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,
2010
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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 or 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 whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(Section 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No þ
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(Section 229.405 of this chapter) 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
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
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 $271.4 million based upon the closing
price of $16.07 per share on June 30, 2010, 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, 2011, 44,773,357 shares of the
registrants Common Stock were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE:
Portions of the CNA Surety Corporation Proxy Statement prepared
for the 2011 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 the
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
(CNAF) with Capsure Holdings Corp.s
(Capsure) insurance subsidiaries. CNA Surety is
currently one of the largest surety providers in the United
States with an approximate market share of 7.8% (based upon 2009
Surety and Fidelity Association of America (SFAA)
written premium data). CNA Suretys wide selection of
surety products ranges from very small commercial bonds to large
contract bonds.
Formation
of CNA Surety and Merger
In December 1996, 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. Through its
insurance subsidiaries, CNAF owns approximately 61% of the
outstanding common stock of CNA Surety. Loews Corporation owns
approximately 90% of the outstanding common stock of CNAF. CNAF,
through its operating subsidiaries, writes multiple lines of
property and casualty insurance, including surety business that
is reinsured by Western Surety. 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).
CNAF
Proposal
In October 2010, the Company received an unsolicited proposal
from CNAF to acquire all of the outstanding shares of common
stock that are not currently owned by subsidiaries of CNAF at a
purchase price of $22.00 per share in cash (the CNAF
Proposal). The Companys Board of Directors appointed
a special committee (the Special Committee),
comprised solely of the Companys three independent
directors, to review and evaluate the CNAF proposal. The Special
Committee retained both legal and financial advisors to assist
in their consideration of the CNAF Proposal.
On February 4, 2011, the Special Committee announced that
it does not support the terms of the proposal and advised CNAF
that it is open to alternate proposals.
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
37,000 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.
2
Financial
Strength Ratings
A.M. Best
Company, Inc.
In February 2010, A.M. Best Company, Inc.
(A.M. Best) affirmed the A (Excellent) rating
and stable rating outlook for Western Surety, Surety Bonding and
Universal Surety. 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-rated insurers have been shown to be among the strongest in
ability to meet policyholder and other contractual obligations.
A.M. Bests letter ratings range from A++ (Superior)
to F (In Liquidation) with A++ being highest. 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 intercompany reinsurance and related agreements, CNA
Suretys customers have access to CCCs broader
underwriting capacity. CCCs A rating and stable rating
outlook was also affirmed in February 2010.
Standard
and Poors
CCC, Western Surety, Surety Bonding and Universal Surety are
currently rated A- (Stable) by Standard and 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
credit-worthiness 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.
3
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.
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 assumes 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):
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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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2010
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Total
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2009
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Total
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2008
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Total
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Contract
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$
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278,375
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63.2
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%
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$
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274,848
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62.7
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%
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$
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300,236
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64.3
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%
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Commercial:
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License and permit
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75,133
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17.1
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75,594
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17.3
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80,291
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17.2
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Judicial and fiduciary
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22,250
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5.1
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22,941
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5.2
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23,227
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5.0
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Public official
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25,111
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5.7
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25,707
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5.9
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23,466
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5.0
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Other
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8,822
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2.0
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9,306
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2.1
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9,015
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1.9
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Total commercial
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131,316
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29.9
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133,548
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30.5
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135,999
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29.1
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Fidelity and other
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30,463
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6.9
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29,909
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6.8
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30,892
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6.6
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$
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440,154
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100.0
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%
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$
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438,305
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100.0
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%
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$
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467,127
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100.0
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%
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Domestic
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$
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430,901
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97.9
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%
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$
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432,260
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98.6
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%
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$
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461,998
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98.9
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%
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International
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9,253
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2.1
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6,045
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1.4
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5,129
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1.1
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$
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440,154
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100.0
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%
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$
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438,305
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100.0
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%
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$
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467,127
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100.0
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%
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4
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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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2010
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Total
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2009
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Total
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2008
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Total
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Contract
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$
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257,410
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61.8
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%
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$
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250,793
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61.0
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%
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$
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268,085
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62.1
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%
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Commercial
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128,401
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30.9
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130,332
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31.7
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132,702
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30.7
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Fidelity and other
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30,463
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7.3
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29,909
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7.3
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30,892
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7.2
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$
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416,274
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100.0
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%
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$
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411,034
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100.0
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%
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$
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431,679
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100.0
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%
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Domestic
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$
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407,021
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97.8
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%
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$
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404,989
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98.5
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%
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$
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426,570
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98.8
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%
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International
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9,253
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2.2
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6,045
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1.5
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5,109
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1.2
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$
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416,274
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100.0
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%
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$
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411,034
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100.0
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%
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$
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431,679
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100.0
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%
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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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2010
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Total
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2009
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Total
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2008
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Total
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Contract
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26
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1.2
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%
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29
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1.3
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%
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31
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1.3
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%
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Commercial
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1,650
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76.0
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1,711
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75.8
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1,836
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76.4
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Fidelity and other
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495
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22.8
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517
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22.9
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537
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22.3
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2,171
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100.0
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%
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2,257
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100.0
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%
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2,404
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100.0
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%
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The following table sets forth the average bond penalty/policy
limit for each principal class of bonds for the past three years
(amounts in thousands):
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Average Bond Penalty/Policy Limit as of
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December 31,
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2010
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2009
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2008
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Contract
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$
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1,286.4
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$
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1,150.0
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$
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1,236.7
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Commercial
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14.9
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14.8
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14.5
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Fidelity and other
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19.7
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19.8
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19.9
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|
In 2010 no individual agency generated more than 1.2% of
aggregate gross written premiums. Approximately
$93.3 million, or 21.2%, of gross written premiums were
generated from national insurance brokers in 2010 with the
single largest national broker production comprising
$22.9 million, or 5.2%, 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 37,000 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 38 local branch
offices.
5
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Gross Written Premiums by State:
|
|
|
|
|
|
|
|
|
|
|
|
|
California
|
|
|
8.9
|
%
|
|
|
8.4
|
%
|
|
|
9.2
|
%
|
Texas
|
|
|
8.6
|
|
|
|
9.4
|
|
|
|
9.4
|
|
New York
|
|
|
5.0
|
|
|
|
4.9
|
|
|
|
5.0
|
|
Florida
|
|
|
4.9
|
|
|
|
5.7
|
|
|
|
6.0
|
|
Illinois
|
|
|
4.2
|
|
|
|
4.5
|
|
|
|
4.5
|
|
Massachusetts
|
|
|
3.6
|
|
|
|
3.3
|
|
|
|
3.1
|
|
Pennsylvania
|
|
|
3.2
|
|
|
|
3.1
|
|
|
|
2.8
|
|
Georgia
|
|
|
2.9
|
|
|
|
2.7
|
|
|
|
3.4
|
|
Colorado
|
|
|
2.5
|
|
|
|
2.3
|
|
|
|
2.7
|
|
Minnesota
|
|
|
2.4
|
|
|
|
1.8
|
|
|
|
2.2
|
|
All
other(a)
|
|
|
53.8
|
|
|
|
53.9
|
|
|
|
51.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes the District of Columbia and Puerto Rico. No other
state represented more than 2.3% for the year ended
December 31, 2010. |
Contract
Surety
The Company broadly targets contractors with less than
$200 million in contracted work in progress, and more
selectively targets contractors with larger work programs.
During 2010, the Company extended its strategy to also target
contractors with the largest work programs. Often referred to as
jumbo contractors, these accounts are typically
served by a group of sureties with each surety taking a share of
the bonds written for the account. The Companys contract
market is comprised of small contractors (less than
$10 million in work in progress), medium contractors
($10-$100 million) and large contractors (greater than
$100 million). With respect to contract surety, 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 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 79%
of the Companys non-contract gross written premiums and
29% of the Companys total gross written premiums.
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. Independent agents use bONdLINE, which
is an Internet-based tool, to request and deliver bonds. In
addition, the Company may provide independent agents with
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.
CNA Surety also maintains specific underwriting staff in
Chicago, Illinois dedicated to middle market and Fortune
1000 accounts. The Companys corporate commercial
account business represents approximately 21%
6
of the Companys commercial gross written premiums and
approximately 8% of the Companys total gross written
premiums.
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 2009 data from the SFAA, the U.S. market aggregates
approximately $6.3 billion in direct written premiums,
comprised of approximately $5.2 billion in surety premiums
and approximately $1.1 billion in fidelity premiums. The 20
largest surety companies account for approximately 82% of the
domestic surety market and 94% of the domestic fidelity market.
The large diversified insurance companies hold the largest
market shares. In 2009, CNA Surety was the fourth largest surety
provider with a 7.8% 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 as a result of ten years of
profitable underwriting experience through 1999. This
competition has typically manifested itself through reduced
premium rates and 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. The surety market has been profitable for
most carriers since 2006 and competition remains strong.
However, the surety market remains steady, with little, if any,
deterioration in underwriting and pricing.
Reinsurance
The Companys insurance subsidiaries, in the ordinary
course of business, purchase reinsurance from other insurance
companies and affiliates. Reinsurance arrangements are used to
limit maximum loss, provide greater diversification of risk,
minimize exposure on larger risks and allow us to meet certain
regulatory restrictions that would otherwise limit the size of
bonds the Company can write. Reinsurance contracts do not
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, 2010, the Company holds approximately
$4.2 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.
7
The Company had no reinsurance receivable from affiliates as of
December 31, 2010 or 2009. CNA Suretys largest
reinsurance recoverable from a third party, a company rated A+
by A.M. Best, was approximately $7.8 million and
$9.0 million at December 31, 2010 and 2009,
respectively.
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) indemnity 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 balance numerous macroeconomic,
customer specific and claims specific factors and trends, most
of which, in and of 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 Losses 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, 2010 (dollars in thousands):
|
|
|
|
|
Net reserves at end of year, GAAP basis
|
|
$
|
346,082
|
|
Ceded reinsurance, net of indemnification
|
|
|
43,007
|
|
|
|
|
|
|
Gross reserves at end of year, GAAP basis
|
|
|
389,089
|
|
Estimated reinsurance recoverable netted against gross reserves
for SAP
|
|
|
(43,007
|
)
|
Net reserves on retroactive reinsurance assumed
|
|
|
(10,223
|
)
|
|
|
|
|
|
Net reserves at end of year, SAP basis
|
|
$
|
335,859
|
|
|
|
|
|
|
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
8
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 on net basis, excluding the effect of foreign exchange
revaluation on loss reserves assumed in
non-U.S. currencies,
primarily the Canadian dollar. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
|
Gross reserves for losses and loss adjustment expenses
|
|
$
|
204,457
|
|
|
$
|
315,811
|
|
|
$
|
303,433
|
|
|
$
|
413,539
|
|
|
$
|
363,387
|
|
|
$
|
424,449
|
|
|
$
|
434,224
|
|
|
$
|
472,842
|
|
|
$
|
428,724
|
|
|
$
|
406,123
|
|
|
$
|
389,089
|
|
Originally reported ceded recoverable
|
|
|
70,159
|
|
|
|
166,318
|
|
|
|
137,301
|
|
|
|
158,357
|
|
|
|
116,831
|
|
|
|
147,435
|
|
|
|
144,858
|
|
|
|
150,496
|
|
|
|
83,691
|
|
|
|
50,968
|
|
|
|
43,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserves for losses and loss adjustment expenses
|
|
|
134,298
|
|
|
|
149,493
|
|
|
|
166,132
|
|
|
|
255,182
|
|
|
|
246,556
|
|
|
|
277,014
|
|
|
|
289,366
|
|
|
|
322,346
|
|
|
|
345,033
|
|
|
|
355,155
|
|
|
|
346,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net paid (cumulative) as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
44,763
|
|
|
|
64,832
|
|
|
|
59,567
|
|
|
|
88,857
|
|
|
|
65,353
|
|
|
|
76,623
|
|
|
|
55,879
|
|
|
|
46,203
|
|
|
|
43,723
|
|
|
|
38,183
|
|
|
|
|
|
Two years later
|
|
|
75,825
|
|
|
|
98,885
|
|
|
|
100,595
|
|
|
|
128,607
|
|
|
|
92,582
|
|
|
|
120,462
|
|
|
|
81,802
|
|
|
|
70,941
|
|
|
|
69,129
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
87,011
|
|
|
|
117,396
|
|
|
|
115,034
|
|
|
|
145,895
|
|
|
|
114,984
|
|
|
|
133,942
|
|
|
|
95,857
|
|
|
|
87,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
93,154
|
|
|
|
132,891
|
|
|
|
125,740
|
|
|
|
158,257
|
|
|
|
124,742
|
|
|
|
145,133
|
|
|
|
107,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
99,117
|
|
|
|
139,051
|
|
|
|
133,696
|
|
|
|
161,978
|
|
|
|
134,324
|
|
|
|
154,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
100,628
|
|
|
|
139,125
|
|
|
|
136,669
|
|
|
|
171,446
|
|
|
|
143,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
98,737
|
|
|
|
145,058
|
|
|
|
143,254
|
|
|
|
179,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
102,953
|
|
|
|
147,770
|
|
|
|
149,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
104,865
|
|
|
|
150,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
104,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserves re-estimated as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of initial year
|
|
|
134,298
|
|
|
|
149,493
|
|
|
|
166,132
|
|
|
|
255,182
|
|
|
|
246,556
|
|
|
|
277,014
|
|
|
|
289,366
|
|
|
|
322,346
|
|
|
|
345,033
|
|
|
|
355,155
|
|
|
|
346,082
|
|
One year later
|
|
|
139,110
|
|
|
|
155,673
|
|
|
|
205,422
|
|
|
|
254,570
|
|
|
|
223,223
|
|
|
|
271,704
|
|
|
|
284,312
|
|
|
|
276,845
|
|
|
|
290,751
|
|
|
|
278,936
|
|
|
|
|
|
Two years later
|
|
|
140,094
|
|
|
|
182,812
|
|
|
|
199,865
|
|
|
|
231,619
|
|
|
|
224,919
|
|
|
|
264,794
|
|
|
|
230,205
|
|
|
|
222,562
|
|
|
|
214,463
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
132,504
|
|
|
|
169,340
|
|
|
|
195,191
|
|
|
|
246,244
|
|
|
|
218,301
|
|
|
|
232,115
|
|
|
|
202,172
|
|
|
|
187,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
120,051
|
|
|
|
174,346
|
|
|
|
203,488
|
|
|
|
237,544
|
|
|
|
202,416
|
|
|
|
214,685
|
|
|
|
190,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
119,471
|
|
|
|
174,847
|
|
|
|
196,258
|
|
|
|
225,537
|
|
|
|
193,888
|
|
|
|
223,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
118,485
|
|
|
|
167,741
|
|
|
|
191,609
|
|
|
|
225,511
|
|
|
|
201,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
118,834
|
|
|
|
164,813
|
|
|
|
190,495
|
|
|
|
233,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
116,344
|
|
|
|
164,343
|
|
|
|
195,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
117,661
|
|
|
|
168,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
118,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net redundancy (deficiency)
|
|
$
|
16,071
|
|
|
$
|
(19,276)
|
|
|
$
|
(29,752)
|
|
|
$
|
21,729
|
|
|
$
|
44,611
|
|
|
$
|
53,133
|
|
|
$
|
98,659
|
|
|
$
|
135,083
|
|
|
$
|
130,570
|
|
|
$
|
76,219
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net redundancy (deficiency) due to foreign exchange
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(110)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative net redundancy (deficiency) excluding foreign exchange
|
|
$
|
16,071
|
|
|
$
|
(19,276)
|
|
|
$
|
(29,752)
|
|
|
$
|
21,729
|
|
|
$
|
44,611
|
|
|
$
|
53,133
|
|
|
$
|
98,659
|
|
|
$
|
135,083
|
|
|
$
|
130,570
|
|
|
$
|
76,329
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative net redundancy (deficiency) as a % of original
estimate
|
|
|
12.0%
|
|
|
|
(12.9)%
|
|
|
|
(17.9)%
|
|
|
|
8.5%
|
|
|
|
18.1%
|
|
|
|
19.2%
|
|
|
|
34.1%
|
|
|
|
41.9%
|
|
|
|
37.8%
|
|
|
|
21.5%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
The following table provides a reconciliation of the
Companys re-estimated reserves on a net basis provided
above to the re-estimated reserves on a gross basis (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Net reserves re-estimated
|
|
$
|
118,227
|
|
|
$
|
168,769
|
|
|
$
|
195,884
|
|
|
$
|
233,453
|
|
|
$
|
201,945
|
|
|
$
|
223,881
|
|
|
$
|
190,707
|
|
|
$
|
187,263
|
|
|
$
|
214,463
|
|
|
$
|
278,936
|
|
Re-estimated ceded recoverable
|
|
|
114,937
|
|
|
|
127,474
|
|
|
|
147,058
|
|
|
|
96,154
|
|
|
|
93,055
|
|
|
|
137,922
|
|
|
|
138,911
|
|
|
|
144,707
|
|
|
|
68,077
|
|
|
|
34,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross reserves re-estimated
|
|
$
|
233,164
|
|
|
$
|
296,243
|
|
|
$
|
342,942
|
|
|
$
|
329,607
|
|
|
$
|
295,000
|
|
|
$
|
361,803
|
|
|
$
|
329,618
|
|
|
$
|
331,970
|
|
|
$
|
282,540
|
|
|
$
|
313,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross (deficiency) redundancy
|
|
$
|
(28,707
|
)
|
|
$
|
19,568
|
|
|
$
|
(39,509)
|
|
|
$
|
83,932
|
|
|
$
|
68,387
|
|
|
$
|
62,646
|
|
|
$
|
104,606
|
|
|
$
|
140,872
|
|
|
$
|
146,184
|
|
|
$
|
92,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross (deficiency) redundancy due to foreign exchange)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(110)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross (deficiency) redundancy excluding foreign exchange
|
|
$
|
(28,707
|
)
|
|
$
|
19,568
|
|
|
$
|
(39,509)
|
|
|
$
|
83,932
|
|
|
$
|
68,387
|
|
|
$
|
62,646
|
|
|
$
|
104,606
|
|
|
$
|
140,872
|
|
|
$
|
146,184
|
|
|
$
|
92,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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. At December 31, 2010, the Company estimates it
has no incurred losses on open claims of this nature.
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, Surety Bonding and Universal Surety are
domiciled in South Dakota. Western Surety is licensed 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.
Insurance regulations generally also require registration and
periodic disclosure of certain information concerning ownership,
financial condition, capital structure, general business
operations and any material
10
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, Western Surety may pay stockholder dividends of
$140.2 million to CNA Surety in 2011. For the year ended
December 31, 2010, CNA Surety received no 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
2008, the South Dakota Division of Insurance began its financial
examination of Western Surety, Surety Bonding and Universal
Surety as of and for the period January 1, 2004 through
December 31, 2008. The final financial examination report
was filed with the South Dakota Division of Insurance on
December 11, 2009. On January 13, 2010, the Company
was notified that the final examination report was adopted by
the Director of the South Dakota Division of Insurance as filed.
No adverse findings were included in the final examination
report.
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 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 2010.
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 were $54.7 million and
$0.7 million, respectively, for the twelve-month period
ended June 30, 2010. Effective July 1, 2010 through
June 30, 2011, the underwriting limitations of Western
Surety and Surety Bonding are $67.1 million and
$0.8 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, 2010 through June 30, 2011, the
underwriting limitations of CCC and its affiliates utilized
under the Quota Share Treaty total $892.1 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. 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
(Investment Committee) establishes investment policy
and oversees the management of each portfolio. A professional
independent investment advisor 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 fair
value of the assets under management.
11
Employees
As of December 31, 2010, the Company employed
719 persons. CNA Surety has not experienced any work
stoppages. Management of CNA Surety believes its relations with
its employees are good.
Availability
of SEC 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) when filed with or submitted to the
Securities and Exchange Commission (the SEC). CNA
Surety also provides links to the SECs website
(www.sec.gov) that contains reports, proxy and information
statements and other information regarding issuers, including
CNA Surety, that file electronically with the SEC. 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.
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 61% 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.
As previously discussed, the Company received an unsolicited
proposal from CNAF to acquire all of the outstanding shares of
common stock that are not currently owned by subsidiaries of
CNAF at a purchase price of $22.00 per share in cash (the
CNAF Proposal). Following public disclosure of the
CNAF Proposal, the Companys common stock has traded at
levels substantially higher than prior to the CNAF Proposal. The
price of the Companys common stock is subject to
significant risks associated with the CNAF Proposal including
whether a transaction is completed, its financial terms and
potential litigation.
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.
12
We have a
significant concentration of exposure to construction
firms.
