e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended
December 31, 2007
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission File
Number: 1-13277
CNA SURETY
CORPORATION
(Exact name of registrant as
specified in its charter)
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Delaware
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36-4144905
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(State or other jurisdiction of
incorporation organization)
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(I.R.S. Employer Identification
No.)
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333 South Wabash Avenue, Chicago, Illinois
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60604
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(Address of principal executive
offices)
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(Zip Code)
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(312) 822-5000
(Registrants 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, $0.01 Par Value
(Title of Class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 þ No o
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 Registrants 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. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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Indicate by check mark whether the registrant is a shell company
(as defined by
Rule 12b-2
of the Exchange Act)
Yes o No þ
The aggregate market value of voting stock held by
non-affiliates was $313.3 million based upon the closing
price of $18.91 per share on June 30, 2007, 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, Officers and Major
Stockholders, some of whom may not be held to be affiliates upon
judicial determination.
At February 8, 2008, 44,125,970 shares of the
Registrants Common Stock were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE:
Portions of the CNA Surety Corporation Proxy Statement prepared
for the 2008 annual meeting of shareholders, pursuant to
Regulation 14A, are incorporated by reference into
Part III of this report.
CNA
SURETY CORPORATION AND SUBSIDIARIES
TABLE OF
CONTENTS
1
CNA
SURETY CORPORATION AND SUBSIDIARIES
PART I.
General
CNA Surety Corporation (CNA Surety or
Company) is an insurance holding company in the
United States formed through the September 30, 1997
combination of the surety business of CNA Financial Corporation
with the insurance subsidiaries of Capsure Holdings Corp.
(Capsure). CNA Surety is currently one of the
largest surety providers in the United States with approximately
an 8.3% market share (based upon 2006 Surety Association of
America (SAA) written premium data). CNA
Suretys wide selection of surety products range from very
small commercial bonds to large contract bonds.
Formation
of CNA Surety and Merger
In December 1996, CNA Financial Corporation (CNAF)
and Capsure agreed to merge (the Merger) the surety
business of CNAF with Capsures insurance subsidiaries,
Western Surety Company (Western Surety), Surety
Bonding Company of America (Surety Bonding) and
Universal Surety of America (Universal Surety), into
CNA Surety. CNAF, through its operating subsidiaries, writes
multiple lines of property and casualty insurance, including
surety business that is reinsured by Western Surety. CNAF owns
approximately 62% of the outstanding common stock of CNA Surety.
Loews Corporation (Loews) owns approximately 89% of
the outstanding common stock of CNAF. The principal operating
subsidiaries of CNAF that wrote the surety line of business for
their own account prior to the Merger were Continental Casualty
Company and its property and casualty affiliates (collectively,
CCC) and The Continental Insurance Company and its
property and casualty affiliates (collectively,
CIC). CIC was acquired by CNAF on May 10, 1995.
The combined surety operations of CCC and CIC are referred to
herein as CCC Surety Operations.
Description
of Business
The Companys corporate objective is to be the leading
provider of surety and surety-related products in North America
and to be the surety of choice for its customers and independent
agents and brokers. CNA Suretys insurance subsidiaries
write surety and fidelity bonds in all 50 states through a
combined network of approximately 36,000 independent agencies.
CNA Suretys insurance subsidiaries are Western Surety,
Surety Bonding, and Universal Surety. The insurance subsidiaries
write, on a direct basis or as business assumed from CCC and
CIC, small fidelity and non-contract surety bonds, referred to
as commercial bonds; small, medium and large contract bonds; and
errors and omissions (E&O) liability insurance.
Western Surety is a licensed insurer in all 50 states, the
District of Columbia and Puerto Rico. Surety Bonding is licensed
in 28 states and the District of Columbia. Universal Surety
is licensed in 44 states and the District of Columbia.
Financial
Strength Ratings
A.M. Best
Company, Inc.
Western Surety, Surety Bonding and Universal Surety are
currently rated A (Excellent) with a stable rating outlook by
A.M. Best Company, Inc. (A.M. Best). An A
(Excellent) rating is assigned to those companies which
A.M. Best believes have an excellent ability to meet their
ongoing obligations to policyholders. A (Excellent) rated
insurers have been shown to be among the strongest in ability to
meet policyholder and other contractual obligations. The rating
outlook indicates the potential direction of a companys
rating for an intermediate period, generally defined as the next
12 to 36 months. Through inter-company reinsurance and
related agreements, CNA Suretys customers have access to
CCCs broader underwriting capacity. CCC is currently rated
A (Excellent) with a stable outlook by A.M. Best.
A.M. Bests letter ratings range from A++ (Superior)
to F (In Liquidation) with A++ being highest.
2
Standard
and Poors
CCC, Western Surety, Surety Bonding and Universal Surety are
currently rated A- (Stable) by Standard & Poors
(S&P). S&Ps letter ratings range
from AAA (Extremely Strong) to CC (Extremely Weak) with AAA
being highest. Ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing
within the major rating categories. An insurer rated A has
strong financial security characteristics, but is somewhat more
likely to be affected by adverse business conditions than are
insurers with higher ratings.
Product
Information
The United States surety market is represented by bonds required
by federal statutes, state laws, and local ordinances. These
bonding requirements range from federal construction projects,
where the contractor is required to post performance and payment
bonds which guarantee performance of contracts to the government
as well as payment of bills to subcontractors and suppliers, to
license and permit bonds which guarantee compliance with legal
requirements for business operations.
Products
and Policies
Unlike a standard, two-party insurance policy, surety bonds are
three-party agreements in which the issuer of the bond (the
surety) joins with a second party (the principal) in
guaranteeing to a third party (the owner/obligee) the
fulfillment of some obligation on the part of the principal. The
surety is the party who guarantees fulfillment of the
principals obligation to the obligee. In addition,
sureties are generally entitled to recover from the principal
any losses and expenses paid to third parties. The suretys
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 applicants
creditworthiness and ability to perform.
There are two broad types of surety products
contract surety and commercial surety bonds. Contract surety
bonds secure a contractors performance
and/or
payment obligation generally with respect to a construction
project. Contract surety bonds are generally required by
federal, state and local governments for public works projects.
Commercial surety bonds include all surety bonds other than
contract and cover obligations typically required by law or
regulation.
Contract bond guarantee obligations include the following:
Bid bonds: used by contractors submitting proposals
on potential contracts. These bonds guarantee that a contractor
will enter into a contract at the amount bid and post the
appropriate performance bonds.
Performance bonds: guarantee to the owner the
performance of the contractors obligations according to
the terms and conditions of the contract.
Payment bonds: guarantee payment of the
contractors obligations under the contract for labor,
subcontractors, and materials supplied to the project. Payment
bonds are utilized in public projects where liens are not
permitted.
Other examples of contract bonds are completion, maintenance and
supply bonds.
Commercial surety business is comprised of bonds covering
obligations typically required by law or regulation, such as the
following:
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.
3
Public Official bonds: required by statutes and
ordinances to guarantee the lawful and faithful performance of
the duties of office by public officials.
CNA Surety also writes direct contract and commercial surety
bonds for international risks. Such bonds are written to satisfy
the international bond requirements of domestic customers and
for select foreign clients.
In addition, the Company markets surety-related products such as
fidelity bonds and E&O insurance. Fidelity bonds cover
losses arising from employee dishonesty. Examples of purchasers
of fidelity bonds are law firms, insurance agencies and
janitorial service companies. CNA Surety writes E&O
policies for two classes of insureds: notaries public and tax
preparers. The notary public E&O policy is marketed as a
companion product to the notary public bond and the tax preparer
E&O policy is marketed to small tax return preparation
firms.
Although all of its products are sold through the same
independent insurance agent and broker distribution network, the
Companys underwriting is organized by the two broad types
of surety products contract surety and commercial
surety, which also includes fidelity bonds and other insurance
products for these purposes. These two operating segments have
been aggregated into one reportable business segment for
financial reporting purposes because of their similar economic
and operating characteristics.
The following tables set forth, for each principal class of
bonds, gross written premiums, net written premiums and number
of domestic bonds and policies in force and the respective
percentages of the total for the past three years (amounts in
thousands, except average bond amounts):
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Gross Written Premiums
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% of
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% of
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% of
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2007
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Total
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2006
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Total
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2005
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Total
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Contract
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$
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305,624
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64.8
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%
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$
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285,157
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63.2
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%
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$
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248,662
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59.6
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%
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Commercial:
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License and permit
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78,875
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16.7
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79,144
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17.5
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77,764
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18.6
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Judicial and fiduciary
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23,348
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5.0
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23,949
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5.3
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23,142
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5.5
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Public official
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23,584
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5.0
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23,491
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5.2
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26,428
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6.3
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Other
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9,021
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1.9
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8,287
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1.9
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6,406
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1.6
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Total commercial
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134,828
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28.6
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134,871
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29.9
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133,740
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32.0
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Fidelity and other
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31,208
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6.6
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31,328
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6.9
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35,128
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8.4
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$
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471,660
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100.0
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%
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$
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451,356
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100.0
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%
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$
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417,530
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100.0
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%
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Domestic
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$
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467,285
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99.1
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%
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$
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448,387
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99.3
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%
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$
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415,520
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99.5
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%
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International
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4,375
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0.9
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2,969
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0.7
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2,010
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0.5
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$
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471,660
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100.0
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%
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$
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451,356
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100.0
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%
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$
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417,530
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100.0
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%
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Net Written Premiums
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% of
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% of
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% of
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2007
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Total
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2006
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Total
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2005
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Total
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Contract
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$
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266,749
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62.3
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%
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$
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247,987
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60.5
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%
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$
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202,798
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55.4
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%
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Commercial
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130,332
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30.4
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130,314
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31.8
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128,022
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35.0
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Fidelity and other
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31,208
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7.3
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31,328
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7.7
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35,128
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9.6
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$
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428,289
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100.0
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%
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$
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409,629
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100.0
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%
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$
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365,948
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100.0
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%
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Domestic
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$
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423,914
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99.0
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%
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$
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406,684
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99.3
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%
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$
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363,940
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99.5
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%
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International
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4,375
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1.0
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2,945
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0.7
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2,008
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0.5
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$
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428,289
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100.0
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%
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$
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409,629
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100.0
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%
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$
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365,948
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100.0
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%
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4
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Domestic Bonds/Policies in Force as of December 31,
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% of
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% of
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% of
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2007
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Total
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2006
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Total
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2005
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Total
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Contract
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30
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1.2
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%
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30
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1.2
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%
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32
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1.2
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%
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Commercial
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1,906
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76.5
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1,926
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76.0
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1,901
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72.4
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Fidelity and other
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557
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22.3
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579
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22.8
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|
693
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26.4
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2,493
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100.0
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%
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2,535
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100.0
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%
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2,626
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100.0
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%
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Average Bond Penalty/Policy Limit as of December 31,
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2007
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2006
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2005
|
|
|
Contract
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|
$
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1,191,817
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$
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1,180,538
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$
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1,011,252
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Commercial
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14,115
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14,236
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14,208
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Fidelity and other
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19,437
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19,486
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20,380
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In 2007, no individual agency generated more than 1.1% of
aggregate gross written premiums. Approximately
$63.4 million, or 13.4%, of gross written premiums were
generated from national insurance brokers in 2007 with the
single largest national broker production comprising
$14.5 million, or 3.1%, of gross written premiums.
Marketing
The Company principally markets its products in all
50 states, as well as the District of Columbia and Puerto
Rico. Its products are marketed primarily through independent
producers, including multi-line agents and brokers such as
surety specialists, many of whom are members of the National
Association of Surety Bond Producers. CNA Surety enjoys broad
national distribution of its products, which are marketed
through approximately 36,000 of the approximately 44,000
independent property and casualty insurance agencies in the
United States. In addition, the Company employs
40 full-time salaried marketing representatives and 5
telemarketing representatives to continually service its vast
producer network. Relationships with these independent producers
are maintained through the Companys 37 local branch
offices.
The following table sets forth the distribution of the business
of CNA Surety, by state based upon gross written premiums in
each of the last three years:
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|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Gross Written Premiums by State:
|
|
|
|
|
|
|
|
|
|
|
|
|
Texas
|
|
|
9.4
|
%
|
|
|
9.5
|
%
|
|
|
8.7
|
%
|
California
|
|
|
9.1
|
|
|
|
8.9
|
|
|
|
10.4
|
|
Florida
|
|
|
7.6
|
|
|
|
7.8
|
|
|
|
7.4
|
|
Illinois
|
|
|
4.5
|
|
|
|
4.6
|
|
|
|
5.2
|
|
New York
|
|
|
4.5
|
|
|
|
3.9
|
|
|
|
4.1
|
|
Georgia
|
|
|
3.3
|
|
|
|
3.0
|
|
|
|
2.8
|
|
Massachusetts
|
|
|
3.1
|
|
|
|
3.1
|
|
|
|
2.9
|
|
Pennsylvania
|
|
|
2.9
|
|
|
|
3.2
|
|
|
|
3.4
|
|
Maryland
|
|
|
2.8
|
|
|
|
2.4
|
|
|
|
2.1
|
|
Arizona
|
|
|
2.7
|
|
|
|
2.4
|
|
|
|
2.6
|
|
All
Other(a)
|
|
|
50.1
|
|
|
|
51.2
|
|
|
|
50.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes the District of Columbia and Puerto Rico. No other
state represented more than 2.4% for the year ended
December 31, 2007. |
5
Contract
Surety
With respect to standard contract surety, the core target
customers for the Company are contractors with less than
$50 million in contracted work in progress. This segment is
comprised of small contractors (less than $5 million in
work in progress), medium contractors ($5-$30 million) and
the lower end of the large contractors (greater than
$30 million). These small and medium contractors, as a
group, represent a significant portion of the United States
construction market. The Companys marketing emphasis
continues to be on small and medium contractors, however, the
Company does have exposure to larger contractors. These
exposures are measured in terms of bonded backlog which is an
indication of the Companys exposure in event of default
before indemnification recoveries. The Company actively monitors
both the number of these large accounts and the exposure on each
account through a variety of underwriting methods. Some of these
accounts are maintained on a co-surety or joint
insurer basis with other sureties in order to manage aggregate
exposure.
Commercial
Surety
A large portion of the commercial surety market is comprised of
small obligations that are routine in nature and require minimal
underwriting. Customers are focused principally on prompt and
efficient service. These small transactional bonds and related
fidelity bonds and E&O products represent approximately 81%
of the Companys non-contract gross written premiums and
29% of the Companys total gross written premium.
The Company continues to focus its marketing efforts on this
small commercial bond market through its Sioux Falls, South
Dakota service center. In this market segment, CNA Surety
emphasizes
one-day
response service,
easy-to-use
forms and an extensive array of commercial 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. CNA
Suretys insurance subsidiaries may also direct their
marketing to particular industries or classes of bonds on a
broad basis. For instance, the Company maintains programs
directed at notary bonds, mortgage broker compliance bonds and
grain warehouse dealer bonds.
CNA Surety also maintains a specific underwriting staff in
Chicago dedicated to middle market and Fortune 1000
accounts. The Companys large commercial account business
is estimated to represent approximately 19% of the
Companys commercial gross written premiums and 7% of the
Companys total gross written premium.
Underwriting
CNA Surety is focused on consistent underwriting profitability.
The extent and sophistication of underwriting activity varies by
type of risk. Contractor accounts and large commercial surety
customers undergo credit, financial and managerial review and
analysis on a regular basis. Certain classifications of bonds,
such as fiduciary and court appeal bonds, also require more
extensive underwriting.
CNA Surety also targets various products in the surety and
fidelity bond market which are characterized by relatively
low-risk exposure and small bond amounts. The underwriting
criteria, including the extent of bonding authority granted to
independent agents, varies depending on the class of business
and the type of bond. For example, relatively little
underwriting information is typically required of certain
low-exposure risks such as notary bonds.
Competition
The surety and fidelity market is highly competitive. According
to 2006 data from the SAA, the U.S. market aggregates
approximately $6.4 billion in direct written premiums,
comprised of approximately $5.1 billion in surety premiums
and approximately $1.3 billion in fidelity premiums. The 20
largest surety companies account for approximately 79% of the
domestic surety market and 96% of the domestic fidelity market.
The large diversified insurance companies hold the largest
market shares. In 2006, CNA Surety was the third largest surety
provider with an 8.3% market share.
Primary competitors of CNA Surety are approximately 20 national,
multi-line companies participating in the surety market
throughout the country. Management believes that its principal
strengths are diverse product offerings, service and
accessibility and long-term relationships with agents and
accounts. Competition increased
6
as a result of ten years of profitable underwriting experience
through 1999. This competition has typically manifested itself
through reduced premium rates and greater tolerance for
relaxation of underwriting standards. Beginning in 2000 and
through the end of 2005, the surety industrys underwriting
performance was negatively impacted by the significant increases
in corporate defaults. Firming of rates, more stringent
underwriting and an improved economy resulted in the surety and
fidelity industry returning to profitability in 2006.
Competition remains strong, particularly in the medium-sized
contract market. Accordingly, management believes the Company
will have limited ability to raise rates in 2008.
Reinsurance
The Companys insurance subsidiaries, in the ordinary
course of business, cede reinsurance to other insurance
companies and affiliates. Reinsurance arrangements are used to
limit maximum loss, provide greater diversification of risk and
minimize exposure on larger risks. Reinsurance contracts do not
ordinarily relieve the Company of its primary obligations to
claimants. Therefore, a contingent liability exists with respect
to reinsurance ceded to the extent that any reinsurer is unable
to meet the obligations assumed under reinsurance contracts. The
Company evaluates the financial condition of its reinsurers,
monitors concentrations of credit risk and establishes
allowances for uncollectible amounts when indicated. At
December 31, 2007, the Company holds approximately
$10.8 million of letters of credit as collateral for
reinsurance receivables.
The Companys reinsurance program is predominantly
comprised of excess of loss reinsurance contracts that limit the
Companys retention on a per principal basis. The
Companys reinsurance coverage is provided by third party
reinsurers and related parties. Refer to Item 7.,
Managements Discussion and Analysis of Financial Condition
and Results of Operations, and Item 8., Note 6 of the
Notes to the Consolidated Financial Statements, Reinsurance, for
further discussion.
CNA Suretys largest reinsurance recoverable from an
affiliate, CCC, an A rated company by A.M. Best, was
approximately $50.5 million and $55.0 million at
December 31, 2007 and 2006, respectively. CNA Suretys
largest reinsurance recoverable from a third party, an A rated
company by A.M. Best, was approximately $16.8 million
and $13.4 million at December 31, 2007 and 2006,
respectively.
In addition, due to the nature of the reinsurance products
available to the Company and other sureties, reinsurers may
cover principals for whom the Company writes surety bonds in one
year, but then exclude or provide only limited reinsurance for
these same principals in subsequent years. As a result, the
Company may continue to have exposure to these principals with
limited or no reinsurance for bonds written during years that
the Company had reinsurance covering these principals.
Reserves
for Unpaid Losses and Loss Adjustment Expenses
Periodic actuarial analysis of the Companys loss reserves
is performed. This analysis is based on a variety of techniques
that involve detailed statistical analysis of past reporting,
settlement activity, and indemnification activity, as well as
claim frequency and severity data when sufficient information
exists to lend statistical credibility to the analysis. The
analysis may be based upon internal loss experience or industry
experience. Techniques may vary depending on the type of claim
being estimated. While techniques may vary, each employs
significant judgments and assumptions. Annually, the
reasonableness of actuarial assumptions used and the sufficiency
of year-end reserves for each of the Companys insurance
subsidiaries are actuarially certified.
The estimated liability for unpaid losses and loss adjustment
expenses includes, on an undiscounted basis, 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, exclusive of reinsurance
recoveries, which are reported as an asset. These estimates are
determined based on the Companys and surety industry loss
experience as well as consideration of current trends and
conditions. The estimated liability for unpaid losses and loss
adjustment expenses is an estimate and there is the potential
that actual future loss payments will differ significantly from
initial estimates. The methods of determining such estimates and
the resulting estimated liability are regularly reviewed and
updated. Changes in the estimated liability are reflected in
income in the period in which such changes are determined to be
needed. The determination of the Companys reserves for
unpaid losses and loss adjustment expenses is inherently a
subjective exercise, which requires management to analyze,
weigh, and
7
balance numerous macroeconomic, customer specific, and claims
specific factors and trends, most of which, in themselves, are
inherently uncertain and difficult to predict. A discussion of
this process is included in Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
A table is included in Item 8., Note 7 of the Notes to
the Consolidated Financial Statements, Reserves for Loss and
Loss Adjustment Expenses, that presents the activity in the
reserves for unpaid losses and loss adjustment expenses for the
Company and is incorporated herein by reference. This table
highlights the impact of revisions to the estimated liability
established in prior years.
The following table sets forth a reconciliation of the
consolidated loss reserves reported in accordance with generally
accepted accounting principles (GAAP), and the
reserves reported to state insurance regulatory authorities in
accordance with statutory accounting practices (SAP)
as of December 31, 2007 (dollars in thousands):
|
|
|
|
|
Net reserves at end of year, GAAP basis
|
|
$
|
322,346
|
|
Ceded reinsurance, net of indemnification
|
|
|
150,496
|
|
|
|
|
|
|
Gross reserves at end of year, GAAP basis
|
|
|
472,842
|
|
Estimated reinsurance recoverable netted against gross reserves
for SAP
|
|
|
(150,496
|
)
|
Net reserves on retroactive reinsurance assumed
|
|
|
(10,284
|
)
|
|
|
|
|
|
Net reserves at end of year, SAP basis
|
|
$
|
312,062
|
|
|
|
|
|
|
The following loss reserve development table illustrates the
change over time of reserves established for the Companys
estimated losses and loss adjustment expenses at the end of
various calendar years. The first section shows the reserves as
originally reported at the end of the stated year. The second
section shows the cumulative amounts paid as of the end of
successive years with respect to that reserve liability. The
third section shows re-estimates of the original recorded
reserve as of the end of each successive year which is the
result of managements expanded awareness of additional
facts and circumstances that pertain to the unsettled claims.
The last section compares the latest re-estimated reserve to the
reserve originally established, and indicates whether the
original reserve was adequate or inadequate to cover the
estimated costs of unsettled claims.
The loss reserve development table is cumulative as of each
December 31, and, therefore, ending balances should not be
added since the amount at the end of each calendar year includes
activity for both the current and prior years. The loss reserve
development table reflects, on a pro forma basis, the reserves
of the CCC Surety Operations, CIC and Capsure since 1996. Such
historical development is not necessarily indicative of the
financial results that would have occurred under the ownership
and management of CNA Surety or of future operating results.
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
1997
|
|
|
1998
|
|
|
1999
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Gross reserves for losses and loss adjustment expenses
|
|
$
|
130,381
|
|
|
$
|
150,020
|
|
|
$
|
157,933
|
|
|
$
|
204,457
|
|
|
$
|
315,811
|
|
|
$
|
303,433
|
|
|
$
|
413,539
|
|
|
$
|
363,387
|
|
|
$
|
424,449
|
|
|
$
|
434,224
|
|
|
$
|
472,842
|
|
Originally reported ceded recoverable
|
|
|
7,656
|
|
|
|
7,986
|
|
|
|
20,464
|
|
|
|
70,159
|
|
|
|
166,318
|
|
|
|
137,301
|
|
|
|
158,357
|
|
|
|
116,831
|
|
|
|
147,435
|
|
|
|
144,858
|
|
|
|
150,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserves for losses and loss adjustment expenses
|
|
|
122,725
|
|
|
|
142,034
|
|
|
|
137,469
|
|
|
|
134,298
|
|
|
|
149,493
|
|
|
|
166,132
|
|
|
|
255,182
|
|
|
|
246,556
|
|
|
|
277,014
|
|
|
|
289,366
|
|
|
|
322,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net paid (cumulative) as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
19,595
|
|
|
|
32,428
|
|
|
|
35,825
|
|
|
|
44,763
|
|
|
|
64,832
|
|
|
|
59,567
|
|
|
|
88,857
|
|
|
|
65,353
|
|
|
|
76,623
|
|
|
|
55,879
|
|
|
|
|
|
Two years later
|
|
|
30,775
|
|
|
|
52,524
|
|
|
|
47,795
|
|
|
|
75,825
|
|
|
|
98,885
|
|
|
|
100,595
|
|
|
|
128,607
|
|
|
|
92,582
|
|
|
|
120,462
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
43,999
|
|
|
|
58,421
|
|
|
|
73,341
|
|
|
|
87,011
|
|
|
|
117,396
|
|
|
|
115,034
|
|
|
|
145,895
|
|
|
|
114,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
47,144
|
|
|
|
67,451
|
|
|
|
81,788
|
|
|
|
93,154
|
|
|
|
132,891
|
|
|
|
125,740
|
|
|
|
158,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
51,742
|
|
|
|
71,352
|
|
|
|
86,539
|
|
|
|
99,117
|
|
|
|
139,051
|
|
|
|
133,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
54,659
|
|
|
|
74,462
|
|
|
|
91,520
|
|
|
|
100,628
|
|
|
|
139,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
57,211
|
|
|
|
77,916
|
|
|
|
92,727
|
|
|
|
98,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
60,330
|
|
|
|
77,576
|
|
|
|
90,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
59,734
|
|
|
|
78,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
60,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserves re-estimated as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of initial year
|
|
|
122,725
|
|
|
|
142,034
|
|
|
|
137,469
|
|
|
|
134,298
|
|
|
|
149,493
|
|
|
|
166,132
|
|
|
|
255,182
|
|
|
|
246,556
|
|
|
|
277,014
|
|
|
|
289,366
|
|
|
|
322,346
|
|
One year later
|
|
|
118,373
|
|
|
|
128,949
|
|
|
|
130,376
|
|
|
|
139,110
|
|
|
|
155,673
|
|
|
|
205,422
|
|
|
|
254,570
|
|
|
|
223,223
|
|
|
|
271,704
|
|
|
|
284,312
|
|
|
|
|
|
Two years later
|
|
|
102,304
|
|
|
|
114,605
|
|
|
|
128,134
|
|
|
|
140,094
|
|
|
|
182,812
|
|
|
|
199,865
|
|
|
|
231,619
|
|
|
|
224,919
|
|
|
|
264,794
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
87,321
|
|
|
|
110,462
|
|
|
|
130,280
|
|
|
|
132,504
|
|
|
|
169,340
|
|
|
|
195,191
|
|
|
|
246,244
|
|
|
|
218,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
86,271
|
|
|
|
113,748
|
|
|
|
122,469
|
|
|
|
120,051
|
|
|
|
174,346
|
|
|
|
203,488
|
|
|
|
237,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
86,320
|
|
|
|
105,797
|
|
|
|
110,055
|
|
|
|
119,471
|
|
|
|
174,847
|
|
|
|
196,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
79,029
|
|
|
|
93,768
|
|
|
|
109,874
|
|
|
|
118,485
|
|
|
|
167,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
69,923
|
|
|
|
93,447
|
|
|
|
109,237
|
|
|
|
118,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
69,963
|
|
|
|
93,556
|
|
|
|
109,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
70,982
|
|
|
|
93,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
71,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net (deficiency) redundancy
|
|
$
|
51,578
|
|
|
$
|
48,402
|
|
|
$
|
27,797
|
|
|
$
|
15,464
|
|
|
$
|
(18,248)
|
|
|
$
|
(30,126)
|
|
|
$
|
17,638
|
|
|
$
|
28,255
|
|
|
$
|
12,220
|
|
|
$
|
5,054
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative redundancy (deficiency) as a percentage of original
estimate
|
|
|
42.0%
|
|
|
|
34.1%
|
|
|
|
20.2%
|
|
|
|
11.5%
|
|
|
|
(12.2)%
|
|
|
|
(18.1)%
|
|
|
|
6.9%
|
|
|
|
11.5%
|
|
|
|
4.4%
|
|
|
|
1.7%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserves re-estimated
|
|
$
|
71,147
|
|
|
$
|
93,632
|
|
|
$
|
109,672
|
|
|
$
|
118,834
|
|
|
$
|
167,741
|
|
|
$
|
196,258
|
|
|
$
|
237,544
|
|
|
$
|
218,301
|
|
|
$
|
264,794
|
|
|
$
|
284,312
|
|
|
|
|
|
Re-estimated ceded recoverable
|
|
|
8,669
|
|
|
|
12,915
|
|
|
|
63,475
|
|
|
|
101,729
|
|
|
|
113,836
|
|
|
|
135,232
|
|
|
|
86,303
|
|
|
|
85,057
|
|
|
|
130,983
|
|
|
|
134,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross reserves re-estimated
|
|
$
|
79,816
|
|
|
$
|
106,547
|
|
|
$
|
173,147
|
|
|
$
|
220,563
|
|
|
$
|
281,577
|
|
|
$
|
331,490
|
|
|
$
|
323,847
|
|
|
$
|
303,358
|
|
|
$
|
395,777
|
|
|
$
|
418,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims
Proactive claims management is an important factor for the
profitable underwriting of surety and fidelity products. The
Company maintains an experienced and dedicated staff of in-house
claim specialists. Claim handling for the Companys
contract and large commercial account business is performed in
Chicago. Claims for the Companys small commercial bonds
and the related fidelity bonds and E&O insurance are
handled in Sioux Falls. The disposition of claims and other
claim-related activity is performed in accordance with
established policies, procedures and expense controls designed
to minimize loss costs and maximize indemnification recoveries.
Indemnity and subrogation rights exist on a significant portion
of the business written, enabling the Company to pursue loss
recovery from the principal.
Environmental
Claims
The Company does not typically bond contractors that specialize
in hazardous environmental remediation work. The Company does,
however, provide bonding programs for several accounts that have
incidental
9
environmental exposure. In the commercial surety market, the
Company provides bonds to large corporations that are in the
business of mining various minerals and are obligated to post
reclamation bonds that guarantee that property which was
disturbed during mining is returned to an acceptable condition
when the mining is completed. The Company also provides court
and other surety bonds for large corporations wherein the
underlying action involves environmental-related issues. While
no environmental responsibility is overtly provided by
commercial or contract bonds, some risk of environmental
exposure may exist if the surety were to assume certain rights
in the completion of a defaulted project or through salvage
recovery. The Company estimates its net incurred losses on known
claims of this nature to be $7.7 million through
December 31, 2007.
Regulation
The Companys insurance subsidiaries are subject to varying
degrees of regulation and supervision in the jurisdictions in
which they transact business under statutes that delegate
regulatory, supervisory and administrative powers to state
insurance regulators. In general, an insurers 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
50 states and the District of Columbia and Puerto Rico.
Surety Bonding is domiciled in South Dakota and licensed in
28 states and the District of Columbia. Universal Surety is
licensed in 44 states and the District of Columbia. As of
January 1, 2008, Universal Suretys state of domicile
was changed from Texas to South Dakota.
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 companys stock without prior
approval of the applicable insurance regulatory authority. In
addition, dividends and other distributions to stockholders
generally may be paid only out of unreserved and unrestricted
statutory earned surplus. Such distributions may be subject to
prior regulatory approval, including a review of the
implications on Risk-Based Capital requirements. A discussion of
Risk-Based Capital requirements for property and casualty
insurance companies is included in both Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations, and Item 8., Note 13 of the
Notes to the Consolidated Financial Statements, Statutory
Financial Data. Without prior regulatory approval in 2008,
Western Surety may pay stockholder dividends of
$96.7 million to CNA Surety. For the year ended
December 31, 2007, CNA Surety received $2.0 million in
dividends from its insurance subsidiaries.
CNA Suretys insurance subsidiaries are subject to periodic
financial and market conduct examinations. These examinations
are generally performed by the domiciliary state insurance
regulatory authorities, however, they may be performed by any
jurisdiction in which the insurer transacts business. During
2006, the California Department of Insurance announced it would
conduct a market conduct examination of Western Surety, Surety
Bonding and Universal Surety, commencing in 2007. These
examinations were completed in 2007 and the final and adopted
examination report was issued on December 5, 2007. The
examination report reflected findings of a small percentage of
errors in the bond files reviewed by the California Department
of Insurance pursuant to the examination and such errors have
been addressed by management. The matters noted did not have a
material impact on the insurance subsidiaries statutory
surplus, nor did they result in any fines or penalties to CNA
Surety or any of its subsidiaries.
Certain states in which CNA Suretys insurance subsidiaries
conduct their 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
10
policies issued by insolvent insurers, the guaranty associations
charge members assessments based on the amount of direct
premiums written in that state. Such assessments were not
material to CNA Suretys results of operations in 2007.
Western Surety and Surety Bonding each qualifies as an
acceptable surety for federal and other public works project
bonds pursuant to U.S. Department of Treasury regulations.
U.S. Treasury underwriting limitations are based on an
insurers statutory surplus. The underwriting limitations
of Western Surety and Surety Bonding, based on each
insurers statutory surplus, were $26.8 million and
$0.7 million, respectively, for the twelve-month period
ended June 30, 2007. Effective July 1, 2007 through
June 30, 2008, the underwriting limitations of Western
Surety and Surety Bonding are $34.2 million and
$0.7 million, respectively. Through a surety quota share
treaty (the Quota Share Treaty) between CCC and
Western Surety discussed in both Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations, and Item 8., Note 6 of the Notes to the
Consolidated Financial Statements, Reinsurance, CNA Surety has
access to CCC and its affiliates U.S. Department of
Treasury underwriting limitations. Effective July 1, 2007
through June 30, 2008, the underwriting limitations of CCC
and its affiliates utilized under the Quota Share Treaty total
$739.9 million. CNA Surety management believes that the
foregoing U.S. Treasury underwriting limitations are
sufficient for the conduct of its business.
Investments
CNA Surety insurance subsidiaries investment practices
must comply with insurance laws and regulations and must also
comply with certain covenants under CNA Suretys credit
facility. Generally, insurance laws and regulations prescribe
the nature and quality of, and set limits on, the various types
of investments that may be made by CNA Suretys insurance
subsidiaries.
