorities in which they conduct
business. Such regulation is generally designed to protect policyholders and
includes such matters as maintenance of minimum statutory surplus and
restrictions on the payment of dividends. Generally, statutory surplus of each
insurance subsidiary in excess of a statutorily prescribed minimum is available
for payment of dividends to the parent company. However, such distributions as
dividends may be subject to prior regulatory approval, including a review of
the implication on RBC. Without prior regulatory approval in 1996, Capsure's
insurance subsidiaries may pay stockholder dividends of $23.8 million in the
aggregate. In 1995, 1994 and 1993, Capsure received $40.9 million (including
$21.6 million of dividends requiring prior approval), $21.0 million (including
$5.0 million of dividends requiring prior approval), and $11.8 million,
respectively, in dividends from its insurance subsidiaries.
Combined statutory surplus and net income for insurance operations,
including preacquisition results, as reported to regulatory authorities were as
follows (dollars in thousands):
1995 1994 1993
-------- -------- --------
Statutory surplus $113,894 $109,750 $104,343
Statutory net income $ 41,717 $ 23,796 $ 19,308
10. INCOME TAXES
The components of deferred income taxes were as follows (dollars in
thousands):
1995 1994
-------- -------
Deferred tax assets:
Net operating losses .................................................. $62,000 $79,100
Loss and loss adjustment expense reserves ............................. 5,534 7,913
Unearned premium reserves ............................................. 4,791 5,302
Accrued expenses ...................................................... 3,768 3,755
Unrealized loss on securities ......................................... -- 5,293
Other ................................................................. 839 1,537
-------- -------
Total gross deferred tax assets .................................... 76,932 102,900
Valuation allowance ................................................... 30,800 30,800
-------- -------
Deferred tax asset, net of valuation allowance .......................... 46,132 72,100
-------- -------
Deferred tax liabilities:
Intangible assets ..................................................... 5,477 6,278
Deferred policy acquisition costs ..................................... 9,470 8,803
Unrealized gain on securities ......................................... 1,062 --
Other ................................................................. 830 2,814
-------- -------
Total deferred tax liabilities ..................................... 16,839 17,895
-------- -------
Net deferred tax asset .................................................. $29,293 $54,205
======== =======
Capsure and its subsidiaries file a consolidated federal income tax
return. As of December 31, 1995, based upon the Company's consolidated federal
income tax returns, approximately $177 million of consolidated NOLs were
available to offset future taxable income of the Company and its subsidiaries.
The majority of such carryforwards expire in 1997, 1998 and 1999. Although
realization is not assured, management believes that it is more likely than not
that Capsure will generate sufficient taxable income to utilize at least $31.2
million of tax benefits from its available NOLs at December 31, 1995. Such
estimate is based upon the earnings history of each of its insurance
subsidiaries and projections of future
-52-
53
taxable income. The amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future taxable
income during the carryforward period are reduced.
The income tax provisions consisted of the following (dollars in
thousands):
1995 1994 1993
------- ------- ------
Federal deferred . . . . . . . . . . . . . $18,086 $8,820 $8,696
Federal current . . . . . . . . . . . . . 1,500 305 338
State . . . . . . . . . . . . . . . . . . 135 276 200
------- ------ ------
Total income tax expense . . . . . . . . . $19,721 $9,401 $9,234
======= ====== ======
Reconciliations from the federal statutory tax rate to the effective tax
rate are as follows:
1995 1994 1993
------- ------ ------
Federal statutory rate ................................................... 35.0% 35.0% 35.0%
Excess of cost over net assets acquired and other
purchase accounting adjustments ....................................... 13.7 3.0 2.2
State income and environmental tax, net of federal
income tax benefit .................................................... .1 .8 .6
Tax exempt interest ...................................................... (.3) (.3) (.2)
Other .................................................................... .5 1.0 (1.4)
------- ------ ------
Effective tax rate .................................................... 49.0% 39.5% 36.2%
======= ====== ======
Intercompany tax sharing agreements between Capsure and its subsidiaries
provide that income taxes shall be allocated based upon separate return
calculations in accordance with the Internal Revenue Code of 1986, as amended
(the "Code"). Intercompany tax payments are remitted at such times as
estimated tax payments would be required to be made to the Internal Revenue
Service ("IRS"). Capsure received tax sharing payments from its subsidiaries
of $12.8 million, $12.3 million and $13.0 million in 1995, 1994 and 1993,
respectively.
The IRS has not examined the Company's tax returns for the years in which
the Company reported net operating losses. Under Section 382 of the Code,
certain restrictions on the utilization of NOLs will apply if there is an
ownership change of a corporation entitled to use such carryovers. The Company
believes that there is currently no restriction on the ability of the Company
to utilize its NOLs. It is possible that future transactions involving the
Company's common stock or rights to acquire such stock could cause an ownership
change of the Company resulting in restrictions of the Company's ability to
utilize the NOLs during all taxable periods after the date of such ownership
change. The Company has adopted provisions in its Certificate of Incorporation
designed to facilitate the Company's ability to preserve and utilize its NOLs.