A significant portion of our business is guaranteeing the
performance of construction firms. Therefore, we are exposed to
the challenges that the construction industry faces. The last
several years have been particularly challenging as significant
issues in the home builder segment have spilled over into the
non-residential segments of the construction industry. These
challenges include a substantial reduction in the availability
of new work and intense competition among contractors for the
limited amount of new work. As a result of these challenges, we
have experienced a lower demand for our bonds, and we may
experience a higher frequency of claims and higher losses.
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
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 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, we may continue to have exposure to these
principals with limited or no reinsurance for bonds written
during years that we had reinsurance covering these principals.
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
13
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 relaxed 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 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. Without specific approval by
the subsidiaries domiciliary state department of
insurance, dividend payments are generally limited to amounts
determined by formula. If we are restricted, by regulatory rules
or otherwise, from paying or receiving intercompany 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 that may be extended to us requires ongoing
compliance with conditions and limitations regarding our
profitability and financial condition.
From time to time, the Company may borrow money from banks.
Typically, this borrowing would include requirements that we
meet certain tests of profitability and financial condition. If
we did not meet these tests, we could 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 cannot
access this credit or 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.
14
CNA Surety leases its executive offices and its shared branch
locations with CCC under the Administrative Services Agreement
(ASA) 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 89,000 square feet and related personal
property at 35 branch locations and its home and executive
offices (30,360 square feet) in Chicago, Illinois. In 2010,
CNA Suretys annual rent under the ASA was approximately
$2.1 million. Annual rent for space leased through the ASA
will be approximately $2.0 million beginning
January 1, 2011.
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, which is subject to
annual adjustments, was $1.8 million as of
December 31, 2010. On September 21, 2010, CNA Surety
entered into a lease agreement for a new property to be occupied
following the expiration of the current lease. The new lease
includes various contingencies including completion of
construction of the building and office space to be occupied.
The lease term shall be ten years from its commencement date as
defined in the agreement. Other specific lease terms such as
final rental square feet and cost will be finalized upon
satisfaction of the required contingencies.
CNA Surety also leased space for contract and commercial branch
offices in San Juan, Puerto Rico and Rocklin, California.
Annual rent for these offices was $0.1 million with leases
terminating in 2011 and 2012, respectively. In 2011, CNA Surety
will also lease space in San Antonio, Texas, with a lease
terminating in 2016. Annual rent under this lease will be less
than $0.1 million.
|
|
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.
PART II.
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
The Companys common stock (Common Stock)
trades on the New York Stock Exchange under the symbol SUR. On
February 8, 2011 the last reported sale price for the
Common Stock was $25.16 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 2010 and
2009.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2010
|
|
|
|
|
|
|
|
|
4th Quarter
|
|
$
|
24.00
|
|
|
$
|
17.24
|
|
3rd Quarter
|
|
$
|
18.00
|
|
|
$
|
15.48
|
|
2nd Quarter
|
|
$
|
18.09
|
|
|
$
|
15.45
|
|
1st Quarter
|
|
$
|
18.12
|
|
|
$
|
13.80
|
|
2009
|
|
|
|
|
|
|
|
|
4th Quarter
|
|
$
|
17.10
|
|
|
$
|
13.24
|
|
3rd Quarter
|
|
$
|
17.91
|
|
|
$
|
12.80
|
|
2nd Quarter
|
|
$
|
19.81
|
|
|
$
|
13.03
|
|
1st Quarter
|
|
$
|
19.80
|
|
|
$
|
11.58
|
|
15
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
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
CNA Surety Corporation
|
|
|
100
|
|
|
|
147.56
|
|
|
|
135.83
|
|
|
|
131.78
|
|
|
|
102.20
|
|
|
|
162.53
|
|
Standard & Poors 500 Stock Index
|
|
|
100
|
|
|
|
113.62
|
|
|
|
117.63
|
|
|
|
72.36
|
|
|
|
89.33
|
|
|
|
100.75
|
|
Standard & Poors Property & Casualty
Index
|
|
|
100
|
|
|
|
110.72
|
|
|
|
93.32
|
|
|
|
63.99
|
|
|
|
69.90
|
|
|
|
75.26
|
|
The number of stockholders of record of Common Stock on
February 4, 2011 was approximately 2,300.
A summary of outstanding options and shares authorized for
issuance under equity compensation plans as of December 31,
2010 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
|
|
|
1,093,181
|
|
|
$
|
15.67
|
|
|
|
2,009,145
|
|
Dividends
Effective November 21, 2002, the Company announced that its
Board of Directors suspended its quarterly cash dividend. The
reintroduction of a quarterly or annual dividend and the amount
of any such dividend will be reassessed at future Board meetings.
16
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The following financial information for CNA Surety as of and for
the years ended December 31, 2010, 2009, 2008, 2007 and
2006 has been derived from the Consolidated Financial Statements
and Notes thereto.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
Total revenues
|
|
$
|
472,693
|
|
|
$
|
473,442
|
|
|
$
|
477,624
|
|
|
$
|
465,697
|
|
|
$
|
431,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums
|
|
$
|
440,154
|
|
|
$
|
438,305
|
|
|
$
|
467,127
|
|
|
$
|
471,660
|
|
|
$
|
451,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premiums
|
|
$
|
416,274
|
|
|
$
|
411,034
|
|
|
$
|
431,679
|
|
|
$
|
428,289
|
|
|
$
|
409,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium
|
|
$
|
418,017
|
|
|
$
|
421,872
|
|
|
$
|
431,696
|
|
|
$
|
421,506
|
|
|
$
|
393,642
|
|
Net losses and loss adjustment
expenses(a)
|
|
|
45,235
|
|
|
|
69,416
|
|
|
|
80,844
|
|
|
|
103,124
|
|
|
|
95,830
|
|
Net commissions, brokerage and other underwriting expenses
|
|
|
227,732
|
|
|
|
233,427
|
|
|
|
235,420
|
|
|
|
227,412
|
|
|
|
216,560
|
|
Net investment income
|
|
|
53,591
|
|
|
|
50,371
|
|
|
|
47,302
|
|
|
|
44,636
|
|
|
|
39,324
|
|
Net realized investment gains (losses)
|
|
|
1,085
|
|
|
|
1,199
|
|
|
|
(1,374
|
)
|
|
|
(445
|
)
|
|
|
(1,273
|
)
|
Interest expense
|
|
|
1,164
|
|
|
|
1,391
|
|
|
|
2,148
|
|
|
|
2,918
|
|
|
|
3,669
|
|
Other
expense(b)
|
|
|
1,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
197,088
|
|
|
|
169,208
|
|
|
|
159,212
|
|
|
|
132,243
|
|
|
|
115,634
|
|
Income tax expense
|
|
|
62,668
|
|
|
|
51,347
|
|
|
|
48,809
|
|
|
|
39,747
|
|
|
|
32,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
134,420
|
|
|
$
|
117,861
|
|
|
$
|
110,403
|
|
|
$
|
92,496
|
|
|
$
|
82,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
3.03
|
|
|
$
|
2.66
|
|
|
$
|
2.50
|
|
|
$
|
2.10
|
|
|
$
|
1.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$
|
3.02
|
|
|
$
|
2.65
|
|
|
$
|
2.49
|
|
|
$
|
2.09
|
|
|
$
|
1.89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
ratio(a)
|
|
|
10.8
|
%
|
|
|
16.5
|
%
|
|
|
18.7
|
%
|
|
|
24.5
|
%
|
|
|
24.3
|
%
|
Expense
ratio(b)
|
|
|
54.5
|
|
|
|
55.3
|
|
|
|
54.5
|
|
|
|
54.0
|
|
|
|
55.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
ratio(a)(b)
|
|
|
65.3
|
%
|
|
|
71.8
|
%
|
|
|
73.2
|
%
|
|
|
78.5
|
%
|
|
|
79.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Invested assets and cash
|
|
$
|
1,466,693
|
|
|
$
|
1,322,654
|
|
|
$
|
1,126,079
|
|
|
$
|
1,024,826
|
|
|
$
|
897,285
|
|
Goodwill and other intangible assets, net of accumulated
amortization
|
|
|
138,785
|
|
|
|
138,785
|
|
|
|
138,785
|
|
|
|
138,785
|
|
|
|
138,785
|
|
Total assets
|
|
|
1,837,734
|
|
|
|
1,709,035
|
|
|
|
1,565,519
|
|
|
|
1,507,654
|
|
|
|
1,368,333
|
|
Insurance reserves
|
|
|
635,075
|
|
|
|
653,899
|
|
|
|
687,548
|
|
|
|
731,772
|
|
|
|
688,027
|
|
Debt
|
|
|
30,930
|
|
|
|
30,930
|
|
|
|
30,892
|
|
|
|
30,791
|
|
|
|
30,690
|
|
Total liabilities
|
|
|
769,001
|
|
|
|
785,951
|
|
|
|
798,224
|
|
|
|
839,949
|
|
|
|
802,431
|
|
Stockholders equity
|
|
|
1,068,733
|
|
|
|
923,084
|
|
|
|
767,295
|
|
|
|
667,705
|
|
|
|
565,902
|
|
Book value per share
|
|
$
|
23.88
|
|
|
$
|
20.85
|
|
|
$
|
17.37
|
|
|
$
|
15.13
|
|
|
$
|
12.90
|
|
|
|
|
(a) |
|
Includes the effect of re-estimates of prior year reserves,
known as reserve development. The dollar amount of these reserve
reductions were $76.3 million, $54.3 million,
$45.5 million, $5.1 million and $5.3 million for
the years ended December 31, 2010, 2009, 2008, 2007 and
2006, respectively. The percentage point effect of these reserve
reductions on the loss and combined ratios for these years were
18.3, 12.8, 10.6, 1.2 and 1.4 percentage points,
respectively. |
|
(b) |
|
Includes expenses of $1.5 million incurred related to the
evaluation of the CNAF Proposal. These expenses are shown as
Other expense in the Consolidated Statements of
Income and are not included in the expense or combined ratios. |
17
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
CNA Surety Corporation is an insurance holding company in the
United States. Through its insurance subsidiaries, CNA Financial
Corporation (CNAF) owns approximately 61% of the
outstanding common stock of CNA Surety Corporation. Loews
Corporation owns approximately 90% of the outstanding common
stock of CNAF. The following is a discussion and analysis of CNA
Surety Corporation and its subsidiaries (collectively,
CNA Surety or the Company) 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.
CNAF
Proposal
In October 2010, the Company received an unsolicited proposal
from CNAF to acquire all of the outstanding shares of common
stock that are not currently owned by subsidiaries of CNAF at a
purchase price of $22.00 per share in cash (the CNAF
Proposal). The Companys Board of Directors appointed
a special committee (the Special Committee),
comprised solely of the Companys three independent
directors, to review and evaluate the CNAF proposal. The Special
Committee retained both legal and financial advisors to assist
in their consideration of the CNAF Proposal.
On February 4, 201l, the Special Committee announced that
it does not support the terms of the proposal and advised CNAF
that it is open to alternate proposals.
Critical
Accounting Policies
The Companys accounting policies related to reserves and
disclosures 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 and of
themselves, are inherently uncertain and difficult to predict.
In addition, management believes the other most critical
accounting policies and related disclosures for purposes of
understanding the Companys results of operations and
financial condition pertain to investments, goodwill and other
intangible assets, recognition of premium revenue and the
related unearned premium liability and deferred policy
acquisition costs.
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 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 reserve 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 claim file, some estimates need to be adjusted during
the life cycle of the claim file as matters continue to develop.
Factors that can necessitate case reserve increases or decreases
are the complexity of the
18
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 claims 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, 2010 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
|
|
$
|
78,737
|
|
|
$
|
178,153
|
|
|
$
|
256,890
|
|
Commercial
|
|
|
49,498
|
|
|
|
71,737
|
|
|
|
121,235
|
|
Fidelity and other
|
|
|
3,586
|
|
|
|
7,378
|
|
|
|
10,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
131,821
|
|
|
$
|
257,268
|
|
|
$
|
389,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periodic actuarial analyses of the Companys loss reserves
are performed. These analyses include a comprehensive review
performed in the fourth quarter based on data as of September 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 and records adjustments as necessary.
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;
|
|
|
|
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 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.
19
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 is utilized to
obtain an estimate of expected ultimate losses. This estimate is
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.
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 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, or actuarial point estimate, was
developed by reviewing the Companys claims experience by
accident year for 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
20
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;
|
|
|
|
Potential changes in the Companys reinsurance
program; 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 applies its judgment of the
impact of these factors, and others, to its selection of the
recorded loss reserves.
The following table shows the point estimate as determined by
the actuarial analysis as compared to the actual loss reserve
established by management, both gross and net of reinsurance
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Gross basis:
|
|
|
|
|
|
|
|
|
Recorded loss reserves
|
|
$
|
389,089
|
|
|
$
|
406,123
|
|
Actuarial point estimate
|
|
|
383,017
|
|
|
|
383,378
|
|
|
|
|
|
|
|
|
|
|
Difference
|
|
$
|
6,072
|
|
|
$
|
22,745
|
|
|
|
|
|
|
|
|
|
|
Difference as a % of actuarial point estimate
|
|
|
1.6
|
%
|
|
|
5.9
|
%
|
Net basis:
|
|
|
|
|
|
|
|
|
Recorded loss reserves
|
|
$
|
346,082
|
|
|
$
|
355,155
|
|
Actuarial point estimate
|
|
|
340,580
|
|
|
|
323,575
|
|
|
|
|
|
|
|
|
|
|
Difference
|
|
$
|
5,502
|
|
|
$
|
31,580
|
|
|
|
|
|
|
|
|
|
|
Difference as a % of actuarial point estimate
|
|
|
1.6
|
%
|
|
|
9.8
|
%
|
At December 31, 2010, managements recorded gross and
net reserves were higher than the actuarial point estimate.
Management recorded reserves that were materially consistent
with the actuarial point estimates for accident years 2008 and
prior. For accident years 2009 and 2010, management recorded
reserves that deviated from the actuarial indications due to the
belief that the potential impact on losses of the economic
recession and associated challenges facing construction firms
was not fully reflected in the actuarial analyses. To determine
the recorded reserves for accident years 2009 and 2010,
management used the same methodology that was used in 2009. This
methodology relied on an analysis of past experience for
accident years that were impacted by periods of economic
difficulties. This analysis was influenced by managements
assessment of key factors like the length and depth of the
recession, the particular challenges facing construction firms,
the financial strength of bonded contractors, the
contractors responses to the economic challenges and the
Companys and the industrys underwriting discipline.
This analysis also included adjustments to historical results to
reflect differences in premium rates, reinsurance coverage and
changes in underwriting appetite, particularly related to large
commercial risks.
At December 31, 2009, managements recorded gross and
net reserves were also higher than the actuarial point estimate
primarily due to the factors and analysis described above as
related to accident years 2008 and 2009. Recorded reserves for
accident years 2007 and prior were materially consistent with
the actuarial point estimates.
21
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, assumptions are made regarding the impact of reinsurance
programs to be in place in future periods. 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 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, a
bootstrapping based methodology was utilized in order to
estimate the distribution of reserves. The bootstrap method is
premised on the idea that the volatility in a companys
historical paid and incurred 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, 2010, the range of reasonable loss reserve
estimates, net of reinsurance receivables, was from
$313 million to $381 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
are the number of large claims, as well as the 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 surrounding individual claims. Again, it is
important to note that it is possible that the actual 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 equity securities as
available-for-sale.
These
22
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.
All securities transactions are recorded on the trade date.
Investment gains or losses realized on the sale of securities
are determined using the
first-in,
first-out method. Cash flows from purchases, sales and
maturities of fixed income and equity securities are reported
gross in the investing activities section of the Consolidated
Statements of Cash Flows.
Fixed income securities in an unrealized loss position that the
Company intends to sell, or it more likely than not will be
required to sell before recovery of amortized cost, are
considered to be
other-than-temporarily
impaired (OTTI). These securities are written down
to fair value and the resulting losses are recognized in
realized gains/losses in the Consolidated Statements of Income.
Fixed income securities in an unrealized loss position for which
management believes a credit loss exists are also considered to
be
other-than-temporarily
impaired. For those securities, the Company bifurcates the
impairment into a credit component and a non-credit component.
The credit component, which represents the difference between
discounted expected cash flows and the fixed income
securitys amortized cost, is recognized in earnings and
the non-credit component is recognized in other comprehensive
income.
The amortized cost of fixed income securities is determined
based on cost, adjustments for previously recorded OTTI losses
and the cumulative effect of amortization of premiums and
accretion of discounts using the interest method. Such
amortization and accretion are included in investment income.
For mortgage-backed and asset-backed securities, the Company
considers estimates of future prepayments in the calculation of
the effective yield used to apply the interest method. If a
difference arises between the anticipated prepayments and the
actual prepayments, the Company recalculates the effective yield
based on actual prepayments and the currently anticipated future
prepayments. The amortized costs of such securities are adjusted
to the amount that would have resulted had the recalculated
effective yields been applied since the acquisition of the
securities with a corresponding charge or credit to investment
income. Prepayment estimates are based on the structural
elements of specific securities, interest rates and generally
recognized prepayment speed indices.
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.
Goodwill
and Other Intangible Assets
CNA Suretys Consolidated Balance Sheets as of
December 31, 2010 and 2009 include goodwill and intangible
assets of approximately $138.8 million. This amount
primarily represents goodwill and identified intangibles with
indefinite useful lives arising from the acquisition of Capsure
Holdings Corp.
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 of a reporting unit refers to the price
that would be received to sell the reporting unit as a whole in
an orderly transaction between market participants. 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. Significant inputs to the
Companys discounted cash flow model include estimated
capital requirements to support the business, expected cash
flows from underwriting activity, required capital reinvestment
to support growth and the selected discount rates. 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.
23
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 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.
Insurance premium receivables do not include financing costs or
other fees and are presented net of an estimated allowance for
doubtful accounts. This allowance is based on a periodic
evaluation of the aging and collectibility of premium
receivables. Premium receivables and any related allowance are
written off after collection efforts have been exhausted.
Deferred
Policy Acquisitions 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 policy 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 policy acquisition costs, a
charge to net income is taken and the deferred policy
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 policy
acquisition costs.
Results
of Operations
Financial
Measures
The Managements Discussion and Analysis of Financial
Condition and Results of Operations (MD&A)
discusses certain accounting principles generally accepted in
the United States of America (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 losses and loss adjustment expenses and net commissions,
brokerage and other underwriting expenses. Management uses
underwriting results to monitor its insurance operations
results 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 losses 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 losses and loss adjustment expenses
to net earned premiums. The expense ratio is the percentage of
net commissions, brokerage and other underwriting expenses,
including the
24
amortization of deferred policy acquisition costs, to net earned
premiums. The combined ratio is the sum of the loss ratio and
expense ratio.
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 the 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, 2010, 2009 and 2008
Analysis
of Net Income
The Company had net income of $134.4 million for the year
ended December 31, 2010 as compared to $117.9 million
for the year ended December 31, 2009 and
$110.4 million for the year ended December 31, 2008.
The increase in net income in 2010 over 2009 reflects the higher
levels of favorable loss development discussed below, lower
underwriting expenses and higher investment income, partially
offset by lower net earned premium. The increase in net income
in 2009 over 2008 reflects the higher levels of favorable loss
development discussed below and higher investment income,
partially offset by lower net earned premium.
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, 2010, 2009 and 2008 are summarized in the
following table (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Gross written premium
|
|
$
|
440,154
|
|
|
$
|
438,305
|
|
|
$
|
467,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premium
|
|
$
|
416,274
|
|
|
$
|
411,034
|
|
|
$
|
431,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium
|
|
$
|
418,017
|
|
|
$
|
421,872
|
|
|
$
|
431,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
$
|
45,235
|
|
|
$
|
69,416
|
|
|
$
|
80,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net commissions, brokerage and other underwriting expenses
|
|
$
|
227,732
|
|
|
$
|
233,427
|
|
|
$
|
235,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
10.8
|
%
|
|
|
16.5
|
%
|
|
|
18.7
|
%
|
Expense ratio
|
|
|
54.5
|
|
|
|
55.3
|
|
|
|
54.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
65.3
|
%
|
|
|
71.8
|
%
|
|
|
73.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 insurance coverage.
25
Through one of its insurance subsidiaries, Western Surety
Company (Western Surety), the Company assumes
significant amounts of premiums primarily from affiliates. This
includes 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 certain 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 assumed business from CCC and CIC.
CNA Surety also assumes premium on contract and commercial
surety bonds for international risks. Such premiums are assumed
pursuant to the terms of reinsurance treaties or as a result of
specific international bond requirements of domestic customers.
For the years ended December 31, 2010, 2009, and 2008,
assumed premiums written under such arrangements were
$4.3 million, $2.4 million and $2.1 million,
respectively.