The Companys investment portfolio generally is managed to
maximize after-tax investment return, while minimizing credit
risk with investments concentrated in high quality income
securities. CNA Suretys portfolio is managed to provide
diversification by limiting exposures to any one industry, issue
or issuer, and to provide liquidity by investing in the public
securities markets. The portfolio is structured to support CNA
Suretys insurance underwriting operations and to consider
the expected duration of liabilities and short-term cash needs.
An investment committee of CNA Suretys Board of Directors
establishes investment policy and oversees the management of
each portfolio. A professional independent investment adviser
has been engaged to assist in the management of each insurance
subsidiary investment portfolio pursuant to established
investment committee guidelines. The insurance subsidiaries pay
an advisory fee based on the market value of the assets under
management.
Employees
As of December 31, 2007, the Company employed
739 persons. CNA Surety has not experienced any work
stoppages. Management of CNA Surety believes its relations with
its employees are good.
Availability
of Securities and Exchange Commission Reports
A copy of this Annual Report on
Form 10-K,
as well as CNA Suretys subsequent Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and any amendments to such reports are available, free of
charge, on the Internet at CNA Suretys website
(www.cnasurety.com) as soon as reasonably practicable after
being filed with or submitted to the Securities and Exchange
Commission (the SEC). Prior to the filing of this
Form 10-K,
CNA Surety provided links to the SECs website
(www.sec.gov) which contained the equivalent of the reports
described above. Any materials the Company files with the SEC
may be read and obtained at the SECs Public Reference Room
at 100 F Street, NE, Washington, DC 20549. Information
regarding the operation of the Public Reference Room may be
obtained by calling the SEC at
1-800-SEC-0330.
This reference to CNA Suretys website or the SECs
address does not constitute incorporation by reference of the
information contained on the website and should not be
considered part of this document.
11
Our business faces many risks. Some of the more significant
risks that we face are described below. There may be additional
risks that we do not currently perceive to be significant or
that we are not currently aware of that may also impact our
business. Each of the risks and uncertainties described below
could lead to events or circumstances that have a material
adverse effect on our business, results of operations, financial
condition or equity.
In addition, ownership of our common stock may be subject to
risks associated with the liquidity of the investment.
Approximately 62% of our common stock is owned by affiliates of
CNAF. This concentration of ownership may reduce the number of
market participants willing to purchase our stock and limit the
ability of a minority owner to liquidate their position.
We may
determine that our loss reserves are insufficient to cover our
estimated ultimate unpaid liability for claims and we may need
to increase them.
We maintain loss reserves to cover our estimated ultimate unpaid
liability for claims and claim adjustment expenses for reported
and unreported claims. Reserves represent our best estimate at a
given accounting date. Loss reserves are not an exact
calculation of liability but instead are complex estimates
derived by us, generally utilizing a variety of reserve
estimation techniques from numerous assumptions and expectations
about future events, many of which are highly uncertain, such as
estimates of claims severity, frequency of claims, inflation,
claims handling, case reserving policies and procedures,
underwriting and pricing policies, changes in the legal and
regulatory environment and the lag time between the occurrence
of an insured event and the time of its ultimate settlement.
Many of these uncertainties are not precisely quantifiable and
require significant judgment on our part.
In light of the many uncertainties associated with establishing
the estimates and making the assumptions necessary to establish
reserve levels, we review and change our reserve estimates in a
regular and ongoing process as experience develops and further
claims are reported and settled. If estimated reserves are
insufficient for any reason, the required increase in reserves
would be recorded as a charge against our earnings for the
period in which reserves are determined to be insufficient.
Surety
losses and our results can be volatile.
In the past, our results have been adversely impacted by a
relatively small number of large claims. In addition, our
results have been significantly impacted by increases in
corporate default rates. These past occurrences illustrate that
our loss experience and results can be volatile.
We have a
significant concentration of exposure to construction
firms.
A significant portion of our business is guaranteeing the
performance of construction firms. We guarantee projects across
all aspects of the construction market including public
construction, private non-residential construction and
residential construction. Therefore, we are exposed to the
challenges that the construction industry faces. Over the last
year, home builders have experienced a reduction in demand for
new homes and have generally reported poor financial results as
they address the changes in their markets. Although other
sectors of the construction industry, particularly the public
construction sector, continue to enjoy strong demand for their
services, we may experience a higher frequency of claims and
higher losses as a result of a challenging construction economy.
Our
premium writings and profitability are impacted by the
availability and cost of reinsurance and our reinsurance
purchasing decisions.
Reinsurance coverage is an important component of our capital
structure. Reinsurance allows us to meet certain regulatory
restrictions that would otherwise limit the size of bonds that
we write and limit the market segments in which we could
compete. In addition, reinsurance reduces the potential
volatility of earnings and protects our capital by limiting the
amount of loss associated with any one bond principal. We have
experienced periods where it was difficult for us to buy as much
reinsurance as we desired and when reinsurance costs have risen
substantially. The availability and cost of reinsurance
protection depends on a number of factors such as our loss
12
experience, the surety industrys loss experience, the
number of reinsurers willing to provide coverage, and broader
economic conditions. If sufficient reinsurance is not available
or is too costly or if we purchase insufficient reinsurance, we
may need to reduce our premium writings and may be susceptible
to higher losses.
In addition, due to the nature of the reinsurance products we
purchase, reinsurers may cover principals in one year, but then
exclude or provide only limited reinsurance for these same
principles in subsequent years. In such cases, we would likely
have continuing exposure to these principals that would not be,
or would only partially be, covered by reinsurance.
We may
not be able to collect amounts owed to us by
reinsurers.
Amounts recoverable from reinsurers are reported as receivables
in our balance sheets and are estimated in a manner consistent
with loss and loss adjustment expense reserves. The ceding of
insurance does not, however, discharge our primary liability for
claims. As a result, we are subject to credit risk relating to
our ability to recover amounts due from reinsurers. It is
possible that future financial deterioration of our reinsurers
could result in certain balances becoming uncollectible.
We rely
upon affiliated companies that we do not control to conduct
certain aspects of our business.
Due to regulatory restrictions that limit the size of the bonds
that our insurance subsidiaries can write, we utilize the
capacity of affiliated companies to service some parts of our
business. If this capacity is no longer available to us, no
longer satisfies the regulatory requirements, or no longer meets
customer requirements, we may need to stop servicing parts of
our business.
Rating
agencies may downgrade their ratings for us or for affiliated
companies that we rely on to write business. This would
adversely affect our ability to write business.
Our customers often refer to the financial strength ratings
assigned by A.M. Best, S&P and other similar companies
when they are choosing a surety company. Because we use the
underwriting capacity of CCC, an affiliate, to serve larger
accounts, our financial strength ratings, as well as those of
CCC, factor into customers decisions. If our ratings or
CCCs ratings are downgraded, we may experience a
significant reduction in premium writings.
We face
intense competition.
All aspects of the insurance industry are highly competitive and
we must continuously allocate resources to refine and improve
our products and services. Insurers compete on the basis of
factors including products, price, services, ratings and
financial strength. Although we seek pricing that will result in
what we believe are adequate returns on the capital allocated to
our business, we may lose business to competitors offering
competitive products at lower prices. We compete with a large
number of stock and mutual insurance companies and other
entities for both distributors and customers. We also compete
against providers of substitute products such as letters of
credit in certain markets.
Demand
for our products is created by laws that could be
changed.
We believe that the vast majority of the demand for our products
results from federal, state and local laws that mandate the use
of surety bonds. If these laws are loosened or eliminated, our
business would be severely impacted.
We are
subject to capital adequacy requirements and, if we do not meet
these requirements, regulatory agencies may restrict or prohibit
us from operating our business.
Insurance companies are subject to risk-based capital standards
set by state regulators to help identify companies that merit
further regulatory attention. These standards apply specified
risk factors to various asset, premium and reserve components of
our statutory capital and surplus reported in our statutory
financial statements. Current rules require companies to
maintain statutory capital and surplus at a specified minimum
level determined
13
using the risk-based capital formula. If we do not meet these
minimum requirements, state regulators may restrict or prohibit
us from operating our business.
Our
insurance subsidiaries, upon whom we depend for dividends and
advances in order to fund our working capital needs, are limited
by state regulators in their ability to pay dividends.
We are a holding company and are dependent upon dividends,
advances, loans and other sources of cash from our subsidiaries
in order to meet our obligations. Dividend payments, however,
must be approved by the subsidiaries domiciliary state
departments of insurance and are generally limited to amounts
determined by formula which varies by state. If we are
restricted, by regulatory rule or otherwise, from paying or
receiving inter-company dividends, we may not be able to fund
our working capital needs and debt service requirements from
available cash. As a result, we would need to look to other
sources of capital which may be more expensive or may not be
available at all.
Some of
the credit extended to us requires ongoing compliance with
conditions and limitations regarding our profitability and
financial condition.
We borrow money from banks under a credit facility that requires
that we meet certain tests of profitability and financial
condition. If we do not meet these tests, we may be required to
repay outstanding borrowings. If we are capable of repaying the
borrowings, we may experience a reduction in capital strength
that may hamper our ability to conduct business. If we are not
capable of repaying the borrowings, we would need to look to
other sources of capital which may be more expensive or may not
be available at all.
Our
investment portfolio may suffer reduced returns or
losses.
Investment returns are an important part of our overall
profitability. General economic conditions, fluctuations in
interest rates, and many other factors beyond our control can
adversely affect the returns and the overall value of our
investment portfolio. In addition, any defaults in the payments
due to us for our investments, especially with respect to liquid
corporate and municipal bonds, could reduce our investment
income and realized investment gains or could cause us to incur
investment losses. As a result of these factors, we may not
realize an adequate return on our investments, may incur losses
on sales of our investments and may be required to write down
the value of our investments.
We rely
on our information technology and telecommunications systems to
conduct our business.
Our business is highly dependent upon the successful and
uninterrupted functioning of our information technology and
telecommunications systems. We rely on these systems to process
new and renewal business, provide customer service, make claims
payments and facilitate collections and cancellations, as well
as to perform actuarial and other analytical functions necessary
for pricing and product development.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
CNA Surety leases its executive offices and its shared branch
locations with CCC under the Administrative Services Agreement
with CCC discussed in detail in Item 8., Note 14 of
the Notes to the Consolidated Financial Statements, Related
Party Transactions. CNA Surety currently uses approximately
96,000 square feet and related personal property at 33
branch locations and its home and executive offices
(30,360 square feet) in Chicago, Illinois. CNA
Suretys annual rent for this space is approximately
$3.1 million. CNA Surety may terminate its use of these
locations as set forth in the Administrative Services Agreement,
without material penalty, by providing CCC with 30 days
written notice.
CNA Surety leases approximately 83,550 square feet of
office space for its primary processing and service center at
101 South Phillips Avenue, Sioux Falls, South Dakota, under a
lease expiring in 2012. The annual rent,
14
which is subject to annual adjustments, was $1.7 million as
of December 31, 2007. CNA Surety also leased space for
contract and commercial branch offices in New York, New York;
Roseville, California; San Juan, Puerto Rico; Hoover,
Alabama; and Rocklin, California. Annual rent for these offices
was $0.3 million with leases terminating in 2007, 2007,
2011, 2010, and 2012, respectively. The New York, New York lease
expiring in 2007 was not renewed as this branch is now a shared
location with CCC. The Roseville, California lease was not
renewed as the branch was relocated to Rocklin, California.
ITEM 3. LEGAL
PROCEEDINGS
The Company and its subsidiaries are parties to various lawsuits
arising in the normal course of business. The Company believes
the resolution of these lawsuits will not have a material
adverse effect on its financial condition or its results of
operations.
ITEM 4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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 Companys
Annual Meeting of Stockholders to be held not later than
120 days after the end of the fiscal year covered by this
Form 10-K.
Information required by Item 4 will appear in the Proxy
Statement and is incorporated herein by reference.
15
PART II.
|
|
ITEM 5.
|
MARKET
FOR THE REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
|
The Companys common stock (Common Stock)
trades on the New York Stock Exchange under the symbol SUR. On
February 8, 2008, the last reported sale price for the
Common Stock was $16.35 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 during 2007 and
2006.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2007
|
|
|
|
|
|
|
|
|
4th Quarter
|
|
$
|
22.00
|
|
|
$
|
16.49
|
|
3rd Quarter
|
|
$
|
21.17
|
|
|
$
|
15.79
|
|
2nd Quarter
|
|
$
|
23.24
|
|
|
$
|
18.86
|
|
1st Quarter
|
|
$
|
22.44
|
|
|
$
|
19.43
|
|
2006
|
|
|
|
|
|
|
|
|
4th Quarter
|
|
$
|
22.74
|
|
|
$
|
19.44
|
|
3rd Quarter
|
|
$
|
21.99
|
|
|
$
|
16.05
|
|
2nd Quarter
|
|
$
|
18.92
|
|
|
$
|
15.61
|
|
1st Quarter
|
|
$
|
18.20
|
|
|
$
|
14.54
|
|
16
The following table and graph present the Companys Common
Stock market performance over the last five years compared to
appropriate industry indices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indexed Returns
|
|
|
|
Years Ended December 31,
|
|
Company/Index
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
CNA Surety Corporation
|
|
|
100
|
|
|
|
121.15
|
|
|
|
170.06
|
|
|
|
185.61
|
|
|
|
273.89
|
|
|
|
252.10
|
|
Standard & Poors 500 Stock Index
|
|
|
100
|
|
|
|
126.38
|
|
|
|
137.75
|
|
|
|
141.88
|
|
|
|
161.20
|
|
|
|
166.89
|
|
Standard & Poors Property & Casualty
Index
|
|
|
100
|
|
|
|
123.96
|
|
|
|
134.33
|
|
|
|
151.76
|
|
|
|
168.03
|
|
|
|
141.61
|
|
The number of stockholders of record of common stock on
February 8, 2008, was approximately 4,900.
A summary of outstanding options and shares authorized for
issuance under equity compensation plans as of December 31,
2007 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities to be
|
|
Weighted-Average
|
|
Number of Securities Remaining
|
|
|
Issued Upon the Exercise of
|
|
Exercise Price of
|
|
Available for Future Issuance
|
|
|
Outstanding Options
|
|
Outstanding Options
|
|
Under Equity Compensation Plans
|
|
Equity compensation plans approved by security holders
|
|
|
1,054,588
|
|
|
$
|
14.53
|
|
|
|
2,678,700
|
|
Dividends
Effective November 21, 2002, the Company announced that its
Board of Directors suspended its quarterly cash dividend. The
Board reassessed the level of dividends which would be
appropriate based upon a number of factors, including CNA
Suretys financial condition, operating characteristics,
projected earnings and growth, capital requirements of its
insurance subsidiaries and debt service obligations. The
reintroduction of a quarterly or annual dividend and the amount
of any such dividend will be reassessed at future Board meetings.
17
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The following financial information has been derived from the
Consolidated Financial Statements and Notes thereto.
The following information presented for CNA Surety is as of and
for the years ended December 31, 2007, 2006, 2005, 2004 and
2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007(b)(c)
|
|
|
2006(b)(c)
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
Total revenues
|
|
$
|
465,697
|
|
|
$
|
431,693
|
|
|
$
|
384,082
|
|
|
$
|
350,789
|
|
|
$
|
332,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums
|
|
$
|
471,660
|
|
|
$
|
451,356
|
|
|
$
|
417,530
|
|
|
$
|
389,417
|
|
|
$
|
371,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premiums
|
|
$
|
428,289
|
|
|
$
|
409,629
|
|
|
$
|
365,948
|
|
|
$
|
318,284
|
|
|
$
|
319,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium
|
|
$
|
421,506
|
|
|
$
|
393,642
|
|
|
$
|
348,361
|
|
|
$
|
317,857
|
|
|
$
|
304,449
|
|
Net losses and loss adjustment
expenses(a)
|
|
|
103,124
|
|
|
|
95,830
|
|
|
|
127,841
|
|
|
|
87,356
|
|
|
|
172,476
|
|
Net commissions, brokerage and other underwriting expenses
|
|
|
227,412
|
|
|
|
216,560
|
|
|
|
202,521
|
|
|
|
207,166
|
|
|
|
190,740
|
|
Net investment income
|
|
|
44,636
|
|
|
|
39,324
|
|
|
|
33,747
|
|
|
|
30,181
|
|
|
|
26,301
|
|
Net realized investment (losses) gains
|
|
|
(445
|
)
|
|
|
(1,273
|
)
|
|
|
1,974
|
|
|
|
2,751
|
|
|
|
1,826
|
|
Interest expense
|
|
|
2,918
|
|
|
|
3,669
|
|
|
|
3,545
|
|
|
|
2,260
|
|
|
|
1,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
132,243
|
|
|
|
115,634
|
|
|
|
50,175
|
|
|
|
54,007
|
|
|
|
(32,163
|
)
|
Income tax expense (benefit)
|
|
|
39,747
|
|
|
|
32,816
|
|
|
|
11,744
|
|
|
|
14,297
|
|
|
|
(18,012
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
92,496
|
|
|
$
|
82,818
|
|
|
$
|
38,431
|
|
|
$
|
39,710
|
|
|
$
|
(14,151
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
|
$
|
2.10
|
|
|
$
|
1.90
|
|
|
$
|
0.89
|
|
|
$
|
0.92
|
|
|
$
|
(0.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share
|
|
$
|
2.09
|
|
|
$
|
1.89
|
|
|
$
|
0.89
|
|
|
$
|
0.92
|
|
|
$
|
(0.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
ratio(a)
|
|
|
24.5
|
%
|
|
|
24.3
|
%
|
|
|
36.7
|
%
|
|
|
27.5
|
%
|
|
|
56.7
|
%
|
Expense ratio
|
|
|
54.0
|
|
|
|
55.0
|
|
|
|
58.1
|
|
|
|
65.2
|
|
|
|
62.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
ratio(a)
|
|
|
78.5
|
%
|
|
|
79.3
|
%
|
|
|
94.8
|
%
|
|
|
92.7
|
%
|
|
|
119.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Invested assets and cash
|
|
$
|
1,024,826
|
|
|
$
|
897,285
|
|
|
$
|
797,914
|
|
|
$
|
766,387
|
|
|
$
|
654,072
|
|
Intangible assets, net of amortization
|
|
|
138,785
|
|
|
|
138,785
|
|
|
|
138,785
|
|
|
|
138,785
|
|
|
|
138,785
|
|
Total assets
|
|
|
1,507,654
|
|
|
|
1,368,333
|
|
|
|
1,262,614
|
|
|
|
1,174,494
|
|
|
|
1,169,123
|
|
Insurance reserves
|
|
|
731,772
|
|
|
|
688,027
|
|
|
|
665,496
|
|
|
|
589,406
|
|
|
|
637,607
|
|
Debt
|
|
|
30,791
|
|
|
|
30,690
|
|
|
|
50,589
|
|
|
|
65,488
|
|
|
|
50,418
|
|
Total liabilities
|
|
|
839,949
|
|
|
|
802,431
|
|
|
|
786,039
|
|
|
|
728,123
|
|
|
|
758,982
|
|
Stockholders equity
|
|
|
667,705
|
|
|
|
565,902
|
|
|
|
476,575
|
|
|
|
446,371
|
|
|
|
410,141
|
|
Book value per share
|
|
$
|
15.13
|
|
|
$
|
12.90
|
|
|
$
|
11.00
|
|
|
$
|
10.38
|
|
|
$
|
9.54
|
|
|
|
|
(a) |
|
Includes the effect of recording revisions of prior year
reserves, known as reserve development. The dollar amount and
the percentage point effect on the loss ratio of these reserve
revisions were a reduction of $5.1 million, or 1.2%, for
the year ended December 31, 2007, a reduction of
$5.3 million, or 1.4%, for the year ended December 31,
2006, a reduction of $23.3 million, or 6.7%, for the year
ended December 31, 2005, a reduction of $0.6 million,
or 0.2%, for the year ended December 31, 2004, and an
addition of $39.3 million, or 12.9%, for the year ended
December 31, 2003. |
18
|
|
|
(b) |
|
Statement of Financial Accounting Standards (SFAS)
No. 123 (revised 2004), Share-based Payment
(SFAS 123R) was effective for the Company on
January 1, 2006. Prior to 2006, the Company applied the
intrinsic value method under Accounting Principles Board
(APB) Opinion No. 25 (APB 25), and
related interpretations, in accounting for its stock-based
compensation plan as allowed under the provisions of
SFAS No. 123, Accounting for Stock-based
Compensation (SFAS 123). Under the
recognition and measurement principles of APB 25, no stock-based
compensation cost was recognized, as the exercise price of the
granted options equaled the market price of the underlying stock
at the grant date. Under SFAS 123R, entities generally are
required to measure and record compensation expense using a
fair-value based method. Adoption of SFAS 123R increased
compensation expense by $1.9 million and $1.2 million
for the years ended December 31, 2007 and 2006,
respectively. Net of deferred tax benefit, adoption of
SFAS 123R decreased net income by $1.2 million and
$0.8 million for the years ended December 31, 2007 and
2006, respectively. |
|
(c) |
|
As of December 31, 2006, the Company adopted
SFAS No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans (an
amendment of FASB Statements No. 87, 88, 106 and 132(R),
(SFAS 158). SFAS 158 requires a company
who sponsors one or more single-employer defined benefit plans
to recognize the overfunded or underfunded status of a defined
benefit postretirement plan as an asset or liability in its
statement of financial position and to recognize changes in that
funded status in the year in which the changes occur through
other comprehensive income. The Companys postretirement
benefit plans are unfunded. Recognition of the accumulated
postretirement benefit obligation, measured as of
December 31, 2007, decreased the liability for
postretirement benefits by $3.4 million, gross of deferred
tax benefit, and increased accumulated other comprehensive
income by $1.0 million. Recognition of the accumulated
postretirement benefit obligation, measured as of
December 31, 2006, increased the liability for
postretirement benefits by $4.7 million, gross of deferred
tax benefit, and decreased accumulated other comprehensive
income by $2.7 million. |
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following is a discussion and analysis of CNA Surety
Corporation (CNA Surety or Company) and
its subsidiaries operating results, liquidity and capital
resources, and financial condition. The most significant risks
and uncertainties impacting the operating performance and
financial condition of the Company are discussed in
Item 1A, Risk Factors of this
Form 10-K.
This discussion should be read in conjunction with the
Consolidated Financial Statements of CNA Surety and Notes
thereto.
Critical
Accounting Policies
Management believes the most significant accounting policies and
related disclosures for purposes of understanding the
Companys results of operations and financial condition
pertain to reserves for unpaid losses and loss adjustment
expenses and reinsurance, investments, goodwill and other
intangible assets, recognition of premium revenue and the
related unearned premium liability, and deferred policy
acquisition costs. The Companys accounting policies
related to reserves for unpaid losses and loss adjustment
expenses and related estimates of reinsurance recoverables, are
particularly critical to an assessment of the Companys
financial results. Given the nature of the surety business, the
determination of these balances is inherently a highly
subjective exercise, which requires management to analyze,
weigh, and balance numerous macroeconomic, customer specific,
and claim specific factors and trends, most of which, in
themselves, are inherently uncertain and difficult to predict.
Reserves
for Unpaid Losses and Loss Adjustment Expenses and
Reinsurance
CNA Surety accrues liabilities for unpaid losses and loss
adjustment expenses (LAE) under its surety and
property and casualty insurance contracts based upon estimates
of the ultimate amounts payable under the contracts related to
losses occurring on or before the balance sheet date.
Reported claims are in various stages of the settlement process.
Due to the nature of surety, which is the relationship among
three parties whereby the surety guarantees the performance of
the principal to a third party (the obligee), the investigation
of claims and the establishment of case estimates on claim files
can be a complex process that can occur over a period of time
depending on the type of bond(s) and the facts and circumstances
involving the
19
particular bond(s), the claim(s) and the principal. Case
reserves are typically established after a claim is filed and an
investigation and analysis has been conducted as to the validity
of the claim, the principals response to the claim and the
principals financial viability. To the extent it is
determined that there are no bona fide defenses to the claim and
the principal is unwilling or financially unable to resolve the
claim, a case estimate is established on the claim file for the
amount the Company estimates it will have to pay to honor its
obligations under the provisions of the bond(s).
While the Company intends to establish initial case reserve
estimates that are sufficient to cover the ultimate anticipated
loss on a file, some estimates need to be adjusted during the
life cycle of the file as matters continue to develop. Factors
that can necessitate case estimate increases or decreases are
the complexity of the bond(s)
and/or
underlying contract(s), if additional
and/or
unexpected claims are filed, if the financial condition of the
principal or obligee changes or as claims develop and more
information is discovered that was unknown
and/or
unexpected at the time the initial case reserve estimate was
established. Ultimately, claims are resolved through payment
and/or a
determination that, based on the information available, a case
reserve is no longer required.
As of any balance sheet date, not all claims have been reported
and some may not be reported for many years. As a result, the
liability for unpaid losses includes significant estimates for
incurred-but-not-reported (IBNR) claims. The IBNR
reserves also include provisions for losses in excess of the
current case reserve for previously reported claims and for
claims that may be reopened. The IBNR reserves also include
offsets for anticipated indemnity recoveries. The following
table shows the estimated liability as of December 31, 2007
for unpaid claims applicable to reported claims and to IBNR
(dollars in thousands) for each sub-line of business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Case Loss
|
|
|
Gross IBNR Loss
|
|
|
Total Gross
|
|
|
|
and LAE Reserves
|
|
|
and LAE Reserves
|
|
|
Reserves
|
|
|
Contract
|
|
$
|
128,039
|
|
|
$
|
172,868
|
|
|
$
|
300,907
|
|
Commercial
|
|
|
103,296
|
|
|
|
56,162
|
|
|
|
159,458
|
|
Fidelity and other
|
|
|
4,316
|
|
|
|
8,161
|
|
|
|
12,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
235,651
|
|
|
$
|
237,191
|
|
|
$
|
472,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periodic actuarial analyses of the Companys loss reserves
are performed. These analyses typically include a comprehensive
review performed in the third quarter based on data as of June
30 and an update of the comprehensive review performed in
January based on data as of December 31. In between these
analyses, management monitors claim activity against benchmarks
of expected claim activity prepared in connection with the
comprehensive review.
The actuarial analyses are based upon multiple projection
methodologies that involve detailed statistical analysis of past
claim reporting, settlement activity, and indemnification
activity, as well as claim frequency and severity data when
sufficient information exists to lend statistical credibility to
the analysis. The analysis may be based upon internal loss
experience or industry experience. Methodologies may vary
depending on the type of claim being estimated. While
methodologies may vary, each employs significant judgments and
assumptions.
In estimating the unpaid claim liabilities, the following
projection methodologies are employed:
|
|
|
|
|
Historical development method, sometimes referred to as a link
ratio method;
|
|
|
|
Bornhuetter-Ferguson method on both a paid and incurred basis;
|
|
|
|
Average hindsight outstanding projection method;
|
|
|
|
Frequency-severity method; and
|
|
|
|
Loss ratio method.
|
The following provides a summary of these projection
methodologies:
Historical
Development Method
As a group of claims mature, their collective value changes.
This change in value over time is referred to as loss
development. The loss development method is a traditional
actuarial approach which relies on the historical
20
changes in losses from one evaluation point to another to
project the current valuation of losses to ultimate settlement
values. Development patterns which have been exhibited by more
mature (older) years are used to estimate the expected
development of the less mature (more recent) years. The strength
of this method is that it is very responsive to emerging loss
experience for each accident year. The weakness is that this
method can become highly leveraged and volatile for less mature
accident years.
Bornhuetter-Ferguson
Method
The incurred Bornhuetter-Ferguson (B-F) method is
commonly used to provide a more stable estimate of ultimate
losses in situations where loss development is volatile,
substantial
and/or
immature. The method calculates IBNR (or unpaid loss when
conducting a paid B-F projection) directly as the product of:
Expected Ultimate Losses multiplied by IBNR (or Unpaid)
Percentage
The IBNR (or unpaid) percentage is derived from the incurred (or
paid) loss development patterns. Various approaches can be used
to determine the expected ultimate losses (e.g., prior year
estimates, pricing assumptions, etc.). An expected loss ratio
(ultimate losses divided by earned premium), based on review of
prior accident years loss ratio experience, was utilized
to obtain an estimate of expected ultimate losses. This estimate
was then applied to the more recent accident years earned
premium. The strength of the B-F method is that it is less
leveraged than the historical development method and thus does
not result in an overreaction to an unusual claim occurrence (or
an unusual lack of claims). The weakness of the method is that
it is reliant on an initial expectation of ultimate losses.
Average
Hindsight Outstanding Method
This method relies on the older, more mature accident
years ultimate loss estimates to restate what the
outstanding losses should have been, with hindsight, by accident
year by stage of development. These restated hindsight
outstanding losses are then trended to the appropriate cost
levels for the accident years being projected and added to the
paid to date losses in order to generate indicated ultimate
losses for the more recent accident years. The strength of this
method is that it is relatively unaffected by changes in a
companys case reserving practices. The weaknesses of this
method are that it is sensitive to payment pattern shifts and
that the average hindsight severities can become highly variable
for certain datasets.
Frequency-Severity
Method
This method first projects the expected number of claims for
each accident year and then multiplies this estimate by the
expected average cost of claims for the applicable accident
year. The number of claims can be projected using the historical
development technique or other methodology. The average cost of
claims for the more recent accident years is estimated by
observing the estimated average cost of claims for the older
more mature accident years and trending those values to
appropriate cost levels for the more recent accident years. The
strength of this method is that it is not reliant on loss
development factors for less mature accident years which can
become highly leveraged and volatile. The weakness is that this
method is slow to react to an abrupt change in claim severities.
Loss
Ratio Method
This method relies on historical projected ultimate loss ratios
for the more mature accident years to estimate the more recent,
less mature accident years ultimate losses. Applying a
selected loss ratio (by reviewing more mature years) to the more
recent years earned premium results in an indication of
the more recent years ultimate losses. The strength of
this method is that it can be used in connection with a
companys pricing targets and can be used when the
historical data has limited credibility. The weakness of this
method is that it is slow to react to the emerging loss
experience for a particular accident year.
Each of the projection methodologies employed rely to varying
degrees on the basic assumption that the Companys
historical claim experience is indicative of the Companys
future claim development. The amount of weight given to any
individual projection method is based on an assessment of the
volatility of the historical data and development patterns, an
understanding of the changes in the overall surety industry over
time and the resultant
21
potential impact of these changes on the Companys
prospective claims development, an understanding of the changes
to the Companys processes and procedures within its
underwriting, claims handling and data systems functions, among
other things. The decision as to how much weight to give to any
particular projection methodology is ultimately a matter of
experience and professional judgment.
Surety results, especially for contract and certain commercial
products like insurance program bonds, workers compensation
insurance bonds and reclamation bonds, tend to be impacted by
fewer, but more severe, losses. With this type of loss
experience, it is more difficult to estimate the required
reserves, particularly for the most current accident years which
may have few reported claims. Therefore, assumptions related to
the frequency and magnitude of severe loss are key in estimating
surety loss reserves.
The indicated reserve was developed by reviewing the
Companys claims experience by accident year for several
individual sub-lines of business. Within each sub-line, the
selection of the point estimate was made after consideration of
the appropriateness of the various projection methodologies in
light of the sub-lines loss characteristics and historical
data. In general, for the older, more mature, accident years the
historical development method (i.e., link ratio method) was
relied upon more heavily. For the more recent years, the
indicated reserves were more heavily based on the
Bornhuetter-Ferguson and loss ratio methods since these are not
as reliant on the Companys large (i.e., leveraged)
development factors and thus are believed to represent a more
stable set of methods from which to select indicated reserves
for the more recent years.
The actuarial analysis is the primary tool that management
utilizes in determining its best estimate of loss reserves.
However, the carried reserve may differ from the actuarial point
estimate as a result of managements consideration of the
impact of factors such as the following, especially as they
relate to the current accident year:
|
|
|
|
|
Current claim activity, including the frequency and severity of
current claims;
|
|
|
|
Changes in underwriting standards and business mix such as the
Companys efforts to reduce exposures to large commercial
bonds;
|
|
|
|
Changes in the claims handling process; and
|
|
|
|
Current economic conditions, especially corporate default rates
and the condition of the construction economy.
|
Management believes that the impact of the factors listed above,
and others, may not be fully quantifiable through actuarial
analysis. Accordingly, management may apply its judgment of the
impact of these factors, and others, to its selection of the
recorded loss reserves.
The following table shows the actuarial point estimate as
compared to the actual loss reserve established by management,
both gross and net of reinsurance (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Gross basis:
|
|
|
|
|
|
|
|
|
Recorded loss reserves
|
|
$
|
472,842
|
|
|
$
|
434,224
|
|
Actuarial point estimate
|
|
|
469,589
|
|
|
|
438,313
|
|
|
|
|
|
|
|
|
|
|
Difference
|
|
$
|
3,253
|
|
|
$
|
(4,089
|
)
|
|
|
|
|
|
|
|
|
|
Difference as a % of actuarial point estimate
|
|
|
0.7
|
%
|
|
|
(0.9
|
)%
|
Net basis:
|
|
|
|
|
|
|
|
|
Recorded loss reserves
|
|
$
|
322,346
|
|
|
$
|
289,366
|
|
Actuarial point estimate
|
|
|
317,325
|
|
|
|
292,703
|
|
|
|
|
|
|
|
|
|
|
Difference
|
|
$
|
5,021
|
|
|
$
|
(3,337
|
)
|
|
|
|
|
|
|
|
|
|
Difference as a % of actuarial point estimate
|
|
|
1.6
|
%
|
|
|
(1.1
|
)%
|
Recorded reserves at December 31, 2007 are slightly higher
than the actuarial point estimate, with the difference
concentrated in the more recent accident years. Management
believes that it would be premature to
22
reduce these reserves due to the inherent uncertainty associated
with the more recent accident years, particularly in light of
current economic conditions.