11. COMMITMENTS AND CONTINGENCIES
At December 31, 1995, the future minimum commitment under operating leases
was as follows: 1996 - $2.2 million; 1997 - $2.0 million; 1998 - $1.8 million;
1999 - $1.8 million; 2000 - $1.4 million and 2001 and after - $1.4 million.
Total rental expense for 1995, 1994 and 1993 was $2.3 million, $2.3 million and
$2.2 million, respectively.
The Company was engaged in oil and gas production, exploration and
development until mid-1993. In connection with the sale of substantially all
of the Company's oil and gas properties, the buyers assumed all material
environmental liabilities.
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54
United Capitol, in the ordinary course of business, chooses to underwrite
accounts which have hazardous, unique or unusual risk characteristics and
applies a strict and specialized underwriting discipline to such risks. Since
United Capitol's organization in 1986, its liability policies have included an
absolute pollution coverage exclusion (except for policies offering pollution
liability coverage to contractors involved in the remediation of preexisting
pollution). In addition, except as discussed below, United Capitol's product
liability and other general liability policies contain exclusions for coverage
of claims for bodily injury or property damage caused by exposure to asbestos.
United Capitol provides coverage to asbestos abatement contractors against
third parties who have alleged bodily injury or property damage as a result of
exposure to asbestos. Employees of the insured contractor and others required
to be in the abatement area are not intended to be covered by United Capitol's
policies. Through the date hereof, there have been no valid claims against
United Capitol's asbestos abatement liability policies alleging bodily injury
arising from exposure to asbestos. Management believes that none of the other
insurance products offered by Capsure's insurance subsidiaries creates any
potential material environmental exposure.
Management believes that Capsure is adequately reserved for risks
associated with environmental liabilities although there can be no assurance
that legal or other developments will not increase the Company's exposure to
environmental liabilities.
The Company and its subsidiaries are parties to numerous lawsuits arising
in the normal course of business, some seeking material damages. The Company
believes the resolution of these lawsuits will not have a material adverse
effect on its financial condition.
12. EMPLOYEE BENEFITS
The Company sponsors a tax-deferred savings plan (401(k)) covering
substantially all of its employees. The Company matches 50% of the
participating employee's contribution up to 6% of eligible compensation (3%
maximum matching). Western Surety employees may also receive a discretionary
profit sharing payment up to 3% of eligible compensation. Company
contributions, including profit sharing payments, for the years ended December
31, 1995, 1994 and 1993, were $0.7 million, $0.7 million and $0.5 million,
respectively.
The Company sponsors a noncontributory defined contribution retirement
plan covering all eligible employees other than Western Surety personnel. The
Company contributes 4.35% of eligible compensation (8.7% on amounts exceeding
the social security wage base). Company contributions for the years ended
December 31, 1995, 1994 and 1993, were $0.3 million, $0.1 million and $0.1
million, respectively.
Western Surety sponsors two postretirement benefit plans covering
substantially all of its employees. One plan provides medical benefits, and
the other plan provides sick leave termination payments. The postretirement
health care plan is contributory; the sick leave plan is noncontributory. The
actuarially determined net periodic postretirement benefit costs for these
plans were $0.3 million, $0.5 million and $0.5 million for the years ended
December 31, 1995, 1994 and 1993, respectively. The unfunded accumulated
postretirement benefit obligation (for retirees and fully vested active plan
participants) was $4.1 million and $4.0 million as of December 31, 1995 and
1994, respectively.
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13. STOCKHOLDERS' EQUITY
At the Annual Meeting of Stockholders on May 24, 1995, stockholders
approved an amendment to the Company's Certificate of Incorporation to increase
the maximum number of shares of Common Stock the Company is authorized to issue
from 20,000,000 shares to 25,000,000 shares.
On May 24, 1995, the Board of Directors of the Company approved a stock
repurchase plan. The plan authorizes the Company to repurchase up to 500,000
shares of its common stock. These shares may be purchased from time to time in
the public market or through privately negotiated transactions. As of December
31, 1995, no shares have been repurchased under this plan.
The Company has reserved shares of its Common Stock for issuance to
directors, officers, employees and consultants of the Company through incentive
stock options, nonqualified stock options and stock appreciation rights to be
granted under the Company's 1990 Stock Option Plan (the "Plan"). On March 2,
1994, the Board of Directors of the Company approved an amendment to the Plan
to increase by 500,000 the aggregate number of shares available for which
options may be granted under the Plan to 1,500,000 shares. This amendment was
approved by the stockholders at the Annual Meeting held on May 19, 1994. The
Plan is administered by the Compensation Committee (the "Committee"),
consisting of a majority of independent members of the Board of Directors. The
option prices are determined by the Committee, but may not be less than the
fair market value of the Common Stock of the Company at the date of grant for
incentive stock options, and may not be less than the par value of the Common
Stock of the Company for non-qualified stock options.