Gross written premium, which is the aggregate of direct written
premiums and assumed written premiums, for the years ended
December 31, 2010, 2009 and 2008 are shown in the table
below (dollars in thousands) for each
sub-line of
business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Contract
|
|
$
|
278,375
|
|
|
$
|
274,848
|
|
|
$
|
300,236
|
|
Commercial
|
|
|
131,316
|
|
|
|
133,548
|
|
|
|
135,999
|
|
Fidelity and other
|
|
|
30,463
|
|
|
|
29,909
|
|
|
|
30,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
440,154
|
|
|
$
|
438,305
|
|
|
$
|
467,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For 2010, gross written premiums increased 0.4 percent to
$440.2 million as compared to 2009. Gross written premiums
for contract surety increased 1.3 percent to
$278.4 million despite continued challenges in the
construction industry. For 2010, commercial surety gross written
premiums decreased 1.7 percent compared to 2009 due to a
modest decline in the small commercial market, partially offset
by selective growth in the corporate commercial market. Fidelity
and other premiums increased 1.9 percent to
$30.5 million.
For 2009, gross written premiums decreased 6.2 percent to
$438.3 million as compared to 2008. Gross written premiums
for contract surety decreased 8.5 percent to
$274.8 million primarily due to lower demand resulting from
fewer new construction projects. For 2009, commercial surety
gross written premiums decreased 1.8 percent compared to
2008 due, in part, to continued adverse economic conditions.
Commercial surety gross written premiums for 2008 included a
non-recurring premium recognition from a single account of
$1.1 million. Fidelity and other premiums decreased
3.2 percent to $29.9 million.
The Companys insurance subsidiaries purchase reinsurance
from other insurance companies and affiliates. Reinsurance
arrangements are used to limit maximum loss, provide greater
diversification of risk and minimize exposure on larger risks.
The cost of this reinsurance is recorded as ceded written
premium. Ceded written premiums decreased from
$27.3 million to $23.9 million for 2010 compared to
2009 primarily due to the lower cost of the Companys 2010
third party excess of loss treaty.
Ceded written premium in 2009 decreased compared to 2008 from
$35.5 million to $27.3 million. The Companys
decision to increase the per principal retention from
$10.0 million to $15.0 million resulted in lower ceded
premiums on the 2009 third party excess of loss treaty. Further,
2008 ceded written premium included $4.2 million recorded
as a result of additional losses ceded under the 2007 excess of
loss treaty as compared to $0.5 million recorded in 2009 as
the result of additional losses ceded under the 2007 third party
excess of loss treaty.
26
Net written premiums, which is gross written premiums less ceded
written premiums, for the years ended December 31, 2010,
2009 and 2008 are shown in the table below (dollars in
thousands) for each
sub-line of
business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Contract
|
|
$
|
257,410
|
|
|
$
|
250,793
|
|
|
$
|
268,085
|
|
Commercial
|
|
|
128,401
|
|
|
|
130,332
|
|
|
|
132,702
|
|
Fidelity and other
|
|
|
30,463
|
|
|
|
29,909
|
|
|
|
30,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
416,274
|
|
|
$
|
411,034
|
|
|
$
|
431,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premiums are recognized as revenue over the policy
term as net earned premiums. Net earned premiums for the years
ended December 31, 2010, 2009 and 2008 are shown in the
table below (dollars in thousands) for each
sub-line of
business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Contract
|
|
$
|
256,696
|
|
|
$
|
259,324
|
|
|
$
|
266,551
|
|
Commercial
|
|
|
131,001
|
|
|
|
131,923
|
|
|
|
133,699
|
|
Fidelity and other
|
|
|
30,320
|
|
|
|
30,625
|
|
|
|
31,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
418,017
|
|
|
$
|
421,872
|
|
|
$
|
431,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums were $418.0 million in 2010 compared to
$421.9 million in 2009. While net written premiums for the
current year increased, the impact of adverse economic
conditions on prior year net written premium is reflected in
this $3.9 million decrease. Net earned premiums for
contract surety business decreased 1.0 percent to
$256.7 million for 2010 compared to 2009. Net earned
premiums for commercial surety decreased 0.7 percent to
$131.0 million for 2010 compared to 2009. Net earned
premium for fidelity and other premiums decreased
1.0 percent to $30.3 million for 2010 compared to 2009.
For 2009, net earned premiums decreased by $9.8 million to
$421.9 million as compared to 2008 reflecting continued
adverse economic conditions, partially offset by the decrease in
ceded written premiums discussed above. Ceded earned premiums
decreased $8.1 million to $27.5 million for 2009
compared to 2008. Net earned premiums for contract surety
business decreased 2.7 percent to $259.3 million for
2009 compared to 2008. Net earned premiums for commercial surety
decreased 1.3 percent to $131.9 million for 2009
compared to 2008. Net earned premium for fidelity and other
premiums decreased 2.6 percent to $30.6 million for
2009 compared to 2008.
Net Loss
Ratio
The loss ratios for the years ended December 31, 2010, 2009
and 2008 were 10.8%, 16.5% and 18.7%, respectively. These loss
ratios include re-estimates of prior accident year reserves,
known as reserve development. The dollar amount and percentage
point effect of these reserve reductions were
$76.3 million, or 18.3 percentage points,
$54.3 million, or 12.8 percentage points, and
$45.5 million, or 10.6 percentage points, for the
years ended December 31, 2010, 2009, and 2008, respectively.
The favorable development for 2010 was primarily related to
accident years 2008, 2007 and 2006. Loss experience for the 2007
and 2006 accident years continued to be lower than expected,
particularly for large losses.
Beginning in 2008, the Company began recording higher loss
provisions for the current accident year in response to the
severe deterioration in economic conditions that began in 2008.
The results of subsequent actuarial reviews indicated
redundancies for accident year 2008, but management believed
that the potential impacts of the economic downturn were not
fully recognized by the actuarial methodologies and maintained
their higher loss estimates. The actuarial review performed in
2010 indicated a larger redundancy for accident year 2008 than
at December 31, 2009. At December 31, 2010, management
believed that the experience for the 2008 accident year was
sufficiently mature to make the actuarial indication credible
and adjusted the reserves to the actuarial indication. In
retrospect, it appears that this deterioration in economic
conditions did not begin to impact loss
27
activity until the 2009 accident year. The Companys
estimates of losses for accident years 2010 and 2009 continue to
reflect the impact of the difficult economic conditions.
The favorable development in 2009 resulted primarily from a
level of loss activity substantially below expectations for
accident years 2006 and 2007. This level of loss activity was
particularly influenced by a lower than expected emergence of
large claims. Significant case reserve reductions and better
than expected indemnification recoveries for accident years 2005
and prior also contributed to the favorable development in 2009.
The Companys initial estimates of losses for accident year
2009 and the estimate for accident year 2008 continued to
reflect the expected impact of less favorable economic
conditions.
The favorable development in 2008 primarily resulted from
several significant case reserve reductions, favorable indemnity
recoveries and a low level of new loss activity for accident
years 2006 and prior. These favorable developments were somewhat
offset by adverse development related to the 2007 accident year
which was recorded in response to economic conditions at
December 31, 2008. Also, the initial estimates of losses
for accident year 2008 reflected the Companys expectations
of the impact of continued deterioration of these economic
conditions.
Expense
Ratio
The expense ratio for the year ended December 31, 2010
decreased to 54.5% from 55.3% in 2009. The expense ratio for
2009 included impairments of capitalized software development
costs related to in-development projects that the Company
decided to terminate. These impairments totaled
$4.9 million, which added 1.1 percentage points to the
expense ratio for 2009.
In 2009, the expense ratio increased to 55.3% from 54.5% in 2008
due to these impairments.
Other
Expense
As previously discussed, in October 2010, the Company received
an unsolicited proposal from CNAF to acquire all of the
outstanding shares of common stock that are not currently owned
by subsidiaries of CNAF. The Special Committee appointed to
review and evaluate the CNAF Proposal retained both legal and
financial advisors to assist in their consideration of the CNAF
Proposal. The Company incurred expenses of $1.5 million in
2010 related to the evaluation of the CNAF Proposal. These
expenses are shown as Other expense in the
Consolidated Statements of Income and are not included in the
expense ratio discussed above.
Investment
Income and Realized Investment Gains/Losses
For 2010, net investment income was $53.6 million compared
to net investment income for 2009 and 2008 of $50.4 million
and $47.3 million, respectively. The annualized pre-tax
yield was 4.0%, 4.2% and 4.4% for 2010, 2009 and 2008,
respectively. The annualized after-tax yield was 3.2%, 3.5% and
3.6% for 2010, 2009 and 2008, respectively. The increase in net
investment income for 2010 and 2009 is primarily attributable to
higher overall invested assets resulting from significant cash
flow from operations, partially offset by a decline in yields.
28
The following summarizes net realized investment gains (losses)
activity (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net realized investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized investment gains
|
|
$
|
1,225
|
|
|
$
|
1,731
|
|
|
$
|
|
|
Gross realized investment losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary
impairment losses
|
|
|
(122
|
)
|
|
|
(116
|
)
|
|
|
(978
|
)
|
Realized losses from sales
|
|
|
(56
|
)
|
|
|
(393
|
)
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross realized investment losses
|
|
|
(178
|
)
|
|
|
(509
|
)
|
|
|
(997
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses) on fixed income securities
|
|
|
1,047
|
|
|
|
1,222
|
|
|
|
(997
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized investment gains
|
|
|
38
|
|
|
|
44
|
|
|
|
13
|
|
Gross realized investment losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary
impairment losses
|
|
|
|
|
|
|
(46
|
)
|
|
|
(343
|
)
|
Realized losses from sales
|
|
|
|
|
|
|
(20
|
)
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross realized investment losses
|
|
|
|
|
|
|
(66
|
)
|
|
|
(389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses) on equity securities
|
|
|
38
|
|
|
|
(22
|
)
|
|
|
(376
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses)
|
|
$
|
1,085
|
|
|
$
|
1,199
|
|
|
$
|
(1,374
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys investment portfolio is generally managed to
maximize after-tax investment return, while minimizing credit
risk with investments concentrated in high quality fixed 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.
Interest
Expense
The benchmark interest rate for the Companys variable
interest rate debt is the London Interbank Offered Rate
(LIBOR). Due to lower three-month LIBOR rates,
interest expense decreased $0.2 million, or
16.3 percent, for 2010 compared to 2009. Interest expense
also decreased $0.8 million, or 35.2 percent for 2009
compared to 2008 due to lower interest rates. Weighted average
debt outstanding was $30.9 million for each of these
periods. The weighted average interest rate for 2010, 2009 and
2008 was 3.7%, 4.3% and 6.4%, respectively.
Income
Taxes
The Companys income tax expense was $62.7 million for
2010, $51.3 million for 2009 and $48.8 million for
2008. The effective income tax rates were 31.8%, 30.3% and 30.7%
for 2010, 2009 and 2008, 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. Investment
income included income from tax-exempt securities of
$24.9 million, $25.5 million and $23.8 million in
2010, 2009 and 2008, respectively.
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
29
various exposure management initiatives. With respect to risks
on large commercial accounts, the Company generally limits its
exposure to $50.0 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 significantly greater than $30.0 million.
The Company manages its exposure on each account 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.
Excess of
Loss Reinsurance
The Companys ceded 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 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.
At December 31, 2010, Munich Reinsurance America, Inc.,
Hannover Rückversicherung AG, Odyssey America Reinsurance
Corporation, Endurance Reinsurance Corp. of America and
Renaissance Reinsurance Ltd. were the five unaffiliated
reinsurers from which the Company had its largest reinsurance
receivables. Each of these reinsurers was rated at least A by
A.M. Best Company, Inc. (A.M. Best). There
were no amounts past due under reinsurance contracts and no
allowances were established for uncollectible reinsurance
receivables at December 31, 2010 or 2009.
2009
Third Party Reinsurance
Effective January 1, 2009, CNA Surety entered into an
excess of loss treaty (2009 Excess of Loss Treaty)
with a group of third party reinsurers on terms similar to the
excess of loss treaty effective in 2008. Under the 2009 Excess
of Loss Treaty, the Companys net retention per principal
was $15 million with a 5% co-participation in the
$90 million layer of third party reinsurance coverage above
the Companys retention. The contract provided aggregate
coverage of $185 million and included an optional extended
discovery period, which was not exercised. The contract also
included a provision for additional premiums of up to
$13.8 million based on losses ceded under the contract. The
actual ceded premiums for the 2009 Excess of Loss Treaty were
$26.6 million.
2010
Third Party Reinsurance
Effective January 1, 2010, CNA Surety entered into an
excess of loss treaty (2010 Excess of Loss Treaty)
with a group of third party reinsurers on terms similar to the
2009 Excess of Loss Treaty. Under the 2010 Excess of Loss
Treaty, the Companys net retention per principal was
$15 million with a 5% co-participation in the
$90 million layer of third party reinsurance coverage above
the Companys retention. The contract provided aggregate
coverage of $185 million and included an optional extended
discovery period, which was not exercised. The contract also
included a provision for additional premiums of up to
$12.3 million based on losses ceded under the contract. The
actual ceded premiums for the 2010 Excess of Loss Treaty were
$23.7 million.
2011
Third Party Reinsurance
Effective January 1, 2011, CNA Surety entered into an
excess of loss treaty (2011 Excess of Loss Treaty)
with a group of third party reinsurers on terms similar to the
2010 Excess of Loss Treaty. Under the 2011 Excess of Loss
Treaty, the Companys net retention per principal remains
at $15 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
30
coverage for losses discovered beyond 2011 on bonds that were in
force during 2011. The contract also includes a provision for
additional premiums of up to $10.7 million based on losses
ceded under the contract. The base annual premium for the 2011
Excess of Loss Treaty is $21.7 million.
Related
Party Reinsurance
Reinsurance agreements together with the Services and Indemnity
Agreement described below provide for the transfer of the surety
business written by CCC and CIC to Western Surety. Many of these
agreements originally were entered into on September 30,
1997 (the Merger Date) and include: (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. Although the contracts entered on
the Merger Date have expired, some have been renewed on
different terms as described below.
Through the Quota Share Treaty, CCC and CIC transfer to Western
Surety surety business written or renewed by CCC and CIC after
the Merger Date. The Quota Share Treaty was renewed on
January 1, 2010 and expired on December 31, 2010. The
Quota Share treaty was renewed on substantially the same terms
on January 1, 2011 and expires on December 31, 2011
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. For
2010 and 2009 this resulted in an override commission on their
actual direct acquisition costs of 4.7% and 4.8%, respectively,
to CCC and CIC.
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, 2010.
Through the Stop Loss Contract, the Companys insurance
subsidiaries were protected from adverse loss development on
certain business underwritten after the Merger Date. The Stop
Loss Contract between the Companys 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 Companys insurance subsidiaries paid CCC an
annual premium of $20,000. The CNA Surety insurance subsidiaries
have paid CCC all required annual premiums. Through
December 31, 2010, losses incurred under the Stop Loss
Contract were $47.2 million. Through December 31,
2009, losses incurred under the Stop Loss Contract were
$49.1 million. The net amount settled in 2010 under this
contract was $1.9 million paid to CCC as a result of
favorable development on claims subject to the Stop Loss
Contract. At December 31, 2010, the amount received under
the Stop Loss Contract included $2.7 million held by the
Company for losses covered under this contract that were
incurred but not paid.
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 surety 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. In 2009, this agreement was
amended so that the Companys authority to conduct
administrative, management, underwriting and claim functions for
bonds written for the large national contractor discussed below
shall continue until CCCs bonds for such contractor have
expired and claims have been settled or closed. This agreement
was renewed on January 1, 2010 and expired on
December 31, 2010. As of December 31, 2010 and 2009,
there were no amounts due to the CNA Surety insurance
subsidiaries under this agreement. This agreement was renewed
with the same terms on January 1, 2011 and expires on
December 31, 2011 and is annually renewable thereafter.
31
From January 1, 2005 to June 30, 2009, the Company and
CCC were parties to an excess of loss contract, and extensions
to that contract, that provided unlimited reinsurance coverage
in excess of $60 million retention for the life of bonds
either in force or written during the contract periods
exclusively for one large national contractor excluded from the
Companys third party reinsurance. Premiums for these
contracts totaled $8.6 million and included an initial
premium of $7.0 million and premiums of $1.6 million
based on the level of premiums written on bonds for the large
national contractor.
In 2009, the Company and CCC terminated the excess of loss
contract discussed in the preceding paragraph. Related to the
termination of this contract, the Company and CCC also commuted
the Quota Share Treaty as regards the premium and losses for the
large national contractor. The impact of this commutation was a
decrease of gross loss reserves of $51.8 million. Under the
terms of the agreements effecting this commutation, the Company
paid CCC $1.8 million. This settlement reflected the
difference between the Companys $60.0 million
retention under the excess of loss contract and the
$58.2 million paid by the Company for losses of the large
national contractor through 2009.
On January 1, 2010, the Company and CCC entered into
separate agreements that provide for the transfer of the
Canadian surety business of CCC to Western Surety. These
agreements, which include a quota share treaty (the
Canadian Quota Share Treaty) and a services and
indemnity agreement (the Canadian Services and Indemnity
Agreement), are substantially similar to the Quota Share
Treaty and the Services and Indemnity Agreement discussed above.
The Canadian Services and Indemnity Agreement provides Western
Surety with the authority to supervise various administrative,
underwriting and claim functions associated with the surety
business written by CCC, through its Canadian branch, on behalf
of the Company. Through the Canadian Quota Share Treaty, this
Canadian surety business is transferred to Western Surety.
Pursuant to these agreements, CCC will transfer the subject
premium and related liabilities of such business and pay to
Western Surety an amount equal to CCCs net written
premiums on all such business, minus a ceding commission of
33.5% of net written premiums. Further, Western Surety will pay
an additional ceding commission to CCC in the amount of actual
direct expense in producing such premium. These agreements
expired on December 31, 2010. These agreements renewed with
the same terms on January 1, 2011 and expire on
December 31, 2011 and are annually renewable thereafter.
As of December 31, 2010 and December 31, 2009, CNA
Surety had an insurance receivable balance from CCC and CIC of
$10.8 million and $9.8 million, respectively,
comprised of premiums receivable. CNA Surety had no reinsurance
payables to CCC or CIC as of December 31, 2010.
The Companys Consolidated Balance Sheets also include a
Deposit with affiliated ceding company of
$23.4 million and $26.9 million at December 31,
2010 and December 31, 2009, respectively. 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. 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.
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 and recoveries under reinsurance contracts.
The primary cash flow uses are payments for claims, operating
expenses, federal income taxes and debt service. 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.
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
32
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.
At December 31, 2010, the carrying value of the
Companys insurance subsidiaries invested assets was
comprised of $1,404.4 million of fixed income securities,
$39.7 million of short-term investments and
$3.4 million of cash. At December 31, 2009, the
carrying value of the Companys insurance
subsidiaries invested assets was comprised of
$1,266.2 million of fixed income securities,
$36.9 million of short-term investments and
$2.9 million of cash.
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. In
2010, parent company cash flows included significant cash flows
from the exercise of stock options under the Companys
stock-based compensation plan. The principal obligations at the
parent company level are to service debt and pay operating
expenses, including income taxes. At December 31, 2010, the
parent companys invested assets consisted of
$1.9 million of equity securities and $16.7 million of
short-term investments and cash. At December 31, 2009, the
parent companys invested assets consisted of
$1.6 million of equity securities and $14.0 million of
short-term investments and cash. At December 31, 2010 and
December 31, 2009, parent company short-term investments
and cash included $11.5 million and $11.1 million,
respectively, of 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 $142.1 million,
$158.0 million and $124.2 million for 2010, 2009 and
2008, respectively. The decrease in net cash flow provided by
operating activities in 2010 primarily relates to higher income
tax payments partially offset by lower claim payments. The
increase in net cash flow provided by operating activities in
2009 compared to 2008 primarily relates to the absence of the
payment of $23.6 million, net of reinsurance recoveries, in
2008 in settlement of a large claim that had been fully
reserved. This increase also reflects the impact of lower ceded
premiums and lower federal income tax payments.
In May 2004, the Company, through a wholly-owned trust,
privately issued $30.0 million of preferred securities
through two pooled transactions. These securities, issued by CNA
Surety Capital Trust I (the Issuer Trust), bear
interest at the LIBOR plus 337.5 basis points with a
30-year
term. As of May 2009, the Company may redeem these securities,
in whole or in part, at par value at any scheduled quarterly
interest payment date. As of December 31, 2010, none of
these preferred securities have been redeemed.
The Companys investment of $0.9 million in the Issuer
Trust is carried at cost in Other assets in the
Companys Consolidated Balance Sheets. The sole asset of
the Issuer Trust consists of a $30.9 million junior
subordinated debenture issued by the Company to the Issuer
Trust. Due to the underlying characteristics of this debt, the
carrying value of the debenture approximates its estimated fair
value.