At December 31, 2006, managements recorded gross and
net reserves were slightly lower than the point estimate, with
the percentage difference being somewhat larger on a net basis.
At December 31, 2006, management believed continued
improvement in economic conditions, lower corporate default
rates and fewer reported severe claims indicated a lower
provision for severe losses was appropriate. Management believed
that the actuarial point estimates included provisions in the
most recent accident year for severe losses that continue to be
influenced by the Companys experience in accident years
2002 and 2003 and did not fully reflect the favorable economic
conditions, changes in the Companys exposures and
favorable claim experience during the most recent accident
years. The conclusion of the actuarial analyses performed in the
third quarter of 2007 with data as of June 30, 2007
resulted in lower point estimates, confirming the positive loss
trends noted by management.
Receivables recorded with respect to insurance losses ceded to
reinsurers under reinsurance contracts are estimated in a manner
similar to liabilities for insurance losses and, therefore, are
also subject to uncertainty. In addition to the factors cited
above, estimates of reinsurance recoveries may prove
uncollectible if the reinsurer is unable to perform under the
contract. Reinsurance contracts do not relieve the ceding
company of its obligations to indemnify its own policyholders.
Casualty insurance loss reserves are subject to a significant
amount of uncertainty. Given the nature of surety losses with
its low frequency, high severity characteristics, this is
particularly true for surety loss reserves. As a result, the
range of reasonable loss reserve estimates may be broader than
that associated with traditional property/casualty insurance
products. While the loss reserve estimates represent the best
professional judgments, arrived at after careful actuarial
analysis of the available data, it is important to note that
variation from the estimates is not only possible but, in fact,
probable. The degree of such variation could be significant and
in either direction from the estimates and could result in
actual losses outside of the estimated reserve range. The
sources of this inherent variability are numerous
future economic conditions, court decisions,
legislative actions, and individual large claim impacts, for
example.
The range of reasonable reserve estimates is not intended to
reflect the maximum
and/or
minimum possible outcomes; but rather reflects a range of
reasonable estimates given the uncertainty in estimating unpaid
claim liabilities for surety business. Further, there is no
generally accepted method of estimating reserve ranges, but
rather many concepts are currently being vetted within actuarial
literature.
In developing the indicated range of reserve estimates for the
Company, the Mack methodology and the point estimate analysis
were utilized in order to estimate the requisite reserve
distribution parameters. The Mack methodology is premised on the
idea that the volatility in a companys historical paid
loss development is representative of the variability in a
companys future payments and thus can be used to estimate
the variability within a companys reserve estimate. Given
the dispersion of the reserve indications, the 50th and
75th percentile were selected as representing a reasonable
range of reserve estimates.
At December 31, 2007, the range of reasonable loss reserve
estimates, net of reinsurance receivables, calculated was from
$268 million to $387 million. Ranges of reasonable
loss reserve estimates are not calculated for the sub-lines of
business. Management believes that the range calculated over
total reserves provides the most meaningful information due to
the importance of correlation of losses between the sub-lines of
business related to the impact of general economic conditions.
The primary factors that would result in the Companys
actual losses being closer to either end of the reserve range is
the emergence of (or lack thereof) a small number of large
claims, as well as the recovery of (or lack thereof) a small
number of large indemnification amounts. In other words, the
primary factors that, if they were to occur, would result in the
Companys actual payments being at the high end of the
indicated range are if the Company experiences an unusually high
number of large claims
and/or an
unusually low number of large indemnification recoveries.
Conversely, if the Company were to experience an unusually low
number of large claims
and/or an
unusually high number of large indemnification recoveries, the
Companys actual payments would tend to be at the low end
of the range. These variations in outcomes could be driven by
broader issues such as the state of the construction economy or
the level of corporate defaults, or by the specific facts and
circumstances
23
surrounding individual claims. Again, it is important to note
that it is possible that the actual net payments could fall
outside of the estimated range.
Due to the inherent uncertainties in the process of establishing
the liabilities for unpaid losses and loss adjustment expenses,
the actual ultimate claims amounts will differ from the
currently recorded amounts. This difference could have a
material effect on reported earnings and financial condition.
Future effects from changes in these estimates will be recorded
in the period such changes are determined to be needed.
Investments
Management believes the Company has the ability to hold all
fixed income 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 all of
its fixed income securities (bonds and redeemable preferred
stocks) and equity securities as available-for-sale. These
securities are reported at fair value, with unrealized gains and
losses, net of deferred income taxes, reported in
stockholders equity as a separate component of accumulated
other comprehensive income. Cash flows from purchases, sales and
maturities are reported gross in the investing activities
section of the Consolidated Statements of Cash Flows.
The amortized cost of fixed income securities is determined
based on cost and the cumulative effect of amortization of
premiums and accretion of discounts. Such amortization and
accretion are included in investment income. For mortgage-backed
and certain asset-backed securities, the Company recognizes
income using the effective-yield method based on estimated cash
flows. All securities transactions are recorded on the trade
date. Investment gains or losses realized on the sale of
securities 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 realized investment gains and losses.
Short-term investments that generally include U.S. Treasury
bills, corporate notes, money market funds and investment grade
commercial paper equivalents, are carried at amortized cost
which approximates fair value. Invested assets are exposed to
various risks, such as interest rate risk, market risk and
credit risk. Due to the level of risk associated with invested
assets and the level of uncertainty related to changes in the
value of these assets, it is possible that changes in risks in
the near term may materially affect the amounts reported in the
Consolidated Balance Sheets and Consolidated Statements of
Income.
Intangible
Assets
CNA Suretys Consolidated Balance Sheet as of
December 31, 2007 includes intangible assets of
$138.8 million. This amount represents goodwill and
identified intangibles with indefinite useful lives arising from
the acquisition of Capsure Holdings Corp. (Capsure).
A significant amount of judgment is required in performing
intangible assets impairment tests. Such tests include
periodically determining or reviewing the estimated fair value
of CNA Suretys reporting units. Under the relevant
standard, fair value refers to the amount for which the entire
reporting unit may be bought or sold. There are several methods
of estimating fair value, including market quotations, asset and
liability fair values and other valuation techniques, such as
discounted cash flows and multiples of earnings or revenues. The
Company uses a valuation technique based on discounted cash
flows. If the carrying amount of a reporting unit, including
goodwill, exceeds the estimated fair value, then individual
assets, including identifiable intangible assets, and
liabilities of the reporting unit are estimated at fair value.
The excess of the estimated fair value of the reporting unit
over the estimated fair value of net assets would establish the
implied value of intangible assets. The excess of the recorded
amount of intangible assets over the implied value of intangible
assets is recorded as an impairment loss.
Insurance
Premiums
Insurance premiums are recognized as revenue ratably over the
term of the related policies in proportion to the insurance
protection provided. Contract bonds provide coverage for the
length of the bonded project and not a fixed time period. As
such, the Company uses estimates of the contract length as the
basis for recognizing premium
24
revenue on these bonds. Premium revenues are net of amounts
ceded to reinsurers. Unearned premiums represent the portion of
premiums written, before ceded reinsurance which is shown as an
asset, applicable to the unexpired terms of policies in force
determined on a pro rata basis.
Deferred
Policy Acquisition Costs
Policy acquisition costs, consisting of commissions, premium
taxes and other underwriting expenses which vary with, and are
primarily related to, the production of business, net of
reinsurance commissions, are deferred and amortized as a charge
to income as the related premiums are earned. The Company
periodically tests that deferred acquisition costs are
recoverable based on the expected profitability embedded in the
reserve for unearned premium. If the expected profitability is
less than the balance of deferred acquisition costs, a charge to
net income is taken and the deferred acquisition cost balance is
reduced to the amount determined to be recoverable. Anticipated
investment income is considered in the determination of the
recoverability of deferred acquisition costs.
Results
of Operations
Financial
Measures
The Managements Discussion and Analysis of Financial
Condition and Results of Operations (MD&A)
discusses certain generally accepted accounting principles
(GAAP) and non-GAAP financial measures in order to
provide information used by management to monitor the
Companys operating performance. Management utilizes
various financial measures to monitor the Companys
insurance operations and investment portfolio. Underwriting
results, which are derived from certain income statement
amounts, are considered a non-GAAP financial measure and are
used by management to monitor performance of the Companys
insurance operations.
Underwriting results are computed as net earned premiums less
net loss and loss adjustment expenses and net commissions,
brokerage and other underwriting expenses. Management uses
underwriting results to monitor the results of its insurance
operations without the impact of certain factors, including net
investment income, net realized investment gains (losses) and
interest expense. Management excludes these factors in order to
analyze the direct relationship between net earned premiums and
the related net loss and loss adjustment expenses along with net
commissions, brokerage and other underwriting expenses.
Operating ratios are calculated using insurance results and are
widely used by the insurance industry and regulators such as
state departments of insurance and the National Association of
Insurance Commissioners for financial regulation and as a basis
of comparison among companies. The ratios discussed in the
Companys MD&A are calculated using GAAP financial
results and include the net loss and loss adjustment expense
ratio (loss ratio) as well as the net commissions,
brokerage and other underwriting expense ratio (expense
ratio) and combined ratio. The loss ratio is the
percentage of net incurred claim and claim adjustment expenses
to net earned premiums. The expense ratio is the percentage of
net commissions, brokerage and other underwriting expenses,
including the amortization of deferred acquisition costs, to net
earned premiums. The combined ratio is the sum of the loss and
expense ratios.
While management uses various GAAP and non-GAAP financial
measures to monitor various aspects of the Companys
performance, net income is the most directly comparable GAAP
measure and represents a more comprehensive measure of operating
performance. Management believes that its process of evaluating
performance through the use of these non-GAAP financial measures
provides a basis for enhanced understanding of its operating
performance and the impact to net income as a whole. Management
also believes that investors may find these widely used
financial measures described above useful in interpreting the
underlying trends and performance, as well as to provide
visibility into the significant components of net income.
Comparison
of CNA Surety Actual Results for the Years Ended
December 31, 2007, 2006 and 2005
Analysis
of Net Income
The Company had net income of $92.5 million for the year
ended December 31, 2007 as compared to $82.8 million
for the year ended December 31, 2006, and
$38.4 million for the year ended December 31, 2005.
The increase in net income in 2007 over 2006 reflects higher
earned premium, higher net investment income and the
25
impact of a lower expense ratio. The increase in net income in
2006 over 2005 primarily reflects the absence of a
$60.0 million pre-tax ($39.0 million after-tax) charge
in 2005 to establish a reserve for contract surety losses
related to the large national contractor discussed in the Net
Loss Ratio section of this MD&A. Other positive impacts in
2006 included higher earned premium, higher investment income
and a lower expense ratio. These impacts were partially offset
by lower favorable reserve development in 2006 as compared to
2005.
The components of net income are discussed in the following
sections.
Results
of Insurance Operations
Underwriting components for the Company for the years ended
December 31, 2007, 2006 and 2005 are summarized in the
following table (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Gross written premium
|
|
$
|
471,660
|
|
|
$
|
451,356
|
|
|
$
|
417,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premium
|
|
$
|
428,289
|
|
|
$
|
409,629
|
|
|
$
|
365,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium
|
|
$
|
421,506
|
|
|
$
|
393,642
|
|
|
$
|
348,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
$
|
103,124
|
|
|
$
|
95,830
|
|
|
$
|
127,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net commissions, brokerage and other underwriting expenses
|
|
$
|
227,412
|
|
|
$
|
216,560
|
|
|
$
|
202,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
24.5
|
%
|
|
|
24.3
|
%
|
|
|
36.7
|
%
|
Expense ratio
|
|
|
54.0
|
|
|
|
55.0
|
|
|
|
58.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
78.5
|
%
|
|
|
79.3
|
%
|
|
|
94.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
Written/Earned
CNA Surety primarily markets contract and commercial surety
bonds. Contract surety bonds generally secure a
contractors performance
and/or
payment obligation with respect to a construction project.
Contract surety bonds are generally required by federal, state
and local governments for public works projects. The most common
types include bid, performance and payment bonds. Commercial
surety bonds include all surety bonds other than contract and
cover obligations typically required by law or regulation. The
commercial surety market includes numerous types of bonds
categorized as court judicial, court fiduciary, public official,
license and permit and many miscellaneous bonds that include
guarantees of financial performance. The Company also writes
fidelity bonds that cover losses arising from employee
dishonesty and other insurance products that are generally
companion products to certain surety bonds. For example, the
Company writes surety bonds for notaries and also offers related
errors and omissions (E&O) insurance coverage.
Through one of its insurance subsidiaries, Western Surety
Company (Western Surety), the Company assumes
significant amounts of premiums primarily from affiliates. This
includes all surety business written or renewed, net of
reinsurance, by Continental Casualty Company (CCC)
and The Continental Insurance Company (CIC), and
their affiliates, after September 30, 1997 that is
reinsured by Western Surety pursuant to reinsurance and related
agreements. Because of certain regulatory restrictions that
limit the Companys ability to write business on a direct
basis, the Company continues to utilize the underwriting
capacity available through these agreements. The Company is in
full control of all aspects of the underwriting and claim
management of this assumed business.
26
Gross written premiums for the years ended December 31,
2007, 2006 and 2005 are shown in the table below (dollars in
thousands) for each sub-line of business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Contract
|
|
$
|
305,624
|
|
|
$
|
285,157
|
|
|
$
|
248,662
|
|
Commercial
|
|
|
134,828
|
|
|
|
134,871
|
|
|
|
133,740
|
|
Fidelity and other
|
|
|
31,208
|
|
|
|
31,328
|
|
|
|
35,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
471,660
|
|
|
$
|
451,356
|
|
|
$
|
417,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For 2007, gross written premiums increased 4.5% to
$471.7 million as compared to 2006. Gross written premiums
for contract surety increased 7.2% to $305.6 million
primarily due to the strength of the non-residential
construction economy and the success of our small contractor
product. For 2007, commercial surety gross written premiums were
flat, and fidelity and other premiums decreased slightly due to
the lingering effects of the loss of a large notary program in
2006 and continued selective underwriting of large commercial
risks.
For 2006, gross written premiums increased 8.1% to
$451.4 million as compared to 2005. Gross written premiums
for contract surety increased 14.7% to $285.2 million
primarily due to increased demand as a result of the strong
construction economy and growth in contract size due to cost
inflation within the construction industry. Commercial surety
and related fidelity and other gross written premiums decreased
1.6% to $166.2 million as a decline in production of notary
bonds and notary E&O policies resulting from the loss of
the large notary program offset growth in other commercial and
related products.
Net written premiums for the years ended December 31, 2007,
2006 and 2005 are shown in the table below (dollars in
thousands) for each sub-line of business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Contract
|
|
$
|
266,749
|
|
|
$
|
247,987
|
|
|
$
|
202,798
|
|
Commercial
|
|
|
130,332
|
|
|
|
130,314
|
|
|
|
128,022
|
|
Fidelity and other
|
|
|
31,208
|
|
|
|
31,328
|
|
|
|
35,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
428,289
|
|
|
$
|
409,629
|
|
|
$
|
365,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For 2007, net written premiums increased by $18.7 million
to $428.3 million as compared to 2006 reflecting the
increase in gross written premiums discussed previously,
partially offset by an increase of $1.6 million of ceded
written premiums to $43.4 million for 2007. The increase in
ceded written premiums was due to additional premiums of
$4.3 million in the fourth quarter of 2007 on the core
reinsurance contract due to loss activity which more than offset
cost savings. Net written premiums for contract surety business
increased 7.6% to $266.7 million for 2007 compared to 2006.
Net written premiums for commercial surety remained at
$130.3 million for 2007 compared to 2006. Fidelity and
other products decreased 0.4% to $31.2 million for the year
2007 compared to 2006.
For 2006, net written premiums increased by $43.7 million
to $409.6 million as compared to 2005 reflecting the
increase in gross written premiums discussed previously and a
decrease of $9.9 million of ceded written premiums to
$41.7 million for 2006. The reduction in ceded written
premiums was due to the Companys decision not to renew a
high-level excess of loss reinsurance treaty and cost savings on
the core reinsurance program. Net written premiums for contract
surety business increased 22.3% to $248.0 million for 2006
compared to 2005. Net written premiums for commercial surety
increased 1.8% to $130.3 million for 2006 compared to 2005.
Fidelity and other products decreased 10.8% to
$31.3 million for the year 2006 compared to 2005 reflecting
the decline in production of notary E&O policies resulting
from the loss of the large notary program discussed previously.
27
Net earned premiums for the years ended December 31, 2007,
2006 and 2005 are shown in the table below (dollars in
thousands) for each sub-line of business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Contract
|
|
$
|
259,362
|
|
|
$
|
230,856
|
|
|
$
|
192,463
|
|
Commercial
|
|
|
130,541
|
|
|
|
129,208
|
|
|
|
122,940
|
|
Fidelity and other
|
|
|
31,603
|
|
|
|
33,578
|
|
|
|
32,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
421,506
|
|
|
$
|
393,642
|
|
|
$
|
348,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For 2007, net earned premiums increased by $27.9 million to
$421.5 million as compared to 2006 reflecting the increase
in gross written premiums discussed above. Ceded earned premiums
remained at $45.0 million for 2007 compared to 2006. Net
earned premiums for contract surety business increased 12.3% to
$259.4 million for 2007 compared to 2006. Net earned
premiums for commercial surety increased 1.0% to
$130.5 million for 2007 compared to 2006. Earned premium
for fidelity and other products decreased 5.9% to
$31.6 million for the year 2007 compared to 2006.
For 2006, net earned premiums increased by $45.3 million to
$393.6 million as compared to 2005 reflecting the increase
in gross written premiums discussed above. Ceded earned premiums
decreased $9.2 million due to the Companys decision
not to renew a high-level excess of loss reinsurance treaty and
cost savings on the core reinsurance program. Net earned
premiums for contract surety business increased 19.9% to
$230.9 million for 2006 compared to 2005. Net earned
premiums for commercial surety increased 5.1% to
$129.2 million for 2006 compared to 2005. Earned premium
for fidelity and other products increased 1.9% to
$33.6 million for the year 2006 compared to 2005.
Excess of
Loss Reinsurance
The Companys reinsurance program is predominantly
comprised of excess of loss reinsurance contracts that limit the
Companys retention on a per principal basis. At
December 31, 2007, Munich Reinsurance America, Inc.,
Renaissance Reinsurance Ltd., Hannover Ruckversicherungs
Aktiengesellschaft and Odyssey America Reinsurance Corporation
(all rated at least A by A.M. Best) were the four
unaffiliated reinsurers from which the Company had its largest
reinsurance receivables.
2006
Third Party Reinsurance Compared to 2005 Third Party
Reinsurance
Effective January 1, 2006, CNA Surety entered into a new
excess of loss treaty (2006 Excess of Loss Treaty)
with a group of third party reinsurers on terms similar to the
2005 Excess of Loss Treaty. Under the 2006 Excess of Loss
Treaty, the Companys net retention per principal remained
at $10 million with a 5% co-participation in the
$90 million layer of third party reinsurance coverage above
the Companys retention. The significant differences
between the 2006 Excess of Loss Treaty and the Companys
2005 Excess of Loss Treaty were as follows. The actual cost for
the 2006 Excess of Loss Treaty was $39.9 million compared
to the actual cost of the 2005 Excess of Loss Treaty of
$41.5 million. The contract included a provision for
additional premiums based on losses ceded under the contract.
The contract also included an optional extended discovery
period, which was not exercised, for an additional premium (a
percentage of the original premium based on any unexhausted
aggregate limit by layer), which would have provided coverage
for losses discovered beyond 2006 on bonds that were in force
during 2006. Only the large national contractor that was
excluded from the 2005 treaty remained excluded from the 2006
Excess of Loss Treaty.
2007
Third Party Reinsurance Compared to 2006 Third Party
Reinsurance
Effective January 1, 2007, CNA Surety entered into a new
excess of loss treaty (2007 Excess of Loss Treaty)
with a group of third party reinsurers on terms similar to the
2006 Excess of Loss Treaty. Under the 2007 Excess of Loss
Treaty, the Companys net retention per principal remained
at $10 million with a 5% co-participation in the
$90 million layer of third party reinsurance coverage above
the Companys retention. The contract includes an optional
extended discovery period, which was not exercised, for an
additional premium (a percentage of the
28
original premium based on any unexhausted aggregate limit by
layer), which would have provided coverage for losses discovered
beyond 2007 on bonds that were in force during 2007. The
contract also includes a provision for additional premiums based
on losses ceded under the contract. The primary difference
between the 2007 Excess of Loss Treaty and the Companys
2006 Excess of Loss Treaty is as follows. The actual cost for
the 2007 Excess of Loss Treaty is $42.6 million, which
includes an initial estimate of additional premiums of
$4.3 million resulting from loss activity, compared to the
actual cost of the 2006 Excess of Loss Treaty of
$39.9 million. Only the large national contractor that was
excluded from the 2006 treaty remained excluded from the 2007
Excess of Loss Treaty.
2008
Third Party Reinsurance Compared to 2007 Third Party
Reinsurance
Effective January 1, 2008, CNA Surety entered into a new
excess of loss treaty (2008 Excess of Loss Treaty)
with a group of third party reinsurers on terms similar to the
2007 Excess of Loss Treaty. Under the 2008 Excess of Loss
Treaty, the Companys net retention per principal remained
at $10 million with a 5% co-participation in the
$90 million layer of third party reinsurance coverage above
the Companys retention. The contract provides aggregate
coverage of $185 million and includes an optional extended
discovery period, for an additional premium (a percentage of the
original premium based on any unexhausted aggregate limit by
layer), which will provide coverage for losses discovered beyond
2008 on bonds that were in force during 2008. The contract also
includes a provision for additional premiums based on losses
ceded under the contract. The primary difference between the
2008 Excess of Loss Treaty and the Companys 2007 Excess of
Loss Treaty is as follows. The base annual premium for the 2008
Excess of Loss Treaty is $33.3 million compared to the base
annual cost of the 2007 Excess of Loss Treaty of
$38.3 million before the additional premium noted above.
Only the large national contractor that was excluded from the
2007 treaty remained excluded from the 2008 Excess of Loss
Treaty.
Related
Party Reinsurance
Reinsurance agreements together with the Services and Indemnity
Agreement that are described below provide for the transfer of
the surety business written by CCC and CIC to Western Surety.
All of these agreements originally were entered into on
September 30, 1997 (the Merger Date):
(i) the Surety Quota Share Treaty (the Quota Share
Treaty); (ii) the Aggregate Stop Loss Reinsurance
Contract (the Stop Loss Contract); and
(iii) the Surety Excess of Loss Reinsurance Contract (the
Excess of Loss Contract). All of these contracts
have expired. Some have been renewed on different terms as
described below.
The Services and Indemnity Agreement provides the Companys
insurance subsidiaries with the authority to perform various
administrative, management, underwriting and claim functions in
order to conduct the business of CCC and CIC and to be
reimbursed by CCC for services rendered. In consideration for
providing the foregoing services, CCC has agreed to pay Western
Surety a quarterly fee of $50,000. This agreement was renewed on
January 1, 2007 and expired on December 31, 2007.
There was no amount due to the CNA Surety insurance subsidiaries
as of December 31, 2007. This agreement was renewed on
January 1, 2008 and expires on December 31, 2008 and
is annually renewable thereafter.
Through the Quota Share Treaty, CCC and CIC transfer to Western
Surety all surety business written or renewed by CCC and CIC
after the Merger Date. The Quota Share Treaty was renewed on
January 1, 2007 and expired on December 31, 2007 and
is annually renewable thereafter. CCC and CIC transfer the
related liabilities of such business and pay to Western Surety
an amount in cash equal to CCCs and CICs net written
premiums written on all such business, minus a quarterly ceding
commission to be retained by CCC and CIC equal to $50,000 plus
25% of net written premiums written on all such business. This
contemplates an approximate 4% override commission for fronting
fees to CCC and CIC on their actual direct acquisition costs.
Under the terms of the Quota Share Treaty, CCC has guaranteed
the loss and loss adjustment expense reserves transferred to
Western Surety as of the Merger Date by agreeing to pay Western
Surety, within 30 days following the end of each calendar
quarter, the amount of any adverse development on such reserves,
as re-estimated as of the end of such calendar quarter. There
was no adverse reserve development for the period from the
Merger Date through December 31, 2007. The Quota Share
Treaty was renewed for one year on January 1, 2008 on
substantially the same terms as 2007.
29
Through the Stop Loss Contract, the Companys insurance
subsidiaries were protected from adverse loss experience on
certain business underwritten after the Merger Date. The Stop
Loss Contract between the insurance subsidiaries and CCC limited
the insurance subsidiaries prospective net loss ratios
with respect to certain accounts and lines of insured business
for three full accident years following the Merger Date. In the
event the insurance subsidiaries accident year net loss
ratio exceeds 24% in any of the accident years 1997 through 2000
on certain insured accounts (the Loss Ratio Cap),
the Stop Loss Contract requires CCC at the end of each calendar
quarter following the Merger Date, to pay to the insurance
subsidiaries a dollar amount equal to (i) the amount, if
any, by which the Companys actual accident year net loss
ratio exceeds the applicable Loss Ratio Cap, multiplied by
(ii) the applicable net earned premiums. In consideration
for the coverage provided by the Stop Loss Contract, the
insurance subsidiaries paid to CCC an annual premium of $20,000.
The CNA Surety insurance subsidiaries have paid CCC all required
annual premiums. As of December 31, 2006, the Company had
billed $47.9 million and had received $45.9 million
under the Stop Loss Contract. The amount received under the Stop
Loss Contract included $28.2 million held by the Company
for losses covered by this contract that were incurred but not
paid as of December 31, 2006. Due to favorable development
of losses subject to the Stop Loss Contract during 2007, the
Company returned $5.6 million to CCC during 2007. As of
December 31, 2007, the net amount billed and received by
the Company was $42.3 million under the Stop Loss Contract.
The amount received under the Stop Loss Contract included
$24.0 million held by the Company for losses covered by
this contract that were incurred but not paid as of
December 31, 2007.
The Company and CCC previously participated in a
$40 million excess of $60 million reinsurance contract
effective from January 1, 2005 to December 31, 2005
providing coverage exclusively for the one large national
contractor excluded from the Companys third party
reinsurance. The premium for this contract was $3.0 million
plus an additional premium of $6.0 million if a loss was
ceded under this contract. In the second quarter of 2005, this
contract was amended to provide unlimited coverage in excess of
the $60 million retention, to increase the premium to
$7.0 million, and to eliminate the additional premium
provision. This treaty provides coverage for the life of bonds
either in force or written during the term of the treaty which
was from January 1, 2005 to December 31, 2005. In
November 2005, the Company and CCC agreed by addendum to extend
this contract for twelve months. This extension, which expired
on December 31, 2006, was for an additional minimum premium
of $0.8 million, subject to adjustment based on the level
of actual premiums written on bonds for the large national
contractor. In January 2007, the Company and CCC agreed by
addendum to extend this contract for another twelve months. This
extension, which expired on December 31, 2007, was for an
additional premium of $0.5 million, which was based on the
level of actual premiums written on bonds for the large national
contractor. In December 2007, the Company and CCC agreed by
addendum to extend this contract for another twelve months. This
extension, which will expire on December 31, 2008, was for
an additional premium subject to the level of actual premiums
written on bonds for the large national contractor. As of
December 31, 2007 and 2006, the Company had ceded losses of
$50.0 million under the terms of this contract, with unpaid
ceded losses of $46.8 million and $50.0 million as of
December 31, 2007 and 2006, respectively.
As of December 31, 2007 and December 31, 2006, CNA
Surety had an insurance receivable balance from CCC and CIC of
$62.9 million, including $50.5 million of reinsurance
recoverables and $12.4 million of premiums receivable, and
$61.9 million, including $55.0 million of reinsurance
recoverables and $6.9 million of premiums receivable,
respectively. CNA Surety had reinsurance payables to CCC and CIC
as of December 31, 2007 of $0.1 million. CNA Surety
had no reinsurance payables to CCC and CIC as of
December 31, 2006.
Net Loss
Ratio
The loss ratios for the years ended December 31, 2007, 2006
and 2005 were 24.5%, 24.3% and 36.7%, respectively. The loss
ratios reflect $5.1 million, $5.3 million and
$23.3 million of net favorable loss reserve development for
the years ended December 31, 2007, 2006 and 2005,
respectively.
The favorable development in 2007 primarily resulted from better
than expected indemnification recoveries related to a large
commercial claim in the 2001 accident year.
The favorable development in 2006 resulted from lower than
expected emergence of additional large claims primarily in the
2005 and 2004 accident years, partially offset by adverse
development primarily in the 2003 and 2002 accident years. The
adverse development in the 2003 accident year was due to an
increase in loss adjustment
30
expense reserves resulting from payments in 2006 that exceeded
previous expectations. The adverse development in the 2002
accident year was primarily due to unfavorable development of a
large contract claim. Establishment of the case reserve on this
claim had been particularly difficult due to on-going litigation
that severely hampered the Companys ability to assess the
amount of work required to complete the bonded project and the
availability of remaining contract funds.
The lower loss ratio in 2006 compared to 2005 reflects the
absence of the reserve charge related to the large national
contractor excluded from the Companys third party
reinsurance. The loss ratio in 2005 reflected the establishment
of a $60.0 million net reserve related to the large
national contractor, which added approximately
17 percentage points to this ratio. In June 2005,
discussions with the large national contractor revealed
significant deterioration of the contractors operations
and cash flow. This deterioration was concentrated in an
operating division of the contractor that had previously been
placed into run off. As a result of these developments, the
Company determined that the large national contractor would
likely be unable to meet its obligations covered under the
surety bonds. Accordingly, in the second quarter of 2005, the
Company established a $40.0 million loss reserve based on
an initial estimate of loss. In the third quarter of 2005, the
Company began a re-evaluation of the contractors
restructuring efforts. Through this re-evaluation that was
completed in the fourth quarter of 2005, the Company determined
that there had been further deterioration of the
contractors actual and projected cash flows. As a result,
the Company increased its gross loss reserves for this account
by $70.0 million in the fourth quarter of 2005. After
applying expected reinsurance recoveries from CCC, the
Companys net incurred loss is $60.0 million, which is
the Companys maximum exposure, net of reinsurance, on this
account.
The Company intends to continue to provide limited surety bonds
on behalf of the contractor to support the continuing
restructuring efforts. However, existing reinsurance agreements
limit the Companys net loss exposure to the
$60.0 million that has already been recorded and paid.
In 2005, the impact on the loss ratio of the reserve charge
related to the large national contractor was partially offset by
increased favorable development from prior accident years and an
increase in net earned premium that resulted from the reduction
in the cost of the Companys 2005 reinsurance program.
The surety business assumed from CCC and CIC is subject to the
Stop Loss Contract between CCC and the Company that limits the
Companys accident year net loss ratio on this business to
24% for accident years 1997 (October 1, 1997 to
December 31, 1997), 1998, 1999 and 2000. In 2007, the
Company recorded a decrease in estimated recoveries from CCC of
$5.6 million. The Company previously recorded the following
increases (decreases) in estimated recoveries under this
contract: 2006 $2.0 million; 2005
($9.0) million; 2003 $29.9 million;
2002 $2.5 million; 2001
$16.6 million; and 2000 $5.8 million. As
of December 31, 2007, there was no unpaid balance related
to amounts due under the Stop Loss Contract.
Exposure
Management
The Companys business is subject to certain risks and
uncertainties associated with the current economic environment
and corporate credit conditions. In response to these risks and
uncertainties, the Company has enacted various exposure
management initiatives. With respect to risks on large
commercial accounts, the Company generally limits its exposure
to $25.0 million per account, but will selectively accept
higher exposures.
With respect to contract surety, the Companys portfolio is
predominantly comprised of contractors with bonded backlog of
less than $30.0 million. Bonded backlog is an estimate of
the Companys exposure in the event of default before
indemnification. The Company does have accounts with bonded
backlogs greater than $30.0 million.
The Company manages its exposure to any one contract credit and
aggressively looks for co-surety, shared accounts and other
means to support or reduce larger exposures. Reinsurance and
indemnification rights, including rights to contract proceeds on
construction projects in the event of default, exist that
substantially reduce CNA Suretys exposure to loss.
Expense
Ratio
The expense ratio decreased to 54.0% for 2007 as compared to
55.0% for 2006. The decrease in the expense ratio primarily
reflects the earned premium growth discussed previously achieved
with a minimal increase in underwriting expenses.
31
The expense ratio decreased to 55.0% for 2006 as compared to
58.1% for 2005. The decrease in the expense ratio primarily
reflects the earned premium growth discussed above achieved with
a minimal increase in underwriting expenses.
Investment
Income
For 2007, net investment income was $44.6 million compared
to net investment income for 2006 and 2005 of $39.3 million
and $33.7 million, respectively. The annualized pre-tax
yield was 4.6%, 4.5% and 4.4% for 2007, 2006 and 2005,
respectively. The annualized after-tax yield was 3.8% for 2007.
The annualized after-tax yield for 2006 and 2005 was 3.7%. The
increase in investment income for both 2007 and 2006 is
primarily attributable to higher overall invested assets
resulting from significant cash flow from operations and, to a
lesser extent, higher yields on short-term investments.
Realized
Investment Gains and Losses
Net realized investment losses were $0.4 million and
$1.3 million in 2007 and 2006, respectively. Net realized
investment gains were $2.0 million for 2005. The net
realized losses in both 2007 and 2006 were primarily due to the
recognition of impairment losses on, and additional losses on
the subsequent sale of, certain fixed income securities which
are discussed below in the Financial Condition section. The net
realized investment gains in 2005 resulted primarily from the
Companys sale of its interest in De Montfort Group, Ltd in
the first quarter of 2005.