The Plan provides for the granting of incentive stock options as defined
under the Code. Under the Plan, all nonqualified stock options and incentive
stock options expire ten years after the date of grant. Since January 1, 1993,
all stock options were granted at an option price equal to fair market value at
the date of grant.
Stock option activity for the three years ended December 31, 1995 was as
follows:
Shares Subject Average Option
to Option Price Per Share
-------------- ----------------
Balance at January 1, 1993 .... 711,000 $6.75 to $9.75
Options granted .............. 222,500 $12.25 to $14.88
Options canceled ............. (6,750) $12.25 to $13.50
Options exercised ............ (20,975) $6.75 to $9.75
---------
Balance at December 31, 1993 .. 905,775 $6.75 to $14.88
Options granted .............. 295,250 $12.88 to $14.75
Options canceled ............. (1,876) $12.25
Options exercised ............ (1,037) $6.75 to $12.25
---------
Balance at December 31, 1994 .. 1,198,112 $6.75 to $14.88
Options granted .............. 190,000 $13.13 to $14.00
Options canceled ............. (9,063) $12.25 to $13.50
Options exercised ............ (14,600) $12.63 to $14.25
---------
Balance at December 31, 1995 .. 1,364,449 $6.75 to $14.88
=========
As of December 31, 1995, 994,611 shares were exercisable under the Plan.
The number of shares available for granting of options under the Plan were
96,189 and 277,126 at December 31, 1995 and 1994, respectively.
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14. RELATED PARTY TRANSACTIONS
Equity Group Investments, Inc. ("EGI"), a company affiliated with certain
directors, officers and stockholders of the Company; other affiliated entities;
and individuals affiliated with certain directors and officers of the Company
perform or provide services to the Company and its subsidiaries. These
services relate to acquisition consulting, financial planning, legal and tax
advice, and investor relations, as well as leasing office space and providing
certain computer equipment, operations and maintenance services to the Company.
Related party agreements are generally for a term of one year and are approved
by the independent members of the Board of Directors. The Company's corporate
office space is leased pursuant to a facilities sharing agreement with EGI.
The Company paid rent, administrative services, and office facility
services to EGI or its affiliates of $0.1 million in 1995, 1994 and 1993. The
Company paid $0.2 million in 1995, 1994 and 1993 for financial planning, tax,
accounting, investor relations and computer support and maintenance to EGI or
its affiliates. The Company paid approximately $0.1 million, $0.2 million and
$0.1 million in fees for legal services to a law firm affiliated with EGI in
1995, 1994 and 1993, respectively. The Company received reimbursement from
affiliates of EGI for financial management services provided by employees of
the Company amounting to $0.1 million in 1995, 1994 and 1993.
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited results of operations for the
past two years. The Company acquired Universal Surety in September 1994 and
the consolidated results of operations shown below include the operating
results of Universal Surety from the date of acquisition, which affects the
comparability of the financial information (dollars in thousands, except per
share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
1995
----
Revenues ..................... $29,539 $29,486 $29,432 $29,059
======= ======= ======= =======
Income before income taxes ... $ 6,968 $ 7,287 $ 7,235 $18,761
Income taxes ................. 2,731 2,851 2,816 11,323
------- ------- ------- -------
Net income ................... $ 4,237 $ 4,436 $ 4,419 $ 7,438
======= ======= ======= =======
Earnings per common and common
equivalent share ............ $ .28 $ .28 $ .29 $ .48
======= ======= ======= =======
1994
----
Revenues ..................... $27,167 $27,809 $27,176 $30,510
======= ======= ======= =======
Income before income taxes ... $ 4,607 $ 6,872 $ 5,903 $ 6,397
Income taxes ................. 1,778 2,774 2,191 2,658
------- ------- ------- -------
Net income ................... $ 2,829 $ 4,098 $ 3,712 $ 3,739
======= ======= ======= =======
Earnings per common and common
equivalent share ............ $ .19 $ .27 $ .25 $ .24
======= ======= ======= =======
16. SUBSEQUENT EVENTS
On February 29, 1996, the Company announced that it had signed an
agreement to sell United Capitol Holding Company ("UCHC") and its subsidiaries,
United Capitol, United Capitol Managers, Inc. and Fischer, to a subsidiary of
Frontier Insurance Group, Inc. Estimated net proceeds to Capsure will be
approximately $75 million, which includes the purchase price for the capital
stock of UCHC and the release of United Capitol's excess statutory surplus on
or before closing. The agreement is subject to several conditions including
approval by insurance regulatory authorities and other governmental
authorities. The transaction is expected to close in the second quarter of
1996.