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 approximately
$55.7 million, consisting of annual dividend payments of
approximately $1.1 million until maturity and the
redemption value of the preferred securities 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 junior subordinated debenture bears interest at a rate of
LIBOR plus 337.5 basis points and matures in April 2034. As
of December 31, 2010 and 2009, the interest rate on the
junior subordinated debenture was 3.66% and 3.65%, respectively.
The Company does not have any material off-balance sheet
arrangements as defined by Item 303 of
Regulation S-K
under the Securities Act of 1933 and the Securities Exchange Act
of 1934.
33
A summary of the Companys contractual obligations as of
December 31, 2010 is presented in the following table:
|
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations as of
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
(In millions)
|
|
|
Debt(a)
|
|
$
|
1.1
|
|
|
$
|
1.1
|
|
|
$
|
1.1
|
|
|
$
|
1.1
|
|
|
$
|
1.1
|
|
|
$
|
51.9
|
|
|
$
|
57.4
|
|
Operating leases
|
|
|
2.0
|
|
|
|
1.1
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
|
|
|
|
3.7
|
|
Loss and loss adjustment expense reserves
|
|
|
104.3
|
|
|
|
96.1
|
|
|
|
64.2
|
|
|
|
40.5
|
|
|
|
26.0
|
|
|
|
58.0
|
|
|
|
389.1
|
|
Other long-term
liabilities(b)
|
|
|
1.8
|
|
|
|
1.4
|
|
|
|
0.9
|
|
|
|
0.4
|
|
|
|
0.5
|
|
|
|
11.4
|
|
|
|
16.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
109.2
|
|
|
$
|
99.7
|
|
|
$
|
66.4
|
|
|
$
|
42.2
|
|
|
$
|
27.8
|
|
|
$
|
121.3
|
|
|
$
|
466.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Reflects expected principal and interest payments. |
|
(b) |
|
Reflects unfunded postretirement benefit plans and long-term
incentive plan payments to certain executives. |
In addition to the operating lease obligations included in the
table above, on September 21, 2010, CNA Surety entered into
a lease agreement for a new property to be occupied following
the 2012 expiration of the lease for its primary processing and
service center in Sioux Falls, South Dakota. The new lease
includes various contingencies including completion of
construction of the building and office space to be occupied.
The lease term shall be ten years from its commencement date as
defined in the agreement. Other specific lease terms such as
final rental square feet and cost will be finalized upon
satisfaction of the required contingencies.
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 potentially 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, Surety Bonding Company of America
(Surety Bonding) and Universal Surety of America
(Universal Surety) are domiciled in South Dakota. 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.
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 2011 is
based on statutory surplus and income at and for the year ended
December 31, 2010. Without prior regulatory approval in
2011, Western Surety may pay dividends of $140.2 million to
CNA Surety. CNA Surety received no dividends from its insurance
subsidiaries in 2010. CNA Surety received dividends of
$5.0 million and $3.0 million from its insurance
subsidiaries during 2009 and 2008, respectively. CNA Surety
received dividends of $0.5 million from its non-insurance
subsidiaries during 2010. CNA Surety did not receive any
dividends from its non-insurance subsidiaries during 2009 and
2008.
Combined statutory surplus totaled $825.6 million at
December 31, 2010, resulting in a net written premium to
statutory surplus ratio of 0.5 to 1. Insurance regulations
restrict the insurance subsidiaries maximum net retention
on a single surety bond to 10 percent of statutory surplus.
Under the 2011 Excess of Loss Treaty, the Companys net
retention on new bonds would generally be $15 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, 2010, this regulation
would limit Western Suretys largest gross risk to
$168.1 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 intercompany tax sharing
agreements between CNA Surety and its subsidiaries, the income
tax of each subsidiary shall be determined based upon each
subsidiarys separate return
34
liability. Intercompany tax payments are made at such times when
estimated tax payments would be required by the Internal Revenue
Service. CNA Surety received tax-sharing payments of
$61.9 million from its subsidiaries for 2010,
$41.3 million for 2009 and $48.6 million for 2008.
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, the maximum net
retention on a single federal surety bond, are based on an
insurers statutory surplus. Effective July 1, 2009
through June 30, 2010, the underwriting limitations of
Western Surety and Surety Bonding were $54.7 million and
$0.7 million, respectively. Effective July 1, 2010
through June 30, 2011, the underwriting limitations of
Western Surety and Surety Bonding are $67.1 million and
$0.8 million, respectively. Through the Quota Share Treaty
previously discussed, CNA Surety has access to CCC and its
affiliates U.S. Department of Treasury underwriting
limitations. Effective July 1, 2010 through June 30,
2011, the underwriting limitations of CCC and its affiliates
utilized under the Quota Share Treaty total $892.1 million.
CNA Surety management believes that the foregoing
U.S. Treasury underwriting limitations are sufficient for
the conduct of its business.
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.
Insurance
Regulation and Supervision
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
2008, the South Dakota Division of Insurance began its financial
examination of Western Surety, Surety Bonding and Universal
Surety as of and for the period January 1, 2004 through
December 31, 2008. The final financial examination report
was filed with the South Dakota Division of Insurance on
December 11, 2009. On January 13, 2010, the Company
was notified that the final examination report was adopted by
the Director of the South Dakota Division of Insurance as filed.
No adverse findings were included in the final examination
report.
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, 2010 and 2009 (dollars in
thousands):
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
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
|
|
$
|
18,202
|
|
|
|
1.3
|
%
|
|
$
|
18,348
|
|
|
|
1.4
|
%
|
U.S. Agencies
|
|
|
6,768
|
|
|
|
0.5
|
|
|
|
10,131
|
|
|
|
0.8
|
|
Collateralized mortgage obligations residential
|
|
|
22,327
|
|
|
|
1.6
|
|
|
|
32,092
|
|
|
|
2.5
|
|
Mortgage pass-through securities residential
|
|
|
72,047
|
|
|
|
5.1
|
|
|
|
96,557
|
|
|
|
7.6
|
|
Obligations of states and political subdivisions
|
|
|
770,608
|
|
|
|
54.8
|
|
|
|
728,568
|
|
|
|
57.5
|
|
Corporate bonds
|
|
|
476,873
|
|
|
|
33.9
|
|
|
|
344,109
|
|
|
|
27.1
|
|
Collateralized mortgage obligations commercial
|
|
|
10,585
|
|
|
|
0.8
|
|
|
|
9,673
|
|
|
|
0.8
|
|
Other asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second mortgages/home equity loans residential
|
|
|
3,522
|
|
|
|
0.3
|
|
|
|
4,761
|
|
|
|
0.4
|
|
Consumer credit receivables
|
|
|
10,156
|
|
|
|
0.7
|
|
|
|
11,583
|
|
|
|
0.9
|
|
Other
|
|
|
13,287
|
|
|
|
0.9
|
|
|
|
10,401
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
1,404,375
|
|
|
|
99.9
|
%
|
|
|
1,266,223
|
|
|
|
99.9
|
%
|
Equity securities
|
|
|
1,916
|
|
|
|
0.1
|
|
|
|
1,610
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,406,291
|
|
|
|
100.0
|
%
|
|
$
|
1,267,833
|
|
|
|
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.
36
The amortized cost, gross unrealized gains, gross unrealized
losses, estimated fair value and unrealized OTTI losses of fixed
income securities and the cost, gross unrealized gains, gross
unrealized losses and estimated fair value of equity securities
held by CNA Surety at December 31, 2010, by investment
category, were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross Unrealized Losses
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Unrealized
|
|
|
Less Than
|
|
|
More Than
|
|
|
Estimated
|
|
|
Unrealized
|
|
December 31, 2010
|
|
or Cost
|
|
|
Gains
|
|
|
12 Months
|
|
|
12 Months
|
|
|
Fair Value
|
|
|
OTTI Losses
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of U.S. Government and
agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
17,288
|
|
|
$
|
914
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
18,202
|
|
|
$
|
|
|
U.S. Agencies
|
|
|
6,518
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
6,768
|
|
|
|
|
|
Collateralized mortgage obligations residential
|
|
|
20,769
|
|
|
|
1,558
|
|
|
|
|
|
|
|
|
|
|
|
22,327
|
|
|
|
|
|
Mortgage pass-through securities residential
|
|
|
68,727
|
|
|
|
3,320
|
|
|
|
|
|
|
|
|
|
|
|
72,047
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
|
746,514
|
|
|
|
30,932
|
|
|
|
(5,096
|
)
|
|
|
(1,742
|
)
|
|
|
770,608
|
|
|
|
|
|
Corporate bonds
|
|
|
456,963
|
|
|
|
21,164
|
|
|
|
(1,249
|
)
|
|
|
(5
|
)
|
|
|
476,873
|
|
|
|
|
|
Collateralized mortgage obligations - commercial
|
|
|
10,018
|
|
|
|
567
|
|
|
|
|
|
|
|
|
|
|
|
10,585
|
|
|
|
|
|
Other asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second mortgages/home equity loans residential
|
|
|
3,878
|
|
|
|
|
|
|
|
(84
|
)
|
|
|
(272
|
)
|
|
|
3,522
|
|
|
|
(927
|
)(a)
|
Consumer credit receivables
|
|
|
9,998
|
|
|
|
158
|
|
|
|
|
|
|
|
|
|
|
|
10,156
|
|
|
|
|
|
Other
|
|
|
12,674
|
|
|
|
617
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
13,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
1,353,347
|
|
|
|
59,480
|
|
|
|
(6,433
|
)
|
|
|
(2,019
|
)
|
|
|
1,404,375
|
|
|
$
|
(927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
1,687
|
|
|
|
229
|
|
|
|
|
|
|
|
|
|
|
|
1,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,355,034
|
|
|
$
|
59,709
|
|
|
$
|
(6,433
|
)
|
|
$
|
(2,019
|
)
|
|
$
|
1,406,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The unrealized loss position of this security was
$0.3 million at December 31, 2010. |
37
The amortized cost, gross unrealized gains, gross unrealized
losses, estimated fair value and unrealized OTTI losses of fixed
income securities and the cost, gross unrealized gains, gross
unrealized losses and estimated fair value of equity securities
held by CNA Surety at December 31, 2009, by investment
category, were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross Unrealized Losses
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Unrealized
|
|
|
Less Than
|
|
|
More Than
|
|
|
Estimated Fair
|
|
|
Unrealized
|
|
December 31, 2009
|
|
or Cost
|
|
|
Gains
|
|
|
12 Months
|
|
|
12 Months
|
|
|
Value
|
|
|
OTTI Losses
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of U.S. Government and
agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
17,378
|
|
|
$
|
970
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
18,348
|
|
|
$
|
|
|
U.S. Agencies
|
|
|
9,794
|
|
|
|
337
|
|
|
|
|
|
|
|
|
|
|
|
10,131
|
|
|
|
|
|
Collateralized mortgage obligations residential
|
|
|
30,709
|
|
|
|
1,383
|
|
|
|
|
|
|
|
|
|
|
|
32,092
|
|
|
|
|
|
Mortgage pass-through securities residential
|
|
|
94,453
|
|
|
|
2,336
|
|
|
|
(232
|
)
|
|
|
|
|
|
|
96,557
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
|
696,505
|
|
|
|
35,847
|
|
|
|
(882
|
)
|
|
|
(2,902
|
)
|
|
|
728,568
|
|
|
|
|
|
Corporate bonds
|
|
|
334,136
|
|
|
|
11,478
|
|
|
|
(1,248
|
)
|
|
|
(257
|
)
|
|
|
344,109
|
|
|
|
|
|
Collateralized mortgage obligations commercial
|
|
|
10,024
|
|
|
|
|
|
|
|
|
|
|
|
(351
|
)
|
|
|
9,673
|
|
|
|
|
|
Other asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second mortgages/home equity loans residential
|
|
|
5,501
|
|
|
|
|
|
|
|
|
|
|
|
(740
|
)
|
|
|
4,761
|
|
|
|
(1,399
|
)(a)
|
Consumer credit receivables
|
|
|
11,055
|
|
|
|
528
|
|
|
|
|
|
|
|
|
|
|
|
11,583
|
|
|
|
|
|
Other
|
|
|
9,715
|
|
|
|
686
|
|
|
|
|
|
|
|
|
|
|
|
10,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
1,219,270
|
|
|
|
53,565
|
|
|
|
(2,362
|
)
|
|
|
(4,250
|
)
|
|
|
1,266,223
|
|
|
$
|
(1,399
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
1,429
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
1,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,220,699
|
|
|
$
|
53,746
|
|
|
$
|
(2,362
|
)
|
|
$
|
(4,250
|
)
|
|
$
|
1,267,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The unrealized loss position of this security was
$0.5 million at December 31, 2009. |
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 Disclosures 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, 2010 and 2009 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
Credit
Rating(a)
|
|
Fair Value
|
|
|
% of Total
|
|
|
Fair Value
|
|
|
% of Total
|
|
|
AAA
|
|
$
|
377,757
|
|
|
|
26.9
|
%
|
|
$
|
475,870
|
|
|
|
37.6
|
%
|
AA
|
|
|
597,065
|
|
|
|
42.5
|
|
|
|
476,641
|
|
|
|
37.6
|
|
A
|
|
|
360,128
|
|
|
|
25.7
|
|
|
|
277,528
|
|
|
|
21.9
|
|
BBB
|
|
|
31,439
|
|
|
|
2.2
|
|
|
|
14,757
|
|
|
|
1.2
|
|
Non-investment grade
|
|
|
37,986
|
|
|
|
2.7
|
|
|
|
21,427
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,404,375
|
|
|
|
100.0
|
%
|
|
$
|
1,266,223
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Securities are categorized using the S&P rating. If a
security is not rated by S&P, the Moodys rating is
used. At December 31, 2010 and 2009, all of the
Companys fixed income securities were rated by S&P or
Moodys. |
38
The Companys investments in fixed income securities do not
contain any industry concentration of credit risk. As of
December 31, 2010, 97% of the Companys fixed income
securities were considered investment grade by S&P or
Moodys and 69% were rated at least AA by those agencies
for 2010. As of December 31, 2009, 98% of the
Companys fixed income securities were considered
investment grade by S&P or Moodys and 75% were rated
at least AA by those agencies for 2009.
As of December 31, 2010, $403.7 million of the
Companys investments were guaranteed by one of three major
mono-line bond insurers. This includes $402.0 million of
bonds of states and political obligations, or about 52% of the
Companys investments in this type of security. Investments
in obligations of states and political subdivisions represent
approximately 55% of the Companys invested assets. The
ratings on these securities reflect the higher of the underlying
rating of the issuer or the insurers rating. Of the
$402.0 million of bonds that were insured,
$29.5 million of these securities reflect credit rating
enhancement due to the guarantee. The underlying ratings of the
enhanced securities is A. The underlying ratings of all
municipal holdings remain very strong and carry an average
rating of AA. The Company views bond insurance as credit
enhancement and not credit substitution and a credit review is
performed on each issuer of bonds purchased. Based on the strong
underlying credit quality of its insured bonds of states and
political subdivisions, the Company believes that any impact of
additional 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.
During 2010, municipal securities have come under increased
investor scrutiny and heightened concerns of default. In
addition to the credit reviews noted above, each municipal bond
investment is reviewed as to the sources of debt service and the
margins of safety around those sources. The Companys
municipal bond investments are focused in revenue bonds and
full-faith-and-credit general obligation bonds. For revenue
bonds, the focus is on bonds where the sources of debt service
are from fees from public universities, transportation, such as
toll ways and airports, and essential services, such as power,
water and sewer. The Company focuses on bonds where there is a
monopoly provider with ratemaking authority and where there are
specific taxes pledged directly to bond repayments. The
Companys municipal bond investments are widely diversified
with a largest single exposure of $16.4 million and an
average exposure of $5.1 million per issuer. Also,
approximately $72.4 million of the Companys municipal
bonds are secured by U.S. Treasury obligations that are
held in escrow pending the retirement of the municipal bonds,
typically at a future call date.
As of December 31, 2010, municipal securities from issuers
within the states of New York, Florida, Washington, Illinois and
Texas represent 4.7%, 4.4%, 3.8%, 3.7% and 3.7%, respectively,
of the estimated fair value of the Companys fixed income
securities. Municipal securities from issuers within other
states individually represent 2.3% or less of the Companys
fixed income portfolio.
The following table provides the composition of fixed income
securities with an unrealized loss at December 31, 2010 in
relation to the total of all fixed income securities by
contractual maturities:
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
% of
|
|
|
|
Estimated
|
|
|
Unrealized
|
|
Contractual Maturity
|
|
Fair Value
|
|
|
Loss
|
|
|
Due after one year through five years
|
|
|
17
|
%
|
|
|
7
|
%
|
Due after five years through ten years
|
|
|
23
|
|
|
|
17
|
|
Due after ten years
|
|
|
57
|
|
|
|
72
|
|
Asset-backed securities
|
|
|
3
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
39
The following table summarizes for fixed income securities in an
unrealized loss position at December 31, 2010 and 2009, 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, 2010
|
|
|
December 31, 2009
|
|
|
|
Estimated
|
|
|
Gross
|
|
|
Estimated
|
|
|
Gross
|
|
Unrealized Loss Aging
|
|
Fair Value
|
|
|
Unrealized Loss
|
|
|
Fair Value
|
|
|
Unrealized Loss
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
grade(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 months
|
|
$
|
223,778
|
|
|
$
|
6,350
|
|
|
$
|
162,087
|
|
|
$
|
2,362
|
|
13-24 months
|
|
|
|
|
|
|
|
|
|
|
11,176
|
|
|
|
469
|
|
Greater than 24 months
|
|
|
7,903
|
|
|
|
663
|
|
|
|
32,932
|
|
|
|
2,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment grade
|
|
|
231,681
|
|
|
|
7,013
|
|
|
|
206,195
|
|
|
|
4,896
|
|
Non-investment grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 months
|
|
|
11,256
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
Greater than 24 months
|
|
|
11,522
|
|
|
|
1,356
|
|
|
|
17,346
|
|
|
|
1,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-investment grade
|
|
|
22,778
|
|
|
|
1,439
|
|
|
|
17,346
|
|
|
|
1,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
254,459
|
|
|
$
|
8,452
|
|
|
$
|
223,541
|
|
|
$
|
6,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Investment grade is determined by using the S&P rating. If
a security is not rated by S&P, the Moodys rating is
used. As of December 31, 2010 and December 31, 2009,
all of the Companys fixed income securities were rated by
S&P or Moodys. |
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 equity securities as
available-for-sale,
and as such, they are carried at fair value.
A security is in an unrealized loss position, or impaired, if
the fair value of the security is less than its amortized cost,
which includes adjustments for accretion, amortization and
previously recorded OTTI losses. When a security is impaired,
the impairment is evaluated to determine whether it is temporary
or
other-than-temporary.
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 identifying 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
other-than-temporary
impairment loss incorporates both quantitative criteria and
qualitative information.
In determining whether an equity security is
other-than-temporarily
impaired, 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 and (d) general market
conditions and industry or sector specific factors. Currently,
the Companys equity portfolio is comprised solely of
mutual funds related to the Companys deferred compensation
plan, which is an unfunded, nonqualified deferred compensation
plan for a select group of management or highly compensated
employees. Due to the nature of the plan, the Company does not
assert the ability to hold these securities until their recovery
in value.
40
As such, if any of these securities are in an unrealized loss
position, they are considered to be
other-than-temporarily
impaired.
For equity 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
realized gains/losses in the Consolidated Statements of Income.
Fixed income securities in an unrealized loss position that the
Company intends to sell, or it more likely than not will be
required to sell before any anticipated recovery of amortized
cost, are considered to be
other-than-temporarily
impaired. These securities are written down to fair value and
the resulting losses are recognized in realized gains/losses in
the Consolidated Statements of Income.
The remaining fixed income securities in an unrealized loss
position are evaluated to determine if a credit loss exists. To
determine if a credit loss exists, the Company considers a
number of factors including, but not limited to: (a) the
financial condition and near-term prospects of the issuer,
(b) credit ratings of the securities, (c) whether the
debtor is current on interest and principal payments,
(d) the length of time and the extent to which the market
value has been less than book value and (e) general market
conditions and industry or sector specific factors.
In addition to these factors, the Company considers the results
of discounted cash flow modeling using assumptions
representative of current market conditions as well as those
specific to the Companys particular security holdings. For
asset-backed and mortgage-backed securities, the focus of this
analysis is on assessing the sufficiency and quality of
underlying collateral and timing of cash flows. Significant
assumptions considered by the Company in its cash flow
projections include delinquency rates, probable risk of default,
over collateralization and credit support from lower level
tranches. If the discounted expected cash flows for a security
equal or exceed the amortized cost of that security, no credit
loss exists and the security is deemed to be temporarily
impaired.
Fixed income securities in an unrealized loss position for which
management believes a credit loss exists are considered to be
other-than-temporarily
impaired. For these fixed income securities, the Company
bifurcates OTTI losses into a credit component and a non-credit
component. The credit component, which represents the difference
between the discounted expected cash flows and the fixed income
securitys amortized cost, is recognized in earnings. The
non-credit component is recognized in other comprehensive income
and represents the difference between fair value and the
discounted cash flows that the Company expects to collect.