The following summarizes net realized investment gains and
losses for the years ended December 31, 2007, 2006 and 2005
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Gross realized investment gains
|
|
$
|
511
|
|
|
$
|
265
|
|
|
$
|
2,302
|
|
Gross realized investment losses
|
|
|
(956
|
)
|
|
|
(1,538
|
)
|
|
|
(328
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment (losses) gains
|
|
$
|
(445
|
)
|
|
$
|
(1,273
|
)
|
|
$
|
1,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
Interest expense decreased $0.8 million, or 20.5% for 2007
compared to 2006 due to a reduction in debt outstanding and
lower interest rates. Interest expense increased
$0.1 million, or 3.5%, for 2006 compared to 2005, as a
reduction of debt outstanding was offset by higher interest
rates. The weighted average interest rate for 2007 was 8.7%
compared to 7.3% and 5.5% for 2006 and 2005, respectively.
Average debt outstanding was $30.9 million in 2007 compared
to $44.2 million and $61.2 million in 2006 and 2005,
respectively.
Income
Taxes
The Companys income tax expense was $39.7 million for
2007, $32.8 million for 2006 and $11.7 million for
2005. The effective income tax rates were 30.1%, 28.4% and 23.4%
for 2007, 2006 and 2005, respectively. The effective tax rates
are lower than the statutory tax rates primarily due to the
Companys ability to exclude interest income from its
significant investments in tax-exempt securities. The impact of
tax-exempt securities on taxable income was $21.4 million,
$18.1 million and $16.3 million for 2007, 2006 and
2005, respectively.
Liquidity
and Capital Resources
It is anticipated that the liquidity requirements of CNA Surety
will be met primarily by funds generated from operations. The
principal sources of operating cash flows are premiums,
investment income, recoveries under reinsurance contracts and
sales and maturities of investments. CNA Surety also may
generate funds from additional borrowings under the credit
facility described below. The primary cash flow uses are
payments for claims, operating expenses, federal income taxes
and debt service, as well as dividends to CNA Surety
stockholders. In general, surety operations generate premium
collections from customers in advance of cash outlays for
claims. Premiums are invested until such time as funds are
required to pay claims and claims adjusting expenses.
32
The Company believes that 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 dividend and income
tax sharing payments of its insurance subsidiaries. If cash
requirements unexpectedly exceed cash inflows, the Company may
raise additional cash by liquidating fixed income securities
ahead of their scheduled maturity. Depending on the interest
rate environment at that time, the Company could generate
realized gains or losses that would increase or decrease net
income for the period. The extent of these gains or losses would
depend on a number of factors such as the prevailing interest
rates and credit spreads, the duration of the assets sold, and
the marketability of the assets. The need to liquidate fixed
income securities would be expected to cause a reduction in
future investment income.
The Company might also access available or new credit facilities
to meet cash needs. This would increase interest expense by
increasing the amount of debt outstanding and potentially
increasing the interest rate on previously outstanding debt. The
Company currently has $25.0 million of borrowing capacity
on existing facilities. The Companys ability to enter into
new facilities is limited by covenants in the existing facility.
At December 31, 2007, the carrying value of the
Companys insurance subsidiaries invested assets was
comprised of $963.4 million of fixed income securities,
$42.2 million of short-term investments and
$4.7 million of cash. At December 31, 2006, the
carrying value of the Companys insurance
subsidiaries invested assets was comprised of
$784.0 million of fixed income securities,
$94.2 million of short-term investments and
$3.5 million of cash.
In 2005, pursuant to an agreement with the claimant on a bond
regarding certain aspects of the claim resolution, the Company
deposited $32.7 million with an affiliate to enable the
affiliate to establish a trust to fund future payments under the
bond. The bond was written by the affiliate and assumed by one
of the Companys insurance subsidiaries pursuant to the
Quota Share Treaty. This deposit is included on the
Companys Consolidated Balance Sheets as Deposit with
affiliated ceding company. The Company is entitled to the
interest income earned by the trust. Prior to the establishment
of the trust, the Company had fully reserved its obligation
under the bond and the claim remains fully reserved.
Cash flow at the parent company level is derived principally
from dividend and tax sharing payments from its insurance
subsidiaries, and to a lesser extent, investment income. The
principal obligations at the parent company level are to service
debt and pay operating expenses, including income taxes. At
December 31, 2007, the parent companys invested
assets consisted of $1.8 million of equity securities,
$7.3 million of short-term investments and
$4.8 million of cash. At December 31, 2006, the parent
companys invested assets consisted of $0.8 million of
fixed income securities, $1.7 million of equity securities,
$9.5 million of short- term investments and
$2.9 million of cash. As of December 31, 2007 and
December 31, 2006, parent company short-term investments
and cash included $9.8 million and $9.4 million,
respectively, of restricted cash and short-term investments
primarily related to premium receipt collections ultimately due
to the Companys insurance subsidiaries.
The Companys consolidated net cash flow provided by
operating activities was $129.2 million,
$124.2 million and $70.0 million for 2007, 2006 and
2005, respectively. The increase in net cash flow provided by
operating activities in 2007 primarily relates to lower loss
payments of $13.3 million, partially offset by higher
income tax payments of $3.9 million and $5.3 million
returned to CCC under the Stop Loss Contract discussed
previously. The increase in net cash flow provided by operating
activities in 2006 primarily related to higher premiums
received, lower loss payments and the absence of the deposit
with the affiliated ceding company made in 2005.
On July 27, 2005, the Company refinanced $30.0 million
in outstanding borrowings under its previous credit facility
with a new credit facility (the 2005 Credit
Facility). The 2005 Credit Facility provided an aggregate
of up to $50.0 million in borrowings under a revolving
credit facility. In September 2006, the Company reduced the
available aggregate revolving credit facility to
$25.0 million in borrowings. The 2005 Credit Facility
matures on June 30, 2008. No other debt matures in the next
five years.
The term of borrowings under the 2005 Credit Facility may be
fixed, at the Companys option, for a period of one, two,
three, or six months. The interest rate is based on, among other
rates, the London Interbank Offered Rate (LIBOR)
plus the applicable margin. The margin, including a utilization
fee, can vary based on the Companys leverage ratio (debt
to total capitalization) from 0.80% to 1.00%. There was no
outstanding balance under the 2005
33
Credit Facility at December 31, 2007 or December 31,
2006. As such, the Company incurred only the facility fee of
0.325% for the years ended December 31, 2007 and 2006.
The 2005 Credit Facility contains, among other conditions,
limitations on the Company with respect to the incurrence of
additional indebtedness and maintenance of a rating of at least
A- by A.M. Best Company, Inc. (A.M. Best)
for each of the Companys insurance subsidiaries. The 2005
Credit Facility also requires the maintenance of certain
financial ratios as follows: a) maximum funded debt to
total capitalization ratio of 25%, b) minimum net worth of
$375.0 million and c) minimum fixed charge coverage
ratio of 2.5 times. The Company was in compliance with all
covenants as of and for the periods ended December 31, 2007
and 2006.
In May 2004, the Company, through a wholly-owned trust,
privately issued $30.0 million of preferred securities
through two pooled transactions. These securities bear interest
at a rate of LIBOR plus 337.5 basis points with a
30-year term
and are redeemable at par value after five years. The securities
were issued by CNA Surety Capital Trust I (the Issuer
Trust). The Companys investment of $0.9 million
in the Issuer Trust is carried at cost in Other
assets in the Companys Consolidated Balance Sheet.
The sole asset of the Issuer Trust consists of a
$30.9 million junior subordinated debenture issued by the
Company to the Issuer Trust. The Company has also guaranteed the
dividend payments and redemption of the preferred securities
issued by the Issuer Trust. The maximum amount of undiscounted
future payments the Company could make under the guarantee is
$75.0 million, consisting of annual dividend payments of
$1.5 million over 30 years and the redemption value of
$30.0 million. Because payment under the guarantee would
only be required if the Company does not fulfill its obligations
under the debentures held by the Issuer Trust, the Company has
not recorded any additional liabilities related to this
guarantee.
The subordinated debenture bears interest at a rate of LIBOR
plus 337.5 basis points and matures in April of 2034. As of
December 31, 2007 and 2006, the interest rate on the junior
subordinated debenture was 8.24% and 8.75%, respectively.
A summary of the Companys contractual obligations as of
December 31, 2007 is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
Debt(a)
|
|
$
|
2.6
|
|
|
$
|
2.6
|
|
|
$
|
2.6
|
|
|
$
|
2.5
|
|
|
$
|
2.5
|
|
|
$
|
85.5
|
|
|
$
|
98.3
|
|
Operating leases
|
|
|
2.0
|
|
|
|
2.0
|
|
|
|
2.0
|
|
|
|
1.8
|
|
|
|
0.9
|
|
|
|
|
|
|
|
8.7
|
|
Loss and loss adjustment expense reserves
|
|
|
190.7
|
|
|
|
122.1
|
|
|
|
83.7
|
|
|
|
23.0
|
|
|
|
13.5
|
|
|
|
39.8
|
|
|
|
472.8
|
|
Other long-term
liabilities(b)
|
|
|
1.2
|
|
|
|
1.0
|
|
|
|
0.6
|
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
9.3
|
|
|
|
13.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
196.5
|
|
|
$
|
127.7
|
|
|
$
|
88.9
|
|
|
$
|
27.8
|
|
|
$
|
17.4
|
|
|
$
|
134.6
|
|
|
$
|
592.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Reflects expected principal and interest payments |
|
(b) |
|
Reflects unfunded postretirement benefit plans and long term
incentive plan payments to certain executives. |
As an insurance holding company, CNA Surety is dependent upon
dividends and other permitted payments from its insurance
subsidiaries to pay operating expenses and meet debt service
requirements, as well as to pay cash dividends. The payment of
dividends by the insurance subsidiaries is subject to varying
degrees of supervision by the insurance regulatory authorities
in the insurance subsidiaries states of domicile. Western
Surety and Surety Bonding Company of America (SBCA)
are domiciled in South Dakota. Universal Surety of America
(Universal Surety) is domiciled in Texas. As of
January 1, 2008, however, Universal Surety has been
re-domiciled in South Dakota and the dividend limitations will
be subject to the South Dakota regulations. In South Dakota,
insurance companies may only pay dividends from earned surplus
excluding surplus arising from unrealized capital gains or
revaluation of assets. The insurance subsidiaries may pay
dividends without obtaining prior regulatory approval only if
such dividend or distribution (together with dividends or
distributions made within the preceding
12-month
period) is less than, as of the end of the immediately preceding
year, the greater of (i) 10% of the insurers surplus
to policyholders or (ii) statutory net income. In South
Dakota, net income includes net realized capital gains in an
amount not to exceed 20% of net unrealized capital gains. All
dividends must be reported to the South Dakota Division of
Insurance prior to payment.
34
The dividends that may be paid without prior regulatory approval
are determined by formulas established by the applicable
insurance regulations, as described above. The formulas that
determine dividend capacity in the current year are dependent
on, among other items, the prior years ending statutory
surplus and statutory net income. Dividend capacity for 2008 is
based on statutory surplus and income at and for the year ended
December 31, 2007. Without prior regulatory approval in
2008, Western Surety may pay dividends of $96.7 million to
CNA Surety. CNA Surety received dividends of $2.0 million
from its insurance subsidiaries during 2007. CNA Surety did not
receive any dividends from its non-insurance subsidiaries during
2007. CNA Surety received dividends of $10.5 million from
its insurance subsidiaries during 2006. CNA Surety received
$0.9 million in dividends from its non-insurance
subsidiaries during 2006.
Combined statutory surplus totaled $442.2 million at
December 31, 2007, resulting in a net written premium to
statutory surplus ratio of 1 to 1. Insurance regulations
restrict Western Suretys maximum net retention on a single
surety bond to 10 percent of statutory surplus. Under the
2008 Excess of Loss Treaty, the Companys net retention on
new bonds would generally be $10 million plus a 5%
co-participation in the $90 million layer of excess
reinsurance above the Companys retention. Based on
statutory surplus as of December 31, 2007, this regulation
would limit Western Suretys largest gross risk to
$129.7 million. This surplus requirement may limit the
amount of future dividends Western Surety could otherwise pay to
CNA Surety.
In accordance with the provisions of inter-company tax sharing
agreements between CNA Surety and its subsidiaries, the tax of
each subsidiary shall be determined based upon each
subsidiarys separate return liability. Inter-company tax
payments are made at such times when estimated tax payments
would be required by the Internal Revenue Service
(IRS). CNA Surety received tax-sharing payments of
$43.4 million from its subsidiaries for 2007 and
$42.4 million for 2006.
Western Surety and Surety Bonding each qualify as an acceptable
surety for federal and other public works project bonds pursuant
to U.S. Department of Treasury regulations.
U.S. Treasury underwriting limitations are based on an
insurers statutory surplus. Effective July 1, 2007
through June 30, 2008, the underwriting limitations of
Western Surety and Surety Bonding are $34.2 million and
$0.7 million, respectively. Through the Surety Quota Share
Treaty previously discussed, CNA Surety has access to CCC and
its affiliates U.S. Department of Treasury
underwriting limitations. Effective July 1, 2007 through
June 30, 2008, the underwriting limitations of CCC and its
affiliates total $739.9 million. CNA Surety management
believes that the foregoing U.S. Treasury underwriting
limitations are sufficient for the conduct of its business.
Subject to the aforementioned uncertainties concerning the
Companys per principal net retentions, CNA Surety
management believes that the Company has sufficient available
resources, including capital protection against large losses
provided by the Companys excess of loss reinsurance
arrangements, to meet its present capital needs.
35
Financial
Condition
Investment
Portfolio
The following table summarizes the distribution of the
Companys fixed income and equity portfolios at estimated
fair values as of December 31, 2007 and 2006 (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
Estimated
|
|
|
% of
|
|
|
Estimated
|
|
|
% of
|
|
|
|
Fair Value
|
|
|
Total
|
|
|
Fair Value
|
|
|
Total
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of U.S. Government and
agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
18,275
|
|
|
|
1.9
|
%
|
|
$
|
14,505
|
|
|
|
1.8
|
%
|
U.S. Agencies
|
|
|
53,308
|
|
|
|
5.5
|
|
|
|
61,764
|
|
|
|
7.9
|
|
Collateralized mortgage obligations
|
|
|
30,470
|
|
|
|
3.2
|
|
|
|
16,937
|
|
|
|
2.2
|
|
Mortgage pass-through securities
|
|
|
54,474
|
|
|
|
5.7
|
|
|
|
37,799
|
|
|
|
4.8
|
|
Obligations of states and political subdivisions
|
|
|
638,125
|
|
|
|
66.1
|
|
|
|
506,345
|
|
|
|
64.4
|
|
Corporate bonds
|
|
|
95,702
|
|
|
|
9.9
|
|
|
|
67,254
|
|
|
|
8.6
|
|
Non-agency collateralized mortgage obligations
|
|
|
34,544
|
|
|
|
3.6
|
|
|
|
36,462
|
|
|
|
4.6
|
|
Other asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second mortgages/home equity loans
|
|
|
9,901
|
|
|
|
1.0
|
|
|
|
20,749
|
|
|
|
2.6
|
|
Credit card receivables
|
|
|
17,685
|
|
|
|
1.8
|
|
|
|
17,441
|
|
|
|
2.2
|
|
Other
|
|
|
10,870
|
|
|
|
1.1
|
|
|
|
5,535
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
963,354
|
|
|
|
99.8
|
%
|
|
|
784,791
|
|
|
|
99.8
|
%
|
Equity securities
|
|
|
1,789
|
|
|
|
0.2
|
|
|
|
1,668
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
965,143
|
|
|
|
100.0
|
%
|
|
$
|
786,459
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys investment portfolio generally is managed to
maximize after-tax investment return, while minimizing credit
risk with investments concentrated in high-quality income
securities. CNA Suretys portfolio is managed to provide
diversification by limiting exposures to any one industry, issue
or issuer, and to provide liquidity by investing in the public
securities markets. The portfolio is structured to support CNA
Suretys insurance underwriting operations and to consider
the expected duration of liabilities and short-term cash needs.
In achieving these goals, assets may be sold to take advantage
of market conditions or other investment opportunities or
regulatory, credit and tax considerations. These activities will
produce realized gains and losses.
CNA Surety classifies its fixed income securities and its equity
securities as available-for-sale, and as such, they are carried
at fair value. The amortized cost of fixed income securities is
adjusted for amortization of premiums and accretion of
discounts, which is included in net investment income. Changes
in fair value are reported as a component of other comprehensive
income.
36
The estimated fair value and amortized cost of fixed income and
equity securities held by CNA Surety by investment category,
were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross Unrealized Losses
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Unrealized
|
|
|
Less Than
|
|
|
More Than
|
|
|
Estimated Fair
|
|
December 31, 2007
|
|
or Cost
|
|
|
Gains
|
|
|
12 Months
|
|
|
12 Months
|
|
|
Value
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of U.S. Government and
agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
17,790
|
|
|
$
|
485
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
18,275
|
|
U.S. Agencies
|
|
|
52,617
|
|
|
|
706
|
|
|
|
|
|
|
|
(15
|
)
|
|
|
53,308
|
|
Collateralized mortgage obligations
|
|
|
30,086
|
|
|
|
502
|
|
|
|
(11
|
)
|
|
|
(107
|
)
|
|
|
30,470
|
|
Mortgage pass-through securities
|
|
|
54,659
|
|
|
|
401
|
|
|
|
|
|
|
|
(586
|
)
|
|
|
54,474
|
|
Obligations of states and political subdivisions
|
|
|
625,858
|
|
|
|
15,408
|
|
|
|
(2,500
|
)
|
|
|
(641
|
)
|
|
|
638,125
|
|
Corporate bonds
|
|
|
95,714
|
|
|
|
1,493
|
|
|
|
(97
|
)
|
|
|
(1,408
|
)
|
|
|
95,702
|
|
Non-agency collateralized mortgage obligations
|
|
|
35,011
|
|
|
|
232
|
|
|
|
|
|
|
|
(699
|
)
|
|
|
34,544
|
|
Other asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second mortgages/home equity loans
|
|
|
9,951
|
|
|
|
|
|
|
|
|
|
|
|
(50
|
)
|
|
|
9,901
|
|
Credit card receivables
|
|
|
17,234
|
|
|
|
451
|
|
|
|
|
|
|
|
|
|
|
|
17,685
|
|
Other
|
|
|
10,788
|
|
|
|
157
|
|
|
|
|
|
|
|
(75
|
)
|
|
|
10,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
949,708
|
|
|
|
19,835
|
|
|
|
(2,608
|
)
|
|
|
(3,581
|
)
|
|
|
963,354
|
|
Equity securities
|
|
|
1,683
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
1,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
951,391
|
|
|
$
|
19,941
|
|
|
$
|
(2,608
|
)
|
|
$
|
(3,581
|
)
|
|
$
|
965,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Invested assets are exposed to various risks, such as interest
rate, market and credit. Due to the level of risk associated
with certain of these invested assets and the level of
uncertainty related to changes in the value of these assets, it
is possible that changes in risks in the near term may
significantly affect the amounts reported in the Consolidated
Balance Sheets and Consolidated Statements of Income. The
Companys Quantitative and Qualitative Discussion about
Market Risk is contained in Item 7A. of this
Form 10-K.
The following table sets forth the ratings assigned by
Standard & Poors (S&P) or
Moodys Investor Services, Inc. (Moodys)
of the fixed income securities portfolio of the Company as of
December 31, 2007 and 2006 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Credit Rating
|
|
Fair Value
|
|
|
% of Total
|
|
|
Fair Value
|
|
|
% of Total
|
|
|
AAA/Aaa
|
|
$
|
758,825
|
|
|
|
78.8
|
%
|
|
$
|
618,835
|
|
|
|
78.8
|
%
|
AA/Aa
|
|
|
130,850
|
|
|
|
13.6
|
|
|
|
113,612
|
|
|
|
14.5
|
|
A/Aa
|
|
|
62,118
|
|
|
|
6.4
|
|
|
|
30,544
|
|
|
|
3.9
|
|
BBB/Baa
|
|
|
7,979
|
|
|
|
0.8
|
|
|
|
17,040
|
|
|
|
2.2
|
|
Non investment grade
|
|
|
3,582
|
|
|
|
0.4
|
|
|
|
3,960
|
|
|
|
0.5
|
|
Not rated
|
|
|
|
|
|
|
|
|
|
|
800
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
963,354
|
|
|
|
100.0
|
%
|
|
$
|
784,791
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007 and 2006, 99% of the Companys
fixed income securities were considered investment grade by
S&P or Moodys and 92% and 93% were rated at least AA
by those agencies for 2007 and 2006, respectively. The
Companys investments in fixed income securities do not
contain any industry concentration of credit risk.
37
At December 31, 2007, the Companys exposure to
sub-prime home loans is limited to two asset-backed securities
rated AAA by S&P that are collateralized by sub-prime home
loans originated prior to 2005. These securities have an
aggregate fair value of $9.9 million and are in an
unrealized loss position of less than $0.1 million at
December 31, 2007.
Municipal bonds represent approximately 63% of the
Companys invested assets. Approximately 60% of these
municipal bonds are insured by one of the major mono-line bond
insurers and are rated AAA. The Company views the bond insurance
as credit enhancement and not credit substitution. A credit
review is performed on each issuer of bonds purchased. Virtually
all of the insured municipal holdings have underlying issuer
ratings of at least A by both Moodys and S&P and the
average of the underlying ratings is Aa/AA. There are four bonds
with a total fair value of $11.4 million that have
underlying ratings of BBB and there are three bonds with a fair
value of $15.3 million that are not rated by Moodys
or S&P.
Based on the strong underlying credit quality of its insured
municipal bonds, the Company believes that any impact of
potential ratings downgrades or other difficulties of the
mono-line bond insurers would not have a significant impact on
the Companys financial position or results of operations.
As of December 31, 2007, municipal securities from the
State of Washington, the State of Illinois, the State of New
York, the State of Florida, the State of Texas and the State of
Ohio, and each states related political subdivisions
represent 4.2%, 4.1%, 4.0%, 3.9%, 3.7% and 3.6%, respectively,
of the estimated fair value of the Companys fixed income
securities. Municipal securities from each other state
individually represent less than 2.9% of the Companys
fixed income portfolio.
The following table provides the composition of fixed income
securities with an unrealized loss at December 31, 2007 in
relation to the total of all fixed maturity securities by
contractual maturities:
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
% of
|
|
|
|
Fair
|
|
|
Unrealized
|
|
Contractual Maturity
|
|
Value
|
|
|
Loss
|
|
|
Due after one year through five years
|
|
|
2
|
%
|
|
|
7
|
%
|
Due after five years through ten years
|
|
|
14
|
|
|
|
17
|
|
Due after ten years
|
|
|
51
|
|
|
|
51
|
|
Asset-backed securities
|
|
|
33
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
The following table summarizes for fixed income securities in an
unrealized loss position at December 31, 2007 and 2006, the
aggregate fair value and gross unrealized loss by length of time
those securities have been continuously in an unrealized loss
position (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
Estimated
|
|
|
Gross
|
|
|
Estimated
|
|
|
Gross
|
|
Unrealized Loss Aging
|
|
Fair Value
|
|
|
Unrealized Loss
|
|
|
Fair Value
|
|
|
Unrealized Loss
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 months
|
|
$
|
17,785
|
|
|
$
|
175
|
|
|
$
|
75,215
|
|
|
$
|
205
|
|
7-12 months
|
|
|
112,914
|
|
|
|
2,433
|
|
|
|
10,104
|
|
|
|
40
|
|
13-24 months
|
|
|
9,984
|
|
|
|
671
|
|
|
|
137,954
|
|
|
|
3,457
|
|
Greater than 24 months
|
|
|
91,683
|
|
|
|
2,463
|
|
|
|
16,206
|
|
|
|
684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment grade
|
|
|
232,366
|
|
|
|
5,742
|
|
|
|
239,479
|
|
|
|
4,386
|
|
Non-investment grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13-24 months
|
|
|
|
|
|
|
|
|
|
|
3,960
|
|
|
|
77
|
|
Greater than 24 months
|
|
|
3,582
|
|
|
|
447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
235,948
|
|
|
$
|
6,189
|
|
|
$
|
243,439
|
|
|
$
|
4,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
A significant judgment in the valuation of investments is the
determination of when an other-than-temporary decline in value
has occurred. The Company follows a consistent and systematic
process for impairing securities that sustain
other-than-temporary declines in value. The Company has
established a watch list that is reviewed by the Chief Financial
Officer and one other executive officer on at least a quarterly
basis. The watch list includes individual securities that fall
below certain thresholds or that exhibit evidence of impairment
indicators including, but not limited to, a significant adverse
change in the financial condition and near-term prospects of the
investment or a significant adverse change in legal factors, the
business climate or credit ratings.
When a security is placed on the watch list, it is monitored for
further market value changes and additional news related to the
issuers financial condition. The focus is on objective
evidence that may influence the evaluation of impairment factors.
The decision to record an impairment loss incorporates both
quantitative criteria and qualitative information. The Company
considers a number of factors including, but not limited to:
(a) the length of time and the extent to which the market
value has been less than book value, (b) the financial
condition and near-term prospects of the issuer, (c) the
intent and ability of the Company to retain its investment for a
period of time sufficient to allow for any anticipated recovery
in value, (d) whether the debtor is current on interest and
principal payments and (e) general market conditions and
industry or sector specific factors.
For securities for which an other-than-temporary impairment loss
has been identified, the security is written down to fair value
and the resulting losses are recognized in net realized
gains/losses in the Consolidated Statements of Income.
As of December 31, 2007, 53 securities held by the Company
were in an unrealized loss position. The Company believes that
48 of these securities are in an unrealized loss position
because of changes in interest rates and expects these
securities will recover in value at or before maturity. Of these
48 securities, 28 were rated AAA by S&P and Aaa by
Moodys and all were investment grade. None of these 48
securities was in a loss position that exceeded 5% of its book
value. The largest unrealized loss was $0.3 million. The
resulting unrealized loss position for this security was 4.5%,
which was also the largest unrealized loss percentage.
Of the five remaining securities that were in an unrealized loss
position, one was issued by the financing subsidiary of a large
domestic automaker. The security was in an unrealized loss
position of 11.1% ($0.4 million) of its book value and was
rated below investment grade by S&P and Moodys. One
of the other securities, rated above investment grade by
S&P and Moodys, was issued by a large student loan
provider and was in an unrealized loss position of 13.1%
($0.4 million) of its book value. The three remaining
securities, rated above investment grade by S&P and
Moodys, were issued by governmental utility authorities
and were in an unrealized loss position of 7.2%
($0.8 million), 11.3% ($0.6 million) and 3.8%
($0.2 million), respectively. The Company believes that the
financial condition and near-term prospects of these issuers are
strong, and expects that these unrealized losses will reverse.
During the second quarter of 2007, the Company recognized
impairment losses on 13 fixed income securities of various
categories of investments that were in an unrealized loss
position. In response to the significant change in interest
rates in the second quarter, as well as a revised outlook on
future interest rates, the Company did not have the intention of
holding these securities to their anticipated recovery. These
securities were sold during the third quarter. The
other-than-temporary impairment losses on these securities were
$1.0 million.
In response to the significant change in interest rates during
the third quarter of 2006, the Company recognized impairment
losses on 21 municipal fixed income securities that were in an
unrealized loss position at September 30, 2006. The Company
did not have the intention of holding these securities to their
anticipated recovery and recorded $0.9 million
other-than-temporary impairment losses on these securities.
These securities were sold during the fourth quarter of 2006
resulting in an additional loss of $0.5 million.
Risk-Based
Capital (RBC) and Other Regulatory Ratios
The National Association of Insurance Commissioners
(NAIC) has promulgated 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, loss reserve adequacy,
and other business factors. The RBC information is used by state
insurance regulators as an early warning mechanism to identify
insurance companies
39
that potentially are inadequately capitalized. In addition, the
formula defines minimum capital standards that 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 enterprises 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 behalf of a company or
regulators. As of December 31, 2007, each of CNA
Suretys insurance subsidiaries had a Ratio that was in
compliance with minimum RBC requirements.
CNA Suretys 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 generally should not exceed 3
to 1. On December 31, 2007, Western Surety and its
insurance subsidiaries had a combined statutory surplus of
$442.2 million and a net written premium to surplus ratio
of 1 to 1. On December 31, 2006, CNA Surety had a combined
statutory surplus of $349.0 million and a net written
premium to surplus ratio of 1.2 to 1. The Company believes that
each insurance companys statutory surplus is sufficient to
support its current and anticipated premium levels.
The NAIC has also developed a rating system, the Insurance
Regulatory Information System (IRIS), primarily
intended to assist state insurance departments in overseeing the
financial condition of all insurance companies operating within
their respective states. IRIS consists of twelve financial
ratios that address various aspects of each insurers
financial condition and stability. In 2007 and 2006, most of the
ratios for Western Surety, Universal Surety and Surety Bonding
were within the usual ranges as defined by the NAIC,
except as noted. In 2007, the Change in Adjusted
Policyholders Surplus for Western Surety was outside the
normal range due to net income and a reduction in dividends paid
to Western Suretys parent company, CNA Surety. In 2006,
the Change in Adjusted Policyholders Surplus for Western
Surety was outside the normal range due to net income and a
reduction in dividends paid to Western Suretys parent
company, CNA Surety. Also, the Change in Net Premiums Written
for Surety Bonding was outside the normal range due to the
decline in production resulting from the loss of the large
notary program discussed previously.
Impact of
Pending Accounting Standards
In February 2007, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities
(SFAS 159), which provides companies with an
option to report selected financial assets and liabilities at
fair value, with changes in fair value recorded in earnings.
SFAS 159 helps to mitigate this type of accounting-induced
earnings volatility by enabling companies to report related
assets and liabilities at fair value, which would likely reduce
the need for companies to comply with detailed rules for hedge
accounting. SFAS 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes
for similar types of assets and liabilities. SFAS 159
requires companies to provide additional information that will
help investors and other users of financial statements to more
easily understand the effect of the companys choice to use
fair value on its earnings. It also requires entities to display
the fair value of those assets and liabilities for which the
company has chosen to use fair value on the face of the balance
sheet. SFAS 159 does not eliminate disclosure requirements
included in other accounting standards, including requirements
for disclosures about fair value measurements included in
SFAS No. 157, Fair Value Measurements
(SFAS 157), discussed below, or
SFAS No. 107, Disclosures about Fair Value of
Financial Instruments. SFAS 159 is effective for
fiscal years ending after November 15, 2007. The Company
plans to adopt SFAS 159 on January 1, 2008, and will
not elect the fair value option for any assets or liabilities
under SFAS 159. The adoption of SFAS 159 is not
expected to have a material impact on the Companys
financial condition or results of operations.
In September 2006, the FASB issued SFAS 157. SFAS 157
defines fair value, establishes a framework for measuring fair
value in accordance with GAAP and expands disclosures about fair
value measurements. SFAS 157 retains the exchange price
notion in the definition of fair value and clarifies that the
exchange price is the price in an orderly transaction between
market participants to sell the asset or transfer the liability
in the market in which the reporting entity would transact for
the asset or liability. SFAS 157 emphasizes that fair value
is a market-based measurement, not an entity-specific
measurement and the fair value measurement should be determined
based on the assumptions that market participants would use in
pricing the asset or liability. SFAS 157 expands
disclosures
40
surrounding the use of fair value to measure assets and
liabilities and specifically focuses on the sources used to
measure fair value. In instances of recurring use of fair value
measures using unobservable inputs, SFAS 157 requires
separate disclosure of the effect on earnings for the period.
SFAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim
periods within the year of adoption. For fiscal years beginning
after November 15, 2007, companies will be required to
implement the standard for financial assets and liabilities, as
well as for any other assets and liabilities that are carried at
fair value on a recurring basis in financial statements. The
Company plans to adopt SFAS 157 on January 1, 2008.
The adoption of SFAS 157 is not expected to have a material
impact on the Companys financial condition or results of
operations.
On December 4, 2007, the FASB issued
SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements
(SFAS 160). SFAS 160 amends Accounting
Research Bulletin (ARB) No. 51,
Consolidated Financial Statements (ARB
51) to establish accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary and clarifies that a
noncontrolling interest in a subsidiary is an ownership interest
in the consolidated entity that should be reported as equity in
the consolidated financial statements. SFAS 160 requires
consolidated net income to be reported at amounts that include
the amounts attributable to both the parent and the
noncontrolling interest and requires disclosure, on the face of
the consolidated statement of income, of the amounts of
consolidated net income attributable to the parent and to the
noncontrolling interest. SFAS 160 establishes a single
method of accounting for changes in a parents ownership
interest in a subsidiary that do not result in deconsolidation
and clarifies that all of those transactions are equity
transactions if the parent retains its controlling financial
interest in the subsidiary. SFAS 160 requires expanded
disclosures in the consolidated financial statements that
clearly identify and distinguish between the interests of the
parents owners and the interests of the noncontrolling
owners of a subsidiary. SFAS 160 is effective as of the
beginning of an entitys first fiscal year that begins
after December 15, 2008. The Company plans to adopt
SFAS 160 on January 1, 2009. The adoption of
SFAS 160 is not expected to have a material impact on the
Companys financial condition or results of operations.
FORWARD-LOOKING
STATEMENTS
This report includes a number of statements, which relate to
anticipated future events (forward-looking statements) rather
than actual present conditions or historical events.
Forward-looking statements generally include words such as
believes, expects, intends,
anticipates, estimates, and similar
expressions. Forward-looking statements in this report include
expected developments in the Companys insurance business,
including losses and loss reserves; the impact of routine
ongoing insurance reserve reviews being conducted by the
Company; the routine state regulatory examinations of the
Companys primary insurance company subsidiaries, and the
Companys responses to the results of those reviews and
examinations; the Companys expectations concerning its
revenues, earnings, expenses and investment activities; expected
cost savings and other results from the Companys expense
reduction and restructuring activities; and the Companys
proposed actions in response to trends in its business.
Forward-looking statements, by their nature, are subject to a
variety of inherent risks and uncertainties that could cause
actual results to differ materially from the results projected.