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57
Summarized financial information for United Capitol follows (dollars in
thousands):
1995 1994 1993
-------- --------- ---------
Net earned premiums ............. $13,709 $19,226 $18,088
Net losses and loss adjustment .. (15,030) 11,752 8,590
Underwriting expenses ........... 3,142 4,321 3,915
-------- --------- ---------
Underwriting income ............. $25,597 $3,153 $5,583
======== ========= =========
Income before income taxes ...... $19,872 $11,693 $15,349
======== ========= =========
Net income ...................... $8,657 $7,311 $9,912
======== ========= =========
Invested assets and cash ........ $129,878 $138,263 $148,510
Intangible and other assets ..... 51,831 72,763 70,535
-------- --------- ---------
Total assets .................... 181,709 211,026 219,045
Insurance reserves .............. (96,209) (121,621) (117,048)
Other liabilities ............... (10,455) (9,355) (13,120)
-------- --------- ---------
Net assets ...................... $75,045 $80,050 $88,877
======== ========= =========
The goodwill associated with the 1990 acquisition of United Capitol has
been reduced to estimated net realizable value as of December 31, 1995,
resulting in a $13.2 million impairment of goodwill in 1995. Prior to
closing, the Company must obtain a waiver from the lenders under the Credit
Facility or otherwise amend the agreement to permit the sale of United Capitol.
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SCHEDULE I
CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
AS OF DECEMBER 31, 1995
(AMOUNTS IN THOUSANDS)
Fair Carrying
Cost Value Value
-------- -------- --------
FIXED MATURITIES:
Bonds:
U.S. Government and government agencies and authorities .. $119,970 $121,323 $121,323
States, municipalities and political subdivisions ........ 5,748 5,740 5,740
Foreign governments ...................................... 5 5 5
All other corporate bonds ................................ 107,553 108,650 108,650
-------- -------- --------
Total fixed maturities ................................ 233,276 235,718 235,718
-------- -------- --------
EQUITY SECURITIES:
Common stocks .............................................. 26,378 26,978 26,978
Non-redeemable preferred stocks ............................ 746 775 775
-------- -------- --------
Total equity securities ............................... 27,124 27,753 27,753
-------- -------- --------
Short-term investments ..................................... 37,865 37,865
Other investments .......................................... 2,686 3,219
-------- --------
Total investments ..................................... $300,951 $304,555
======== ========
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59
SCHEDULE II
CAPSURE HOLDINGS CORP.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)
BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
December 31,
------------------
1995 1994
-------- --------
ASSETS
Investment in and advances to Capsure Financial Group, Inc. ......... $221,552 $170,772
Deferred income taxes, net of valuation allowance ................... 37,275 55,616
-------- --------
$258,827 $226,388
======== ========
LIABILITIES
Other liabilities ................................................... $ 1,523 $ 1,523
-------- --------
STOCKHOLDERS' EQUITY
Common stock ........................................................ 770 770
Additional paid-in capital .......................................... 179,276 179,250
Retained earnings from August 1, 1986 (date of reorganization) ...... 75,286 54,756
Unrealized gain (loss) on securities, net of deferred income taxes .. 1,972 (9,830)
Treasury stock, at cost ............................................. -- (81)
-------- --------
Total stockholders' equity .......................................... 257,304 224,865
-------- --------
$258,827 $226,388
======== ========
See Notes to Condensed Financial Information and Notes to Consolidated
Financial Statements
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60
SCHEDULE II
CAPSURE HOLDINGS CORP.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY) - (CONTINUED)
STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS)
Years Ended December 31,
----------------------------
1995 1994 1993
-------- -------- --------
Revenues:
Net investment income .................................... $ -- $ 17 $ 1,897
Net investment gains ..................................... -- 444 3,103
Other income ............................................. -- -- 10
-------- -------- --------
-- 461 5,010
Expenses:
Corporate expense ........................................ -- 355 2,251
-------- -------- --------
Income from operations before income taxes
and equity in net income of subsidiaries ................. -- 106 2,759
Income taxes ............................................... -- 37 690
-------- -------- --------
Income before equity in net income
of subsidiaries .......................................... -- 69 2,069
Cash dividends from subsidiaries ........................... -- -- 1,500
Equity in net income of subsidiaries, less cash dividends .. 20,530 14,309 12,715
-------- -------- --------
Net income ................................................. $ 20,530 $ 14,378 $ 16,284
======== ======== ========
See Notes to Condensed Financial Information and Notes to Consolidated
Financial Statements
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61
SCHEDULE II
CAPSURE HOLDINGS CORP.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY) - (CONTINUED)
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
Years Ended December 31,
----------------------------
1995 1994 1993
-------- -------- --------
OPERATING ACTIVITIES:
Net income .................................................... $ 20,530 $ 14,378 $16,284
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation ............................................... -- -- 3
Equity in net income of subsidiaries, less cash dividends .. (20,530) (14,309) (12,715)
Net investment gains ....................................... -- (444) (3,103)