At December 31, 2010, the Company holds 276 fixed income
securities with a total estimated fair value of
$1,149.9 million in a gross unrealized gain position of
$59.5 million in the aggregate.
41
The following table summarizes securities in a gross unrealized
loss position by investment category and by credit rating. The
table also discloses the corresponding count of securities in an
unrealized loss position and estimated fair value by category
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized Losses
|
|
|
Estimated
|
|
December 31, 2010
|
|
AAA
|
|
|
AA
|
|
|
A
|
|
|
BBB
|
|
|
Total
|
|
|
Count
|
|
|
Fair Value
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
grade(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of U. S. Government and
agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage pass-through securities residential
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
1
|
(b)
|
|
$
|
1,000
|
|
Obligations of states and political subdivisions
|
|
|
628
|
|
|
|
3,166
|
|
|
|
1,960
|
|
|
|
|
|
|
|
5,754
|
|
|
|
32
|
|
|
|
165,796
|
|
Corporate bonds
|
|
|
|
|
|
|
|
|
|
|
948
|
|
|
|
223
|
|
|
|
1,171
|
|
|
|
13
|
|
|
|
60,134
|
|
Other asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second mortgages/home equity loans residential
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
|
|
|
|
1
|
|
|
|
1,755
|
|
Other
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
1
|
|
|
|
2,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment grade
|
|
|
716
|
|
|
|
3,166
|
|
|
|
2,908
|
|
|
|
223
|
|
|
|
7,013
|
|
|
|
48
|
|
|
|
231,681
|
|
Non-investment grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,084
|
|
|
|
1
|
|
|
|
9,756
|
|
Corporate bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
|
|
|
|
8
|
|
|
|
11,256
|
|
Other asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second mortgages/home equity loans residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
272
|
|
|
|
1
|
|
|
|
1,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-investment grade
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,439
|
|
|
|
10
|
|
|
|
22,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
716
|
|
|
$
|
3,166
|
|
|
$
|
2,908
|
|
|
$
|
223
|
|
|
$
|
8,452
|
|
|
|
58
|
|
|
$
|
254,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Securities are categorized using the S&P rating. If a
security is not rated by S&P, the Moodys rating is
used. At December 31, 2010, all of the Companys fixed
income securities were rated by S&P or Moodys. |
|
(b) |
|
The unrealized loss on this AAA-rated U.S. Government agency
security is negligible and does not result in an amount when
rounded to thousands of dollars. |
The Company has no current intent to sell any of the securities
in an unrealized loss position, nor is it more likely than not
that it will be required to sell these securities prior to
recovery of amortized cost. The Company believes that all of the
securities in an unrealized loss position will recover in value
and that none of these unrealized losses were due to factors
regarding credit-worthiness. Based on the current facts and
circumstances of the Companys particular security
holdings, the Company has determined that no additional OTTI
losses related to the securities in an unrealized loss position
are required to be recorded.
Obligations
of State and Political Subdivisions
The unrealized losses on the Companys investments in
obligations of states and political subdivisions are due to
changes in credit spreads and rising interest rates. Of the
thirty-two investment grade obligations of states and political
subdivisions in an unrealized loss position at December 31,
2010, only seven were in an unrealized loss position exceeding
5% of the securitys amortized cost. The largest unrealized
loss, $0.7 million, or 11.9% of the securitys
amortized cost, was on a security issued by a governmental
utility authority. The unrealized loss position of this security
has deteriorated slightly compared to December 31, 2009
when it was $0.6 million, or 11.3% of the securitys
amortized cost. While the overall unrealized loss position of
obligations of states and political subdivisions grew from
$2.6 million, or 2.9% of their amortized cost, at
December 31, 2009 to $5.8 million, or 3.4% of their
amortized cost, at December 31, 2010 the Company continues
to believe that all interest and principal will be paid
according to their contractual terms. The Company has no current
intent to sell these securities, nor is it more likely than not
that it will be required to sell prior to recovery of amortized
cost. The Company does not believe the unrealized losses on
these securities are indicative of credit losses and, as such,
has not recorded an OTTI loss on these securities at
December 31, 2010.
One of the Companys investments in obligations of states
and political subdivisions is rated below investment grade at
December 31, 2010 and is in an unrealized loss position of
$1.1 million, or 10.0% of its amortized cost. This
42
security, issued by a governmental utility authority, was in an
unrealized loss position of $0.9 million, or 8.4% of
amortized cost, at December 31, 2009. The Company believes
that the security is rated below investment grade because an
inconsequential contingency amount is insured with one of the
major monoline insurers which is rated B by S&P. The
Company believes that this insurer is the lowest rated source of
security involved in the transaction and, despite the fact that
the amount of security provided by this insurer is
inconsequential, the entire transaction is rated to the
lowest-rated component. Based on the Companys analysis of
the sources of debt service on this bond and the fact that the
security is current on all interest payments due through
December 31, 2010, the Company continues to believe that
all interest and principal will be paid according to their
contractual terms. The Company has no current intent to sell
this security, nor is it more likely than not that it will be
required to sell prior to recovery of amortized cost. The
Company does not believe the unrealized loss on this security is
indicative of credit loss and, as such, has not recorded an OTTI
loss on this security at December 31, 2010.
Corporate
Bonds
Of the Companys thirteen investment grade corporate bond
investments with an unrealized loss at December 31, 2010,
none was in an unrealized loss position that exceeded 5% of the
securitys amortized cost. Although interest rate increases
in the fourth quarter of 2010 increased the unrealized loss
position of these investments, the overall unrealized loss
position on the Companys corporate bond holdings improved
$0.3 million at December 31, 2010 compared to
December 31, 2009. The Company has no current intent to
sell these securities, nor is it more likely than not that it
will be required to sell prior to recovery of amortized cost.
The Company does not believe the unrealized losses on these
securities are indicative of credit losses and, as such, has not
recorded any OTTI losses on these securities at
December 31, 2010.
During 2010, the Company purchased fifteen non-investment grade
corporate bonds. These bonds had an estimated fair value of
$22.5 million at December 31, 2010. Eight of these
securities were in an unrealized loss position at
December 31, 2010. In the aggregate, these eight securities
had an unrealized loss of $0.1 million as of
December 31, 2010. Each of these securities was in an
unrealized loss position representing less than 1.2% of that
securitys amortized cost. The Company has no current
intent to sell these securities, nor is it more likely than not
that it will be required to sell prior to recovery of amortized
cost. The Company does not believe the unrealized losses on
these securities are indicative of credit losses and, as such,
has not recorded an OTTI loss on these securities at
December 31, 2010.
Other
Asset-backed Securities
Two investment grade asset-backed securities, including one with
exposure to
sub-prime
home loans, held by the Company were in an unrealized loss
position at December 31, 2010. Neither of these securities
was in an unrealized loss position that exceeded 5% of the
securitys amortized cost. The Company has no current
intent to sell these securities, nor is it more likely than not
that it will be required to sell prior to recovery of amortized
cost. The Company does not believe the unrealized losses on
these securities are indicative of credit losses and, as such,
has not recorded any OTTI losses on these securities at
December 31, 2010.
At December 31, 2010 the Companys exposure to
sub-prime
home loans was limited to two asset-backed securities
collateralized by
sub-prime
home loans which originated prior to 2005. The estimated fair
value of these securities was $3.5 million at
December 31, 2010. Both of these securities are in an
unrealized loss position at December 31, 2010. One of these
securities is rated below investment grade at December 31,
2010. The investment grade security was discussed previously.
The non-investment grade security is in an unrealized loss
position of $0.3 million, or 13.4% of its amortized cost.
During 2010, the Company received repayments on this security of
$0.7 million, or approximately 25% of the par value
outstanding at December 31, 2009. This security was
determined to have credit losses totaling $0.1 million
during 2010. The non-credit component of this securitys
OTTI recognized in accumulated other comprehensive income at
December 31, 2010 was $0.2 million. The Company
believes the non-credit component of the unrealized loss on this
security is primarily attributable to this asset class being out
of favor with investors and is not indicative of the quality of
the underlying collateral. The Company has no current intent to
sell this security, nor is it more likely than not that it will
be required to sell prior to recovery of the adjusted amortized
cost.
43
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 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, 2010, 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, 2010, Western Surety and its
insurance subsidiaries had a combined statutory surplus of
$825.6 million and a net written premium to surplus ratio
of 0.5 to 1. On December 31, 2009, CNA Surety had a
combined statutory surplus of $679.3 million and a net
written premium to surplus ratio of 0.6 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 thirteen financial
ratios that address various aspects of each insurers
financial condition and stability. In 2010, the Investment Yield
ratio for both Universal Surety and Surety Bonding were outside
the usual range due to lower interest rates on both
long-term and short-term investments. The Gross Change in
Policyholders Surplus ratio for Surety Bonding was outside the
usual range due to a change in capital structure
that had no effect on Surety Bondings statutory surplus.
In 2009, the Investment Yield ratio for Universal Surety was
outside the usual range due to lower interest rates
on short-term investments.
Impact of
Pending Accounting Standards
In October 2010, the Financial Accounting Standards Board
(FASB) issued Accounting Standards Update
(ASU)
No. 2010-26,
Financial Services Insurance (Topic
944) Accounting for Costs Associated with Acquiring
or Renewing Insurance Contracts. This updated accounting
guidance modifies the definition of the types of costs incurred
to acquire or renew insurance contracts that may be capitalized.
Under the new guidance, these costs include those costs that are
incremental direct costs and certain costs that are directly
related to successful contract acquisitions. This accounting
guidance is effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15,
2011 with prospective or retrospective application allowed. The
Company is currently assessing the available application methods
as well as the impact this accounting guidance will have on its
financial condition and results of operations.
In December 2010, the FASB issued ASU
No. 2010-28,
Intangibles Goodwill and Other (Topic
350) When to Perform Step 2 of the Goodwill
Impairment Test for Reporting Units with Zero or Negative
Carrying Amounts. This guidance clarifies application of
Step 2 of the goodwill impairment tests. When Step 1 of the
goodwill impairment test results in a zero or negative amount,
some entities had concluded that Step 2 of the test was
unnecessary in this circumstance because the fair value of their
reporting unit would be greater than zero. The guidance requires
an entity to perform Step 2 if it is more likely than not that
an impairment exists. This accounting guidance is effective for
fiscal years beginning after December 15, 2010. The Company
does not expect the adoption of this guidance 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
44
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;
|
|
|
|
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 Companys
ability to access capital markets;
|
|
|
|
changes in the Companys composition of operating segments;
|
|
|
|
the actual closing of contemplated transactions and agreements;
|
|
|
|
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 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.
45
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES 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,
consistent with the expected duration of its insurance and other
liabilities.
The tables below summarize the estimated effects of certain
hypothetical changes in interest rates. It is assumed that the
changes occur immediately and uniformly across each investment
category. The selected hypothetical changes in market interest
rates reflect the Companys expectations of the reasonably
possible scenarios over a one-year period and the hypothetical
fair values are based upon the same prepayment assumptions that
were utilized in computing fair values at December 31, 2010
and December 31, 2009. Significant variations in market
interest rates could produce changes in the timing of repayments
due to prepayment options available. The fair value of such
instruments could be affected and therefore actual results might
differ from those reflected in the following tables.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair
|
|
|
Hypothetical
|
|
|
|
|
|
|
Hypothetical
|
|
|
Value After
|
|
|
Percentage
|
|
|
|
Fair Value at
|
|
|
Change in
|
|
|
Hypothetical
|
|
|
Decrease in
|
|
|
|
December 31,
|
|
|
Interest Rate
|
|
|
Change in
|
|
|
Stockholders
|
|
|
|
2010
|
|
|
(bp=basis points)
|
|
|
Interest Rate
|
|
|
Equity
|
|
|
|
(Dollars in thousands)
|
|
|
U.S. Government and government agencies and authorities
|
|
$
|
119,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200 bp increase
|
|
|
$
|
111,034
|
|
|
|
(0.5
|
)%
|
|
|
|
|
|
|
|
150 bp increase
|
|
|
|
113,329
|
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
100 bp increase
|
|
|
|
115,538
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
50 bp increase
|
|
|
|
117,578
|
|
|
|
(0.1
|
)
|
States, municipalities and political subdivisions
|
|
|
770,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200 bp increase
|
|
|
|
682,531
|
|
|
|
(5.4
|
)
|
|
|
|
|
|
|
|
150 bp increase
|
|
|
|
703,332
|
|
|
|
(4.1
|
)
|
|
|
|
|
|
|
|
100 bp increase
|
|
|
|
724,944
|
|
|
|
(2.8
|
)
|
|
|
|
|
|
|
|
50 bp increase
|
|
|
|
747,360
|
|
|
|
(1.4
|
)
|
Corporate bonds
|
|
|
476,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200 bp increase
|
|
|
|
436,507
|
|
|
|
(2.5
|
)
|
|
|
|
|
|
|
|
150 bp increase
|
|
|
|
446,132
|
|
|
|
(1.9
|
)
|
|
|
|
|
|
|
|
100 bp increase
|
|
|
|
456,064
|
|
|
|
(1.3
|
)
|
|
|
|
|
|
|
|
50 bp increase
|
|
|
|
466,309
|
|
|
|
(0.6
|
)
|
Mortgage-backed and asset-backed
|
|
|
37,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200 bp increase
|
|
|
|
36,031
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
150 bp increase
|
|
|
|
36,400
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
100 bp increase
|
|
|
|
36,776
|
|
|
|
|
|
|
|
|
|
|
|
|
50 bp increase
|
|
|
|
37,159
|
|
|
|
|
|
Total fixed income securities
available-for-sale
|
|
$
|
1,404,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200 bp increase
|
|
|
|
1,266,103
|
|
|
|
(8.4
|
)
|
|
|
|
|
|
|
|
150 bp increase
|
|
|
|
1,299,193
|
|
|
|
(6.4
|
)
|
|
|
|
|
|
|
|
100 bp increase
|
|
|
|
1,333,322
|
|
|
|
(4.3
|
)
|
|
|
|
|
|
|
|
50 bp increase
|
|
|
|
1,368,406
|
|
|
|
(2.2
|
)
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair
|
|
|
Hypothetical
|
|
|
|
|
|
|
Hypothetical
|
|
|
Value After
|
|
|
Percentage
|
|
|
|
Fair Value at
|
|
|
Change in
|
|
|
Hypothetical
|
|
|
Decrease in
|
|
|
|
December 31,
|
|
|
Interest Rate
|
|
|
Change in
|
|
|
Stockholders
|
|
|
|
2009
|
|
|
(bp=basis points)
|
|
|
Interest Rate
|
|
|
Equity
|
|
|
|
(Dollars in thousands)
|
|
|
U.S. Government and government agencies and authorities
|
|
$
|
157,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200 bp increase
|
|
|
$
|
144,937
|
|
|
|
(0.9
|
)%
|
|
|
|
|
|
|
|
150 bp increase
|
|
|
|
148,310
|
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
100 bp increase
|
|
|
|
151,570
|
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
50 bp increase
|
|
|
|
154,580
|
|
|
|
(0.2
|
)
|
States, municipalities and political subdivisions
|
|
|
728,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200 bp increase
|
|
|
|
641,122
|
|
|
|
(6.2
|
)
|
|
|
|
|
|
|
|
150 bp increase
|
|
|
|
661,735
|
|
|
|
(4.7
|
)
|
|
|
|
|
|
|
|
100 bp increase
|
|
|
|
683,176
|
|
|
|
(3.2
|
)
|
|
|
|
|
|
|
|
50 bp increase
|
|
|
|
705,453
|
|
|
|
(1.6
|
)
|
Corporate bonds
|
|
|
344,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200 bp increase
|
|
|
|
310,703
|
|
|
|
(2.4
|
)
|
|
|
|
|
|
|
|
150 bp increase
|
|
|
|
318,610
|
|
|
|
(1.8
|
)
|
|
|
|
|
|
|
|
100 bp increase
|
|
|
|
326,806
|
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
50 bp increase
|
|
|
|
335,301
|
|
|
|
(0.6
|
)
|
Mortgage-backed and asset-backed
|
|
|
36,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200 bp increase
|
|
|
|
34,525
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
150 bp increase
|
|
|
|
34,982
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
100 bp increase
|
|
|
|
35,450
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
50 bp increase
|
|
|
|
35,928
|
|
|
|
|
|
Total fixed income securities
available-for-sale
|
|
$
|
1,266,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200 bp increase
|
|
|
|
1,131,287
|
|
|
|
(9.6
|
)
|
|
|
|
|
|
|
|
150 bp increase
|
|
|
|
1,163,637
|
|
|
|
(7.2
|
)
|
|
|
|
|
|
|
|
100 bp increase
|
|
|
|
1,197,002
|
|
|
|
(4.9
|
)
|
|
|
|
|
|
|
|
50 bp increase
|
|
|
|
1,231,262
|
|
|
|
(2.4
|
)
|
47
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2010, 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 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, 2010, 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, 2010 of
the Company and our report dated February 18, 2011
expressed an unqualified opinion on those financial statements
and financial statement schedules and included an explanatory
paragraph relating to a change in method of accounting for the
recognition and presentation of other-than-temporary impairments
in 2009.
/s/ Deloitte &
Touche LLP
Chicago, Illinois
February 18, 2011
48
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of CNA Surety Corporation and subsidiaries
(CNA Surety or the Company) 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, 2010. In making this assessment, it used the
criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission in Internal Control
Integrated Framework. Based on our assessment we
believe that, as of December 31, 2010, 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 the Companys internal control over financial
reporting. Their report appears immediately prior to this
Managements Report on Internal Control Over Financial
Reporting as the first item of Item 8, Financial Statements
and Supplementary Data of this
Form 10-K.
Chicago, Illinois
February 18, 2011
49
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2010 and
December 31, 2009, and the related consolidated statements
of income, stockholders equity, and cash flows for each of
the three years in the period ended December 31, 2010. 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 CNA
Surety Corporation and subsidiaries as of December 31, 2010
and 2009, and the results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2010, 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 the
recognition and presentation of
other-than-temporary
impairments in 2009.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
December 31, 2010, 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 18, 2011 expressed
an unqualified opinion on the Companys internal control
over financial reporting.