Many of these risks and uncertainties cannot be controlled by
the Company. Some examples of these risks and uncertainties are:
|
|
|
|
|
general economic and business conditions;
|
|
|
|
changes in financial markets such as fluctuations in interest
rates, long-term periods of low interest rates, credit
conditions and currency, commodity and stock prices;
|
|
|
|
the ability of the Companys contract principals to fulfill
their bonded obligations;
|
|
|
|
the effects of corporate bankruptcies on surety bond claims, as
well as on capital markets;
|
|
|
|
changes in foreign or domestic political, social and economic
conditions;
|
|
|
|
regulatory initiatives and compliance with governmental
regulations, judicial decisions, including interpretation of
policy provisions, decisions regarding coverage, trends in
litigation and the outcome of any litigation involving the
Company, and rulings and changes in tax laws and regulations;
|
41
|
|
|
|
|
regulatory limitations, impositions and restrictions upon the
Company, including the effects of assessments and other
surcharges for guaranty funds and other mandatory pooling
arrangements;
|
|
|
|
the impact of competitive products, policies and pricing and the
competitive environment in which the Company operates, including
changes in the Companys books of business;
|
|
|
|
product and policy availability and demand and market responses,
including the level of ability to obtain rate increases and
decline or non-renew underpriced accounts, to achieve premium
targets and profitability and to realize growth and retention
estimates;
|
|
|
|
development of claims and the impact on loss reserves, including
changes in claim settlement practices;
|
|
|
|
the performance of reinsurance companies under reinsurance
contracts with the Company;
|
|
|
|
results of financing efforts, including the availability of bank
credit facilities;
|
|
|
|
changes in the Companys composition of operating segments;
|
|
|
|
the sufficiency of the Companys loss reserves and the
possibility of future increases in reserves;
|
|
|
|
the risks and uncertainties associated with the Companys
loss reserves; and,
|
|
|
|
the possibility of further changes in the Companys ratings
by ratings agencies, including the inability to access certain
markets or distribution channels and the required
collateralization of future payment obligations as a result of
such changes, and changes in rating agency policies and
practices.
|
Any forward-looking statements made in this report are made by
the Company as of the date of this report. The Company does not
have any obligation to update or revise any forward-looking
statement contained in this report, even if the Companys
expectations or any related events, conditions or circumstances
change.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCUSSIONS ABOUT MARKET RISK
|
CNA Suretys investment portfolio is subject to economic
losses due to adverse changes in the fair value of its financial
instruments, or market risk. Interest rate risk represents the
largest market risk factor affecting the Companys
consolidated financial condition due to its significant level of
investments in fixed income securities. Increases and decreases
in prevailing interest rates generally translate into decreases
and increases in the fair value of the Companys fixed
income portfolio. The fair value of these interest rate
sensitive instruments may also be affected by the
credit-worthiness of the issuer, prepayment options, relative
value of alternative investments, the liquidity of the
instrument, income tax considerations and general market
conditions. The Company manages its exposure to interest rate
risk primarily through an asset/liability matching strategy. The
Companys exposure to interest rate risk is mitigated by
the relative short-term nature of its insurance and other
liabilities. The targeted effective duration of the
Companys investment portfolio is approximately
5 years, consistent with the expected duration of its
insurance and other liabilities.
The tables below summarize the estimated effects of certain
hypothetical increases and decreases in interest rates. It is
assumed that the changes occur immediately and uniformly across
each investment category. The hypothetical changes in market
interest rates selected reflect the Companys expectations
of the reasonably possible best or worst-case scenarios over a
one-year period. The hypothetical fair values are based upon the
same prepayment assumptions that were utilized in computing fair
values as of December 31, 2007. Significant variations in
market interest rates could produce changes in the timing of
repayments due to prepayment options available.
42
The fair value of such instruments could be affected and
therefore actual results might differ from those reflected in
the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hypothetical
|
|
|
|
|
|
|
|
|
|
Estimated Fair
|
|
|
Percentage
|
|
|
|
|
|
|
Hypothetical
|
|
|
Value After
|
|
|
Increase
|
|
|
|
Fair Value at
|
|
|
Change in
|
|
|
Hypothetical
|
|
|
(Decrease) in
|
|
|
|
December 31,
|
|
|
Interest Rate
|
|
|
Change in
|
|
|
Stockholders
|
|
|
|
2007
|
|
|
(bp=basis points)
|
|
|
Interest Rate
|
|
|
Equity
|
|
|
|
(Dollars in thousands)
|
|
|
U.S. Government and government agencies and authorities
|
|
$
|
156,527
|
|
|
|
200 bp increase
|
|
|
$
|
143,016
|
|
|
|
(1.3
|
)%
|
|
|
|
|
|
|
|
100 bp increase
|
|
|
|
150,653
|
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
100 bp decrease
|
|
|
|
160,156
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
200 bp decrease
|
|
|
|
162,267
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States, municipalities and political subdivisions
|
|
|
638,125
|
|
|
|
200 bp increase
|
|
|
|
561,138
|
|
|
|
(7.5
|
)
|
|
|
|
|
|
|
|
100 bp increase
|
|
|
|
598,496
|
|
|
|
(3.9
|
)
|
|
|
|
|
|
|
|
100 bp decrease
|
|
|
|
680,200
|
|
|
|
4.1
|
|
|
|
|
|
|
|
|
200 bp decrease
|
|
|
|
725,517
|
|
|
|
8.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds and all other
|
|
|
168,702
|
|
|
|
200 bp increase
|
|
|
|
153,539
|
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 bp increase
|
|
|
|
160,869
|
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
|
100 bp decrease
|
|
|
|
177,063
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
200 bp decrease
|
|
|
|
185,960
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities available-for-sale
|
|
$
|
963,354
|
|
|
|
200 bp increase
|
|
|
|
857,693
|
|
|
|
(10.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 bp increase
|
|
|
|
910,018
|
|
|
|
(5.3
|
)
|
|
|
|
|
|
|
|
100 bp decrease
|
|
|
|
1,017,419
|
|
|
|
5.3
|
|
|
|
|
|
|
|
|
200 bp decrease
|
|
|
|
1,073,744
|
|
|
|
10.8
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hypothetical
|
|
|
|
|
|
|
|
|
|
Estimated Fair
|
|
|
Percentage
|
|
|
|
|
|
|
Hypothetical
|
|
|
Value After
|
|
|
Increase
|
|
|
|
Fair Value at
|
|
|
Change in
|
|
|
Hypothetical
|
|
|
(Decrease) in
|
|
|
|
December 31,
|
|
|
Interest Rate
|
|
|
Change in
|
|
|
Stockholders
|
|
|
|
2006
|
|
|
(bp=basis points)
|
|
|
Interest Rate
|
|
|
Equity
|
|
|
|
(Dollars in thousands)
|
|
|
U.S. Government and government agencies and authorities
|
|
$
|
131,005
|
|
|
|
200 bp increase
|
|
|
$
|
120,310
|
|
|
|
(1.2
|
)%
|
|
|
|
|
|
|
|
100 bp increase
|
|
|
|
126,070
|
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
100 bp decrease
|
|
|
|
134,299
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
200 bp decrease
|
|
|
|
136,143
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
States, municipalities and political subdivisions
|
|
|
506,345
|
|
|
|
200 bp increase
|
|
|
|
447,610
|
|
|
|
(6.7
|
)
|
|
|
|
|
|
|
|
100 bp increase
|
|
|
|
476,768
|
|
|
|
(3.4
|
)
|
|
|
|
|
|
|
|
100 bp decrease
|
|
|
|
537,633
|
|
|
|
3.6
|
|
|
|
|
|
|
|
|
200 bp decrease
|
|
|
|
571,614
|
|
|
|
7.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds and all other
|
|
|
147,441
|
|
|
|
200 bp increase
|
|
|
|
136,456
|
|
|
|
(1.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 bp increase
|
|
|
|
141,804
|
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
100 bp decrease
|
|
|
|
153,399
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
200 bp decrease
|
|
|
|
159,611
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities available-for-sale
|
|
$
|
784,791
|
|
|
|
200 bp increase
|
|
|
|
704,376
|
|
|
|
(9.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 bp increase
|
|
|
|
744,642
|
|
|
|
(4.6
|
)
|
|
|
|
|
|
|
|
100 bp decrease
|
|
|
|
825,331
|
|
|
|
4.7
|
|
|
|
|
|
|
|
|
200 bp decrease
|
|
|
|
867,368
|
|
|
|
9.5
|
|
44
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
CNA Surety Corporation
Chicago, Illinois
We have audited the internal control over financial reporting of
CNA Surety Corporation and subsidiaries (the
Company) as of December 31, 2007, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting,
included in the accompanying managements report on
internal control over financial reporting. Our responsibility is
to express an opinion on the effectiveness of the Companys
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2007, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement
schedules as of and for the year ended December 31, 2007,
of the Company and our report dated February 19, 2008,
expressed an unqualified opinion on the consolidated financial
statements and financial statement schedules. Such report
includes an explanatory paragraph relating to the changes in the
Companys method of accounting for defined benefit
postretirement plans and for stock-based compensation in 2006.
/s/ Deloitte &
Touche LLP
Chicago, Illinois
February 19, 2008
45
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of CNA Surety Corporation (CNA Surety
or the Company) and subsidiaries is responsible for
establishing and maintaining adequate internal control over
financial reporting. CNA Suretys internal control system
was designed to provide reasonable assurance to the
Companys management, its Audit Committee and Board of
Directors regarding the preparation and fair presentation of
published financial statements.
There are inherent limitations to the effectiveness of any
internal control or system of control, however well designed,
including the possibility of human error and the possible
circumvention or overriding of such controls or systems.
Moreover, because of changing conditions the reliability of
internal controls may vary over time. As a result, even
effective internal controls can provide no more than reasonable
assurance with respect to the accuracy and completeness of
financial statements and their process of preparation.
CNA Surety management assessed the effectiveness of the
Companys internal control over financial reporting as of
December 31, 2007. In making this assessment, it used the
criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) in Internal
Control Integrated Framework. Based on our
assessment we believe that, as of December 31, 2007, the
Companys internal control over financial reporting is
effective based on those criteria.
CNA Suretys independent registered public accounting firm,
Deloitte & Touche LLP, has issued an audit report
covering our assessment of the Companys internal control
over financial reporting. This report appears on page 45.
CNA Surety Corporation
Chicago, Illinois
February 19, 2008
46
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
CNA Surety Corporation
Chicago, Illinois
We have audited the accompanying consolidated balance sheets of
CNA Surety Corporation and subsidiaries (the
Company) as of December 31, 2007 and 2006, and
the related consolidated statements of income,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2007. Our audits
also included the financial statement schedules listed in the
Index at Item 15. These financial statements and financial
statement schedules are the responsibility of the Companys
management. Our responsibility is to express an opinion on the
financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). 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 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, such consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as of December 31, 2007 and 2006, and the results
of their operations and their cash flows for each of the three
years in the period ended December 31, 2007, in conformity
with accounting principles generally accepted in the United
States of America. Also, in our opinion, such financial
statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth
therein.
As discussed in Note 1 to the consolidated financial
statements, the Company changed its method of accounting for
defined postretirement plans and changed its method of
accounting for stock-based compensation in 2006.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2007, based on the
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
February 19, 2008, expressed an unqualified opinion of the
Companys internal control over financial reporting.
/s/ Deloitte &
Touche LLP
Chicago, Illinois
February 19, 2008
47
CNA
SURETY CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Amounts in thousands, except per share data)
|
|
|
ASSETS
|
Invested assets:
|
|
|
|
|
|
|
|
|
Fixed income securities, at fair value (amortized cost: $949,708
and $773,178)
|
|
$
|
963,354
|
|
|
$
|
784,791
|
|
Equity securities, at fair value (cost: $1,683 and $1,508)
|
|
|
1,789
|
|
|
|
1,668
|
|
Short-term investments, at cost (approximates fair value)
|
|
|
49,453
|
|
|
|
103,640
|
|
Other investments, at cost
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
Total invested assets
|
|
|
1,014,596
|
|
|
|
890,121
|
|
Cash
|
|
|
10,230
|
|
|
|
7,164
|
|
Deferred policy acquisition costs
|
|
|
104,280
|
|
|
|
102,937
|
|
Insurance receivables:
|
|
|
|
|
|
|
|
|
Premiums, including $12,317 and $6,885 from affiliates, (net of
allowance for doubtful accounts: $1,145 and $1,369)
|
|
|
36,317
|
|
|
|
37,205
|
|
Reinsurance, including $50,547 and $55,023 from affiliates
|
|
|
127,119
|
|
|
|
118,412
|
|
Deposit with affiliated ceding company
|
|
|
34,644
|
|
|
|
33,145
|
|
Intangible assets (net of accumulated amortization: $25,523 and
$25,523)
|
|
|
138,785
|
|
|
|
138,785
|
|
Current income taxes receivable
|
|
|
1,960
|
|
|
|
323
|
|
Property and equipment, at cost (less accumulated depreciation
and amortization: $29,467 and $24,466)
|
|
|
24,288
|
|
|
|
24,807
|
|
Prepaid reinsurance premiums (including $322 and $1,702 from
affiliates)
|
|
|
510
|
|
|
|
2,165
|
|
Accrued investment income
|
|
|
12,242
|
|
|
|
10,089
|
|
Other assets
|
|
|
2,683
|
|
|
|
3,180
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,507,654
|
|
|
$
|
1,368,333
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Reserves:
|
|
|
|
|
|
|
|
|
Unpaid losses and loss adjustment expenses
|
|
$
|
472,842
|
|
|
$
|
434,224
|
|
Unearned premiums
|
|
|
258,930
|
|
|
|
253,803
|
|
|
|
|
|
|
|
|
|
|
Total reserves
|
|
|
731,772
|
|
|
|
688,027
|
|
Debt
|
|
|
30,791
|
|
|
|
30,690
|
|
Deferred income taxes, net
|
|
|
17,756
|
|
|
|
17,298
|
|
Reinsurance and other payables to affiliates
|
|
|
643
|
|
|
|
166
|
|
Accrued expenses
|
|
|
18,273
|
|
|
|
20,247
|
|
Liability for postretirement benefits
|
|
|
10,001
|
|
|
|
12,466
|
|
Other liabilities
|
|
|
30,713
|
|
|
|
33,537
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
839,949
|
|
|
|
802,431
|
|
Commitments and contingencies (See Note 6, 7 & 8)
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
Preferred stock, par value $.01 per share, 20,000 shares
authorized; none issued and outstanding
|
|
|
|
|
|
|
|
|
Common stock, par value $.01 per share, 100,000 shares
authorized; 45,505 shares issued and 44,121 shares
outstanding at December 31, 2007 and 45,263 shares
issued and 43,872 shares outstanding at December 31,
2006
|
|
|
455
|
|
|
|
453
|
|
Additional paid-in capital
|
|
|
274,069
|
|
|
|
268,651
|
|
Retained earnings
|
|
|
399,241
|
|
|
|
306,745
|
|
Accumulated other comprehensive income
|
|
|
8,800
|
|
|
|
4,993
|
|
Treasury stock, 1,384 and 1,391 shares, at cost
|
|
|
(14,860
|
)
|
|
|
(14,940
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
667,705
|
|
|
|
565,902
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,507,654
|
|
|
$
|
1,368,333
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
48
CNA
SURETY CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands,
|
|
|
|
except per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium
|
|
$
|
421,506
|
|
|
$
|
393,642
|
|
|
$
|
348,361
|
|
Net investment income
|
|
|
44,636
|
|
|
|
39,324
|
|
|
|
33,747
|
|
Net realized investment (losses) gains
|
|
|
(445
|
)
|
|
|
(1,273
|
)
|
|
|
1,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
465,697
|
|
|
|
431,693
|
|
|
|
384,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
|
103,124
|
|
|
|
95,830
|
|
|
|
127,841
|
|
Net commissions, brokerage and other underwriting expenses
|
|
|
227,412
|
|
|
|
216,560
|
|
|
|
202,521
|
|
Interest expense
|
|
|
2,918
|
|
|
|
3,669
|
|
|
|
3,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
333,454
|
|
|
|
316,059
|
|
|
|
333,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
132,243
|
|
|
|
115,634
|
|
|
|
50,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
39,747
|
|
|
|
32,816
|
|
|
|
11,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
92,496
|
|
|
$
|
82,818
|
|
|
$
|
38,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share
|
|
$
|
2.10
|
|
|
$
|
1.90
|
|
|
$
|
0.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share, assuming dilution
|
|
$
|
2.09
|
|
|
$
|
1.89
|
|
|
$
|
0.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
44,000
|
|
|
|
43,654
|
|
|
|
43,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, assuming dilution
|
|
|
44,267
|
|
|
|
43,922
|
|
|
|
43,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
49
CNA
SURETY CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
Additional
|
|
|
Comprehensive
|
|
|
|
|
|
Other
|
|
|
Treasury
|
|
|
Total
|
|
|
|
Stock Shares
|
|
|
Common
|
|
|
Paid-in
|
|
|
Income
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Stock
|
|
|
Stockholders
|
|
|
|
Outstanding
|
|
|
Stock
|
|
|
Capital
|
|
|
(Loss)
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
At Cost
|
|
|
Equity
|
|
|
|
(Amounts in thousands)
|
|
|
Balance, January 1, 2005
|
|
|
43,015
|
|
|
$
|
444
|
|
|
$
|
255,996
|
|
|
|
|
|
|
$
|
185,496
|
|
|
$
|
19,551
|
|
|
$
|
(15,116
|
)
|
|
$
|
446,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
38,431
|
|
|
$
|
38,431
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
38,431
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains on securities, after income tax
benefit of $6,464 (net of reclassification adjustment of $1,193,
after income tax expense of $643)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,005
|
)
|
|
|
|
|
|
|
(12,005
|
)
|
|
|
|
|
|
|
(12,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
26,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised and other
|
|
|
319
|
|
|
|
3
|
|
|
|
3,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
|
|
|
|
3,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
43,334
|
|
|
$
|
447
|
|
|
$
|
259,684
|
|
|
|
|
|
|
$
|
223,927
|
|
|
$
|
7,546
|
|
|
$
|
(15,029
|
)
|
|
$
|
476,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
82,818
|
|
|
$
|
82,818
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
82,818
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains on securities, after income tax
expense of $57 (net of reclassification adjustment of ($819),
after income tax benefit of $441)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107
|
|
|
|
|
|
|
|
107
|
|
|
|
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
82,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to initially recognize accumulated postretirement
benefit obligations, net of tax benefit of $1,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,660
|
)
|
|
|
|
|
|
|
(2,660
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
1,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,207
|
|
Stock options exercised and other
|
|
|
538
|
|
|
|
6
|
|
|
|
7,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
|
|
|
|
7,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
43,872
|
|
|
$
|
453
|
|
|
$
|
268,651
|
|
|
|
|
|
|
$
|
306,745
|
|
|
$
|
4,993
|
|
|
$
|
(14,940
|
)
|
|
$
|
565,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
92,496
|
|
|
$
|
92,496
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
92,496
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains on securities, after income tax
expense of $693 (net of reclassification adjustment of ($120),
after income tax benefit of $64)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,286
|
|
|
|
|
|
|
|
1,286
|
|
|
|
|
|
|
|
1,286
|
|
Net change related to postretirement benefits, after income tax
expense of $1,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,521
|
|
|
|
|
|
|
|
2,521
|
|
|
|
|
|
|
|
2,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
96,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
1,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,892
|
|
Stock options exercised and other
|
|
|
249
|
|
|
|
2
|
|
|
|
3,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
3,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
44,121
|
|
|
$
|
455
|
|
|
$
|
274,069
|
|
|
|
|
|
|
$
|
399,241
|
|
|
$
|
8,800
|
|
|
$
|
(14,860
|
)
|
|
$
|
667,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
50
CNA
SURETY CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
92,496
|
|
|
$
|
82,818
|
|
|
$
|
38,431
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts
|
|
|
393
|
|
|
|
594
|
|
|
|
(168
|
)
|
Depreciation and amortization
|
|
|
6,179
|
|
|
|
5,302
|
|
|
|
4,486
|
|
Amortization of bond premium, net
|
|
|
369
|
|
|
|
1,149
|
|
|
|
2,310
|
|
Loss on disposal of property and equipment
|
|
|
279
|
|
|
|
141
|
|
|
|
242
|
|
Net realized investment losses (gains)
|
|
|
445
|
|
|
|
1,273
|
|
|
|
(1,974
|
)
|
Stock-based compensation
|
|
|
1,892
|
|
|
|
1,207
|
|
|
|
|
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance receivables
|
|
|
(8,212
|
)
|
|
|
(3,182
|
)
|
|
|
(21,647
|
)
|
Reserve for unearned premiums
|
|
|
5,127
|
|
|
|
12,756
|
|
|
|
15,028
|
|
Reserve for unpaid losses and loss adjustment expenses
|
|
|
38,618
|
|
|
|
9,775
|
|
|
|
61,062
|
|
Deposit with affiliated ceding company
|
|
|
(1,499
|
)
|
|
|
(859
|
)
|
|
|
(31,886
|
)
|
Deferred policy acquisition costs
|
|
|
(1,343
|
)
|
|
|
(104
|
)
|
|
|
(705
|
)
|
Deferred income taxes, net
|
|
|
(1,523
|
)
|
|
|
(1,630
|
)
|
|
|
(1,740
|
)
|
Reinsurance and other payables to affiliates
|
|
|
477
|
|
|
|
(8
|
)
|
|
|
(287
|
)
|
Prepaid reinsurance premiums
|
|
|
1,655
|
|
|
|
3,231
|
|
|
|
2,559
|
|
Accrued expenses
|
|
|
(1,974
|
)
|
|
|
3,715
|
|
|
|
(558
|
)
|
Other assets and liabilities
|
|
|
(4,173
|
)
|
|
|
8,070
|
|
|
|
5,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
129,206
|
|
|
|
124,248
|
|
|
|
70,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(350,480
|
)
|
|
|
(337,848
|
)
|
|
|
(174,192
|
)
|
Maturities
|
|
|
55,357
|
|
|
|
47,288
|
|
|
|
35,591
|
|
Sales
|
|
|
114,303
|
|
|
|
224,338
|
|
|
|
124,363
|
|
Purchases of equity securities
|
|
|
(822
|
)
|
|
|
(1,193
|
)
|
|
|
(817
|
)
|
Proceeds from the sale of equity securities
|
|
|
844
|
|
|
|
1,041
|
|
|
|
809
|
|
Changes in short-term investments
|
|
|
56,897
|
|
|
|
(37,180
|
)
|
|
|
(36,157
|
)
|
Purchases of property and equipment, net
|
|
|
(5,838
|
)
|
|
|
(10,475
|
)
|
|
|
(8,666
|
)
|
Other, net
|
|
|
(9
|
)
|
|
|
767
|
|
|
|
1,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) investing activities
|
|
|
(129,748
|
)
|
|
|
(113,262
|
)
|
|
|
(57,502
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on debt
|
|
|
|
|
|
|
(20,000
|
)
|
|
|
(15,000
|
)
|
Debt issuance costs
|
|
|
|
|
|
|
|
|
|
|
(125
|
)
|
Employee stock option exercises and other
|
|
|
3,608
|
|
|
|
7,855
|
|
|
|
3,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
3,608
|
|
|
|
(12,145
|
)
|
|
|
(11,697
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash
|
|
|
3,066
|
|
|
|
(1,159
|
)
|
|
|
987
|
|
Cash at beginning of period
|
|
|
7,164
|
|
|
|
8,323
|
|
|
|
7,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
10,230
|
|
|
$
|
7,164
|
|
|
$
|
8,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
2,837
|
|
|
$
|
3,628
|
|
|
$
|
3,271
|
|
Income taxes
|
|
$
|
42,219
|
|
|
$
|
38,349
|
|
|
$
|
10,156
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
51
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
Significant
Accounting Policies
|
Formation
of CNA Surety Corporation and Merger
In December 1996, CNA Financial Corporation (CNAF)
and Capsure Holdings Corp. (Capsure) agreed to merge
(the Merger) the surety business of CNAF with
Capsures insurance subsidiaries, Western Surety Company
(Western Surety), Surety Bonding Company of America
(Surety Bonding) and Universal Surety of America
(Universal Surety), into CNA Surety Corporation
(CNA Surety or the Company). CNAF,
through its operating subsidiaries, writes multiple lines of
property and casualty insurance, including surety business that
is reinsured by Western Surety. CNAF owns approximately 62% of
the outstanding common stock of CNA Surety. Loews Corporation
(Loews) owns approximately 89% of the outstanding
common stock of CNAF. The principal operating subsidiaries of
CNAF that wrote the surety line of business for their own
account prior to the Merger were Continental Casualty Company
and its property and casualty affiliates (collectively,
CCC) and The Continental Insurance Company and its
property and casualty affiliates (collectively, CIC).
Principles
of Consolidation
The consolidated financial statements include the accounts of
CNA Surety and all majority-owned subsidiaries.
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles (GAAP)
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
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.
Investments
Management believes the Company has the ability to hold all
fixed income 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 all of
its fixed income securities (bonds and redeemable preferred
stocks) and equity securities as available-for-sale. These
securities are reported at fair value, with unrealized gains and
losses, net of deferred income taxes, reported as a separate
component of stockholders equity.
The amortized cost of fixed income securities is determined
based on cost and the cumulative effect of amortization of
premiums and accretion of discounts. Such amortization and
accretion are included in investment income. For mortgage-backed
and certain asset-backed securities, the Company recognizes
income using the effective-yield method based on estimated cash
flows. All securities transactions are recorded on the trade
date. Investment gains or losses realized on the sale of
securities 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 net realized investment gains/losses.
Short-term investments, that generally include
U.S. Treasury bills, corporate notes, money market funds
and investment grade commercial paper equivalents, are carried
at amortized cost which approximates fair value.
Deferred
Policy Acquisition Costs
Policy acquisition costs, consisting of commissions, premium
taxes and other underwriting expenses that vary with, and are
primarily related to, the production of business, net of
reinsurance commissions, are deferred and amortized as the
related premiums are earned. The Company periodically tests that
deferred acquisition costs are recoverable based on the expected
profitability embedded in the reserve for unearned premium. If
the expected
52
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
profitability is less than the balance of deferred acquisition
costs, a charge to net income is taken and the deferred
acquisition cost balance is reduced to the amount determined to
be recoverable. Anticipated investment income is considered in
the determination of the recoverability of deferred acquisition
costs.
Intangible
Assets
CNA Suretys Consolidated Balance Sheet as of
December 31, 2007 includes intangible assets of
$138.8 million. These amounts represent goodwill and
identified intangibles with indefinite useful lives arising from
the acquisition of Capsure. The Company performs impairment
tests of these intangible assets annually, or when certain
conditions are present.
A significant amount of judgment is required in performing
intangible asset impairment tests. Such tests include
periodically determining or reviewing the estimated fair value
of CNA Suretys reporting units. Under the relevant
standard, fair value refers to the amount for which the entire
reporting unit may be bought or sold. There are several methods
of estimating fair value, including market quotations, asset and
liability fair values and other valuation techniques, such as
discounted cash flows and multiples of earnings or revenues. If
the carrying amount of a reporting unit, including goodwill,
exceeds the estimated fair value, then individual assets,
including identifiable intangible assets, and liabilities of the
reporting unit are estimated at fair value. The excess of the
estimated fair value of the reporting unit over the estimated
fair value of net assets would establish the implied value of
intangible assets. The excess of the recorded amount of
intangible assets over the implied value of intangible assets is
recorded as an impairment loss.
The Company used a valuation technique based on discounted cash
flows to complete its annual intangible asset impairment test as
of October 1, 2007. No impairment was indicated.
Reserves
for Unpaid Losses and Loss Adjustment Expenses
The estimated liability for unpaid losses and loss adjustment
expenses includes, on an undiscounted basis, estimates of
(a) the ultimate settlement value of reported claims,
(b) incurred-but-not-reported (IBNR) claims,
including provisions for losses in excess of the current case
reserve for previously reported claims and for claims that may
be reopened, as well as offsets for anticipated indemnification
recoveries, (c) future expenses to be incurred in the
settlement of claims, and (d) claim recoveries, before
reinsurance recoveries, which are reported as an asset. These
estimates are determined based on the facts and circumstances of
each claim and the Companys loss experience as well as
consideration of industry experience, current trends and
conditions. The estimated liability for unpaid losses and loss
adjustment expenses is an estimate and there is the potential
that actual future loss payments will differ significantly from
recorded amounts. The methods of determining such estimates and
the resulting estimated liability are regularly reviewed and
updated. Changes in the estimated liability are reflected in
income in the period in which such changes are determined to be
needed.
Insurance
Premiums
Insurance premiums are recognized as revenue ratably over the
terms of the related policies in proportion to the insurance
protection provided. Contract bonds provide coverage for the
length of the bonded project and not a fixed time period. As
such, the Company uses estimates of the contract length as the
basis for recognizing premium revenue on these bonds. Premium
revenues are net of amounts ceded to reinsurers. Unearned
premiums represent the portion of premiums written, before ceded
reinsurance which is shown as an asset, applicable to the
unexpired terms of policies in force determined on a pro rata
basis.
Reinsurance
The Company assumes and cedes insurance with other insurers and
reinsurers to limit maximum loss, provide greater
diversification of risk and minimize exposure on larger risks.
Premiums and loss and loss adjustment
53
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
expenses that are ceded under reinsurance arrangements reduce
the respective revenues and expenses. Amounts recoverable from
reinsurers are estimated in a manner consistent with the claim
liability associated with the reinsured policy and are reported
as reinsurance receivables. The Company evaluates the financial
condition of its reinsurers, monitors concentrations of credit
risk and establishes allowances for uncollectible amounts when
indicated.
Stock-Based
Compensation
Statement of Financial Accounting Standards (SFAS)
No. 123 (revised 2004), Share-based Payment
(SFAS 123R) was effective for the Company on
January 1, 2006. Prior to 2006, the Company applied the
intrinsic value method under Accounting Principles Board
(APB) Opinion No. 25 (APB 25), and
related interpretations, in accounting for its stock-based
compensation plan as allowed under the provisions of
SFAS No. 123, Accounting for Stock-based
Compensation (SFAS 123). Under the
recognition and measurement principles of APB 25, no stock-based
compensation cost was recognized, as the exercise price of the
granted options equaled the market price of the underlying stock
at the grant date. Under SFAS 123R, entities generally are
required to measure and record compensation expense using a
fair-value based method. Public companies are to apply
SFAS 123R using either the modified prospective method or
the modified retrospective method. The Company applied the
modified prospective transition method to record compensation
expense. The Company accounts for graded vesting using the
accelerated method. The Company applied the alternative
transition method in calculating its pool of excess tax benefits
available to absorb future tax deficiencies as provided by
Financial Accounting Standards Board (FASB) Staff
Position (FSP) FAS 123(R)-3, Transition
Election Related to Accounting for the Tax Effects of
Share-Based Payment Awards.
Income
Taxes
The Company accounts for income taxes under the liability
method. Under the 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 unearned premium reserves and
deferred policy acquisition costs. The effect on deferred taxes
of a change in tax rates is recognized in income in the period
of enactment. Future tax benefits are recognized to the extent
that realization of such benefits are more likely than not.
The Company adopted the provisions of FASB Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes an Interpretation of FASB Statement
No. 109 (FIN 48), effective on
January 1, 2007. FIN 48 prescribes a comprehensive
model for how a company should recognize, measure, present and
disclose in its financial statements uncertain tax positions
that the company has taken or expects to take on a tax return.
The adoption of FIN 48 did not result in the recognition of
a liability for uncertain income tax liability benefits at
adoption or during 2007. The Company has elected to classify
interest, if any, recognized in accordance with FIN 48 as
interest expense. Likewise, penalties, if any, recognized in
accordance with FIN 48 will be classified as miscellaneous
expense.
Property
and Equipment
Property and equipment are carried at cost less accumulated
depreciation. The Company records depreciation using the
straight-line method based on the estimated useful lives of the
various classes of property and equipment ranging from
3 years to 20 years. Depreciation and amortization
expense for 2007, 2006 and 2005 was $6.1 million,
$5.2 million and $4.4 million, respectively. The cost
of maintenance and repairs is charged to income as incurred;
major improvements are capitalized.
Earnings
Per Share
Basic earnings per common share is computed by dividing income
available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted earnings
per common share is
54
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
computed based on the weighted average number of shares
outstanding plus the dilutive effect of common stock equivalents
which is computed using the treasury stock method.
The computation of earnings per share is as follows (amounts in
thousands, except for per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net income
|
|
$
|
92,496
|
|
|
$
|
82,818
|
|
|
$
|
38,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
43,872
|
|
|
|
43,334
|
|
|
|
43,015
|
|
Weighted average shares of options exercised and additional
stock issuance
|
|
|
128
|
|
|
|
320
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted average shares outstanding
|
|
|
44,000
|
|
|
|
43,654
|
|
|
|
43,205
|
|
Effect of dilutive options
|
|
|
267
|
|
|
|
268
|
|
|
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted average shares outstanding, assuming dilution
|
|
|
44,267
|
|
|
|
43,922
|
|
|
|
43,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
$
|
2.10
|
|
|
$
|
1.90
|
|
|
$
|
0.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share, assuming dilution
|
|
$
|
2.09
|
|
|
$
|
1.89
|
|
|
$
|
0.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No adjustments were made to reported net income in the
computation of earnings per share. Options to purchase shares of
common stock of 0.3 million were excluded from the
calculation of diluted earnings per share for the year ended
December 31, 2007 because the exercise price of these
options was greater than the average market price of CNA
Suretys common stock. There were no options excluded from
the calculation of diluted earnings per share for the year ended
December 31, 2006. At December 31, 2005, options to
purchase shares of 0.4 million were excluded from the
calculation of diluted earnings per share.