Changes in:
Deferred income taxes, net ................................. 18,341 1,217 (5,648)
Other assets and liabilities ............................... -- 2,406 6,328
-------- -------- --------
Net cash provided by operating activities ....................... 18,341 3,248 1,149
-------- -------- --------
INVESTING ACTIVITIES:
Available-for-sale equity securities purchased ................ -- (209) (30,512)
Available-for-sale equity securities sold ..................... -- -- 31,048
Change in short-term investments .............................. -- 5,451 2,846
Change in investments in and advances to subsidiaries ......... (18,448) (8,981) (4,389)
Capital expenditures, net ..................................... -- -- (13)
-------- -------- --------
Net cash used in investing activities ........................... (18,448) (3,739) (1,020)
-------- -------- --------
FINANCING ACTIVITIES:
Exercise of warrants and options .............................. 107 10 187
Repurchase of outstanding warrants ............................ -- -- (42)
Stock issuance costs .......................................... -- -- (11)
-------- -------- --------
Net cash provided by financing activities ....................... 107 10 134
-------- -------- --------
Increase (decrease) in cash ..................................... -- (481) 263
Cash at beginning of year ....................................... -- 481 218
-------- -------- --------
Cash at end of year ............................................. $ -- $ -- $ 481
======== ======== ========
See Notes to Condensed Financial Information and Notes to Consolidated
Financial Statements
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62
SCHEDULE II
CAPSURE HOLDINGS CORP.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY) - (CONTINUED)
NOTES TO CONDENSED FINANCIAL INFORMATION
1. BASIS OF PRESENTATION
The condensed financial information of the parent company includes the
accounts of Capsure Holdings Corp. ("Capsure"). On March 29, 1994, Capsure
formed Capsure Financial Group, Inc., a direct wholly owned subsidiary, to
which Capsure contributed substantially all its assets and liabilities,
including its investments in SI Acquisition Corp. (parent company of Western
Surety), NI Acquisition Corp. (parent company of United Capitol) and Pin Oak
Petroleum, Inc.
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63
SCHEDULE III
CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(AMOUNTS IN THOUSANDS)
Property and Casualty Insurance
-------------------------------------
1995 1994 1993
----------- ----------- -----------
Deferred policy acquisition costs ......................... $ 27,057 $ 25,150 $ 18,421
=========== =========== ===========
Future policy benefits, losses, claims and loss expenses .. $ 126,061 $ 149,041 $ 135,825
=========== =========== ===========
Unearned premiums ......................................... $ 76,781 $ 76,630 $ 69,363
=========== =========== ===========
Other policy claims and benefits payable .................. $ -- $ -- $ --
=========== =========== ===========
Net premium revenue ....................................... $ 98,692 $ 92,481 $ 86,029
=========== =========== ===========
Net investment income ..................................... $ 19,773 $ 18,597 $ 18,753
=========== =========== ===========
Benefits, claims, losses and settlement expenses .......... $ (7,451) $ 23,344 $ 19,957
=========== =========== ===========
Amortization of deferred policy acquisition costs ......... $ 35,759 $ 29,390 $ 21,164
=========== =========== ===========
Other operating expenses .................................. $ 25,553 $ 24,514 $ 29,684
=========== =========== ===========
Net premiums written ...................................... $ 97,728 $ 90,578 $ 88,306
=========== =========== ===========
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64
SCHEDULE IV
CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(AMOUNTS IN THOUSANDS)
Percentage
Ceded to Assumed of Amount
Gross Other from Other Net Assumed
Amount Companies Companies Amount To Net
-------- --------- ---------- ------- ----------
1995
- ----
Premiums:
Property and casualty insurance .. $113,538 $15,093 $247 $98,692 0.3%
-------- --------- ---------- ------- ----------
Total premiums ................. $113,538 $15,093 $247 $98,692 0.3%
======== ========= ========== ======= ==========
1994
- ----
Premiums:
Property and casualty insurance .. $103,871 $11,533 $143 $92,481 0.2%
-------- --------- ---------- ------- ----------
Total premiums ................. $103,871 $11,533 $143 $92,481 0.2%
======== ========= ========== ======= ==========
1993
- ----
Premiums:
Property and casualty insurance .. $97,543 $11,969 $455 $86,029 0.5%
-------- --------- ---------- ------- ----------
Total premiums ................. $97,543 $11,969 $455 $86,029 0.5%
======== ========= ========== ======= ==========
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65
SCHEDULE V
CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(AMOUNTS IN THOUSANDS)
Additions
-------------------------
Balance at Charged to Charged to Balance
Beginning of Costs and Other at End of
Period Expenses Accounts Deductions(1) Period
------------ ---------- ----------- ------------- ----------
Year ended December 31, 1995
Allowance for possible losses
on premiums receivable ..... $ 898 $245 $-- $375 $ 768
====== ==== === ==== ======
Allowance for possible losses
on reinsurance receivable .. $ 5 $ 65 $-- $ -- $ 70
====== ==== === ==== ======
Year ended December 31, 1994
Allowance for possible losses
on premiums receivable(2) .. $1,276 $190 $-- $568 $ 898
====== ==== === ==== ======
Allowance for possible losses
on reinsurance receivable .. $ 2 $ 3 $-- $ -- $ 5
====== ==== === ==== ======
Year ended December 31, 1993
Allowance for possible losses
on premiums receivable ..... $ 951 $690 $-- $417 $1,224
====== ==== === ==== ======
Allowance for possible losses
on reinsurance receivable .. $ -- $ 2 $-- $ -- $ 2
====== ==== === ==== ======
(1) Accounts charged against allowance.