/s/ Deloitte &
Touche LLP
Chicago, Illinois
February 18, 2011
50
CNA
SURETY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Amounts in thousands, except per share data)
|
|
|
Assets
|
Invested assets:
|
|
|
|
|
|
|
|
|
Fixed income securities, at fair value (amortized cost:
$1,353,347 and $1,219,270)
|
|
$
|
1,404,375
|
|
|
$
|
1,266,223
|
|
Equity securities, at fair value (cost: $1,687 and $1,429)
|
|
|
1,916
|
|
|
|
1,610
|
|
Short-term investments, at amortized cost (approximates fair
value)
|
|
|
53,089
|
|
|
|
48,999
|
|
|
|
|
|
|
|
|
|
|
Total invested assets
|
|
|
1,459,380
|
|
|
|
1,316,832
|
|
Cash
|
|
|
7,313
|
|
|
|
5,822
|
|
Deferred policy acquisition costs
|
|
|
98,572
|
|
|
|
99,836
|
|
Insurance receivables:
|
|
|
|
|
|
|
|
|
Premiums, including $10,840 and $9,753 from affiliates, (net of
allowance for doubtful accounts: $1,410 and $1,110)
|
|
|
33,378
|
|
|
|
33,392
|
|
Reinsurance
|
|
|
41,453
|
|
|
|
48,645
|
|
Deposit with affiliated ceding company
|
|
|
23,446
|
|
|
|
26,878
|
|
Goodwill and other intangible assets (net of accumulated
amortization: $25,523 and $25,523)
|
|
|
138,785
|
|
|
|
138,785
|
|
Property and equipment, at cost (less accumulated depreciation
and amortization: $38,931 and $37,514)
|
|
|
15,645
|
|
|
|
19,681
|
|
Prepaid reinsurance premiums
|
|
|
164
|
|
|
|
210
|
|
Accrued investment income
|
|
|
17,307
|
|
|
|
15,832
|
|
Other assets
|
|
|
2,291
|
|
|
|
3,122
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,837,734
|
|
|
$
|
1,709,035
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
Reserves:
|
|
|
|
|
|
|
|
|
Unpaid losses and loss adjustment expenses
|
|
$
|
389,089
|
|
|
$
|
406,123
|
|
Unearned premiums
|
|
|
245,986
|
|
|
|
247,776
|
|
|
|
|
|
|
|
|
|
|
Total reserves
|
|
|
635,075
|
|
|
|
653,899
|
|
Long-term debt
|
|
|
30,930
|
|
|
|
30,930
|
|
Deferred income taxes, net
|
|
|
29,098
|
|
|
|
28,065
|
|
Reinsurance and other payables to affiliates
|
|
|
177
|
|
|
|
548
|
|
Accrued expenses
|
|
|
21,726
|
|
|
|
18,586
|
|
Liability for postretirement benefits
|
|
|
12,330
|
|
|
|
10,718
|
|
Payable for securities purchased
|
|
|
|
|
|
|
1,356
|
|
Income tax payable
|
|
|
13,775
|
|
|
|
13,389
|
|
Other liabilities
|
|
|
25,890
|
|
|
|
28,460
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
769,001
|
|
|
|
785,951
|
|
Commitments and contingencies (See Notes 3, 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; 46,104 shares issued and 44,748 shares
outstanding at December 31, 2010 and 45,635 shares
issued and 44,268 shares outstanding at December 31,
2009
|
|
|
461
|
|
|
|
456
|
|
Additional paid-in capital
|
|
|
288,471
|
|
|
|
279,388
|
|
Retained earnings
|
|
|
761,925
|
|
|
|
627,505
|
|
Accumulated other comprehensive income
|
|
|
32,436
|
|
|
|
30,406
|
|
Treasury stock, 1,356 and 1,367 shares, at cost
|
|
|
(14,560
|
)
|
|
|
(14,671
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,068,733
|
|
|
|
923,084
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,837,734
|
|
|
$
|
1,709,035
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
51
CNA
SURETY CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Amounts in thousands,
|
|
|
|
except per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premium
|
|
$
|
418,017
|
|
|
$
|
421,872
|
|
|
$
|
431,696
|
|
Net investment income
|
|
|
53,591
|
|
|
|
50,371
|
|
|
|
47,302
|
|
Net realized investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary
impairment losses
|
|
|
|
|
|
|
(1,870
|
)
|
|
|
(1,321
|
)
|
Portion of
other-than-temporary
impairment losses recognized in other comprehensive income
(before taxes)
|
|
|
(122
|
)
|
|
|
1,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings
|
|
|
(122
|
)
|
|
|
(162
|
)
|
|
|
(1,321
|
)
|
Net realized investment gains (losses), excluding impairment
losses
|
|
|
1,207
|
|
|
|
1,361
|
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized investment gains (losses)
|
|
|
1,085
|
|
|
|
1,199
|
|
|
|
(1,374
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
472,693
|
|
|
|
473,442
|
|
|
|
477,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
|
45,235
|
|
|
|
69,416
|
|
|
|
80,844
|
|
Net commissions, brokerage and other underwriting expenses
|
|
|
227,732
|
|
|
|
233,427
|
|
|
|
235,420
|
|
Interest expense
|
|
|
1,164
|
|
|
|
1,391
|
|
|
|
2,148
|
|
Other expense
|
|
|
1,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
275,605
|
|
|
|
304,234
|
|
|
|
318,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
197,088
|
|
|
|
169,208
|
|
|
|
159,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
62,668
|
|
|
|
51,347
|
|
|
|
48,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
134,420
|
|
|
$
|
117,861
|
|
|
$
|
110,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share
|
|
$
|
3.03
|
|
|
$
|
2.66
|
|
|
$
|
2.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share, assuming dilution
|
|
$
|
3.02
|
|
|
$
|
2.65
|
|
|
$
|
2.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
44,376
|
|
|
|
44,247
|
|
|
|
44,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, assuming dilution
|
|
|
44,559
|
|
|
|
44,397
|
|
|
|
44,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
52
CNA
SURETY CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
Treasury
|
|
|
Total
|
|
|
|
Shares
|
|
|
Common
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Stock
|
|
|
Stockholders
|
|
|
|
Outstanding
|
|
|
Stock
|
|
|
Capital
|
|
|
Income
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
At Cost
|
|
|
Equity
|
|
|
|
(Amounts in thousands)
|
|
|
Balance, January 1, 2008
|
|
|
44,121
|
|
|
$
|
455
|
|
|
$
|
274,069
|
|
|
|
|
|
|
$
|
399,241
|
|
|
$
|
8,800
|
|
|
$
|
(14,860
|
)
|
|
$
|
667,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
110,403
|
|
|
$
|
110,403
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
110,403
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) on securities, after income
tax benefit of $7,323 (net of reclassification adjustment of
($282), after income tax benefit of $152)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,599
|
)
|
|
|
|
|
|
|
(13,599
|
)
|
|
|
|
|
|
|
(13,599
|
)
|
Net change related to postretirement benefits, after income tax
expense of $565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
513
|
|
|
|
|
|
|
|
513
|
|
|
|
|
|
|
|
513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
97,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
1,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,693
|
|
Stock options exercised and other
|
|
|
47
|
|
|
|
|
|
|
|
493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
|
|
|
|
580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
44,168
|
|
|
$
|
455
|
|
|
$
|
276,255
|
|
|
|
|
|
|
$
|
509,644
|
|
|
$
|
(4,286
|
)
|
|
$
|
(14,773
|
)
|
|
$
|
767,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
117,861
|
|
|
$
|
117,861
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
117,861
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) on securities, after income
tax expense of $19,196 (net of reclassification adjustment of
($3,242), after income tax benefit of $1,746)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,651
|
|
|
|
|
|
|
|
35,651
|
|
|
|
|
|
|
|
35,651
|
|
Other-than-temporary
impairment losses not recognized in the Consolidated Statements
of Income, after income tax benefit of $190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(353
|
)
|
|
|
|
|
|
|
(353
|
)
|
|
|
|
|
|
|
(353
|
)
|
Net change related to postretirement benefits, after income tax
benefit of $236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(606
|
)
|
|
|
|
|
|
|
(606
|
)
|
|
|
|
|
|
|
(606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
152,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
1,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,990
|
|
Stock options exercised and other
|
|
|
100
|
|
|
|
1
|
|
|
|
1,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102
|
|
|
|
1,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
44,268
|
|
|
$
|
456
|
|
|
$
|
279,388
|
|
|
|
|
|
|
$
|
627,505
|
|
|
$
|
30,406
|
|
|
$
|
(14,671
|
)
|
|
$
|
923,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
134,420
|
|
|
$
|
134,420
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
134,420
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) on securities, after income
tax expense of $1,348 (net of reclassification adjustment of
$682, after income tax expense of $367)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,504
|
|
|
|
|
|
|
|
2,504
|
|
|
|
|
|
|
|
2,504
|
|
Change in
other-than-temporary
impairment losses not recognized in the Consolidated Statements
of Income, after income tax expense of $95 (net of
reclassification adjustment of ($79), after income tax benefit
of $43)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
176
|
|
|
|
|
|
|
|
176
|
|
|
|
|
|
|
|
176
|
|
Net change related to postretirement benefits, after income tax
benefit of $350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(650
|
)
|
|
|
|
|
|
|
(650
|
)
|
|
|
|
|
|
|
(650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
136,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
1,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,758
|
|
Stock options exercised and other
|
|
|
480
|
|
|
|
5
|
|
|
|
7,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111
|
|
|
|
7,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
|
44,748
|
|
|
$
|
461
|
|
|
$
|
288,471
|
|
|
|
|
|
|
$
|
761,925
|
|
|
$
|
32,436
|
|
|
$
|
(14,560
|
)
|
|
$
|
1,068,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
53
CNA
SURETY CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Amounts in thousands)
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
134,420
|
|
|
$
|
117,861
|
|
|
$
|
110,403
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts
|
|
|
655
|
|
|
|
564
|
|
|
|
443
|
|
Depreciation and amortization
|
|
|
6,172
|
|
|
|
6,055
|
|
|
|
5,809
|
|
Amortization of bond premium, net
|
|
|
7,318
|
|
|
|
4,862
|
|
|
|
2,888
|
|
(Gain) loss on disposal or impairment of property and equipment
|
|
|
(82
|
)
|
|
|
4,934
|
|
|
|
1,155
|
|
Net realized investment (gains) losses
|
|
|
(1,085
|
)
|
|
|
(1,199
|
)
|
|
|
1,374
|
|
Stock-based compensation
|
|
|
1,758
|
|
|
|
1,990
|
|
|
|
1,693
|
|
Deferred income tax benefit
|
|
|
(973
|
)
|
|
|
(448
|
)
|
|
|
(1,406
|
)
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance receivables
|
|
|
6,551
|
|
|
|
45,799
|
|
|
|
34,593
|
|
Reserve for unearned premiums
|
|
|
(1,790
|
)
|
|
|
(11,048
|
)
|
|
|
(106
|
)
|
Reserve for unpaid losses and loss adjustment expenses
|
|
|
(17,034
|
)
|
|
|
(22,601
|
)
|
|
|
(44,118
|
)
|
Deposit with affiliated ceding company
|
|
|
3,432
|
|
|
|
2,815
|
|
|
|
4,951
|
|
Deferred policy acquisition costs
|
|
|
1,264
|
|
|
|
2,256
|
|
|
|
2,188
|
|
Reinsurance and other payables to affiliates
|
|
|
(371
|
)
|
|
|
(1,132
|
)
|
|
|
1,037
|
|
Prepaid reinsurance premiums
|
|
|
46
|
|
|
|
210
|
|
|
|
90
|
|
Accrued expenses
|
|
|
3,140
|
|
|
|
(1,470
|
)
|
|
|
1,783
|
|
Other assets and liabilities
|
|
|
(1,303
|
)
|
|
|
8,536
|
|
|
|
1,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
142,118
|
|
|
|
157,984
|
|
|
|
124,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(241,752
|
)
|
|
|
(362,262
|
)
|
|
|
(183,949
|
)
|
Maturities
|
|
|
63,737
|
|
|
|
124,428
|
|
|
|
62,802
|
|
Sales
|
|
|
37,608
|
|
|
|
56,654
|
|
|
|
24,402
|
|
Purchases of equity securities
|
|
|
(413
|
)
|
|
|
(868
|
)
|
|
|
(550
|
)
|
Proceeds from the sale of equity securities
|
|
|
193
|
|
|
|
648
|
|
|
|
626
|
|
Changes in short-term investments
|
|
|
(4,031
|
)
|
|
|
31,693
|
|
|
|
(30,403
|
)
|
Purchases of property and equipment, net
|
|
|
(2,054
|
)
|
|
|
(6,255
|
)
|
|
|
(6,952
|
)
|
Changes in payables for securities purchased
|
|
|
(1,356
|
)
|
|
|
(7,042
|
)
|
|
|
8,398
|
|
Other, net
|
|
|
|
|
|
|
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) investing activities
|
|
|
(148,068
|
)
|
|
|
(163,004
|
)
|
|
|
(125,426
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock option exercises and other
|
|
|
7,441
|
|
|
|
1,246
|
|
|
|
580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
7,441
|
|
|
|
1,246
|
|
|
|
580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash
|
|
|
1,491
|
|
|
|
(3,774
|
)
|
|
|
(634
|
)
|
Cash at beginning of period
|
|
|
5,822
|
|
|
|
9,596
|
|
|
|
10,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
7,313
|
|
|
$
|
5,822
|
|
|
$
|
9,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,163
|
|
|
$
|
1,427
|
|
|
$
|
2,154
|
|
Income taxes
|
|
$
|
62,087
|
|
|
$
|
39,793
|
|
|
$
|
46,600
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
54
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. 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). Through its insurance subsidiaries, CNAF owns
approximately 61% of the outstanding common stock of CNA Surety.
Loews Corporation owns approximately 90% of the outstanding
common stock of CNAF.
CNAF
Proposal
In October 2010, the Company received an unsolicited proposal
from CNAF to acquire all of the outstanding shares of common
stock that are not currently owned by subsidiaries of CNAF at a
purchase price of $22.00 per share in cash (the CNAF
Proposal). The Companys Board of Directors appointed
a special committee (the Special Committee),
comprised solely of the Companys three independent
directors, to review and evaluate the CNAF Proposal. The Special
Committee retained both legal and financial advisors to assist
in their consideration of the CNAF Proposal. During 2010, the
Company incurred expenses of $1.5 million directly related
to the consideration of the proposal. These expenses are shown
as Other expense in the Consolidated Statements of
Income.
CNAF
Proposal Subsequent Event
On February 4, 201l, the Special Committee announced that
it does not support the terms of the proposal and advised CNAF
that it is open to alternate proposals.
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
the 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 equity securities as
available-for-sale,
and as such, they are carried at fair value.
55
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
All securities transactions are recorded on the trade date.
Investment gains or losses realized on the sale of securities
are determined using the
first-in,
first-out method. Cash flows from purchases, sales and
maturities of fixed income and equity securities 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, adjustments for previously recorded
other-than-temporary
impairment (OTTI) losses and the cumulative effect
of amortization of premiums and accretion of discounts using the
interest method. Such amortization and accretion are included in
net investment income in the Consolidated Statements of Income.
For mortgage-backed and asset-backed securities, the Company
considers estimates of future prepayments in the calculation of
the effective yield used to apply the interest method. If a
difference arises between the anticipated prepayments and the
actual prepayments, the Company recalculates the effective yield
based on actual prepayments and the currently anticipated future
prepayments. The amortized costs of such securities are adjusted
to the amount that would have resulted had the recalculated
effective yields been applied since the acquisition of the
securities with a corresponding charge or credit to net
investment income in the Consolidated Statements of Income.
Prepayment estimates are based on the structural elements of
specific securities, interest rates and generally recognized
prepayment speed indices.
In April 2009, the Financial Accounting Standards Board
(FASB) issued updated accounting guidance, which
amended the OTTI loss model for fixed income securities. A fixed
income security is impaired if the fair value of the security is
less than its amortized cost basis, which is its cost adjusted
for accretion, amortization and previously recorded OTTI losses.
The updated accounting guidance requires an OTTI loss equal to
the difference between fair value and amortized cost to be
recognized in earnings if the Company intends to sell the fixed
income security or if it is more likely than not that the
Company will be required to sell the fixed income security
before recovery of its amortized cost basis.
The remaining fixed income securities in an unrealized loss
position are evaluated to determine if a credit loss exists. If
the Company does not expect to recover the entire amortized cost
basis of a fixed income security, the security is deemed to be
other-than-temporarily
impaired for credit reasons. For these securities, the
bifurcation of OTTI losses into a credit component and a
non-credit component is required by the updated accounting
guidance. The credit component is recognized in earnings and
represents the difference between the present value of the
future cash flows that the Company expects to collect and a
fixed income securitys amortized cost basis. The
non-credit component is recognized in other comprehensive income
and represents the difference between fair value and the present
value of the future cash flows that the Company expects to
collect.
Prior to the adoption of the updated accounting guidance, OTTI
losses were not bifurcated between credit and non-credit
components. The difference between fair value and amortized cost
was recognized in earnings for all securities for which the
Company did not expect to recover the amortized cost basis, or
for which the Company did not have the ability and intent to
hold until recovery of fair value to amortized cost.
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 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 tests
that deferred policy 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 policy acquisition costs, a charge to income is
taken and the deferred policy 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 policy acquisition costs.
56
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Intangible
Assets
CNA Suretys Consolidated Balance Sheet as of
December 31, 2010 includes intangible assets of
$138.8 million, comprised of $122.7 million of
goodwill and $16.1 million of 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 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 of a reporting unit refers to the price
that would be received to sell the reporting unit as a whole in
an orderly transaction between market participants. 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. Significant inputs to the
Companys discounted cash flow model include estimated
capital requirements to support the business, expected cash
flows from underwriting activity, required capital reinvestment
to support growth and the selected discount rates. If the
carrying amount of a reporting unit, including goodwill and
other intangible assets, 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, 2010. No impairment was indicated. The
Company also evaluated the indefinite-lived intangible and
determined that no events or circumstances have occurred that
warrant a re-categorization of this intangible to a finite-lived
intangible.
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 and (c) future expenses to be incurred in the
settlement of claims, 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
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 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.
Insurance premium receivables do not include financing costs or
other fees and are presented net of an estimated allowance for
doubtful accounts. This allowance is based on a periodic
evaluation of the aging and
57
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
collectibility of premium receivables. Premium receivables and
any related allowance are written off after collection efforts
have been exhausted.
Reinsurance
The Company assumes and cedes insurance with other insurers and
reinsurers to limit maximum loss, provide greater
diversification of risk, minimize exposure on larger risks and
to meet certain regulatory restrictions that would otherwise
limit the size of bonds the Company can write. Premiums and
losses and loss adjustment 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.
Reinsurance receivables include unpaid amounts related to paid
losses and loss adjustment expenses. These amounts are
considered past due based on the reinsurance contract terms. 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
The Company measures and records stock-based compensation
expense using a fair-value based method. The Company applies the
alternative transition method in calculating its pool of excess
tax benefits available to absorb future tax deficiencies and
accounts for graded vesting using the accelerated method.
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,
deferred policy acquisition costs and net unrealized
gains/losses on securities. 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.
Effective in 2007, the Company adopted guidance which prescribed
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 Company has elected to classify
interest, if any, recognized in accordance with this guidance as
interest expense. Likewise, penalties, if any, recognized in
accordance with this guidance 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 2010, 2009 and 2008 was $6.2 million,
$6.0 million and $5.7 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 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.
58
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The computation of earnings per share is as follows (amounts in
thousands, except for per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net income
|
|
$
|
134,420
|
|
|
$
|
117,861
|
|
|
$
|
110,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
44,268
|
|
|
|
44,168
|
|
|
|
44,121
|
|
Weighted average shares of options exercised and additional
stock issuance
|
|
|
108
|
|
|
|
79
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted average shares outstanding
|
|
|
44,376
|
|
|
|
44,247
|
|
|
|
44,145
|
|
Effect of dilutive options
|
|
|
183
|
|
|
|
150
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted average shares outstanding, assuming dilution
|
|
|
44,559
|
|
|
|
44,397
|
|
|
|
44,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
$
|
3.03
|
|
|
$
|
2.66
|
|
|
$
|
2.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share, assuming dilution
|
|
$
|
3.02
|
|
|
$
|
2.65
|
|
|
$
|
2.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No adjustments were made to reported net income in the
computation of earnings per share. Options to purchase shares of
common stock of 0.4 million, 0.7 million and
0.6 million for the years ending December 31, 2010,
2009 and 2008, respectively, were excluded from the calculation
of diluted earnings per share because the exercise price of the
options was greater than the average market price of CNA
Suretys common stock.
Adopted
Accounting Pronouncements
In June 2009, the FASB issued Accounting Standards Update
(ASU)
No. 2009-16,
Transfers and Servicing (Topic 860) Accounting
for Transfers of Financial Assets. This guidance removed
the concept of a qualifying special-purpose entity and
eliminated it from exceptions under the guidance for
consolidation of variable interest entities. It also modified
the de-recognition conditions related to legal isolation and
effective control and added additional disclosure requirements
for transfers of financial assets. This guidance was effective
for annual reporting periods beginning after November 15,
2009. The adoption of this guidance did not have an impact on
the Companys financial condition or results of operations.
In June 2009, the FASB issued ASU
No. 2009-17,
Consolidations (Topic 810) Improvements to
Financial Reporting by Enterprises Involved with Variable
Interest Entities. This guidance amended existing
consolidation guidance applicable for variable interest entities
as well as requirements for determination of the primary
beneficiary of a variable interest entity, required an ongoing
assessment of whether an entity is the primary beneficiary and
required enhanced disclosures that will provide users of
financial statements information regarding an enterprises
involvement in a variable interest entity. This guidance was
effective for annual reporting periods beginning after
November 15, 2009. The Company evaluated its trust
preferred security arrangement discussed further in
Note 3., Debt, to these Consolidated Financial Statements
and determined the issuer trust should remain unconsolidated
under this guidance. As such, the adoption of this guidance did
not have an impact on the Companys financial condition or
results of operations.
Pending
Accounting Pronouncements
In October 2010, the FASB issued ASU
No. 2010-26,
Financial Services Insurance (Topic 944)
Accounting for Costs Associated with Acquiring or
Renewing Insurance Contracts. This updated accounting
guidance modifies the definition of the types of costs incurred
to acquire or renew insurance contracts that may be capitalized.
Under the new guidance, these costs include those costs that are
incremental direct costs and certain costs that are directly
related to successful contract acquisitions. This accounting
guidance is effective for fiscal years, and interim periods
within those
59
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
fiscal years, beginning after December 15, 2011 with
prospective or retrospective application allowed. The Company is
currently assessing the available application methods as well as
the impact this accounting guidance will have on its financial
condition and results of operations.
In December 2010, the FASB issued ASU
No. 2010-28,
Intangibles Goodwill and Other (Topic
350) When to Perform Step 2 of the Goodwill
Impairment Test for Reporting Units with Zero or Negative
Carrying Amounts. This guidance clarifies application of
Step 2 of the goodwill impairment tests. When Step 1 of the
goodwill impairment test results in a zero or negative amount,
some entities had concluded that Step 2 of the test was
unnecessary because the fair value of their reporting unit would
be greater than zero. The guidance requires an entity to perform
Step 2 if it is more likely than not that an impairment exists.