Accounting
Pronouncements
In July 2006, the FASB issued FIN 48. FIN 48
prescribes a comprehensive model for how a company should
recognize, measure, present, and disclose in its financial
statements uncertain tax positions that the company has taken or
expects to take on a tax return. FIN 48 states that a
tax benefit from an uncertain position may be recognized only if
it is more likely than not that the position is
sustainable, based on its technical merits. The tax benefit of a
qualifying position is the largest amount of tax benefit that is
greater than 50 percent likely of being realized upon
ultimate settlement with a taxing authority having full
knowledge of all relevant information. FIN 48 is effective
for fiscal years beginning after December 15, 2006. As
discussed previously, FIN 48 was adopted by the Company as
of January 1, 2007. The Company has elected to classify
interest, if any, recognized in accordance with FIN 48 as
interest expense. Likewise, penalties, if any, recognized in
accordance with FIN 48 will be classified as miscellaneous
expense. No amounts have been recognized subject to these
provisions as of December 31, 2007. As of December 31,
2007, the tax years 2004 through 2007 remain subject to
examination by the Internal Revenue Service. Adoption and
subsequent application of this standard did not have an impact
on the Companys results of operations and financial
condition.
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments
(SFAS 155). SFAS 155 amends
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities
(SFAS 133), and SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities
(SFAS 140). SFAS 155 also resolves issues
addressed in SFAS 133 Implementation Issue No. D1,
Application of Statement 133 to Beneficial Interests in
Securitized Financial Assets. SFAS 155 eliminates the
exemption from applying SFAS 133 to interests in certain
securitized financial assets so that similar instruments are
accounted for in the same manner regardless of the form of the
instruments. SFAS 155 also allows a preparer to elect
55
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
fair value measurement at acquisition, at issuance, or when a
previously recognized financial instrument is subject to a
re-measurement (new basis) event, on an
instrument-by-instrument
basis. The fair value election provided for in
paragraph 4(c) of SFAS 155 may also be applied upon
adoption of SFAS 155 for hybrid financial instruments that
had been bifurcated under paragraph 12 of SFAS 133
prior to the adoption of this Statement. SFAS 155 is
effective for all financial instruments acquired or issued after
the beginning of an entitys first fiscal year that begins
after September 15, 2006, and was adopted by the Company as
of January 1, 2007. Adoption and subsequent application of
this standard did not have an impact on the Companys
results of operations and financial condition.
In September 2005, the Accounting Standards Executive Committee
of the American Institute of Certified Public Accountants issued
Statement of Position (SOP)
05-1,
Accounting by Insurance Enterprises for Deferred
Acquisition Costs in Connection with Modifications or Exchanges
of Insurance Contracts
(SOP 05-1).
SOP 05-1
provides guidance on accounting by insurance enterprises for
deferred acquisition costs on internal replacements of insurance
and investment contracts other than those specifically described
in SFAS No. 97, Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and
for Realized Gains and Losses from the Sale of
Investments.
SOP 05-1
defines an internal replacement as a modification in product
benefits, features, rights, or coverages that occur by the
exchange of a contract for a new contract, or by amendment,
endorsement, or rider to a contract, or by the election of a
feature or coverage within a contract.
SOP 05-1
is effective for internal replacements occurring in fiscal years
beginning after December 15, 2006 and was adopted by the
Company as of January 1, 2007. Adoption and subsequent
application of this standard did not have an impact on the
Companys results of operations and financial condition.
The estimated fair value and amortized cost of fixed income and
equity securities held by investment category were as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross Unrealized Losses
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Unrealized
|
|
|
Less Than
|
|
|
More Than
|
|
|
Estimated
|
|
December 31, 2007
|
|
or Cost
|
|
|
Gains
|
|
|
12 Months
|
|
|
12 Months
|
|
|
Fair Value
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of U.S. Government and
agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
17,790
|
|
|
$
|
485
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
18,275
|
|
U.S. Agencies
|
|
|
52,617
|
|
|
|
706
|
|
|
|
|
|
|
|
(15
|
)
|
|
|
53,308
|
|
Collateralized mortgage obligations
|
|
|
30,086
|
|
|
|
502
|
|
|
|
(11
|
)
|
|
|
(107
|
)
|
|
|
30,470
|
|
Mortgage pass-through securities
|
|
|
54,659
|
|
|
|
401
|
|
|
|
|
|
|
|
(586
|
)
|
|
|
54,474
|
|
Obligations of states and political subdivisions
|
|
|
625,858
|
|
|
|
15,408
|
|
|
|
(2,500
|
)
|
|
|
(641
|
)
|
|
|
638,125
|
|
Corporate bonds
|
|
|
95,714
|
|
|
|
1,493
|
|
|
|
(97
|
)
|
|
|
(1,408
|
)
|
|
|
95,702
|
|
Non-agency collateralized mortgage obligations
|
|
|
35,011
|
|
|
|
232
|
|
|
|
|
|
|
|
(699
|
)
|
|
|
34,544
|
|
Other asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second mortgages/home equity loans
|
|
|
9,951
|
|
|
|
|
|
|
|
|
|
|
|
(50
|
)
|
|
|
9,901
|
|
Credit card receivables
|
|
|
17,234
|
|
|
|
451
|
|
|
|
|
|
|
|
|
|
|
|
17,685
|
|
Other
|
|
|
10,788
|
|
|
|
157
|
|
|
|
|
|
|
|
(75
|
)
|
|
|
10,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
949,708
|
|
|
|
19,835
|
|
|
|
(2,608
|
)
|
|
|
(3,581
|
)
|
|
|
963,354
|
|
Equity securities
|
|
|
1,683
|
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
1,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
951,391
|
|
|
$
|
19,941
|
|
|
$
|
(2,608
|
)
|
|
$
|
(3,581
|
)
|
|
$
|
965,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross Unrealized Losses
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Unrealized
|
|
|
Less Than
|
|
|
More Than
|
|
|
Estimated
|
|
December 31, 2006
|
|
or Cost
|
|
|
Gains
|
|
|
12 Months
|
|
|
12 Months
|
|
|
Fair Value
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of U.S. Government and
agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
14,832
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(327
|
)
|
|
$
|
14,505
|
|
U.S. Agencies
|
|
|
62,106
|
|
|
|
14
|
|
|
|
(96
|
)
|
|
|
(260
|
)
|
|
|
61,764
|
|
Collateralized mortgage obligations
|
|
|
16,969
|
|
|
|
294
|
|
|
|
|
|
|
|
(326
|
)
|
|
|
16,937
|
|
Mortgage pass-through securities
|
|
|
38,851
|
|
|
|
77
|
|
|
|
|
|
|
|
(1,129
|
)
|
|
|
37,799
|
|
Obligations of states and political subdivisions
|
|
|
492,640
|
|
|
|
13,833
|
|
|
|
(118
|
)
|
|
|
(10
|
)
|
|
|
506,345
|
|
Corporate bonds
|
|
|
66,943
|
|
|
|
1,375
|
|
|
|
(5
|
)
|
|
|
(1,059
|
)
|
|
|
67,254
|
|
Non-agency collateralized mortgage obligations
|
|
|
37,069
|
|
|
|
210
|
|
|
|
|
|
|
|
(817
|
)
|
|
|
36,462
|
|
Other asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second mortgages/home equity loans
|
|
|
20,925
|
|
|
|
|
|
|
|
(26
|
)
|
|
|
(150
|
)
|
|
|
20,749
|
|
Other
|
|
|
17,230
|
|
|
|
211
|
|
|
|
|
|
|
|
|
|
|
|
17,441
|
|
Redeemable preferred stock
|
|
|
5,613
|
|
|
|
62
|
|
|
|
|
|
|
|
(140
|
)
|
|
|
5,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
773,178
|
|
|
|
16,076
|
|
|
|
(245
|
)
|
|
|
(4,218
|
)
|
|
|
784,791
|
|
Equity securities
|
|
|
1,508
|
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
|
1,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
774,686
|
|
|
$
|
16,236
|
|
|
$
|
(245
|
)
|
|
$
|
(4,218
|
)
|
|
$
|
786,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys insurance subsidiaries, as required by state
law, deposit certain securities with state insurance regulatory
authorities. At December 31, 2007, securities on deposit
had an aggregate carrying value of $3.4 million.
The amortized cost and estimated fair value of fixed income
securities, by contractual maturity, at December 31, 2007
and 2006 are shown below. Actual maturities may 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Amortized
|
|
|
Estimated Fair
|
|
|
Amortized
|
|
|
Estimated Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year
|
|
$
|
4,133
|
|
|
$
|
4,164
|
|
|
$
|
9,041
|
|
|
$
|
9,049
|
|
Due after one year but within five years
|
|
|
189,384
|
|
|
|
193,656
|
|
|
|
146,632
|
|
|
|
147,897
|
|
Due after five years but within ten years
|
|
|
323,327
|
|
|
|
332,657
|
|
|
|
302,253
|
|
|
|
310,292
|
|
Due after ten years
|
|
|
275,135
|
|
|
|
274,933
|
|
|
|
178,595
|
|
|
|
182,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
791,979
|
|
|
|
805,410
|
|
|
|
636,521
|
|
|
|
649,868
|
|
Mortgage pass-through securities, collateralized mortgage
obligations and asset-backed securities
|
|
|
157,729
|
|
|
|
157,944
|
|
|
|
136,657
|
|
|
|
134,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
949,708
|
|
|
$
|
963,354
|
|
|
$
|
773,178
|
|
|
$
|
784,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Major categories of net investment income were as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
$
|
39,990
|
|
|
$
|
35,648
|
|
|
$
|
31,694
|
|
Equity securities
|
|
|
72
|
|
|
|
41
|
|
|
|
37
|
|
Short-term investments
|
|
|
4,265
|
|
|
|
3,333
|
|
|
|
2,592
|
|
Other investments
|
|
|
|
|
|
|
4
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income on available-for-sale securities
|
|
|
44,327
|
|
|
|
39,026
|
|
|
|
34,396
|
|
Investment income on deposit with affiliated ceding company
|
|
|
1,611
|
|
|
|
1,513
|
|
|
|
401
|
|
Investment expenses
|
|
|
(1,302
|
)
|
|
|
(1,215
|
)
|
|
|
(1,050
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
44,636
|
|
|
$
|
39,324
|
|
|
$
|
33,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains and losses and the net change in
unrealized gains and losses of available-for-sale securities
were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net realized investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized investment gains
|
|
$
|
345
|
|
|
$
|
140
|
|
|
$
|
1,622
|
|
Gross realized investment losses
|
|
|
(955
|
)
|
|
|
(1,391
|
)
|
|
|
(325
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment (losses) gains on fixed income securities
|
|
|
(610
|
)
|
|
|
(1,251
|
)
|
|
|
1,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized investment gains
|
|
|
147
|
|
|
|
125
|
|
|
|
83
|
|
Gross realized investment losses
|
|
|
(1
|
)
|
|
|
(8
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains on equity securities
|
|
|
146
|
|
|
|
117
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
19
|
|
|
|
(139
|
)
|
|
|
597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment (losses) gains
|
|
$
|
(445
|
)
|
|
$
|
(1,273
|
)
|
|
$
|
1,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
$
|
2,032
|
|
|
$
|
109
|
|
|
$
|
(18,460
|
)
|
Equity securities
|
|
|
(53
|
)
|
|
|
55
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net change in unrealized gains (losses)
|
|
$
|
1,979
|
|
|
$
|
164
|
|
|
$
|
(18,469
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) and change in unrealized gains
(losses)
|
|
$
|
1,534
|
|
|
$
|
(1,109
|
)
|
|
$
|
(16,495
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized investment losses were $1.0 million for 2007
due to the recognition of impairment losses on certain fixed
income securities as discussed below. Gross realized investment
losses were $1.4 million for 2006 due to the recognition of
impairment losses and additional losses on the subsequent sale
of certain fixed income securities as discussed below. The gross
realized investment gains in 2005 resulted primarily from the
Companys sale of its interest in De Montfort Group, Ltd in
the first quarter of 2005.
58
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table provides the composition of fixed income
securities with an unrealized loss at December 31, 2007 in
relation to the total of all fixed income securities by
contractual maturities:
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
% of
|
|
|
|
Fair
|
|
|
Unrealized
|
|
Contractual Maturity
|
|
Value
|
|
|
Loss
|
|
|
Due after one year through five years
|
|
|
2
|
%
|
|
|
7
|
%
|
Due after five years through ten years
|
|
|
14
|
|
|
|
17
|
|
Due after ten years
|
|
|
51
|
|
|
|
51
|
|
Asset-backed securities
|
|
|
33
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
The following table summarizes for fixed income securities in an
unrealized loss position at December 31, 2007 and 2006, the
aggregate fair value and gross unrealized loss by length of time
those securities have been continuously in an unrealized loss
position (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
Estimated
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
Unrealized
|
|
Unrealized Loss Aging
|
|
Fair Value
|
|
|
Loss
|
|
|
Fair Value
|
|
|
Loss
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 months
|
|
$
|
17,785
|
|
|
$
|
175
|
|
|
$
|
75,215
|
|
|
$
|
205
|
|
7-12 months
|
|
|
112,914
|
|
|
|
2,433
|
|
|
|
10,104
|
|
|
|
40
|
|
13-24 months
|
|
|
9,984
|
|
|
|
671
|
|
|
|
137,954
|
|
|
|
3,457
|
|
Greater than 24 months
|
|
|
91,683
|
|
|
|
2,463
|
|
|
|
16,206
|
|
|
|
684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment grade
|
|
|
232,366
|
|
|
|
5,742
|
|
|
|
239,479
|
|
|
|
4,386
|
|
Non-investment grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13-24 months
|
|
|
|
|
|
|
|
|
|
|
3,960
|
|
|
|
77
|
|
Greater than 24 months
|
|
|
3,582
|
|
|
|
447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
235,948
|
|
|
$
|
6,189
|
|
|
$
|
243,439
|
|
|
$
|
4,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the second quarter of 2007, the Company recognized
impairment losses on 13 fixed income securities of various
categories of investments that were in an unrealized loss
position. In response to the significant change in interest
rates in the second quarter, as well as a revised outlook on
future interest rates, the Company did not have the intention of
holding these securities to their anticipated recovery. These
securities were sold during the third quarter. The
other-than-temporary impairment losses on these securities were
$1.0 million.
In response to the significant change in interest rates during
the third quarter of 2006, the Company recognized impairment
losses on 21 municipal fixed income securities that were in an
unrealized loss position at September 30, 2006. The Company
did not have the intention of holding these securities to their
anticipated recovery and recorded $0.9 million
other-than-temporary impairment losses on these securities.
These securities were sold during the fourth quarter of 2006
resulting in an additional loss of $0.5 million.
As of December 31, 2007, 53 securities held by the Company
were in an unrealized loss position. The Company believes that
48 of these securities are in an unrealized loss position
because of changes in interest rates and expects these
securities will recover in value at or before maturity. Of these
48 securities, 28 were rated AAA by Standard &
Poors (S&P) and Aaa by Moodys
Investor Services (Moodys) and all were
investment grade. None of these 48 securities was in a loss
position that exceeded 5% of its book value. The largest
unrealized loss was
59
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$0.3 million. The resulting unrealized loss position for
this security was 4.5%, which was also the largest unrealized
loss percentage.
Of the five remaining securities that were in an unrealized loss
position, one was issued by the financing subsidiary of a large
domestic automaker. The security was in an unrealized loss
position of 11.1% ($0.4 million) of its book value and was
rated below investment grade by S&P and Moodys. One
of the other securities, rated above investment grade by
S&P and Moodys, was issued by a large student loan
provider and was in an unrealized loss position of 13.1%
($0.4 million) of its book value. The three remaining
securities, rated above investment grade by S&P and
Moodys, were issued by governmental utility authorities
and were in an unrealized loss position of 7.2%
($0.8 million), 11.3% ($0.6 million) and 3.8%
($0.2 million), respectively. The Company believes that the
financial condition and near-term prospects of these issuers are
strong, and expects that these unrealized losses will reverse.
The Company intends and believes it has the ability to hold
these investments until the expected recovery in value, which
may be at maturity.
Invested assets are exposed to various risks, such as interest
rate, market and credit risks. Due to the level of risk
associated with certain of these invested assets and the level
of uncertainty related to changes in the value of these assets,
it is possible that changes in risks in the near term may
significantly affect the amounts reported in the Consolidated
Balance Sheets and Consolidated Statements of Income.
On July 27, 2005, the Company refinanced $30.0 million
in outstanding borrowings under its previous credit facility
with a new credit facility (the 2005 Credit
Facility). The 2005 Credit Facility provided an aggregate
of up to $50.0 million in borrowings under a revolving
credit facility. In September 2006, the Company reduced the
available aggregate revolving credit facility to
$25.0 million in borrowings. The 2005 Credit Facility
matures on June 30, 2008. No other debt matures in the next
five years.
The term of borrowings under the 2005 Credit Facility may be
fixed, at the Companys option, for a period of one, two,
three, or six months. The interest rate is based on, among other
rates, the London Interbank Offered Rate (LIBOR)
plus the applicable margin. The margin, including a utilization
fee, can vary based on the Companys leverage ratio (debt
to total capitalization) from 0.80% to 1.00%. There was no
outstanding balance under the 2005 Credit Facility at
December 31, 2007 and December 31, 2006. As such, the
Company incurred only the facility fee of 0.325% for the years
ended December 31, 2007 and 2006.
The 2005 Credit Facility contains, among other conditions,
limitations on the Company with respect to the incurrence of
additional indebtedness and maintenance of a rating of at least
A- by A.M. Best Company, Inc. (A.M. Best)
for each of the Companys insurance subsidiaries. The 2005
Credit Facility also requires the maintenance of certain
financial ratios as follows: a) maximum funded debt to
total capitalization ratio of 25%, b) minimum net worth of
$375.0 million and c) minimum fixed charge coverage
ratio of 2.5 times. The Company was in compliance with all
covenants as of and for the years ended December 31, 2007
and 2006.
In May 2004, the Company, through a wholly-owned trust,
privately issued $30.0 million of preferred securities
through two pooled transactions. These securities bear interest
at a rate of LIBOR plus 337.5 basis points with a
30-year term
and are redeemable at par value after five years. The securities
were issued by CNA Surety Capital Trust I (the Issuer
Trust). The Companys investment of $0.9 million
in the Issuer Trust is carried at cost in Other
assets in the Companys Consolidated Balance Sheet.
The sole asset of the Issuer Trust consists of a
$30.9 million junior subordinated debenture issued by the
Company to the Issuer Trust. The Company has also guaranteed the
dividend payments and redemption of the preferred securities
issued by the Issuer Trust. The maximum amount of undiscounted
future payments the Company could make under the guarantee is
$75.0 million, consisting of annual dividend payments of
$1.5 million over 30 years and the redemption value of
$30.0 million. Because payment under the guarantee would
only be required if the Company does not fulfill its obligations
under
60
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the debentures held by the Issuer Trust, the Company has not
recorded any additional liabilities related to this guarantee.
The subordinated debenture bears interest at a rate of LIBOR
plus 337.5 basis points and matures in April 2034. As of
December 31, 2007 and 2006, the interest rate on the junior
subordinated debenture was 8.24% and 8.75%, respectively.
|
|
4.
|
Fair
Value of Financial Instruments
|
The following table summarizes fair value information about
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. Potential taxes and other transaction costs
have not been considered in estimating fair value. Accordingly,
the estimates presented herein are subjective in nature and are
not necessarily indicative of the amounts that the Company could
realize in a current market exchange. This information excludes
certain financial instruments such as insurance contracts and
all non-financial instruments from fair value disclosure.
Therefore, these fair value amounts cannot be aggregated to
determine the underlying economic value of the Company.
The carrying amounts and estimated fair values of financial
instruments at December 31, 2007 and 2006 were as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Fixed income securities
|
|
$
|
963,354
|
|
|
$
|
963,354
|
|
|
$
|
784,791
|
|
|
$
|
784,791
|
|
Equity securities
|
|
|
1,789
|
|
|
|
1,789
|
|
|
|
1,668
|
|
|
|
1,668
|
|
Short-term investments
|
|
|
49,453
|
|
|
|
49,453
|
|
|
|
103,640
|
|
|
|
103,640
|
|
Other investments
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
|
22
|
|
Cash
|
|
|
10,230
|
|
|
|
10,230
|
|
|
|
7,164
|
|
|
|
7,164
|
|
Debt
|
|
|
30,791
|
|
|
|
30,791
|
|
|
|
30,690
|
|
|
|
30,690
|
|
The following methods and assumptions were used by the Company
in estimating fair values of financial instruments:
Investments The estimated fair values for the
fixed income securities and equity securities are based upon
quoted market prices, where available. For fixed income
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.
Cash, Short-term Investments and Other
Investments The carrying value for these
instruments approximates their estimated fair values.
Debt The estimated fair value of the
Companys 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.
61
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
Deferred
Policy Acquisition Costs and Other Operating Expenses
|
Policy acquisition costs deferred and the related amortization
of deferred policy acquisition costs were as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Balance at beginning of period
|
|
$
|
102,937
|
|
|
$
|
102,833
|
|
|
$
|
102,128
|
|
Costs deferred
|
|
|
171,689
|
|
|
|
164,614
|
|
|
|
157,347
|
|
Amortization
|
|
|
(170,346
|
)
|
|
|
(164,510
|
)
|
|
|
(156,642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
104,280
|
|
|
$
|
102,937
|
|
|
$
|
102,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net commissions, brokerage and other underwriting expenses were
comprised as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Amortization of deferred policy acquisition costs
|
|
$
|
170,346
|
|
|
$
|
164,510
|
|
|
$
|
156,642
|
|
Other operating expenses
|
|
|
57,066
|
|
|
|
52,050
|
|
|
|
45,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net commissions, brokerage and other underwriting expenses
|
|
$
|
227,412
|
|
|
$
|
216,560
|
|
|
$
|
202,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys insurance subsidiaries, in the ordinary
course of business, cede insurance to other insurance companies
and affiliates. Reinsurance arrangements are used to limit
maximum loss, provide greater diversification of risk and
minimize exposure on larger risks. Reinsurance contracts do not
relieve the Company of its primary obligations to claimants.
Therefore, a contingent liability exists with respect to
insurance ceded to the extent that any reinsurer is unable to
meet the obligations assumed under the reinsurance contracts.
The Company evaluates the financial condition of its reinsurers,
assesses the need for allowances for uncollectible amounts and
monitors concentrations of credit risk. CNA Suretys
largest reinsurance receivable from an affiliate, CCC, an A
(Excellent) rated company by A.M. Best was approximately
$50.5 million and $55.0 million at December 31,
2007 and 2006, respectively. CNA Suretys largest
reinsurance receivable from an unaffiliated reinsurer, rated A
(Excellent) by A.M. Best, was approximately
$16.8 million and $13.4 million at December 31,
2007 and 2006, respectively.
The effect of reinsurance on premiums written and earned was as
follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Written
|
|
|
Earned
|
|
|
Written
|
|
|
Earned
|
|
|
Written
|
|
|
Earned
|
|
|
Direct
|
|
$
|
360,877
|
|
|
$
|
353,594
|
|
|
$
|
334,020
|
|
|
$
|
324,831
|
|
|
$
|
311,435
|
|
|
$
|
288,994
|
|
Assumed
|
|
|
110,783
|
|
|
|
112,938
|
|
|
|
117,336
|
|
|
|
113,769
|
|
|
|
106,095
|
|
|
|
113,508
|
|
Ceded
|
|
|
(43,371
|
)
|
|
|
(45,026
|
)
|
|
|
(41,727
|
)
|
|
|
(44,958
|
)
|
|
|
(51,582
|
)
|
|
|
(54,141
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums
|
|
$
|
428,289
|
|
|
$
|
421,506
|
|
|
$
|
409,629
|
|
|
$
|
393,642
|
|
|
$
|
365,948
|
|
|
$
|
348,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed premiums primarily includes all surety business written
or renewed, net of reinsurance, by CCC and CIC, and their
affiliates, after September 30, 1997 that is reinsured by
Western Surety pursuant to reinsurance and related agreements.
Because of certain regulatory restrictions that limit the
Companys ability to write business on a direct basis, the
Company continues to utilize the underwriting capacity available
through these agreements. The Company is in full control of all
aspects of the underwriting and claim management of the business
assumed from these affiliates.
62
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Assumed premium also includes surety business written by another
affiliate, First Insurance Company of Hawaii, Ltd. and its
subsidiaries First Indemnity Insurance of Hawaii, Inc., First
Fire and Casualty Insurance of Hawaii, Inc. and First Security
Insurance of Hawaii, Inc. (collectively, FICOH).
CNAF owns approximately 50% of the outstanding common stock of
First Insurance Company of Hawaii, Ltd. Under the terms of this
excess of loss agreement that covers certain contract business,
FICOH retains losses of $2 million per principal and
Western Surety assumes 80% of $5 million per principal
subject to an aggregate annual limit of $8 million.
Premiums assumed by Western Surety under this agreement were
$0.1 million in 2007, 2006 and 2005.
The effect of reinsurance on the Companys provision for
loss and loss adjustment expenses and the corresponding ratio to
earned premium was as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
$
|
|
|
Ratio
|
|
|
$
|
|
|
Ratio
|
|
|
$
|
|
|
Ratio
|
|
|
Gross losses and loss adjustment expenses
|
|
$
|
119,567
|
|
|
|
25.6
|
%
|
|
$
|
94,520
|
|
|
|
21.6
|
%
|
|
$
|
176,416
|
|
|
|
43.8
|
%
|
(Increase) decrease in reinsurance recoverables
|
|
|
(16,443
|
)
|
|
|
36.5
|
%
|
|
|
1,310
|
|
|
|
(2.9
|
)%
|
|
|
(48,575
|
)
|
|
|
89.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
$
|
103,124
|
|
|
|
24.5
|
%
|
|
$
|
95,830
|
|
|
|
24.3
|
%
|
|
$
|
127,841
|
|
|
|
36.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2006, the Company reduced certain gross reserves, with
corresponding reductions in ceded reserves, reflecting changes
in estimates of incurred-but-not-reported reserves for large
losses and the associated estimates of reinsurance recoverables.
These actions resulted in the unusual fluctuations in the gross
and ceded amounts shown above.
The Companys reinsurance program is predominantly
comprised of excess of loss reinsurance contracts that limit the
Companys retention on a per principal basis. The
Companys reinsurance coverage is provided by third party
reinsurers and related parties. Due to the terms of conditions
of these excess of loss treaties, reinsurers may cover some
principals in one year but then exclude these same principals in
subsequent years. As a result, the Company may have exposures to
these principals that have limited or no reinsurance coverage.
Excess of
Loss Reinsurance
2006
Third Party Reinsurance Compared to 2005 Third Party
Reinsurance
Effective January 1, 2006, CNA Surety entered into a new
excess of loss treaty (2006 Excess of Loss Treaty)
with a group of third party reinsurers on terms similar to the
2005 Excess of Loss Treaty. Under the 2006 Excess of Loss
Treaty, the Companys net retention per principal remained
at $10 million with a 5% co-participation in the
$90 million layer of third party reinsurance coverage above
the Companys retention. The significant differences
between the 2006 Excess of Loss Treaty and the Companys
2005 Excess of Loss Treaty were as follows. The actual cost for
the 2006 Excess of Loss Treaty was $39.9 million compared
to the actual cost of the 2005 Excess of Loss Treaty of
$41.5 million. The contract included a provision for
additional premiums based on losses ceded under the contract.
The contract also included an optional extended discovery
period, which was not exercised, for an additional premium (a
percentage of the original premium based on any unexhausted
aggregate limit by layer), which would have provided coverage
for losses discovered beyond 2006 on bonds that were in force
during 2006. Only the large national contractor that was
excluded from the 2005 treaty remained excluded from the 2006
Excess of Loss Treaty.
2007
Third Party Reinsurance Compared to 2006 Third Party
Reinsurance
Effective January 1, 2007, CNA Surety entered into a new
excess of loss treaty (2007 Excess of Loss Treaty)
with a group of third party reinsurers on terms similar to the
2006 Excess of Loss Treaty. Under the 2007 Excess of
63
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Loss Treaty, the Companys net retention per principal
remained at $10 million with a 5% co-participation in the
$90 million layer of third party reinsurance coverage above
the Companys retention. The contract includes an optional
extended discovery period, which was not exercised, for an
additional premium (a percentage of the original premium based
on any unexhausted aggregate limit by layer), which would have
provided coverage for losses discovered beyond 2007 on bonds
that were in force during 2007. The contract also includes a
provision for additional premiums based on losses ceded under
the contract. The primary difference between the 2007 Excess of
Loss Treaty and the Companys 2006 Excess of Loss Treaty is
as follows. The actual cost for the 2007 Excess of Loss Treaty
is $42.6 million, which includes an initial estimate of
additional premiums of $4.3 million resulting from loss
activity, compared to the actual cost of the 2006 Excess of Loss
Treaty of $39.9 million. Only the large national contractor
that was excluded from the 2006 treaty remained excluded from
the 2007 Excess of Loss Treaty.
2008
Third Party Reinsurance Compared to 2007 Third Party
Reinsurance
Effective January 1, 2008, CNA Surety entered into a new
excess of loss treaty (2008 Excess of Loss Treaty)
with a group of third party reinsurers on terms similar to the
2007 Excess of Loss Treaty. Under the 2008 Excess of Loss
Treaty, the Companys net retention per principal remained
at $10 million with a 5% co-participation in the
$90 million layer of third party reinsurance coverage above
the Companys retention. The contract provides aggregate
coverage of $185 million and includes an optional extended
discovery period, for an additional premium (a percentage of the
original premium based on any unexhausted aggregate limit by
layer), which will provide coverage for losses discovered beyond
2008 on bonds that were in force during 2008. The contract also
includes a provision for additional premiums based on losses
ceded under the contract. The primary difference between the
2008 Excess of Loss Treaty and the Companys 2007 Excess of
Loss Treaty is as follows. The base annual premium for the 2008
Excess of Loss Treaty is $33.3 million compared to the base
annual cost of the 2007 Excess of Loss Treaty of
$38.3 million before the additional premium noted above.
Only the large national contractor that was excluded from the
2007 treaty remained excluded from the 2008 Excess of Loss
Treaty.
Related
Party Reinsurance
Reinsurance agreements together with the Services and Indemnity
Agreement that are described below provide for the transfer of
the surety business written by CCC and CIC to Western Surety.
All of these agreements originally were entered into on
September 30, 1997 (the Merger Date):
(i) the Surety Quota Share Treaty (the Quota Share
Treaty); (ii) the Aggregate Stop Loss Reinsurance
Contract (the Stop Loss Contract); and
(iii) the Surety Excess of Loss Reinsurance Contract (the
Excess of Loss Contract). All of these contracts
have expired. Some have been renewed on different terms as
described below.
The Services and Indemnity Agreement provides the Companys
insurance subsidiaries with the authority to perform various
administrative, management, underwriting and claim functions in
order to conduct the business of CCC and CIC and to be
reimbursed by CCC for services rendered. In consideration for
providing the foregoing services, CCC has agreed to pay Western
Surety a quarterly fee of $50,000. This agreement was renewed on
January 1, 2007 and expired on December 31, 2007.
There was no amount due to the CNA Surety insurance subsidiaries
as of December 31, 2007. This agreement was renewed on
January 1, 2008 and expires on December 31, 2008 and
is annually renewable thereafter.
Through the Quota Share Treaty, CCC and CIC transfer to Western
Surety all surety business written or renewed by CCC and CIC
after the Merger Date. The Quota Share Treaty was renewed on
January 1, 2007 and expired on December 31, 2007 and
is annually renewable thereafter. CCC and CIC transfer the
related liabilities of such business and pay to Western Surety
an amount in cash equal to CCCs and CICs net written
premiums written on all such business, minus a quarterly ceding
commission to be retained by CCC and CIC equal to $50,000 plus
25% of net written premiums written on all such business. This
contemplates an approximate 4% override commission for fronting
fees to CCC and CIC on their actual direct acquisition costs.
64
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Under the terms of the Quota Share Treaty, CCC has guaranteed
the loss and loss adjustment expense reserves transferred to
Western Surety as of the Merger Date by agreeing to pay Western
Surety, within 30 days following the end of each calendar
quarter, the amount of any adverse development on such reserves,
as re-estimated as of the end of such calendar quarter. There
was no adverse reserve development for the period from the
Merger Date through December 31, 2007. The Quota Share
Treaty was renewed for one year on January 1, 2008 on
substantially the same terms as 2007.
Through the Stop Loss Contract, the Companys insurance
subsidiaries were protected from adverse loss experience on
certain business underwritten after the Merger Date. The Stop
Loss Contract between the insurance subsidiaries and CCC limited
the insurance subsidiaries prospective net loss ratios
with respect to certain accounts and lines of insured business
for three full accident years following the Merger Date. In the
event the insurance subsidiaries accident year net loss
ratio exceeds 24% in any of the accident years 1997 through 2000
on certain insured accounts (the Loss Ratio Cap),
the Stop Loss Contract requires CCC at the end of each calendar
quarter following the Merger Date, to pay to the insurance
subsidiaries a dollar amount equal to (i) the amount, if
any, by which the Companys actual accident year net loss
ratio exceeds the applicable Loss Ratio Cap, multiplied by
(ii) the applicable net earned premiums. In consideration
for the coverage provided by the Stop Loss Contract, the
insurance subsidiaries paid to CCC an annual premium of $20,000.
The CNA Surety insurance subsidiaries have paid CCC all required
annual premiums. As of December 31, 2006, the Company had
billed $47.9 million and had received $45.9 million
under the Stop Loss Contract. The amount received under the Stop
Loss Contract included $28.2 million held by the Company
for losses covered by this contract that were incurred but not
paid as of December 31, 2006. Due to favorable development
of losses subject to the Stop Loss Contract during 2007, the
Company returned $5.6 million to CCC during 2007. As of
December 31, 2007, the net amount billed and received by
the Company under the Stop Loss Contract was $42.3 million.