(2) Includes balance at acquisition date of Universal Surety of $52.
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66
SCHEDULE VI
CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY
INSURANCE OPERATIONS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(AMOUNTS IN THOUSANDS)
1995 1994 1993
--------- -------- ---------
Deferred policy acquisition costs ........................... $ 27,057 $ 25,150 $ 18,421
========= ======== =========
Reserves for unpaid claims and claim adjustment expenses .... $ 126,061 $149,041 $ 135,825
========= ======== =========
Discount (if any) deducted .................................. $ -- $ -- $ --
========= ======== =========
Unearned premiums ........................................... $ 76,781 $ 76,630 $ 69,363
========= ======== =========
Net earned premiums ......................................... $ 98,692 $ 92,481 $ 86,029
========= ======== =========
Net investment income ....................................... $ 19,773 $ 18,597 $ 18,753
========= ======== =========
Net claims and claim adjustment expenses incurred related to:
Current year ............................................ $ 21,631 $ 31,688 $ 31,250
========= ======== =========
Prior years ............................................. $(29,082) $(8,344) $(11,293)
========= ======== =========
Amortization of deferred policy acquisition costs ........... $ 35,759 $ 29,390 $ 21,164
========= ======== =========
Net paid claims and claim adjustment expenses ............... $ 16,636 $ 16,719 $ 15,455
========= ======== =========
Net premiums written ........................................ $ 97,728 $ 90,578 $ 88,306
========= ======== =========
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67
(A)(3) EXHIBITS
Exhibit
Number Description
- ------- -----------
2 Not applicable.
3(1) The Certificate of Incorporation of Nucorp, Inc. dated May 6, 1988
together with the Certificate of Merger of Nucorp Energy, Inc. with and
into Nucorp, Inc. dated August 12, 1988 (filed on August 15, 1988 as
Exhibit 3.1 to Nucorp, Inc.'s Quarterly Report on Form 10-Q for the
Period March 31, 1988 through June 30, 1988, and incorporated herein by
reference).
3(2) Amendment to the Certificate of Incorporation dated July 14, 1995.
3(3) Bylaws of Nucorp, Inc. (filed on August 15, 1988 as Exhibit 3.2 to
Nucorp, Inc.'s Quarterly Report on Form 10-Q for the Period March 31,
1988 through June 30, 1988, and incorporated herein by reference).
4 Specimen of Capsure Holdings Corp. Common Stock Certificate (filed on
March 30, 1995 as Exhibit 4 to Capsure Holdings Corp.'s Form 10-K, and
incorporated herein by reference).
9 Not applicable.
10(1) Employment Agreement dated as of September 30, 1995 by and between
Capsure Holdings Corp., a Delaware corporation, and Bruce A. Esselborn,
an individual.
10(2) Employment Agreement dated as of September 30, 1995 by and between
Capsure Holdings Corp., a Delaware corporation and Mary Jane Robertson,
an individual.
10(3) Employment Agreement dated as of February 20, 1995 by and between
Capsure Holdings Corp., a Delaware corporation, and Steven S. Zeitman,
an individual (filed on March 30, 1995 as Exhibit 10.6 to Capsure
Holdings Corp's Form 10-K, and incorporated herein by reference).
10(4) Executive Change in Control and Termination Benefits Agreement dated as
of November 6, 1995 by and among Capsure Holdings Corp., a Delaware
corporation, United Capitol Insurance Company, a Wisconsin corporation,
and Steven S. Zeitman, an individual.
10(5) Executive Employment Agreement dated as of August 14, 1992 by and among
Nucorp, Inc., a Delaware corporation, Surewest Financial Corp., a
South Dakota corporation, SI Acquisition Corp., a Texas corporation,
Western Surety Company, a South Dakota corporation, Equity Holdings, an
Illinois partnership, and Dan L. Kirby (filed on March 30, 1995 as
Exhibit 10.7 to Capsure Holdings Corp's Form 10-K, and incorporated
herein by reference).
10(6) Executive Employment Agreement dated as of August 14, 1992 by and among
Nucorp, Inc., a Delaware corporation, SI Acquisition Corp., a Texas
corporation, Surewest Financial Corp., a South Dakota corporation,
Western Surety Company, a South Dakota corporation, Equity Holdings, an
Illinois partnership, and Joe P. Kirby (filed on March 30, 1995 as
Exhibit 10.8 to Capsure Holdings Corp's Form 10-K, and incorporated
herein by reference).