This accounting guidance is effective for fiscal years beginning
after December 15, 2010. The Company does not expect the
adoption of this guidance to have an impact on the
Companys financial condition or results of operations.
Major categories of net investment income were as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
$
|
54,765
|
|
|
$
|
51,060
|
|
|
$
|
46,134
|
|
Equity securities
|
|
|
39
|
|
|
|
39
|
|
|
|
56
|
|
Short-term investments
|
|
|
85
|
|
|
|
127
|
|
|
|
1,340
|
|
Other
|
|
|
49
|
|
|
|
62
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income on
available-for-sale
securities
|
|
|
54,938
|
|
|
|
51,288
|
|
|
|
47,575
|
|
Investment income on deposit with affiliated ceding company
|
|
|
93
|
|
|
|
335
|
|
|
|
912
|
|
Investment expenses
|
|
|
(1,440
|
)
|
|
|
(1,252
|
)
|
|
|
(1,185
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
53,591
|
|
|
$
|
50,371
|
|
|
$
|
47,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net realized investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized investment gains
|
|
$
|
1,225
|
|
|
$
|
1,731
|
|
|
$
|
|
|
Gross realized investment losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary
impairment losses
|
|
|
(122
|
)
|
|
|
(116
|
)
|
|
|
(978
|
)
|
Realized losses from sales
|
|
|
(56
|
)
|
|
|
(393
|
)
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross realized investment losses
|
|
|
(178
|
)
|
|
|
(509
|
)
|
|
|
(997
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses) on fixed income securities
|
|
|
1,047
|
|
|
|
1,222
|
|
|
|
(997
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized investment gains
|
|
|
38
|
|
|
|
44
|
|
|
|
13
|
|
Gross realized investment losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary
impairment losses
|
|
|
|
|
|
|
(46
|
)
|
|
|
(343
|
)
|
Realized losses from sales
|
|
|
|
|
|
|
(20
|
)
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross realized investment losses
|
|
|
|
|
|
|
(66
|
)
|
|
|
(389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses) on equity securities
|
|
|
38
|
|
|
|
(22
|
)
|
|
|
(376
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses)
|
|
$
|
1,085
|
|
|
$
|
1,199
|
|
|
$
|
(1,374
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities
|
|
$
|
4,075
|
|
|
$
|
54,123
|
|
|
$
|
(20,816
|
)
|
Equity securities
|
|
|
48
|
|
|
|
181
|
|
|
|
(106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net change in unrealized gains (losses)
|
|
$
|
4,123
|
|
|
$
|
54,304
|
|
|
$
|
(20,922
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses) and change in unrealized gains
(losses)
|
|
$
|
5,208
|
|
|
$
|
55,503
|
|
|
$
|
(22,296
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains were $1.1 million for 2010.
Realized gains on sales of fixed income securities were
partially offset by the recognition of additional
other-than-temporary
impairment losses on a fixed income security for which OTTI
losses were first recognized in 2009. The OTTI losses on this
security and OTTI losses on equity securities related to the
Companys nonqualified deferred compensation plan partially
offset realized gains on sales of fixed income securities
resulting in net realized investment gains of $1.2 million
for 2009. Net realized investment losses were $1.4 million
for 2008 due to the recognition of an OTTI loss on a fixed
income security and OTTI losses on equity securities related to
the Companys nonqualified deferred compensation plan.
61
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The amortized cost, gross unrealized gains, gross unrealized
losses, estimated fair value and unrealized OTTI losses of fixed
income securities and the cost, gross unrealized gains, gross
unrealized losses and estimated fair value of equity securities
held by CNA Surety at December 31, 2010, by investment
category, were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross Unrealized Losses
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Unrealized
|
|
|
Less Than
|
|
|
More Than
|
|
|
Estimated
|
|
|
Unrealized
|
|
December 31, 2010
|
|
or Cost
|
|
|
Gains
|
|
|
12 Months
|
|
|
12 Months
|
|
|
Fair Value
|
|
|
OTTI Losses
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of U.S. Government and
agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
17,288
|
|
|
$
|
914
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
18,202
|
|
|
$
|
|
|
U.S. Agencies
|
|
|
6,518
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
6,768
|
|
|
|
|
|
Collateralized mortgage obligations residential
|
|
|
20,769
|
|
|
|
1,558
|
|
|
|
|
|
|
|
|
|
|
|
22,327
|
|
|
|
|
|
Mortgage pass-through securities residential
|
|
|
68,727
|
|
|
|
3,320
|
|
|
|
|
|
|
|
|
|
|
|
72,047
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
|
746,514
|
|
|
|
30,932
|
|
|
|
(5,096
|
)
|
|
|
(1,742
|
)
|
|
|
770,608
|
|
|
|
|
|
Corporate bonds
|
|
|
456,963
|
|
|
|
21,164
|
|
|
|
(1,249
|
)
|
|
|
(5
|
)
|
|
|
476,873
|
|
|
|
|
|
Collateralized mortgage obligations commercial
|
|
|
10,018
|
|
|
|
567
|
|
|
|
|
|
|
|
|
|
|
|
10,585
|
|
|
|
|
|
Other asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second mortgages/home equity loans residential
|
|
|
3,878
|
|
|
|
|
|
|
|
(84
|
)
|
|
|
(272
|
)
|
|
|
3,522
|
|
|
|
(927
|
)(a)
|
Consumer credit receivables
|
|
|
9,998
|
|
|
|
158
|
|
|
|
|
|
|
|
|
|
|
|
10,156
|
|
|
|
|
|
Other
|
|
|
12,674
|
|
|
|
617
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
13,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
1,353,347
|
|
|
|
59,480
|
|
|
|
(6,433
|
)
|
|
|
(2,019
|
)
|
|
|
1,404,375
|
|
|
$
|
(927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
1,687
|
|
|
|
229
|
|
|
|
|
|
|
|
|
|
|
|
1,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,355,034
|
|
|
$
|
59,709
|
|
|
$
|
(6,433
|
)
|
|
$
|
(2,019
|
)
|
|
$
|
1,406,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The unrealized loss position of this security was
$0.3 million at December 31, 2010. |
62
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The amortized cost, gross unrealized gains, gross unrealized
losses, estimated fair value and unrealized OTTI losses of fixed
income securities and the cost, gross unrealized gains, gross
unrealized losses and estimated fair value of equity securities
held by CNA Surety at December 31, 2009, by investment
category, were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross Unrealized Losses
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Unrealized
|
|
|
Less Than
|
|
|
More Than
|
|
|
Estimated
|
|
|
Unrealized
|
|
December 31, 2009
|
|
or Cost
|
|
|
Gains
|
|
|
12 Months
|
|
|
12 Months
|
|
|
Fair Value
|
|
|
OTTI Losses
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of U.S. Government and
agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
17,378
|
|
|
$
|
970
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
18,348
|
|
|
$
|
|
|
U.S. Agencies
|
|
|
9,794
|
|
|
|
337
|
|
|
|
|
|
|
|
|
|
|
|
10,131
|
|
|
|
|
|
Collateralized mortgage obligations residential
|
|
|
30,709
|
|
|
|
1,383
|
|
|
|
|
|
|
|
|
|
|
|
32,092
|
|
|
|
|
|
Mortgage pass-through securities residential
|
|
|
94,453
|
|
|
|
2,336
|
|
|
|
(232
|
)
|
|
|
|
|
|
|
96,557
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
|
696,505
|
|
|
|
35,847
|
|
|
|
(882
|
)
|
|
|
(2,902
|
)
|
|
|
728,568
|
|
|
|
|
|
Corporate bonds
|
|
|
334,136
|
|
|
|
11,478
|
|
|
|
(1,248
|
)
|
|
|
(257
|
)
|
|
|
344,109
|
|
|
|
|
|
Collateralized mortgage obligations commercial
|
|
|
10,024
|
|
|
|
|
|
|
|
|
|
|
|
(351
|
)
|
|
|
9,673
|
|
|
|
|
|
Other asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second mortgages/home equity loans residential
|
|
|
5,501
|
|
|
|
|
|
|
|
|
|
|
|
(740
|
)
|
|
|
4,761
|
|
|
|
(1,399
|
)(a)
|
Consumer credit receivables
|
|
|
11,055
|
|
|
|
528
|
|
|
|
|
|
|
|
|
|
|
|
11,583
|
|
|
|
|
|
Other
|
|
|
9,715
|
|
|
|
686
|
|
|
|
|
|
|
|
|
|
|
|
10,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
1,219,270
|
|
|
|
53,565
|
|
|
|
(2,362
|
)
|
|
|
(4,250
|
)
|
|
|
1,266,223
|
|
|
$
|
(1,399
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
1,429
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
1,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,220,699
|
|
|
$
|
53,746
|
|
|
$
|
(2,362
|
)
|
|
$
|
(4,250
|
)
|
|
$
|
1,267,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The unrealized loss position of this security was
$0.5 million at December 31, 2009. |
The Company did not hold any non-income producing fixed income
securities as of December 31, 2010 or 2009. As of
December 31, 2010 and December 31, 2009, no investments in
any single issuer exceeded 10% of stockholders equity.
A security is in an unrealized loss position, or impaired, if
the fair value of the security is less than its amortized cost,
which includes adjustments for accretion, amortization and
previously recorded
other-than-temporary
impairment losses. When a security is impaired, the impairment
is evaluated to determine whether it is temporary or
other-than-temporary.
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 identifying 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.
63
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
other-than-temporary
impairment loss incorporates both quantitative criteria and
qualitative information.
In determining whether an equity security is
other-than-temporarily
impaired, 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 and (d) general market
conditions and industry or sector specific factors. Currently,
the Companys equity portfolio is comprised solely of
mutual funds related to the Companys deferred compensation
plan, which is an unfunded, nonqualified deferred compensation
plan for a select group of management or highly compensated
employees. Due to the nature of the plan, the Company does not
assert the ability to hold these securities until an anticipated
recovery in value. As such, if any of these securities are in an
unrealized loss position, they are considered to be
other-than-temporarily
impaired.
For equity 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
realized gains/losses in the Consolidated Statements of Income.
Based on the Companys evaluation of this quantitative
criteria and qualitative information, the Company recorded no
OTTI losses on equity securities in 2010. In 2009 and 2008, the
Company recorded
other-than-temporary
impairment losses of less than $0.1 million and
$0.4 million, respectively, on the equity securities that
are related to the Companys nonqualified deferred
compensation plan.
Fixed income securities in an unrealized loss position that the
Company intends to sell, or it more likely than not will be
required to sell before any anticipated recovery of amortized
cost, are considered to be
other-than-temporarily
impaired. These securities are written down to fair value and
the resulting losses are recognized in realized gains/losses in
the Consolidated Statements of Income.
The remaining fixed income securities in an unrealized loss
position are evaluated to determine if a credit loss exists. To
determine if a credit loss exists, the Company considers a
number of factors including, but not limited to: (a) the
financial condition and near-term prospects of the issuer,
(b) credit ratings of the securities, (c) whether the
debtor is current on interest and principal payments,
(d) the length of time and the extent to which the market
value has been less than book value and (e) general market
conditions and industry or sector specific factors.
In addition to these factors, the Company considers the results
of discounted cash flow modeling using assumptions
representative of current market conditions as well as those
specific to the Companys particular security holdings. For
asset-backed and mortgage-backed securities, the focus of this
analysis is on assessing the sufficiency and quality of
underlying collateral and timing of cash flows. Significant
assumptions considered by the Company in its cash flow
projections include delinquency rates, probable risk of default,
over collateralization and credit support from lower level
tranches. If the discounted expected cash flows for a security
equal or exceed the amortized cost of that security, no credit
loss exists and the security is deemed to be temporarily
impaired.
Fixed income securities in an unrealized loss position for which
management believes a credit loss exists are considered to be
other-than-temporarily
impaired. For these fixed income securities, the Company
bifurcates OTTI losses into a credit component and a non-credit
component. The credit component, which represents the difference
between the discounted expected cash flows and the fixed income
securitys amortized cost, is recognized in earnings. The
non-credit component is recognized in other comprehensive income
and represents the difference between fair value and the
discounted cash flows that the Company expects to collect.
Based on the Companys evaluation of this quantitative
criteria and qualitative information, the Company recorded
credit-related OTTI losses of $0.1 million on fixed income
securities during 2010. These credit-related
64
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
OTTI losses were recorded on a security collateralized by
sub-prime
home loans that is rated below investment grade by
Standard & Poors (S&P). The
Company also recorded credit-related OTTI losses of
$0.1 million on this security during 2009.
The following table presents a roll-forward of the
Companys cumulative credit losses recognized in net
realized gains/losses on the Consolidated Statements of Income
on fixed income securities held as of December 31, 2010 (in
thousands of dollars):
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
Beginning balance
|
|
$
|
116
|
|
Credit losses for which an OTTI loss was not previously
recognized
|
|
|
|
|
Credit losses for which an OTTI loss was previously recognized
|
|
|
122
|
|
|
|
|
|
|
Ending balance
|
|
$
|
238
|
|
|
|
|
|
|
The following table presents a roll-forward of the
Companys cumulative credit losses recognized in net
realized gains/losses on the Consolidated Statements of Income
on fixed income securities held as of December 31, 2009 (in
thousands of dollars):
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
Beginning balance
|
|
$
|
|
|
Credit losses for which an OTTI loss was not previously
recognized
|
|
|
116
|
|
Credit losses for which an OTTI loss was previously recognized
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
116
|
|
|
|
|
|
|
In 2008, the Company recorded
other-than-temporary
impairment losses of $1.0 million on one fixed income
security. The security was issued by the financing subsidiary of
a large domestic automaker and was rated below investment grade
by S&P and Moodys Investor Services
(Moodys). The Company determined that this
previously recorded OTTI loss was credit-related.
65
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The amortized cost and estimated fair value of fixed income
securities, by contractual maturity, at December 31, 2010
and 2009 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Amortized
|
|
|
Estimated Fair
|
|
|
Amortized
|
|
|
Estimated Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year
|
|
$
|
39,649
|
|
|
$
|
40,035
|
|
|
$
|
13,006
|
|
|
$
|
13,224
|
|
Due after one year but within five years
|
|
|
422,319
|
|
|
|
441,895
|
|
|
|
304,654
|
|
|
|
321,144
|
|
Due after five years but within ten years
|
|
|
480,548
|
|
|
|
507,793
|
|
|
|
447,485
|
|
|
|
468,254
|
|
Due after ten years
|
|
|
284,767
|
|
|
|
282,728
|
|
|
|
292,668
|
|
|
|
298,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,227,283
|
|
|
|
1,272,451
|
|
|
|
1,057,813
|
|
|
|
1,101,156
|
|
Mortgage pass-through securities, collateralized mortgage
obligations and asset-backed securities
|
|
|
126,064
|
|
|
|
131,924
|
|
|
|
161,457
|
|
|
|
165,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,353,347
|
|
|
$
|
1,404,375
|
|
|
$
|
1,219,270
|
|
|
$
|
1,266,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table provides the composition of fixed income
securities with an unrealized loss at December 31, 2010 in
relation to the total of all fixed income securities by
contractual maturities:
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
% of
|
|
|
|
Estimated
|
|
|
Unrealized
|
|
Contractual Maturity
|
|
Fair Value
|
|
|
Loss
|
|
|
Due after one year through five years
|
|
|
17
|
%
|
|
|
7
|
%
|
Due after five years through ten years
|
|
|
23
|
|
|
|
17
|
|
Due after ten years
|
|
|
57
|
|
|
|
72
|
|
Asset-backed securities
|
|
|
3
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
The following table summarizes for fixed income securities in an
unrealized loss position at December 31, 2010 and 2009, 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, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
Estimated
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
Unrealized
|
|
Unrealized Loss Aging
|
|
Fair Value
|
|
|
Loss
|
|
|
Fair Value
|
|
|
Loss
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
grade(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 months
|
|
$
|
223,778
|
|
|
$
|
6,350
|
|
|
$
|
162,087
|
|
|
$
|
2,362
|
|
13-24 months
|
|
|
|
|
|
|
|
|
|
|
11,176
|
|
|
|
469
|
|
Greater than 24 months
|
|
|
7,903
|
|
|
|
663
|
|
|
|
32,932
|
|
|
|
2,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment grade
|
|
|
231,681
|
|
|
|
7,013
|
|
|
|
206,195
|
|
|
|
4,896
|
|
Non-investment grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-6 months
|
|
|
11,256
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
Greater than 24 months
|
|
|
11,522
|
|
|
|
1,356
|
|
|
|
17,346
|
|
|
|
1,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-investment grade
|
|
|
22,778
|
|
|
|
1,439
|
|
|
|
17,346
|
|
|
|
1,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
254,459
|
|
|
$
|
8,452
|
|
|
$
|
223,541
|
|
|
$
|
6,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Investment grade is determined by using the S&P rating. If
a security is not rated by S&P, the Moodys rating is
used. As of December 31, 2010 and December 31, 2009,
all of the Companys fixed income securities were rated by
S&P or Moodys. |
66
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At December 31, 2010, the Company holds 276 fixed income
securities with a total estimated fair value of
$1,149.9 million in a gross unrealized gain position of
$59.5 million in the aggregate.
The following table summarizes securities in a gross unrealized
loss position by investment category and by credit rating. The
table also discloses the corresponding count of securities in an
unrealized loss position and estimated fair value by category
(in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized Losses
|
|
|
Estimated Fair
|
|
December 31, 2010
|
|
AAA
|
|
|
AA
|
|
|
A
|
|
|
BBB
|
|
|
Total
|
|
|
Count
|
|
|
Value
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
grade(a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of U.S. Government
and agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage pass-through securities residential
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
1
|
(b)
|
|
$
|
1,000
|
|
Obligations of states and political subdivisions
|
|
|
628
|
|
|
|
3,166
|
|
|
|
1,960
|
|
|
|
|
|
|
|
5,754
|
|
|
|
32
|
|
|
|
165,796
|
|
Corporate bonds
|
|
|
|
|
|
|
|
|
|
|
948
|
|
|
|
223
|
|
|
|
1,171
|
|
|
|
13
|
|
|
|
60,134
|
|
Other asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second mortgages/home equity loans residential
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
|
|
|
|
1
|
|
|
|
1,755
|
|
Other
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
1
|
|
|
|
2,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment grade
|
|
|
716
|
|
|
|
3,166
|
|
|
|
2,908
|
|
|
|
223
|
|
|
|
7,013
|
|
|
|
48
|
|
|
|
231,681
|
|
Non-investment grade:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of states and political subdivisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,084
|
|
|
|
1
|
|
|
|
9,756
|
|
Corporate bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
|
|
|
|
8
|
|
|
|
11,256
|
|
Other asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second mortgages/home equity loans residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
272
|
|
|
|
1
|
|
|
|
1,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-investment grade
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,439
|
|
|
|
10
|
|
|
|
22,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
716
|
|
|
$
|
3,166
|
|
|
$
|
2,908
|
|
|
$
|
223
|
|
|
$
|
8,452
|
|
|
|
58
|
|
|
$
|
254,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Securities are categorized using the S&P rating. If a
security is not rated by S&P, the Moodys rating is
used. At December 31, 2010, all of the Companys fixed
income securities were rated by S&P or Moodys. |
|
(b) |
|
The unrealized loss on this AAA-rated U.S. Government agency
security is negligible and does not result in an amount when
rounded to thousands of dollars. |
The unrealized losses on the Companys investments in
obligations of states and political subdivisions are due to
changes in credit spreads and rising interest rates. Of the
thirty-two investment grade obligations of states and political
subdivisions in an unrealized loss position at December 31,
2010, only seven were in an unrealized loss position exceeding
5% of the securitys amortized cost. The largest unrealized
loss, $0.7 million, or 11.9% of the securitys
amortized cost, was on a security issued by a governmental
utility authority. The unrealized loss position of this security
has deteriorated slightly compared to December 31, 2009
when it was $0.6 million, or 11.3% of the securitys
amortized cost. While the overall unrealized loss position of
obligations of states and political subdivisions grew from
$2.6 million, or 2.9% of their amortized cost, at
December 31, 2009 to $5.8 million, or 3.4% of their
amortized cost, at December 31, 2010 the Company continues
to believe that all interest and principal will be paid
according to their contractual terms. The Company has no current
intent to sell these securities, nor is it more likely than not
that it will be required to sell prior
67
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
to recovery of amortized cost. The Company does not believe the
unrealized losses on these securities are indicative of credit
losses and, as such, has not recorded an OTTI loss on these
securities at December 31, 2010.