The amount received under the Stop Loss Contract included
$24.0 million held by the Company for losses covered by
this contract that were incurred but not paid as of
December 31, 2007.
The Company and CCC previously participated in a
$40 million excess of $60 million reinsurance contract
effective from January 1, 2005 to December 31, 2005
providing coverage exclusively for the one large national
contractor excluded from the Companys third party
reinsurance. The premium for this contract was $3.0 million
plus an additional premium of $6.0 million if a loss was
ceded under this contract. In the second quarter of 2005, this
contract was amended to provide unlimited coverage in excess of
the $60 million retention, to increase the premium to
$7.0 million, and to eliminate the additional premium
provision. This treaty provides coverage for the life of bonds
either in force or written during the term of the treaty which
was from January 1, 2005 to December 31, 2005. In
November 2005, the Company and CCC agreed by addendum to extend
this contract for twelve months. This extension, which expired
on December 31, 2006, was for an additional minimum premium
of $0.8 million, subject to adjustment based on the level
of actual premiums written on bonds for the large national
contractor. In January 2007, the Company and CCC agreed by
addendum to extend this contract for another twelve months. This
extension, which expired on December 31, 2007, was for an
additional premium of $0.5 million, which was based on the
level of actual premiums written on bonds for the large national
contractor. In December 2007, the Company and CCC agreed by
addendum to extend this contract for another twelve months. This
extension, which will expire on December 31, 2008, was for
an additional premium subject to the level of actual premiums
written on bonds for the large national contractor. As of
December 31, 2007 and 2006, the Company had ceded losses of
$50.0 million under the terms of this contract, with unpaid
ceded losses of $46.8 million and $50.0 million as of
December 31, 2007 and 2006, respectively.
As of December 31, 2007 and December 31, 2006, CNA
Surety had an insurance receivable balance from CCC and CIC of
$62.9 million, including $50.5 million of reinsurance
recoverables and $12.4 million of premiums receivable, and
$61.9 million, including $55.0 million of reinsurance
recoverables and $6.9 million of premiums receivable,
respectively. CNA Surety had reinsurance payables to CCC and CIC
as of December 31, 2007 of $0.1 million. CNA Surety
had no reinsurance payables to CCC and CIC as of
December 31, 2006.
65
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
7.
|
Reserves
for Losses and Loss Adjustment Expenses
|
Activity in the reserves for unpaid losses and loss adjustment
expenses was as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Reserves at beginning of period:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
$
|
434,224
|
|
|
$
|
424,449
|
|
|
$
|
363,387
|
|
Ceded reinsurance
|
|
|
144,858
|
|
|
|
147,435
|
|
|
|
116,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserves at beginning of period
|
|
|
289,366
|
|
|
|
277,014
|
|
|
|
246,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net incurred loss and loss adjustment expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for insured events of current period
|
|
|
108,178
|
|
|
|
101,140
|
|
|
|
151,174
|
|
Decrease in provision for insured events of prior periods
|
|
|
(5,054
|
)
|
|
|
(5,310
|
)
|
|
|
(23,333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net incurred
|
|
|
103,124
|
|
|
|
95,830
|
|
|
|
127,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net payments attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period events
|
|
|
14,265
|
|
|
|
6,855
|
|
|
|
32,030
|
|
Prior period events
|
|
|
55,879
|
|
|
|
76,623
|
|
|
|
65,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net payments
|
|
|
70,144
|
|
|
|
83,478
|
|
|
|
97,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserves at end of period
|
|
|
322,346
|
|
|
|
289,366
|
|
|
|
277,014
|
|
Ceded reinsurance at end of period
|
|
|
150,496
|
|
|
|
144,858
|
|
|
|
147,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross reserves at end of period
|
|
$
|
472,842
|
|
|
$
|
434,224
|
|
|
$
|
424,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded net loss reserve development in prior
accident years which resulted in a decrease of the estimated
liability of $5.1 million, $5.3 million and
$23.3 million for 2007, 2006 and 2005, respectively.
The favorable development in 2007 primarily resulted from better
than expected indemnification recoveries related to a large
commercial claim in the 2001 accident year.
The favorable development in 2006 resulted from lower than
expected emergence of additional large claims primarily in the
2005 and 2004 accident years, offset by adverse development
primarily in the 2003 and 2002 accident years. The adverse
development in the 2003 accident year was due to an increase in
loss adjustment expense reserves resulting from payments in 2006
that exceeded previous expectations. The adverse development in
the 2002 accident year was primarily due to unfavorable
development of a large contract claim. Establishment of the case
reserve on this claim had been particularly difficult due to
on-going litigation that severely hampered the Companys
ability to assess the amount of work required to complete the
bonded project and the availability of remaining contract funds.
The favorable development in 2005 resulted from favorable
outcomes on several specific large claims and lower than
expected emergence of additional large claims primarily in the
2003 and 2002 accident years.
|
|
8.
|
Commitments
and Contingencies
|
At December 31, 2007 the future minimum commitments under
operating leases are as follows: 2008
$2.0 million; 2009 $2.0 million;
2010 $2.0 million; 2011
$1.8 million; 2012 $0.9 million. Total
rental expense for 2007, 2006 and 2005 was $5.2 million,
$5.1 million and $5.0 million, respectively.
The Company is party to various lawsuits arising in the normal
course of business. The Company believes the resolution of these
lawsuits will not have a material adverse effect on its
financial condition or its results of operations.
66
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of deferred income taxes as of December 31,
2007 and 2006 were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred tax assets related to:
|
|
|
|
|
|
|
|
|
Unearned premium reserve
|
|
$
|
18,361
|
|
|
$
|
17,795
|
|
Loss and loss adjustment expense reserve
|
|
|
3,946
|
|
|
|
4,070
|
|
Accrued expenses
|
|
|
2,253
|
|
|
|
2,205
|
|
Postretirement benefits
|
|
|
4,233
|
|
|
|
4,873
|
|
Other
|
|
|
4,639
|
|
|
|
3,618
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
33,432
|
|
|
|
32,561
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities related to:
|
|
|
|
|
|
|
|
|
Deferred policy acquisition costs
|
|
|
36,498
|
|
|
|
36,028
|
|
Intangible assets
|
|
|
5,650
|
|
|
|
5,650
|
|
Unrealized net gains on securities
|
|
|
4,813
|
|
|
|
4,120
|
|
Other
|
|
|
4,227
|
|
|
|
4,061
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
51,188
|
|
|
|
49,859
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
17,756
|
|
|
$
|
17,298
|
|
|
|
|
|
|
|
|
|
|
CNA Surety and its subsidiaries file a consolidated federal
income tax return. The income tax allocation between the Company
and its subsidiaries is subject to written agreement, approved
by the Board of Directors. Allocation is based upon separate
return calculations in accordance with the Internal Revenue Code
of 1986 with current credit being given to separate company net
losses.
The income tax provisions consisted of the following (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Current tax expense
|
|
$
|
41,270
|
|
|
$
|
34,446
|
|
|
$
|
13,484
|
|
Deferred tax benefit
|
|
|
(1,523
|
)
|
|
|
(1,630
|
)
|
|
|
(1,740
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
39,747
|
|
|
$
|
32,816
|
|
|
$
|
11,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation from the federal statutory tax rate to the
effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Tax-exempt income deduction
|
|
|
(5.7
|
)
|
|
|
(5.5
|
)
|
|
|
(11.5
|
)
|
Non-deductible expenses
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.3
|
|
State income tax, net of federal income tax benefit
|
|
|
0.9
|
|
|
|
1.0
|
|
|
|
0.6
|
|
Other
|
|
|
(0.3
|
)
|
|
|
(2.3
|
)
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
|
30.1
|
%
|
|
|
28.4
|
%
|
|
|
23.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
CNA Surety is subject to taxation in the United States and
various state jurisdictions. The Companys tax years for
2004 through 2007 are subject to examination by the Internal
Revenue Service. We do not anticipate any material change in the
total amount of unrecognized tax benefits to occur within the
next twelve months.
CNA Surety sponsors a tax deferred savings plan (401(k)
plan) covering substantially all of its employees. The
Company matches 100% of the participating employees
contribution up to 3% of eligible compensation and 50% of the
participating employees contribution between 3% and 6% of
eligible compensation (4.5% maximum matching). The Company also
makes an additional basic contribution to eligible 401(k) plan
participants of 3% (if under age 45) or 5% (if 45 or
older) of eligible compensation. In addition, the Company may
also make an annual discretionary profit sharing contribution to
the 401(k) plan, subject to the approval of the Companys
Board of Directors. The profit sharing contribution may be
restricted by plan and regulatory limitations. The Company
contribution, including profit sharing, to the 401(k) plan was
$4.7 million, $4.0 million and $4.1 million for
the years ended December 31, 2007, 2006 and 2005,
respectively.
CNA Surety established the CNA Surety Corporation Deferred
Compensation Plan (the 2000 Plan), effective
April 1, 2000. The Company established and maintains the
2000 Plan as an unfunded, non-qualified deferred compensation
plan for a select group of management or highly compensated
employees. The purpose of the CNA Surety Corporation Deferred
Compensation Plan is to permit designated employees of the
Company and participating affiliates to accumulate additional
retirement income through a nonqualified deferred compensation
plan that enables them to defer compensation to which they will
become entitled in the future.
On April 25, 2005, the Board of Directors of CNA Surety
Corporation approved the CNA Surety Corporation 2005 Deferred
Compensation Plan (the 2005 Plan) and the CNA Surety
Corporation 2005 Deferred Compensation Plan Trust (the
2005 Trust). The 2005 Plan and 2005 Trust were
adopted in connection with the enactment of Section 409A of
the Internal Revenue Code of 1986, as amended (the
Code), which was implemented under the American Jobs
Creation Act of 2004. The 2005 Plan and 2005 Trust will be used
in lieu of the 2000 Plan and the CNA Surety Corporation Deferred
Compensation Plan Trust (the 2000 Trust) for all
amounts deferred on or after January 1, 2005. Amounts
deferred under the 2000 Plan prior to January 1, 2005 will
continue to be covered by and paid out in accordance with the
terms of the 2000 Plan, the 2000 Trust and the elections made by
participants under the 2000 Plan.
Western Surety sponsors two postretirement benefit plans
covering certain employees. One plan provides medical benefits,
and the other plan provides sick leave termination payments. The
medical benefit plan provides coverage for employees, and their
eligible dependents, hired by Western Surety before
November 1, 1991 and who retire at age 55 or later
with at least 15 years of service. Only employees hired by
Western Surety prior to 1988 are eligible for the sick leave
plan. Further, benefits for the sick leave plan are based on
unused accrued sick leave as of December 31, 2003, the date
the accruals were frozen. The postretirement medical benefit
plan is contributory and the sick leave plan is
non-contributory. Western Surety uses a December 31 measurement
date for both of its postretirement benefit plans. There were no
plan assets for either of the postretirement benefit plans.
The postretirement benefit plan that provides medical benefits
has been determined to be actuarially equivalent to Medicare
Part D on an estimated basis under the rules provided in
final regulations issued January 21, 2005. As such, the
federal subsidy to plan sponsors under the Medicare
Modernization Act (MMA) has been recognized in the
accounting for that plan.
68
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the plans combined
accumulated postretirement benefit obligation at the beginning
and end of the last two fiscal years (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Reconciliation of benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of the year
|
|
$
|
12,466
|
|
|
$
|
10,570
|
|
Service cost
|
|
|
334
|
|
|
|
259
|
|
Interest cost
|
|
|
761
|
|
|
|
584
|
|
Actuarial (gain) loss
|
|
|
(3,359
|
)
|
|
|
1,349
|
|
Benefits and expenses paid
|
|
|
(201
|
)
|
|
|
(296
|
)
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
10,001
|
|
|
$
|
12,466
|
|
|
|
|
|
|
|
|
|
|
The Companys postretirement medical benefit plans
accumulated postretirement benefit obligation as of
December 31, 2007 is $9.3 million.
The Companys postretirement sick leave plans
accumulated postretirement benefit obligation as of
December 31, 2007 is $0.7 million.
The Company adopted SFAS 158 at December 31, 2006. In
accordance with SFAS 158, the following tables set forth
the combined plans pre-tax adjustment to accumulated other
comprehensive income (AOCI) (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Amounts not yet recognized in net periodic benefit cost:
|
|
|
|
|
|
|
|
|
Net prior service cost (benefit)
|
|
$
|
(511
|
)
|
|
$
|
(672
|
)
|
Net actuarial loss
|
|
|
1,528
|
|
|
|
5,329
|
|
|
|
|
|
|
|
|
|
|
Total pre-tax accumulated other comprehensive income
|
|
$
|
1,017
|
|
|
$
|
4,657
|
|
|
|
|
|
|
|
|
|
|
Pre-tax AOCI in beginning of year related to postretirement
benefit obligation
|
|
$
|
4,657
|
|
|
$
|
|
|
Reclassification adjustments recognized in net periodic benefit
cost:
|
|
|
|
|
|
|
|
|
Amortization of prior service cost (credit)
|
|
|
106
|
|
|
|
|
|
Amortization of net actuarial loss
|
|
|
(387
|
)
|
|
|
|
|
Amounts recognized in other comprehensive income arising during
the year:
|
|
|
|
|
|
|
|
|
Net actuarial losses/(gains)
|
|
|
(3,359
|
)
|
|
|
|
|
Increase due to adoption of SFAS 158
|
|
|
|
|
|
|
4,657
|
|
|
|
|
|
|
|
|
|
|
Pre-tax AOCI at end of year related to postretirement benefit
obligation
|
|
$
|
1,017
|
|
|
$
|
4,657
|
|
|
|
|
|
|
|
|
|
|
The net actuarial gain in 2007 resulted primarily from a change
in the expected cost of claims under the medical benefit plan.
In fourth quarter 2007, the Company made a decision to change
its service provider effective January 1, 2008. This is
expected to result in a significant reduction in the cost of
claims.
The amounts recognized in the consolidated balance sheets for
postretirement benefit obligations at December 31, 2007 and
2006 were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Amounts recognized in the consolidated balance sheets for
postretirement benefit obligations:
|
|
|
|
|
|
|
|
|
Liability for postretirement benefits
|
|
$
|
10,001
|
|
|
$
|
12,466
|
|
Deferred income taxes, net
|
|
|
4,223
|
|
|
|
4,873
|
|
Accumulated other comprehensive income, net of tax
|
|
|
138
|
|
|
|
2,660
|
|
69
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Difference Due to
|
|
|
Including Effects
|
|
Without Effects of
|
|
Effects of
|
|
|
of Tax-Free Subsidy
|
|
Tax-Free Subsidy
|
|
Tax-Free Subsidy
|
|
Liability for postretirement benefits after application of
SFAS 158 at December 31, 2007
|
|
$
|
10,001
|
|
|
$
|
11,495
|
|
|
$
|
1,494
|
|
The plans combined net periodic postretirement benefit
cost for the last three fiscal years included the following
components (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
333
|
|
|
$
|
259
|
|
|
$
|
241
|
|
Interest cost
|
|
|
761
|
|
|
|
584
|
|
|
|
511
|
|
Amortization of prior service cost
|
|
|
(106
|
)
|
|
|
(162
|
)
|
|
|
(162
|
)
|
Net amortization of actuarial loss (gain)
|
|
|
387
|
|
|
|
270
|
|
|
|
193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
1,375
|
|
|
$
|
951
|
|
|
$
|
783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Key Assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.875
|
%
|
|
|
5.625
|
%
|
|
|
5.50
|
%
|
Rate of compensation increases (postretirement sick leave plan
only)
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
Initial health care cost trend rate,
pre-Medicare
|
|
|
10.0
|
%
|
|
|
10.0
|
%
|
|
|
10.0
|
%
|
Initial health care cost trend rate,
post-Medicare
|
|
|
10.0
|
%
|
|
|
10.0
|
%
|
|
|
10.0
|
%
|
Ultimate health care cost trend rate
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
Year in which ultimate trend rate is reached
|
|
|
2013
|
|
|
|
2012
|
|
|
|
2011
|
|
Mortality
|
|
|
RP 2000 Projected
|
|
|
|
RP 2000 Projected
|
|
|
|
1983 GAM
|
|
Average remaining service life postretirement
medical plan
|
|
|
12.7 Years
|
|
|
|
12.7 Years
|
|
|
|
13.1 Years
|
|
Average life expectancy postretirement medical plan
|
|
|
14.3 Years
|
|
|
|
13.5 Years
|
|
|
|
13.9 Years
|
|
Average remaining service life sick leave plan
|
|
|
12.7 Years
|
|
|
|
12.6 Years
|
|
|
|
12.9 Years
|
|
The Company selected a discount rate of 5.875% to measure the
accumulated postretirement benefit obligation. Reasonableness of
this rate was verified by determining the single constant
discount rate that determines approximately the same liability
as does discounting the expected cash flow associated with the
liability using a yield curve model for yields on high grade
corporate bonds. Models used to evaluate this rate included the
Citigroup Pension Discount Curve and the Hewitt Bond Universe.
At December 31, 2006, the rates determined by these models
were very similar. In selecting the rate of 5.625% at that date,
the Company relied more heavily on the Citigroup Pension
Discount Curve. As a result of downward divergence of the Hewitt
Bond Universe in 2007, the Company relied more heavily on this
model to select the December 31, 2007 discount rate.
The health care cost trend rate assumption has a significant
effect on the amounts reported. To illustrate, increasing the
assumed health care cost trend rates by 1 percentage point
in each year would increase the benefit
70
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
obligation as of December 31, 2007 by $1.9 million and
increase the aggregate of service cost and interest cost for the
year then ended by $0.2 million. Decreasing the assumed
health care cost trend rates by 1 percentage point in each
year would decrease the benefit obligation as of
December 31, 2007 by $1.5 million and decrease the
aggregate of service cost and interest cost for the year then
ended by $0.1 million.
The estimated benefit expected to be recognized from AOCI into
net periodic benefit cost in 2008 is as follows (dollars in
thousands):
|
|
|
|
|
Amortization of prior service cost (credit)
|
|
$
|
(162
|
)
|
Amortization of net actuarial loss
|
|
|
50
|
|
|
|
|
|
|
Total estimated (benefit) expense to be recognized
|
|
$
|
(112
|
)
|
|
|
|
|
|
The Company expects to contribute $0.3 million to the
postretirement benefit plans to pay benefits in 2008. The
following benefit payments, which reflect expected future
service, as appropriate, are expected to be paid. These amounts
are shown both gross and net of the federal subsidy to plan
sponsors under the MMA in the following table (dollars in
thousands).
|
|
|
|
|
|
|
|
|
|
|
Before Impact of Federal Subsidy
|
|
|
Net of Federal Subsidy
|
|
|
2008
|
|
$
|
281
|
|
|
$
|
254
|
|
2009
|
|
|
301
|
|
|
|
270
|
|
2010
|
|
|
317
|
|
|
|
278
|
|
2011
|
|
|
337
|
|
|
|
292
|
|
2012
|
|
|
375
|
|
|
|
327
|
|
2013-2017
|
|
|
2,802
|
|
|
|
2,505
|
|
The compensation expense recorded for the Companys
stock-based compensation plan in 2007 and 2006 was
$1.9 million and $1.2 million, respectively. The total
income tax benefit recognized in the income statement for
stock-based compensation arrangements was $0.6 million and
$0.4 million in 2007 and 2006, respectively. The amount of
cash received from the exercise of stock options was
$3.6 million, $7.8 million and $3.7 million in
2007, 2006 and 2005, respectively.
EQUITY
COMPENSATION PLANS
The Company previously reserved shares of its common stock for
issuance to directors, officers, employees and certain advisors
of the Company through incentive stock options, non-qualified
stock options and stock appreciation rights (SARs)
to be granted under the CNA Surety 1997 Long-Term Equity
Compensation Plan (the 1997 Plan). Option exercises
under the 1997 Plan were settled in newly issued common shares.
No options were granted under the 1997 Plan during 2006.
The Companys 2006 Long-Term Equity Compensation Plan (the
2006 Plan), approved by shareholders on
April 25, 2006, replaced the 1997 Plan. Incentive stock
options, non-qualified stock options, restricted stock, bonus
shares, or SARs may be granted to directors, officers, employees
and certain advisors of the Company under the 2006 Plan. The
aggregate number of shares initially available for which options
may be granted under the 2006 Plan was 3,000,000. Option
exercises under the 2006 Plan are settled in newly issued common
shares.
The 2006 Plan is administered by a committee (the
Committee) of the Board of Directors, consisting of
two or more directors of the Company. Subject to the provisions
set forth in the 2006 Plan, all of the members of the Committee
shall be independent members of the Board of Directors. The
Committee determines the option exercise prices. Exercise prices
may not be less than the fair market value of the Companys
common stock on the date of
71
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
grant for incentive stock options and may not be less than the
par value of the Companys common stock for non-qualified
stock options.
The 2006 Plan provides for the granting of incentive stock
options as defined under Section 382 of the Internal
Revenue Code of 1986, as amended. All non-qualified stock
options and incentive stock options granted under the 2006 Plan
expire ten years after the date of grant and vest ratably over
the four-year period following the date of grant.
On February 13, 2007, 334,100 options were granted under
the 2006 Plan. The fair market value (at grant date) per option
granted was $9.04 for these options. The fair value of these
options was estimated at grant date using a Black-Scholes option
pricing model with the following weighted average assumptions:
risk free interest rate of 4.8%; dividend yield of 0.0%;
volatility of 34.7%; and expected option life of 6.3 years.
The Company has estimated the expected option life using the
simplified method allowed under the Securities and Exchange
Commissions Staff Accounting Bulletin (SAB)
No. 107 (SAB 107). The Companys
stock options qualify for this method based on the criteria
defined in SAB 107. As of December 31, 2007, the
number of shares available for granting of options under the
2006 Plan was 2,678,700.
No options were granted during 2006. During 2005, 354,775
options were granted. The weighted average fair market value (at
grant date) for these options was $5.17 per option. The fair
value of these options was estimated at grant date using a
Black-Scholes option pricing model with the following weighted
average assumptions for the year ended December 31, 2005:
risk free interest rate of 4.4%; dividend yield of 0.0%;
expected option life of 6 years; and volatility of 30.2%.
A summary of the status of the Companys outstanding
options as of December 31, 2007 and changes during the year
then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average Option
|
|
|
|
Shares Subject
|
|
|
Price per
|
|
|
|
to Option
|
|
|
Share
|
|
|
Outstanding options at January 1, 2007
|
|
|
1,008,525
|
|
|
|
12.02
|
|
Options granted
|
|
|
334,100
|
|
|
|
20.70
|
|
Options forfeited
|
|
|
(40,825
|
)
|
|
|
14.97
|
|
Options expired
|
|
|
(7,390
|
)
|
|
|
15.80
|
|
Options exercised
|
|
|
(239,822
|
)
|
|
|
12.43
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at December 31, 2007
|
|
|
1,054,588
|
|
|
|
14.53
|
|
|
|
|
|
|
|
|
|
|
A summary of the status of the Companys non-vested options
as of December 31, 2007 and changes during the year then
ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Shares
|
|
|
Average
|
|
|
|
Subject
|
|
|
Grant Date
|
|
|
|
To Option
|
|
|
Fair Value
|
|
|
Non-vested options at January 1, 2007
|
|
|
481,613
|
|
|
$
|
4.51
|
|
Options granted
|
|
|
334,100
|
|
|
$
|
9.04
|
|
Options vested
|
|
|
(220,331
|
)
|
|
$
|
4.28
|
|
Options forfeited
|
|
|
(40,825
|
)
|
|
$
|
5.98
|
|
|
|
|
|
|
|
|
|
|
Non-vested options at December 31, 2007
|
|
|
554,557
|
|
|
$
|
7.23
|
|
|
|
|
|
|
|
|
|
|
The total fair value of stock options vested was
$0.9 million, $1.2 million and $0.9 million in
2007, 2006 and 2005, respectively.
72
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes information about stock options
outstanding at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Options Exercisable
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Weighted Average
|
|
|
Number
|
|
|
Weighted Average
|
|
Range of Exercise Prices
|
|
Outstanding
|
|
|
Contractual Life
|
|
|
Exercise Price
|
|
|
Exercisable
|
|
|
Exercise Price
|
|
|
$9.35 to $11.50
|
|
|
234,725
|
|
|
|
5.0 years
|
|
|
$
|
9.86
|
|
|
|
233,475
|
|
|
$
|
9.86
|
|
$12.06 to $15.875
|
|
|
498,563
|
|
|
|
7.1 years
|
|
|
|
12.76
|
|
|
|
266,556
|
|
|
|
12.77
|
|
$16.00 and above
|
|
|
321,300
|
|
|
|
9.1 years
|
|
|
|
20.70
|
|
|
|
|
|
|
|
|
|
A summary of the options vested or expected to vest and options
exercisable as of December 31, 2007 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Vested or Expected to Vest
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
Remaining
|
|
|
Number
|
|
|
Exercise Price
|
|
|
Intrinsic Value
|
|
|
Contractual Life
|
|
December 31, 2007
|
|
|
982,045
|
|
|
$
|
14.23
|
|
|
$
|
5,707,693
|
|
|
7.2 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
Remaining
|
|
|
Number
|
|
|
Exercise Price
|
|
|
Intrinsic Value
|
|
|
Contractual Life
|
|
December 31, 2007
|
|
|
500,031
|
|
|
$
|
11.41
|
|
|
$
|
4,190,236
|
|
|
5.9 years
|
The total intrinsic value of options exercised was
$1.9 million, $2.6 million and $1.0 million for
2007, 2006 and 2005 respectively. The tax benefits recognized by
the Company for these exercises were $0.6 million,
$0.9 million and $0.4 million for 2007, 2006 and 2005
respectively.
As previously discussed, the Company adopted SFAS 123R on
January 1, 2006. Prior to 2006, the Company applied the
intrinsic value method under APB 25, and related
interpretations, in accounting for its stock-based compensation
plan as allowed under the provisions of SFAS 123. Under the
recognition and measurement principles of APB 25, no stock-based
compensation cost was recognized, as the exercise price of the
granted options equaled the market price of the underlying stock
at the grant date. The following table illustrates the effect on
net income and earnings per share data if the Company had
applied the fair value recognition provisions of SFAS 123
to stock-based compensation under the Companys stock-based
compensation plan (amounts in thousands, except for per share
data):
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
Net income
|
|
$
|
38,431
|
|
Less: Total stock-based compensation cost determined under the
fair value method, net of tax
|
|
|
(758
|
)
|
|
|
|
|
|
Pro forma net income
|
|
$
|
37,673
|
|
|
|
|
|
|
Basic and diluted earnings per share, as reported
|
|
$
|
0.89
|
|
|
|
|
|
|
Basic earnings per share, pro forma
|
|
$
|
0.87
|
|
|
|
|
|
|
As of December 31, 2007, there was $1.6 million of
total unrecognized compensation cost related to non-vested
stock-based compensation arrangements granted under the
Companys equity compensation plans. That cost is expected
to be recognized as follows: 2008 $1.0 million;
2009 $0.4 million; 2010
$0.2 million.
Effective January 1, 1998, the Company established the CNA
Surety Corporation Non-Employee Directors Deferred Compensation
Plan. Under this plan, which was terminated on December 31,
2004, each director who was
73
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
not a full-time employee of the Company or any of its affiliates
could defer all or a portion of the annual retainer fee that
would otherwise be paid to such director. The deferral amount
was credited to a deferred compensation account and deemed
invested in common stock units. Each director was fully vested
in his or her deferred compensation amount. Common stock units
are convertible into CNA Surety common stock at the election of
the director. Aggregate common stock units outstanding as of
December 31, 2007 and 2006 were 12,511 and 14,339,
respectively.
The Company is a leading provider of surety and fidelity bonds
in the United States. According to the Surety Association of
America (SAA), the surety and fidelity segment of
the domestic property and casualty insurance industry aggregates
approximately $6.4 billion in direct written premiums,
comprised of approximately $5.1 billion in surety premiums
and $1.3 billion in fidelity premiums.
Surety bonds are three-party agreements in which the issuer of
the bond (the surety) joins with a second party (the principal)
in guaranteeing to a third party (the owner/obligee) the
fulfillment of some obligation on the part of the principal. The
surety is the party who guarantees fulfillment of the
principals obligation to the obligee. There are two broad
types of surety products contract surety and
commercial surety bonds.
Contract surety bonds secure a contractors performance
and/or
payment obligation generally with respect to a construction
project. Contract surety bonds are generally required by
federal, state, and local governments for public works projects.
Commercial surety bonds include all surety bonds other than
contract and cover obligations typically required by law or
regulation. Fidelity bonds cover losses arising from employee
dishonesty.
Although all of its products are sold through the same
independent insurance agent and broker distribution network, the
Companys underwriting is organized by the two broad types
of surety products contract surety and commercial
surety, which also includes fidelity bonds and other insurance
products for these purposes. These two operating segments have
been aggregated into one reportable business segment for
financial reporting purposes because of their similar economic
and operating characteristics. The following tables set forth
gross and net written premiums, dollars in thousands, by product
and between domestic and international risks and the respective
percentage of the total for the past three years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Written Premiums
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
2007
|
|
|
Total
|
|
|
2006
|
|
|
Total
|
|
|
2005
|
|
|
Total
|
|
|
Contract
|
|
$
|
305,624
|
|
|
|
64.8
|
%
|
|
$
|
285,157
|
|
|
|
63.2
|
%
|
|
$
|
248,662
|
|
|
|
59.6
|
%
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License and permit
|
|
|
78,875
|
|
|
|
16.7
|
|
|
|
79,144
|
|
|
|
17.5
|
|
|
|
77,764
|
|
|
|
18.6
|
|
Judicial and fiduciary
|
|
|
23,348
|
|
|
|
5.0
|
|
|
|
23,949
|
|
|
|
5.3
|
|
|
|
23,142
|
|
|
|
5.5
|
|
Public official
|
|
|
23,584
|
|
|
|
5.0
|
|
|
|
23,491
|
|
|
|
5.2
|
|
|
|
26,428
|
|
|
|
6.3
|
|
Other
|
|
|
9,021
|
|
|
|
1.9
|
|
|
|
8,287
|
|
|
|
1.9
|
|
|
|
6,406
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
134,828
|
|
|
|
28.6
|
|
|
|
134,871
|
|
|
|
29.9
|
|
|
|
133,740
|
|
|
|
32.0
|
|
Fidelity and other
|
|
|
31,208
|
|
|
|
6.6
|
|
|
|
31,328
|
|
|
|
6.9
|
|
|
|
35,128
|
|
|
|
8.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
471,660
|
|
|
|
100.0
|
%
|
|
$
|
451,356
|
|
|
|
100.0
|
%
|
|
$
|
417,530
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
467,285
|
|
|
|
99.1
|
%
|
|
$
|
448,387
|
|
|
|
99.3
|
%
|
|
$
|
415,520
|
|
|
|
99.5
|
%
|
International
|
|
|
4,375
|
|
|
|
0.9
|
|
|
|
2,969
|
|
|
|
0.7
|
|
|
|
2,010
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
471,660
|
|
|
|
100.0
|
%
|
|
$
|
451,356
|
|
|
|
100.0
|
%
|
|
$
|
417,530
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Written Premiums
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
2007
|
|
|
Total
|
|
|
2006
|
|
|
Total
|
|
|
2005
|
|
|
Total
|
|
|
Contract
|
|
$
|
266,749
|
|
|
|
62.3
|
%
|
|
$
|
247,987
|
|
|
|
60.5
|
%
|
|
$
|
202,798
|
|
|
|
55.4
|
%
|
Commercial
|
|
|
130,332
|
|
|
|
30.4
|
|
|
|
130,314
|
|
|
|
31.8
|
|
|
|
128,022
|
|
|
|
35.0
|
|
Fidelity and other
|
|
|
31,208
|
|
|
|
7.3
|
|
|
|
31,328
|
|
|
|
7.7
|
|
|
|
35,128
|
|
|
|
9.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
428,289
|
|
|
|
100.0
|
%
|
|
$
|
409,629
|
|
|
|
100.0
|
%
|
|
$
|
365,948
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
423,914
|
|
|
|
99.0
|
%
|
|
$
|
406,684
|
|
|
|
99.3
|
%
|
|
$
|
363,940
|
|
|
|
99.5
|
%
|
International
|
|
|
4,375
|
|
|
|
1.0
|
|
|
|
2,945
|
|
|
|
0.7
|
|
|
|
2,008
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
428,289
|
|
|
|
100.0
|
%
|
|
$
|
409,629
|
|
|
|
100.0
|
%
|
|
$
|
365,948
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2007, approximately $63.4 million, or 13.4% of gross
written premiums were generated from national insurance brokers,
with the single largest national broker production comprising
$14.5 million, or 3.1%, of gross written premiums.
Approximately $61.9 million, or 13.7%, of gross written
premiums were generated from national insurance brokers in 2006
with the single largest national broker production comprising
$14.5 million, or 3.2%, of gross written premiums. In 2005,
approximately $61.4 million, or 14.7%, of gross written
premiums were generated from national insurance brokers, with
the single largest national broker production comprising
$13.3 million, or 3.2%, of gross written premiums.
|
|
13.
|
Statutory
Financial Data (unaudited)
|
CNA Suretys insurance subsidiaries file 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. The Companys insurance subsidiaries follow
three permitted accounting practices which did not have a
material effect on reported statutory surplus or income. The
Companys insurance subsidiaries were given permission to
report activity in the Small Business Administrations
Surety Bond Guarantee program as a reinsurance program and to
report all indemnification recoveries as recoveries of loss
rather than allocating recoveries between loss and loss
adjustment expenses. Also, Surety Bonding has been given
permission to report ceding commissions received from Western
Surety that exceed the acquisition costs related to the business
ceded as a reduction to commission expense. Historically, the
principal differences between statutory financial statements and
financial statements prepared in accordance with GAAP are that
statutory financial statements do not reflect deferred policy
acquisition costs or intangible assets, deferred income taxes
are recorded but there are limitations as to the amount of
deferred tax assets that may be reported as admitted
assets and fixed income securities are generally carried at
amortized cost in statutory financial statements.