10(7) Purchase Agreement dated as of December 21, 1989 among Nucorp, Inc. and
Bruce A. Esselborn (filed on August 2, 1990 as Exhibit 10.8 to
Post-Effective Amendment No. 1 to Nucorp's Registration Statement on
Form S-1, and incorporated herein by reference).
-67-
68
Exhibit
Number Description
- ------ -----------
10(8) Purchase Agreement dated as of March 25, 1992 among Nucorp, Inc., SI
Acquisition Corp. and Surewest Financial Corp. (filed on March 27,
1992, as Exhibit 2 on Form 8-K, and incorporated herein by reference).
10(9) Stock Purchase Agreement between Nucorp, Inc.; SI Acquisition Corp.;
Surewest Financial Corp.; Joe P. Kirby; Dan L. Kirby; Kevin T. Kirby;
Steven T. Kirby; First Bank of South Dakota, N.A., as Trustee of the
Dan L. Kirby Trust; First Bank of South Dakota, N.A., as Trustee of the
Kevin T. Kirby Trust; Norwest Bank South Dakota, N.A., as Trustee of
the Joe P. Kirby Trust; and Norwest Bank South Dakota, N.A., as Trustee
of the Steven T. Kirby Trust, dated March 25, 1992 and schedules
thereto (filed on March 25, 1992 as Exhibit 2 on Nucorp, Inc.'s Form
8-K, and incorporated herein by reference).
10(10) Credit Agreement dated as of March 29, 1994 among Capsure Financial
Group, Inc., Capsure Holdings Corp., the Lenders named therein and
Chemical Bank, as Administrative Agent (filed on March 30, 1995 as
Exhibit 10.17 to Capsure Holdings Corp's Form 10-K, and incorporated
herein by reference).
10(11) Stock Purchase Agreement among John Knox, Jr., Universal Surety Holding
Corp., Capsure Financial Group, Inc. and Capsure Holdings Corp. dated
July 26, 1994 (filed on October 6, 1994 as Exhibit 2 to Capsure
Holdings Corp. Current Report on Form 8-K, and incorporated herein by
reference).
10(12) 1990 Stock Option Plan of Nucorp, Inc. (filed on April 19, 1990 as
Exhibit A to Nucorp, Inc.'s Proxy Statement for the Annual Meeting of
Shareholders on May 9, 1990, and incorporated herein by reference).
10(13) First Amendment to the Nucorp, Inc. 1990 Stock Option Plan (filed on
April 27, 1992 as part of Nucorp, Inc.'s Proxy Statement for the Annual
Meeting of Shareholders on June 9, 1992, and incorporated herein by
reference).
10(14) Second Amendment to the 1990 Stock Option Plan (filed on March 31, 1994
as part of Capsure Holdings Corp.'s Proxy Statement for the
Annual Meeting of Shareholders on May 19, 1994, and incorporated herein
by reference).
10(15) Managing General Agency Agreement between Western Surety Company and
United Capitol Managers, Inc. (filed on March 2, 1993 as Exhibit 28(a)
to Nucorp, Inc.'s Registration Statement on Form S-3, and incorporated
herein by reference).
10(16) Surety Bond Quota Share Reinsurance Agreement between Western Surety
Company and United Capitol Insurance Company (filed on March 2, 1993 as
Exhibit 28(b) to Nucorp, Inc.'s Registration Statement on Form S-3, and
incorporated herein by reference).
10(17) Contract Surety Bond Reinsurance Agreement dated as of September 22,
1994 between Western Surety Company, a South Dakota corporation, and
Universal Surety of America, a Texas corporation (filed on March 30,
1995 as Exhibit 10.23 to Capsure Holdings Corp's Form 10-K, and
incorporated herein by reference).
10(18) Co-Employee Agreement dated as of September 22, 1994 between Western
Surety Company and Universal Surety of America (filed on March 30, 1995
as Exhibit 10.24 to Capsure Holdings Corp's Form 10-K, and incorporated
herein by reference).
-68-
69
Exhibit
Number Description
- ------ -----------
10(19) Directors' and Officers' and Errors and Omissions Liability Quota Share
Reinsurance Agreement dated as of August 15, 1994 between Western Surety
Company, a South Dakota corporation, and United Capitol Insurance
Company, a Wisconsin corporation.
11 Earnings per share computation.
12 Not applicable.
13 Not applicable.
16 Not applicable.
18 Not applicable.
21 Subsidiaries of the Registrant.
22 Not applicable.
23 Consent of Coopers & Lybrand dated March 20, 1996.
24(1) Power of Attorney for Herbert A. Denton dated March 1, 1996.
24(2) Power of Attorney for Bradbury Dyer, III dated March 1, 1996.
24(3) Power of Attorney for Talton R. Embry dated March 4, 1996.
24(4) Power of Attorney for Dan L. Kirby dated March 4, 1996.
24(5) Power of Attorney for Joe P. Kirby dated March 4, 1996.