75
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table reconciles consolidated stockholders
equity at December 31, 2007 and 2006 as reported herein in
conformity with GAAP with total statutory capital and surplus of
CNA Suretys insurance subsidiaries, determined in
accordance with statutory accounting practices prescribed or
permitted by insurance regulatory authorities (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Consolidated equity per GAAP
|
|
$
|
667,705
|
|
|
$
|
565,902
|
|
Impact of non-insurance companies and eliminations
|
|
|
18,063
|
|
|
|
19,720
|
|
|
|
|
|
|
|
|
|
|
Insurance company equity per GAAP
|
|
|
685,768
|
|
|
|
585,622
|
|
Intangible assets
|
|
|
(133,361
|
)
|
|
|
(133,361
|
)
|
Net unrealized gain on fixed income securities
|
|
|
(14,092
|
)
|
|
|
(11,690
|
)
|
Deferred policy acquisition costs
|
|
|
(104,280
|
)
|
|
|
(102,937
|
)
|
Deferred income taxes, net
|
|
|
34,134
|
|
|
|
33,408
|
|
Accumulated postretirement benefit obligations
|
|
|
1,017
|
|
|
|
4,657
|
|
Non-admitted assets
|
|
|
(26,961
|
)
|
|
|
(26,684
|
)
|
|
|
|
|
|
|
|
|
|
Total statutory capital and surplus per statutory accounting
practices
|
|
$
|
442,225
|
|
|
$
|
349,015
|
|
|
|
|
|
|
|
|
|
|
The 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, loss reserve adequacy, and other business factors. The
RBC information is used by state insurance regulators as an
early warning mechanism to identify insurance companies that
potentially are inadequately capitalized. In addition, the
formula defines minimum capital standards that supplement the
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 enterprises 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 a company or regulators. As of
December 31, 2007 each of CNA Suretys insurance
subsidiaries had a Ratio that was in compliance with the minimum
RBC requirements.
CNA Suretys 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. Without
prior regulatory approval in 2008, Western Surety may pay
dividends of $96.7 million to CNA Surety. Combined
statutory surplus for the insurance subsidiaries at
December 31, 2007 was $442.2 million.
|
|
14.
|
Related
Party Transactions
|
In addition to those described in Note 6. Reinsurance, the
Company has the following related party transactions.
Effective July 1, 2004, CNA Surety entered into an
Administrative Services Agreement with CCC. This agreement, that
replaced an agreement originally effective January 1, 2001,
allows the Company to purchase
and/or have
access to certain services provided by CNAF. The Company will
also pay CNAF a management fee for its proportionate share of
administrative and overhead costs incurred in supporting the
services provided pursuant to this agreement. The management fee
for the year 2008 is $2.1 million that shall be paid by CNA
Surety to CNAF. The amounts paid were $2.1 million,
$2.0 million and $1.9 million for 2007, 2006 and 2005,
respectively. The agreement also allows CCC to purchase services
from the Company. In 2007, 2006 and 2005, CCC paid the
76
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Company $1.3 million, $1.1 million and
$0.8 million, respectively, for services in connection with
licensing and appointing CCCs insurance producers as
required by state insurance laws. This agreement shall be
effective so long as CNAF or their affiliates or shareholders
shall continue to own a majority interest in CNA Surety. This
agreement may be terminated by either party upon the provision
of 30 days prior notice of such termination to the other
party.
The Company was charged $7.3 million, $7.4 million and
$6.9 million for the years ended December 31, 2007,
2006 and 2005, respectively, for rents and services provided
under the Administrative Services Agreement. The Company was
charged $0.4 million and $0.5 million for the years
ended December 31, 2007 and 2006, respectively, for direct
costs incurred by CCC on the Companys behalf. In 2005, the
Company received $0.1 million for direct costs incurred by
CCC on the Companys behalf. This credit resulted from the
release of certain prior year expenses allocated to the Company
during 2005. The Company had a $0.5 million payable balance
to CCC related to the Administrative Services Agreement as of
December 31, 2007. The Company had no payable balance to
CCC related to the Administrative Services Agreement as of
December 31, 2006.
In 2005, pursuant to an agreement with the claimant on a bond
regarding certain aspects of the claim resolution, the Company
deposited $32.7 million with an affiliate to enable the
affiliate to establish a trust to fund future payments under the
bond. The bond was written by the affiliate and assumed by one
of the Companys insurance subsidiaries pursuant to the
Quota Share Treaty. This deposit is included on the
Companys Consolidated Balance Sheets as Deposit with
affiliated ceding company. This claim was previously fully
reserved. The Company is entitled to the interest income earned
by the trust.
From time to time, Western Surety provided surety bonds
guaranteeing insurance payments of certain companies to CCC and
its affiliates under retrospectively rated insurance policies
underwritten by CCC and its affiliates. Under the terms of these
bonds, referred to as insurance program bonds, if the principal,
the insured company, failed to make a required premium payment,
CCC and its affiliates would have a claim against the Company
under the bond. The Company now has a policy not to issue such
bonds to companies insured by CCC and its affiliates. The last
such bond was written in 2001 and currently bonds with less than
$0.1 million of total penal sums remain as of
December 31, 2007.
Western Surety from time to time provides license and permit
bonds and appeal bonds to CCC and its affiliates and to clients
of CCC and its affiliates. Under procedures established by the
Audit Committee, the Company may issue appeal bonds for CCC and
its affiliates and their clients with penal sums of
$10.0 million or less without prior Audit Committee
approval as long as those bonds meet the Companys normal
underwriting standards, the rates charged are market rates and
that the Company has received the indemnity of CCC. Bonds
greater than $10.0 million require the prior approval of
the Audit Committee. As of December 31, 2007, the total
amount of the outstanding appeal and license and permit bonds
written on behalf of CCC and its affiliates was approximately
$95.2 million. Of that amount, the majority consisted of 36
appeal bonds with a penal sum of $91.6 million. Western
Surety has entered into indemnity agreements with CCC and its
affiliates indemnifying Western Surety for any loss arising from
the issuance of bonds for CCC and its affiliates. The premium
for all bonds written on behalf of CCC and its affiliates was
approximately $0.6 million in 2007, $0.6 million in
2006 and $0.6 million in 2005.
In 2006, the Company, through the Quota Share Treaty, assumed
three bonds for Mexdrill Offshore, S. DE R.L. DE C. V.
(Mexdrill Offshore), a subsidiary of Diamond
Offshore Drilling, Inc. (Diamond Offshore). Loews
owns 51% of Diamond Offshores shares. As stated in
Note 6. Reinsurance, the Company is in full control of all
aspects of the underwriting and claim management of the business
assumed under the Quota Share Treaty. Prior to the
Companys issuance of these bonds with penal sums of
$24.9 million, $32.0 million and $16.1 million,
respectively, the Companys Audit Committee approved
issuance of the bonds on behalf of Diamond Offshore for up to
$150.0 million in total bond exposure provided that the
bonds meet the Companys normal underwriting standards, the
rates charged are market rates and the Company receives the
indemnity of Diamond Offshore. The premium for these bonds was
$0.9 million.
77
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In 2007, the Company, through the Quota Share Treaty, assumed
one bond for Mexdrill Offshore and one bond for Diamond
Offshore. The penal sums of these bonds were $0.7 million
and $7.3 million, respectively. The premium for these two
bonds was less than $0.1 million.
Also, in 2007, the Company, through the Quota Share Treaty,
assumed two bonds for Gulf South Pipeline Company, LP, a
subsidiary of Boardwalk Pipeline Partners, LP (Boardwalk
Pipeline). Loews owns 70% of Boardwalk Pipeline shares.
Prior to the Companys issuance of these bonds with penal
sums of $1.2 million and $0.4 million, respectively,
the Companys Audit Committee approved issuance of the
bonds on behalf of Boardwalk Pipeline. The premium for these two
bonds was less than $0.1 million in 2007.
|
|
15.
|
Selected
Quarterly Financial Data (unaudited)
|
The following is a summary of the quarterly results of
operations for the years ended December 31, 2007, 2006 and
2005 (dollars in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
109,283
|
|
|
$
|
115,620
|
|
|
$
|
125,010
|
|
|
$
|
115,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
29,721
|
|
|
$
|
31,018
|
|
|
$
|
40,478
|
|
|
$
|
31,026
|
|
Income tax expense
|
|
|
8,972
|
|
|
|
9,124
|
|
|
|
12,481
|
|
|
|
9,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
20,749
|
|
|
$
|
21,894
|
|
|
$
|
27,997
|
|
|
$
|
21,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.47
|
|
|
$
|
0.50
|
|
|
$
|
0.64
|
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$
|
0.47
|
|
|
$
|
0.50
|
|
|
$
|
0.63
|
|
|
$
|
0.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
101,060
|
|
|
$
|
107,145
|
|
|
$
|
111,649
|
|
|
$
|
111,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
25,599
|
|
|
$
|
27,674
|
|
|
$
|
33,022
|
|
|
$
|
29,339
|
|
Income tax expense
|
|
|
7,598
|
|
|
|
8,185
|
|
|
|
9,402
|
|
|
|
7,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
18,001
|
|
|
$
|
19,489
|
|
|
$
|
23,620
|
|
|
$
|
21,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.41
|
|
|
$
|
0.45
|
|
|
$
|
0.54
|
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$
|
0.41
|
|
|
$
|
0.45
|
|
|
$
|
0.54
|
|
|
$
|
0.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
90,545
|
|
|
$
|
93,316
|
|
|
$
|
99,850
|
|
|
$
|
100,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
19,535
|
|
|
$
|
(20,344
|
)
|
|
$
|
27,045
|
|
|
$
|
23,939
|
|
Income tax expense (benefit)
|
|
|
5,460
|
|
|
|
(8,409
|
)
|
|
|
7,262
|
|
|
|
7,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
14,075
|
|
|
$
|
(11,935
|
)
|
|
$
|
19,783
|
|
|
$
|
16,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings (loss) per common share
|
|
$
|
0.33
|
|
|
$
|
(0.28
|
)
|
|
$
|
0.46
|
|
|
$
|
0.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
As of December 31, 2007, the Companys management,
including the Companys Chief Executive Officer
(CEO) and Chief Financial Officer (CFO)
have conducted an evaluation of the effectiveness of its
disclosure controls and procedures (as such term is defined in
Rules 13a-15
(e) and
15d-15
(e) under the Securities Exchange Act of 1934, as amended
(the Exchange Act)). Based on their evaluation, the
CEO and CFO concluded that the Companys disclosure
controls and procedures are effective in ensuring that all
material information required to be filed in this Annual Report
has been made known to them in a timely manner.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002,
the Company included a report of managements assessment of
the design and effectiveness of its internal controls as part of
this Annual Report on
Form 10-K
for the fiscal year ended December 31, 2007.
Managements report and the independent registered public
accounting firms attestation report are included in the
Companys 2007 Financial Statements under the captions
entitled Managements Report on Internal Control Over
Financial Reporting and Report of Independent
Registered Public Accounting Firm and are incorporated
herein by reference.
There were no changes in the Companys internal control
over financial reporting (as defined in
Rules 13a-15
(f) and
15d-15
(f) under the Exchange Act) during the quarter ended
December 31, 2007 that has materially affected, or is
reasonably likely to materially affect, the Companys
internal control over financial reporting.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
None.
PART III.
|
|
ITEMS 10,
11, 12, 13, and 14.
|
DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT, EXECUTIVE
COMPENSATION, SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS, CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND PRINCIPAL ACCOUNTANT
FEES AND SERVICES
|
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 Companys
Annual Meeting of Stockholders to be held not later than
120 days after the end of the fiscal year covered by this
Form 10-K.
Information required by Items 10 through 14 will appear in
the Proxy Statement and is incorporated herein by reference.
79
PART IV.
|
|
ITEM 15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
|
|
|
|
|
|
|
Page
|
|
Financial Statement Schedules:
|
|
|
|
|
|
|
|
81
|
|
|
|
|
82
|
|
|
|
|
86
|
|
|
|
|
87
|
|
|
|
|
88
|
|
|
|
|
89
|
|
|
|
|
90
|
|
80
SCHEDULE I
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
|
|
Cost or
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Carrying
|
|
|
|
Cost
|
|
|
Value
|
|
|
Value
|
|
|
|
(Amounts in thousands)
|
|
|
Fixed Income Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and government agencies and authorities
|
|
$
|
155,152
|
|
|
$
|
156,527
|
|
|
$
|
156,527
|
|
States, municipalities and political subdivisions
|
|
|
625,858
|
|
|
|
638,125
|
|
|
|
638,125
|
|
All other bonds, including corporate bonds and other
asset-backed securities
|
|
|
168,698
|
|
|
|
168,702
|
|
|
|
168,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
949,708
|
|
|
|
963,354
|
|
|
|
963,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
1,683
|
|
|
|
1,789
|
|
|
|
1,789
|
|
Short-term investments
|
|
|
49,453
|
|
|
|
|
|
|
|
49,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
1,000,844
|
|
|
|
|
|
|
$
|
1,014,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
Cost or
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Carrying
|
|
|
|
Cost
|
|
|
Value
|
|
|
Value
|
|
|
|
(Amounts in thousands)
|
|
|
Fixed Income Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and government agencies and authorities
|
|
$
|
132,758
|
|
|
$
|
131,005
|
|
|
$
|
131,005
|
|
States, municipalities and political subdivisions
|
|
|
492,640
|
|
|
|
506,345
|
|
|
|
506,345
|
|
All other bonds, including corporate bonds and other
asset-backed securities
|
|
|
147,780
|
|
|
|
147,441
|
|
|
|
147,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
773,178
|
|
|
|
784,791
|
|
|
|
784,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
1,508
|
|
|
|
1,668
|
|
|
|
1,668
|
|
Short-term investments
|
|
|
103,640
|
|
|
|
|
|
|
|
103,640
|
|
Other investments
|
|
|
22
|
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
878,348
|
|
|
|
|
|
|
$
|
890,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
SCHEDULE II
CNA
SURETY CORPORATION
(PARENT COMPANY)
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Amounts in thousands)
|
|
|
ASSETS
|
Investments in and advances to subsidiaries
|
|
$
|
680,923
|
|
|
$
|
578,865
|
|
Fixed income securities (amortized cost: $-0- and $800)
|
|
|
|
|
|
|
800
|
|
Equity investments (cost: $1,683 and $1,508)
|
|
|
1,789
|
|
|
|
1,668
|
|
Short-term investments, at cost (which approximates fair value)
|
|
|
7,294
|
|
|
|
9,452
|
|
Cash (restricted: $4,765 and $2,823)
|
|
|
4,767
|
|
|
|
2,897
|
|
Other assets
|
|
|
6,384
|
|
|
|
6,394
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
701,157
|
|
|
$
|
600,076
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Debt
|
|
$
|
30,791
|
|
|
$
|
30,690
|
|
Other liabilities
|
|
|
2,661
|
|
|
|
3,484
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
33,452
|
|
|
|
34,174
|
|
|
STOCKHOLDERS EQUITY
|
Common stock
|
|
|
455
|
|
|
|
453
|
|
Additional paid-in capital
|
|
|
274,069
|
|
|
|
268,651
|
|
Retained earnings
|
|
|
399,241
|
|
|
|
306,745
|
|
Accumulated other comprehensive income
|
|
|
8,800
|
|
|
|
4,993
|
|
Treasury stock, at cost
|
|
|
(14,860
|
)
|
|
|
(14,940
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
667,705
|
|
|
|
565,902
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
701,157
|
|
|
$
|
600,076
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
financial statements.
82
SCHEDULE II
CNA
SURETY CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY) (Continued)
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
677
|
|
|
$
|
854
|
|
|
$
|
774
|
|
Net realized investment gains
|
|
|
146
|
|
|
|
117
|
|
|
|
2,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
823
|
|
|
|
971
|
|
|
|
3,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
2,918
|
|
|
|
3,669
|
|
|
|
3,545
|
|
Corporate expense
|
|
|
7,193
|
|
|
|
7,672
|
|
|
|
5,648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
10,111
|
|
|
|
11,341
|
|
|
|
9,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations before income taxes and equity in net
income of subsidiaries
|
|
|
(9,288
|
)
|
|
|
(10,370
|
)
|
|
|
(6,192
|
)
|
Income tax benefit
|
|
|
(3,367
|
)
|
|
|
(5,235
|
)
|
|
|
(2,069
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before equity in net income of subsidiaries
|
|
|
(5,921
|
)
|
|
|
(5,135
|
)
|
|
|
(4,123
|
)
|
Equity in net income of subsidiaries
|
|
|
98,417
|
|
|
|
87,953
|
|
|
|
42,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
92,496
|
|
|
$
|
82,818
|
|
|
$
|
38,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
financial statements.
83
SCHEDULE II
CNA
SURETY CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY) (Continued)
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
92,496
|
|
|
$
|
82,818
|
|
|
$
|
38,431
|
|
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net income of subsidiaries
|
|
|
(98,417
|
)
|
|
|
(87,953
|
)
|
|
|
(42,554
|
)
|
Depreciation and amortization
|
|
|
101
|
|
|
|
101
|
|
|
|
101
|
|
Net realized investment gains
|
|
|
(146
|
)
|
|
|
(117
|
)
|
|
|
(2,227
|
)
|
Stock-based compensation
|
|
|
1,892
|
|
|
|
1,207
|
|
|
|
|
|
Cash dividends from subsidiaries
|
|
|
2,000
|
|
|
|
11,513
|
|
|
|
20,465
|
|
Tax payments received from subsidiaries
|
|
|
43,385
|
|
|
|
42,449
|
|
|
|
11,764
|
|
Federal income tax payments
|
|
|
(41,000
|
)
|
|
|
(37,250
|
)
|
|
|
(10,000
|
)
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes, net
|
|
|
(483
|
)
|
|
|
(653
|
)
|
|
|
(650
|
)
|
Accrued expenses
|
|
|
(747
|
)
|
|
|
642
|
|
|
|
(373
|
)
|
Change in other assets and liabilities
|
|
|
(3,380
|
)
|
|
|
(5,358
|
)
|
|
|
(253
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(4,299
|
)
|
|
|
7,399
|
|
|
|
14,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net advances from (to) subsidiaries
|
|
|
232
|
|
|
|
(2,032
|
)
|
|
|
731
|
|
Net sales of fixed income securities
|
|
|
200
|
|
|
|
200
|
|
|
|
7,860
|
|
Net purchases of equity securities
|
|
|
(29
|
)
|
|
|
(190
|
)
|
|
|
(38
|
)
|
Changes in short-term investments
|
|
|
2,158
|
|
|
|
7,099
|
|
|
|
(10,753
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
2,561
|
|
|
|
5,077
|
|
|
|
(2,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on debt
|
|
|
|
|
|
|
(20,000
|
)
|
|
|
(15,000
|
)
|
Debt issuance costs
|
|
|
|
|
|
|
|
|
|
|
(125
|
)
|
Employee stock option exercises and other
|
|
|
3,608
|
|
|
|
7,855
|
|
|
|
3,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
3,608
|
|
|
|
(12,145
|
)
|
|
|
(11,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash
|
|
|
1,870
|
|
|
|
331
|
|
|
|
804
|
|
Cash at beginning of period
|
|
|
2,897
|
|
|
|
2,566
|
|
|
|
1,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
4,767
|
|
|
$
|
2,897
|
|
|
$
|
2,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
financial statements.
84
SCHEDULE II
CNA
SURETY CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY) (Continued)
NOTES TO CONDENSED FINANCIAL INFORMATION
|
|
1.
|
Restricted
Cash and Short-Term Investments
|
As of December 31, 2007 and 2006, short-term investments
and cash included $9.8 million and $9.4 million,
respectively, of restricted cash primarily related to premium
receipt collections ultimately due to the Companys
insurance subsidiaries.
85
SCHEDULE III
CNA
SURETY CORPORATION AND SUBSIDIARIES
As of and for the Years Ended
December 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Deferred policy acquisition costs
|
|
$
|
104,280
|
|
|
$
|
102,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid losses and loss adjustment expense reserves
|
|
$
|
472,842
|
|
|
$
|
434,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned premiums
|
|
$
|
258,930
|
|
|
$
|
253,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premium revenue
|
|
$
|
421,506
|
|
|
$
|
393,642
|
|
|
$
|
348,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
44,636
|
|
|
$
|
39,324
|
|
|
$
|
33,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, claims, losses and settlement expenses
|
|
$
|
103,124
|
|
|
$
|
95,830
|
|
|
$
|
127,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred policy acquisition costs
|
|
$
|
170,346
|
|
|
$
|
164,510
|
|
|
$
|
156,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses
|
|
$
|
57,066
|
|
|
$
|
52,050
|
|
|
$
|
45,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
428,289
|
|
|
$
|
409,629
|
|
|
$
|
365,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
SCHEDULE IV
CNA
SURETY CORPORATION AND SUBSIDIARIES
For the Years Ended December 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
Ceded to
|
|
|
Assumed
|
|
|
|
|
|
of Amount
|
|
|
|
Gross
|
|
|
Other
|
|
|
from Other
|
|
|
Net
|
|
|
Assumed
|
|
|
|
Amount
|
|
|
Companies
|
|
|
Companies(1)
|
|
|
Amount
|
|
|
to Net
|
|
|
|
(Amounts in thousands)
|
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance
|
|
$
|
360,877
|
|
|
$
|
43,371
|
|
|
$
|
110,783
|
|
|
$
|
428,289
|
|
|
|
25.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums written
|
|
$
|
360,877
|
|
|
$
|
43,371
|
|
|
$
|
110,783
|
|
|
$
|
428,289
|
|
|
|
25.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance
|
|
$
|
353,594
|
|
|
$
|
45,026
|
|
|
$
|
112,938
|
|
|
$
|
421,506
|
|
|
|
26.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums earned
|
|
$
|
353,594
|
|
|
$
|
45,026
|
|
|
$
|
112,938
|
|
|
$
|
421,506
|
|
|
|
26.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance
|
|
$
|
334,020
|
|
|
$
|
41,727
|
|
|
$
|
117,336
|
|
|
$
|
409,629
|
|
|
|
28.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums written
|
|
$
|
334,020
|
|
|
$
|
41,727
|
|
|
$
|
117,336
|
|
|
$
|
409,629
|
|
|
|
28.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance
|
|
$
|
324,831
|
|
|
$
|
44,958
|
|
|
$
|
113,769
|
|
|
$
|
393,642
|
|
|
|
28.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums earned
|
|
$
|
324,831
|
|
|
$
|
44,958
|
|
|
$
|
113,769
|
|
|
$
|
393,642
|
|
|
|
28.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance
|
|
$
|
311,435
|
|
|
$
|
51,582
|
|
|
$
|
106,095
|
|
|
$
|
365,948
|
|
|
|
29.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums written
|
|
$
|
311,435
|
|
|
$
|
51,582
|
|
|
$
|
106,095
|
|
|
$
|
365,948
|
|
|
|
29.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance
|
|
$
|
288,994
|
|
|
$
|
54,141
|
|
|
$
|
113,508
|
|
|
$
|
348,361
|
|
|
|
32.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums earned
|
|
$
|
288,994
|
|
|
$
|
54,141
|
|
|
$
|
113,508
|
|
|
$
|
348,361
|
|
|
|
32.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Primarily from affiliates. |
87
SCHEDULE V
CNA
SURETY CORPORATION AND SUBSIDIARIES
As of and for the Years Ended December 31, 2007, 2006
and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
Charged to
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
Costs and
|
|
|
Other
|
|
|
|
|
|
End of
|
|
|
|
of Period
|
|
|
Expenses
|
|
|
Accounts
|
|
|
Deductions(1)
|
|
|
Period
|
|
|
|
(Amounts in thousands)
|
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts on premiums receivable
|
|
$
|
1,369
|
|
|
$
|
393
|
|
|
$
|
|
|
|
$
|
617
|
|
|
$
|
1,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts on reinsurance receivable
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts on premiums receivable
|
|
$
|
1,490
|
|
|
$
|
594
|
|
|
$
|
|
|
|
$
|
715
|
|
|
$
|
1,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts on reinsurance receivable
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts on premiums receivable
|
|
$
|
2,153
|
|
|
$
|
(168
|
)
|
|
$
|
|
|
|
$
|
495
|
|
|
$
|
1,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts on reinsurance receivable
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Write-offs charged against allowance. |
88
SCHEDULE VI
CNA
SURETY CORPORATION AND SUBSIDIARIES
INSURANCE OPERATIONS
As of and for the Years Ended December 31, 2007, 2006
and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Amounts in thousands)
|
|
|
Deferred policy acquisition costs
|
|
$
|
104,280
|
|
|
$
|
102,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for unpaid claims and claim adjustment expenses
|
|
$
|
472,842
|
|
|
$
|
434,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount (if any) deducted
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned premiums
|
|
$
|
258,930
|
|
|
$
|
253,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premium revenue
|
|
$
|
421,506
|
|
|
$
|
393,642
|
|
|
$
|
348,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
44,636
|
|
|
$
|
39,324
|
|
|
$
|
33,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net claims and claim expenses incurred related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
$
|
108,178
|
|
|
$
|
101,140
|
|
|
$
|
151,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior years
|
|
$
|
(5,054
|
)
|
|
$
|
(5,310
|
)
|
|
$
|
(23,333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred policy acquisition costs
|
|
$
|
170,346
|
|
|
$
|
164,510
|
|
|
$
|
156,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net paid claims and claim adjustment expenses
|
|
$
|
70,144
|
|
|
$
|
83,478
|
|
|
$
|
97,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
428,289
|
|
|
$
|
409,629
|
|
|
$
|
365,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
(a)(3)
Exhibits
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
9
|
|
|
Not applicable.
|
|
10
|
(1)
|
|
Form of The CNA Surety Corporation Replacement Stock Option Plan
(filed on August 15, 1997 as Exhibit 10(12) to CNA
Surety Corporations Registration Statement on
Form S-4
(Registration
No. 333-33753),
and incorporated herein by reference.)
|
|
10
|
(2)
|
|
Form of CNA Surety Corporation 1997 Long-Term Equity
Compensation Plan (filed on August 15, 1997 as
Exhibit 10(13) to CNA Surety Corporations
Registration Statement on
Form S-4
(Registration
No. 333-33753),
and incorporated herein by reference.)
|
|
10
|
(3)
|
|
Form of Aggregate Stop Loss Reinsurance Contract by and between
Western Surety Company, Universal Surety of America, Surety
Bonding Company of America and Continental Casualty Company
(filed on December 27, 1996 as Exhibit 2 to Capsure
Holdings Corp.s
Form 8-K,
and incorporated herein by reference.)
|
|
10
|
(13)
|
|
Form of Surety Excess of Loss Reinsurance Contract by and
between Western Surety Company, Universal Surety of America,
Surety Bonding Company of America and Continental Casualty
Company (filed on March 15, 2004 as Exhibit 10(13) to
CNA Surety Corporations
Form 10-K,
and incorporated herein by reference.)
|
|
10
|
(15)
|
|
Credit Agreement between CNA Surety Corporation and LaSalle Bank
National Association (filed on November 14, 2002 as
Exhibit 10(3) to CNA Surety Corporations
Form 10-Q,
and incorporated herein by reference.)
|
|
10
|
(16)
|
|
Amendment to Credit Agreement between CNA Surety Corporation and
LaSalle Bank National Association (filed on March 26, 2003
as Exhibit 10(9) to CNA Surety Corporations
Form 10-K,
and incorporated herein by reference.)
|
|
10
|
(17)
|
|
Second Amendment to Credit Agreement between CNA Surety
Corporation and LaSalle Bank National Association (filed on
November 13, 2003 as Exhibit 10(2) to CNA Surety
Corporations
Form 10-Q,
and incorporated herein by reference.)
|
|
10
|
(18)
|
|
Third Amendment to Credit Agreement between CNA Surety
Corporation and LaSalle Bank National Association (filed on
November 13, 2003 as Exhibit 10(2) to CNA Surety
Corporations
Form 10-Q,
and incorporated herein by reference.)
|
|
10
|
(19)
|
|
Form of Services and Indemnity Agreement by and between Western
Surety Company and Continental Casualty Company (filed on
November 14, 2002 as Exhibit 10(5) to CNA Surety
Corporations
Form 10-Q,
and incorporated herein by reference.)
|
|
10
|
(23)
|
|
Form of CNA Surety Corporation 2000 Employee Stock Purchase Plan
(filed on January 26, 2001 (incorporated by reference) to
CNA Surety Corporations Registration Statement on
Form S-8
(Registration
No. 333-54440),
and incorporated herein by reference.)
|
|
10
|
(27)
|
|
Form of CNA Surety Corporation 2005 Deferred Compensation Plan
(filed on May 2, 2005 as Exhibit 10(27) to CNA Surety
Corporations
Form 10-Q,
and incorporated herein by reference.)
|
|
10
|
(28)
|
|
Form of CNA Surety Corporation 2005 Deferred Compensation Plan
Trust (filed on May 2, 2005 as Exhibit 10(28) to CNA
Surety Corporations
Form 10-Q,
and incorporated herein by reference.)
|
|
10
|
(29)
|
|
Form of Third Amendment to CNA Surety Corporation 2005 Deferred
Compensation Plan (filed on May 2, 2005 as
Exhibit 10(29) to CNA Surety Corporations
Form 10-Q,
and incorporated herein by reference.)
|
|
10
|
(30)
|
|
Form of Employment Agreement dated as of January 1, 2006 by
and between CNA Surety Corporation and John F. Welch (filed on
December 14, 2005 as Exhibit 10(30) to CNA Surety
Corporations
Form 8-K,
and incorporated herein by reference.)
|
|
10
|
(32)
|
|
Amendment to Form of Surety Excess of Loss Reinsurance Contract
by and between Western Surety Company, Universal Surety of
America, Surety Bonding Company of America and Continental
Casualty Company (filed on August 2, 2005 as
Exhibit 10(31) to CNA Surety Corporations
Form 10-Q,
and incorporated herein by reference.)
|
|
10
|
(33)
|
|
Amendment to Form of Surety Quota Share Reinsurance Contract by
and between Western Surety Company and Continental Casualty
Company (filed on August 2, 2005 as Exhibit 10(32) to
CNA Surety Corporations
Form 10-Q,
and incorporated herein by reference.)
|
90
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
(34)
|
|
Form of CNA Surety Corporation 2006 Long-Term Equity
Compensation Plan (filed on February 16, 2006 as
Exhibit 10(34) to CNA Surety Corporations
Form 8-K,
and incorporated herein by reference.)
|
|
10
|
(35)
|
|
Refinancing of Credit Agreement between CNA Surety Corporation
and LaSalle Bank National Association (filed on July 28,
2005 as CNA Surety Corporations
Form 8-K,
and incorporated herein by reference.)
|
|
10
|
(36)
|
|
CNA Surety Corporation 2006 Long-Term Equity Compensation Plan
(filed on December 21, 2006 to CNA Surety
Corporations Registration Statement on
Form S-8
(Registration
No. 333-139551),
and incorporated herein by reference.)
|
|
10
|
(37)
|
|
Post-Effective Amendment to CNA Surety Corporation 1997
Long-Term Equity Compensation Plan (filed on December 21,
2006 to CNA Surety Corporations Registration Statement on
Form S-8
POS (Registration
No. 333-37207),
and incorporated herein by reference.)
|
|
10
|
(38)
|
|
Form of Surety Quota Share Reinsurance Contract by and between
Western Surety Company and Continental Casualty Company (filed
on February 21, 2007 as Exhibit 10(38) to CNA Surety
Corporations Form
10-K, and
incorporated herein by reference.)
|
|
11
|
|
|
Not Applicable.
|
|
12
|
|
|
Not Applicable.
|
|
13
|
|
|
Not Applicable.
|
|
16
|
|
|
Not Applicable.
|
|
18
|
|
|
Not Applicable.
|
|
21
|
|
|
Subsidiaries of the Registrant.
|
|
22
|
|
|
Not Applicable.
|
|
23
|
|
|
Consent of Deloitte & Touche LLP dated
February 19, 2008.
|
|
24
|
|
|
Not Applicable.
|
|
31
|
(1)
|
|
Certification pursuant to
Rule 13a-14(a)
of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002-Chief
Executive Officer.
|
|
31
|
(2)
|
|
Certification pursuant to
Rule 13a-14(a)
of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002-Chief
Financial Officer.
|
|
32
|
(1)
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
|
32
|
(2)
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
91
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.
CNA SURETY CORPORATION
John F. Welch
President and Chief Executive Officer
(Principal Executive Officer)
John F. Corcoran
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated February 19, 2008
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.
|
|
|
|
|
Date
|
|
Title
|
|
Signature
|
|
February 19, 2008
|
|
Chairman of the Board
and Director
|
|
/s/ James
R. Lewis
James
R. Lewis
|
|
|
|
|
|
February 19, 2008
|
|
Director
|
|
/s/ Philip
H. Britt
Philip
H. Britt
|
|
|
|
|
|
February 19, 2008
|
|
Director
|
|
/s/ Robert
A. Tinstman
Robert
A. Tinstman
|
|
|
|
|
|
February 19, 2008
|
|
Director
|
|
/s/ David
B. Edelson
David
B. Edelson
|
|
|
|
|
|
February 19, 2008
|
|
Director
|
|
/s/ Anthony
S. Cleberg
Anthony
S. Cleberg
|
|
|
|
|
|
February 19, 2008
|
|
Director
|
|
/s/ D.
Craig Mense
D.
Craig Mense
|
|
|
|
|
|
February 19, 2008
|
|
Director
|
|
/s/ John
F. Welch
John
F. Welch
|
92