24(6) Power of Attorney for Richard I. Weingarten dated March 11, 1996.
27 Financial Data Schedule.
28 Information from reports furnished to state insurance regulatory
authorities - Schedule P from 1995 Combined Annual Statement of Capsure
Holdings Corp.
_________________________
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995:
The statements which are not historical facts contained in this Annual Report
and Form 10-K are forward-looking statements that involve risks and
uncertainties, including, but not limited to, product and policy demand and
market response risks, the effect of economic conditions, the impact of
competitive products, policies and pricing, product and policy development,
regulatory changes and conditions, rating agency policies and practices,
development of claims and the effect on loss reserves, the performance of
reinsurance companies under reinsurance contracts with the Company, investment
portfolio developments and reaction to market conditions, the results of
financing efforts, the actual closing of contemplated transactions and
agreements, the effect of the Company's accounting policies, and other risks
detailed in the Company's Securities and Exchange Commission filings. No
assurance can be given that the actual results of operations and financial
condition will conform to the forward-looking statements contained herein.
-69-
70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
CAPSURE HOLDINGS CORP.
/s/ Bruce A. Esselborn
---------------------------------------
Bruce A. Esselborn
President
(Principal Executive Officer)
/s/ Mary Jane Robertson
---------------------------------------
Mary Jane Robertson
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ John S. Heneghan
---------------------------------------
John S. Heneghan
Vice President and Controller
(Principal Accounting Officer)
Dated: March 20, 1996
--------------------
(CONTINUED)
-70-
71
CAPSURE HOLDINGS CORP. - SIGNATURES - (CONTINUED)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Title
-----
March 20, 1996 Chairman of the Board and /s/ Samuel Zell
- --------------- Chief Executive Officer ---------------------
Samuel Zell
March 20, 1996 Director /s/ Rod F. Dammeyer
- --------------- ---------------------
Rod F. Dammeyer
March 20, 1996 Director * Herbert A. Denton
- --------------- ---------------------
* Herbert A. Denton
March 20, 1996 Director * Bradbury Dyer, III
- --------------- ------------------------
* Bradbury Dyer, III
March 20, 1996 Director * Talton R. Embry
- --------------- ------------------------
* Talton R. Embry
March 20, 1996 Director /s/ Bruce A. Esselborn
- --------------- ------------------------
Bruce A. Esselborn
March 20, 1996 Director * Dan L. Kirby
- --------------- ------------------------
* Dan L. Kirby
March 20, 1996 Director * Joe P. Kirby
- --------------- ------------------------
* Joe P. Kirby
March 20, 1996 Director /s/ Donald W. Phillips
- --------------- ------------------------
Donald W. Phillips
March 20, 1996 Director and /s/ Sheli Z. Rosenberg
- --------------- *Attorney-in-Fact ------------------------
Sheli Z. Rosenberg
Director
- --------------- ------------------------
L.G. Schafran
March 20, 1996 Director * Richard I. Weingarten
- --------------- ------------------------
* Richard I. Weingarten
-71-
72
CAPSURE HOLDINGS CORP. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit Page
Number Description No.
- ------- ----------- -----
3(2) Amendment to the Certificate of Incorporation dated
July 14, 1995.
10(1) Employment Agreement dated as of September 30, 1995 by
and between Capsure Holdings Corp., a Delaware corporation,
and Bruce A. Esselborn, an individual..........................
10(2) Employment Agreement dated as of September 30, 1995 by and
between Capsure Holdings Corp., a Delaware corporation and
Mary Jane Robertson, an individual.............................
10(4) Executive Change in Control and Termination Benefits Agreement
dated as of November 6, 1995 by and among Capsure Holdings Corp.,
a Delaware corporation, United Capitol Insurance Company, a
Wisconsin corporation, and Steven S. Zeitman, an individual.
10(19) Directors' and Officers' and Errors and Omissions Liability
Quota Share Reinsurance Agreement dated as of August 15,
1994 between Western Surety Company, a South Dakota corporation,
and United Capitol Insurance Company, a Wisconsin corporation.
11 Earnings per share computation.................................
21 Subsidiaries of the Registrant.................................
23 Consent of Coopers & Lybrand dated March 20, 1996..............
24(1) Power of Attorney for Herbert A. Denton dated March 1, 1996....
24(2) Power of Attorney for Bradbury Dyer, III dated March 1, 1996...
24(3) Power of Attorney for Talton R. Embry dated March 4, 1996......
24(4) Power of Attorney for Dan L. Kirby dated March 4, 1996.........
24(5) Power of Attorney for Joe P. Kirby dated March 4, 1996.........
24(6) Power of Attorney for Richard I. Weingarten dated
March 11, 1996................................................
27 Financial Data Schedule........................................
28 Information from reports furnished to state insurance regulatory
authorities - Schedule P from 1995 Combined Annual Statement of
Capsure Holdings Corp. .........................................
-72-