Of the Companys thirteen investment grade corporate bond
investments with an unrealized loss at December 31, 2010,
none was in an unrealized loss position that exceeded 5% of the
securitys amortized cost. Although interest rate increases
in the fourth quarter of 2010 increased the unrealized loss
position of these investments, the overall unrealized loss
position on the Companys corporate bond holdings improved
$0.3 million at December 31, 2010 compared to
December 31, 2009. The Company has no current intent to
sell these securities, nor is it more likely than not that it
will be required to sell prior to recovery of amortized cost.
The Company does not believe the unrealized losses on these
securities are indicative of credit losses and, as such, has not
recorded any OTTI losses on these securities at
December 31, 2010.
Two investment grade asset-backed securities, including one with
exposure to
sub-prime
home loans, held by the Company were in an unrealized loss
position at December 31, 2010. Neither of these securities
was in an unrealized loss position that exceeded 5% of the
securitys amortized cost. The Company has no current
intent to sell these securities, nor is it more likely than not
that it will be required to sell prior to recovery of amortized
cost. The Company does not believe the unrealized losses on
these securities are indicative of credit losses and, as such,
has not recorded any OTTI losses on these securities at
December 31, 2010.
One of the Companys investments in obligations of states
and political subdivisions is rated below investment grade at
December 31, 2010 and is in an unrealized loss position of
$1.1 million, or 10.0% of its amortized cost. This
security, issued by a governmental utility authority, was in an
unrealized loss position of $0.9 million, or 8.4% of
amortized cost, at December 31, 2009. The Company believes
that the security is rated below investment grade because an
inconsequential contingency amount is insured with one of the
major monoline insurers which is rated B by S&P. The
Company believes that this insurer is the lowest rated source of
security involved in the transaction and, despite the fact that
the amount of security provided by this insurer is
inconsequential, the entire transaction is rated to the lowest
rated component. Based on the Companys analysis of the
sources of debt service on this bond and the fact that the
security is current on all interest payments due through
December 31, 2010, the Company continues to believe that
all interest and principal will be paid according to their
contractual terms. The Company has no current intent to sell
this security, nor is it more likely than not that it will be
required to sell prior to recovery of amortized cost. The
Company does not believe the unrealized loss on this security is
indicative of credit loss and, as such, has not recorded an OTTI
loss on this security at December 31, 2010.
During 2010, the Company purchased fifteen non-investment grade
corporate bonds. These bonds had an estimated fair value of
$22.5 million at December 31, 2010. Eight of these
securities were in an unrealized loss position at
December 31, 2010. In the aggregate, these eight securities
had an unrealized loss of $0.1 million as of
December 31, 2010. Each of these securities was in an
unrealized loss position representing less than 1.2% of that
securitys amortized cost. The Company has no current
intent to sell these securities, nor is it more likely than not
that it will be required to sell prior to recovery of amortized
cost. The Company does not believe the unrealized losses on
these securities are indicative of credit losses and, as such,
has not recorded any OTTI losses on these securities at
December 31, 2010.
At December 31, 2010 the Companys exposure to
sub-prime
home loans was limited to two asset-backed securities
collateralized by
sub-prime
home loans which originated prior to 2005. The estimated fair
value of these securities was $3.5 million at
December 31, 2010. Both of these securities are in an
unrealized loss position at December 31, 2010. One of these
securities was rated below investment grade at December 31,
2010. The investment grade security was discussed previously.
The non-investment grade security is in an unrealized loss
position of $0.3 million, or 13.4% of its amortized cost.
During 2010, the Company received repayments on this security of
$0.7 million, or approximately 25% of the par value
outstanding at December 31, 2009. As discussed previously,
this security was determined to have credit losses totaling
$0.1 million during 2010. The non-credit component of this
securitys OTTI recognized in accumulated other
68
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
comprehensive income at December 31, 2010 was
$0.2 million. The Company believes the non-credit component
of the unrealized loss on this security is primarily
attributable to this asset class being out of favor with
investors and is not indicative of the quality of the underlying
collateral. The Company has no current intent to sell this
security, nor is it more likely than not that it will be
required to sell prior to recovery of the adjusted amortized
cost.
Based on the current facts and circumstances discussed above for
the Companys securities in an unrealized loss position,
the Company has determined that no additional OTTI losses
related to the securities in an unrealized loss position are
required to be recorded at December 31, 2010.
The Companys insurance subsidiaries, as required by state
law, deposit certain securities with state insurance regulatory
authorities. At December 31, 2010, securities on deposit
had an aggregate estimated fair value of $5.2 million.
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.
In May 2004, the Company, through a wholly-owned trust,
privately issued $30.0 million of preferred securities
through two pooled transactions. These securities, issued by CNA
Surety Capital Trust I (the Issuer Trust), bear
interest at the London Interbank Offered Rate
(LIBOR) plus 337.5 basis points with a
30-year
term. As of May 2009, the Company may redeem these securities,
in whole or in part, at par value at any scheduled quarterly
interest payment date. As of December 31, 2010, none of
these preferred securities have been redeemed.
The Companys investment of $0.9 million in the Issuer
Trust is carried at cost in Other assets in the
Companys Consolidated Balance Sheets. The sole asset of
the Issuer Trust consists of a $30.9 million junior
subordinated debenture issued by the Company to the Issuer
Trust. Due to the underlying characteristics of this debt, the
carrying value of the debenture approximates its estimated fair
value.
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 approximately
$55.7 million, consisting of annual dividend payments of
approximately $1.1 million until maturity and the
redemption value of the preferred securities 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 junior subordinated debenture bears interest at a rate of
LIBOR plus 337.5 basis points and matures in April 2034. As
of December 31, 2010 and 2009, the interest rate on the
junior subordinated debenture was 3.66% and 3.65%, respectively.
|
|
4.
|
Fair
Value of Financial Instruments
|
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. The Company
uses the following fair value hierarchy in selecting inputs,
with the highest priority given to Level 1, as these are
the most transparent or reliable:
|
|
|
|
|
Level 1 Quoted prices for identical
instruments in active markets.
|
|
|
|
Level 2 Quoted prices for similar
instruments in active markets; quoted prices for identical or
similar instruments in markets that are not active; and
model-derived valuations in which all significant inputs are
observable in active markets.
|
|
|
|
Level 3 Valuations derived from
valuation techniques in which one or more significant inputs are
unobservable.
|
69
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company utilizes a pricing service for the valuation of the
majority of securities held. This pricing service is an
independent, third party vendor recognized to be an industry
leader with access to market information who obtains or computes
fair market values from quoted market prices, pricing for
similar securities, recently executed transactions, cash flow
models with yield curves and other pricing models. For
valuations obtained from the pricing service, the Company
performs due diligence to understand how the valuation was
calculated or derived, focusing on the valuation technique used
and the nature of the inputs.
The following section describes the valuation methodologies used
to measure different financial instruments at fair value,
including an indication of the level in the fair value hierarchy
in which the instrument is generally classified.
Fixed
Income Securities
Securities valued using Level 1 inputs include highly
liquid government bonds for which quoted market prices are
available. Securities using Level 2 inputs are valued using
pricing for similar securities, recently executed transactions,
cash flow models with yield curves and other pricing models
utilizing observable inputs. Most fixed income securities are
valued using Level 2 inputs. Level 2 includes
corporate bonds, municipal bonds, asset-backed securities and
mortgage pass-through securities.
Equity
Securities
Level 1 includes publicly traded securities valued using
quoted market prices.
Short-Term
Investments
The valuation of securities that are actively traded and have
quoted prices are classified as Level 1. These securities
include money market funds and U.S. Treasury bills.
Level 2 includes commercial paper, for which all
significant inputs are observable.
70
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Assets measured at fair value on a recurring basis as of
December 31, 2010 and December 31, 2009 are summarized
below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
Fair Value Measurement Using
|
|
|
Assets at Fair
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Value
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of U.S. Government and
agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
18,202
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
18,202
|
|
U.S. Agencies
|
|
|
|
|
|
|
6,768
|
|
|
|
|
|
|
|
6,768
|
|
Collateralized mortgage obligations residential
|
|
|
|
|
|
|
22,327
|
|
|
|
|
|
|
|
22,327
|
|
Mortgage pass-through securities residential
|
|
|
|
|
|
|
72,047
|
|
|
|
|
|
|
|
72,047
|
|
Obligations of states and political subdivisions
|
|
|
|
|
|
|
770,608
|
|
|
|
|
|
|
|
770,608
|
|
Corporate bonds
|
|
|
|
|
|
|
476,873
|
|
|
|
|
|
|
|
476,873
|
|
Collateralized mortgage obligations commercial
|
|
|
|
|
|
|
10,585
|
|
|
|
|
|
|
|
10,585
|
|
Other asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second mortgages/home equity loans residential
|
|
|
|
|
|
|
3,522
|
|
|
|
|
|
|
|
3,522
|
|
Consumer credit receivables
|
|
|
|
|
|
|
10,156
|
|
|
|
|
|
|
|
10,156
|
|
Other
|
|
|
|
|
|
|
13,287
|
|
|
|
|
|
|
|
13,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
18,202
|
|
|
|
1,386,173
|
|
|
|
|
|
|
|
1,404,375
|
|
Equity securities at fair value
|
|
|
1,916
|
|
|
|
|
|
|
|
|
|
|
|
1,916
|
|
Short-term investments at fair
value(a)
|
|
|
16,842
|
|
|
|
36,247
|
|
|
|
|
|
|
|
53,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
36,960
|
|
|
$
|
1,422,420
|
|
|
$
|
|
|
|
$
|
1,459,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes commercial paper, U.S. Government agency discount notes
and money market funds. |
71
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Fair Value Measurement Using
|
|
|
Assets at Fair
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Value
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of U.S. Government and
agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
18,348
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
18,348
|
|
U.S. Agencies
|
|
|
|
|
|
|
10,131
|
|
|
|
|
|
|
|
10,131
|
|
Collateralized mortgage obligations residential
|
|
|
|
|
|
|
32,092
|
|
|
|
|
|
|
|
32,092
|
|
Mortgage pass-through securities residential
|
|
|
|
|
|
|
96,557
|
|
|
|
|
|
|
|
96,557
|
|
Obligations of states and political subdivisions
|
|
|
|
|
|
|
728,568
|
|
|
|
|
|
|
|
728,568
|
|
Corporate bonds
|
|
|
|
|
|
|
344,109
|
|
|
|
|
|
|
|
344,109
|
|
Collateralized mortgage obligations commercial
|
|
|
|
|
|
|
9,673
|
|
|
|
|
|
|
|
9,673
|
|
Other asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second mortgages/home equity loans residential
|
|
|
|
|
|
|
4,761
|
|
|
|
|
|
|
|
4,761
|
|
Consumer credit receivables
|
|
|
|
|
|
|
11,583
|
|
|
|
|
|
|
|
11,583
|
|
Other
|
|
|
|
|
|
|
10,401
|
|
|
|
|
|
|
|
10,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
18,348
|
|
|
|
1,247,875
|
|
|
|
|
|
|
|
1,266,223
|
|
Equity securities at fair value
|
|
|
1,610
|
|
|
|
|
|
|
|
|
|
|
|
1,610
|
|
Short-term investments at fair
value(a)
|
|
|
15,412
|
|
|
|
33,587
|
|
|
|
|
|
|
|
48,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
35,370
|
|
|
$
|
1,281,462
|
|
|
$
|
|
|
|
$
|
1,316,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes commercial paper, U.S. Government agency discount notes
and money market funds. |
|
|
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,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Balance at beginning of period
|
|
$
|
99,836
|
|
|
$
|
102,092
|
|
|
$
|
104,280
|
|
Costs deferred
|
|
|
166,755
|
|
|
|
166,434
|
|
|
|
171,117
|
|
Amortization
|
|
|
(168,019
|
)
|
|
|
(168,690
|
)
|
|
|
(173,305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
98,572
|
|
|
$
|
99,836
|
|
|
$
|
102,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Net commissions, brokerage and other underwriting expenses were
comprised as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Amortization of deferred policy acquisition costs
|
|
$
|
168,019
|
|
|
$
|
168,690
|
|
|
$
|
173,305
|
|
Other operating expenses
|
|
|
59,713
|
|
|
|
64,737
|
|
|
|
62,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net commissions, brokerage and other underwriting expenses
|
|
$
|
227,732
|
|
|
$
|
233,427
|
|
|
$
|
235,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, minimize
exposure on larger risks and to meet certain regulatory
restrictions that would otherwise limit the size of bonds the
Company can write. 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.
There were no amounts past due under reinsurance contracts and
no allowances were established for uncollectible reinsurance
receivables at December 31, 2010 or 2009. At both
December 31, 2010 and 2009, receivables from five
reinsurers individually comprised 10% or more of the
Companys reinsurance receivable balance. At
December 31, 2010, these receivables, $7.8 million,
$5.6 million, $5.5 million, $4.6 million and
$4.2 million, respectively, were from non-affiliated
reinsurers rated at least A (Excellent) by A.M. Best. At
December 31, 2009, these receivables, $9.0 million,
$7.6 million, $6.8 million, $6.1 million and
$5.8 million, respectively, were also due from
non-affiliated reinsurers rated at least A by A.M. Best. At
December 31, 2010 and 2009, CNA Surety had no reinsurance
receivable from affiliates.
The effect of reinsurance on premiums written and earned was as
follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
Written
|
|
|
Earned
|
|
|
Written
|
|
|
Earned
|
|
|
Written
|
|
|
Earned
|
|
|
Direct
|
|
$
|
347,896
|
|
|
$
|
349,718
|
|
|
$
|
347,646
|
|
|
$
|
351,519
|
|
|
$
|
358,625
|
|
|
$
|
357,771
|
|
Assumed
|
|
|
92,258
|
|
|
|
92,225
|
|
|
|
90,659
|
|
|
|
97,833
|
|
|
|
108,502
|
|
|
|
109,463
|
|
Ceded
|
|
|
(23,880
|
)
|
|
|
(23,926
|
)
|
|
|
(27,271
|
)
|
|
|
(27,480
|
)
|
|
|
(35,448
|
)
|
|
|
(35,538
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums
|
|
$
|
416,274
|
|
|
$
|
418,017
|
|
|
$
|
411,034
|
|
|
$
|
421,872
|
|
|
$
|
431,679
|
|
|
$
|
431,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed premiums primarily include surety business written or
renewed, net of reinsurance, by CCC and CIC after
September 30, 1997 that is reinsured by Western Surety
pursuant to reinsurance and related agreements. Because of
certain regulatory restrictions that limit Western Suretys
ability to write certain business on a direct basis, the Company
utilizes the underwriting capacity available through these
agreements while retaining control of the underwriting and claim
management of the assumed business.
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).
Through its insurance subsidiaries, 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
effective January 1, 2010 through December 31, 2010
that covers certain contract surety business, FICOH retains
losses of $2 million per principal and Western Surety
73
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
assumes 80% of $5 million per principal in excess of
$2 million subject to an aggregate annual limit of
$8 million. Premiums assumed by Western Surety under this
agreement were $0.1 million for 2010 and 2009. In 2008,
premiums assumed by Western Surety under this agreement were
$0.2 million. This treaty was renewed with the same terms
on January 1, 2011 and expires on December 31, 2011.
CNA Surety also assumes premium on contract and commercial
surety bonds for international risks. Such premiums are assumed
pursuant to the terms of reinsurance treaties or as a result of
specific international bond requirements of domestic customers.
For the years ended December 31, 2010, 2009 and 2008,
assumed premiums written under such arrangements were
$4.3 million, $2.4 million and $2.1 million,
respectively.
The effect of reinsurance on the Companys provision for
losses and loss adjustment expenses and the corresponding ratio
to earned premium was as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
$
|
|
|
Ratio
|
|
|
$
|
|
|
Ratio
|
|
|
$
|
|
|
Ratio
|
|
|
Gross losses and loss adjustment expenses
|
|
$
|
35,689
|
|
|
|
8.1
|
%
|
|
$
|
76,564
|
|
|
|
17.0
|
%
|
|
$
|
93,151
|
|
|
|
19.9
|
%
|
Ceded losses and loss adjustment expenses
|
|
|
9,546
|
|
|
|
(39.9
|
)%
|
|
|
(7,148
|
)
|
|
|
26.0
|
%
|
|
|
(12,307
|
)
|
|
|
34.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment expenses
|
|
$
|
45,235
|
|
|
|
10.8
|
%
|
|
$
|
69,416
|
|
|
|
16.5
|
%
|
|
$
|
80,844
|
|
|
|
18.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unusual relationship in the gross and ceded amounts shown
above for the year ended December 31, 2010 resulted from
adjustments to the estimated loss and loss adjustment expense
reserves during the year ended December 31, 2010. The
Company reduced gross reserves related to prior accident years
by $92.5 million reflecting changes in estimates of
incurred-but-not-reported reserves. The corresponding change in
ceded reserves was such that net reserves related to prior
accident years were reduced by $76.3 million for the year
ended December 31, 2010.
Excess of
Loss Reinsurance
The Companys ceded 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 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.
2009
Third Party Reinsurance
Effective January 1, 2009, CNA Surety entered into an
excess of loss treaty (2009 Excess of Loss Treaty)
with a group of third party reinsurers on terms similar to the
excess of loss treaty effective in 2008. Under the 2009 Excess
of Loss Treaty, the Companys net retention per principal
was $15 million with a 5% co-participation in the
$90 million layer of third party reinsurance coverage above
the Companys retention. The contract provided aggregate
coverage of $185 million and included an optional extended
discovery period, which was not exercised. The contract also
included a provision for additional premiums of up to
$13.8 million based on losses ceded under the contract. The
actual ceded premiums for the 2009 Excess of Loss Treaty were
$26.6 million.
2010
Third Party Reinsurance
Effective January 1, 2010, CNA Surety entered into an
excess of loss treaty (2010 Excess of Loss Treaty)
with a group of third party reinsurers on terms similar to the
2009 Excess of Loss Treaty. Under the 2010 Excess of Loss
Treaty, the Companys net retention per principal was
$15 million with a 5% co-participation in the
$90 million layer of third party reinsurance coverage above
the Companys retention. The contract provided
74
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
aggregate coverage of $185 million and included an optional
extended discovery period, which was not exercised. The contract
also included a provision for additional premiums of up to
$12.3 million based on losses ceded under the contract. The
actual ceded premiums for the 2010 Excess of Loss Treaty were
$23.7 million.
2011
Third Party Reinsurance
Effective January 1, 2011, CNA Surety entered into an
excess of loss treaty (2011 Excess of Loss Treaty)
with a group of third party reinsurers on terms similar to the
2010 Excess of Loss Treaty. Under the 2011 Excess of Loss
Treaty, the Companys net retention per principal remains
at $15 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
2011 on bonds that were in force during 2011. The contract also
includes a provision for additional premiums of up to
$10.7 million based on losses ceded under the contract. The
base annual premium for the 2011 Excess of Loss Treaty is
$21.7 million.
Related
Party Reinsurance
Reinsurance agreements together with the Services and Indemnity
Agreement described below provide for the transfer of the surety
business written by CCC and CIC to Western Surety. Many of these
agreements originally were entered into on September 30,
1997 (the Merger Date) and include: (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. Although the contracts entered on
the Merger Date have expired, some have been renewed on
different terms as described below.
Through the Quota Share Treaty, CCC and CIC transfer to Western
Surety surety business written or renewed by CCC and CIC after
the Merger Date. The Quota Share Treaty was renewed on
January 1, 2010 and expired on December 31, 2010. The
Quota Share treaty was renewed on substantially the same terms
on January 1, 2011 and expires on December 31, 2011
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. For
2010 and 2009 this resulted in an override commission on their
actual direct acquisition costs of 4.7% and 4.8%, respectively,
to CCC and CIC.
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, 2010.
Through the Stop Loss Contract, the Companys insurance
subsidiaries were protected from adverse loss development on
certain business underwritten after the Merger Date. The Stop
Loss Contract between the Companys 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 Companys insurance subsidiaries paid CCC an
annual premium of $20,000. The CNA Surety insurance subsidiaries
have paid CCC all required annual premiums. Through
December 31, 2010, losses incurred under the Stop Loss
Contract were $47.2 million. Through December 31,
2009, losses incurred under the Stop Loss
75
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Contract were $49.1 million. The net amount settled in 2010
under this contract was $1.9 million paid to CCC as a
result of favorable development on claims subject to the Stop
Loss Contract. At December 31, 2010, the amount received
under the Stop Loss Contract included $2.7 million held by
the Company for losses covered under this contract that were
incurred but not paid.
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 surety 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. In 2009, this agreement was
amended so that the Companys authority to conduct
administrative, management, underwriting and claim functions for
bonds written for the large national contractor discussed below
shall continue until CCCs bonds for such contractor have
expired and claims have been settled or closed. This agreement
was renewed on January 1, 2010 and expired on
December 31, 2010. As of December 31, 2010 and 2009,
there were no amounts due to the CNA Surety insurance
subsidiaries under this agreement. This agreement was renewed
with the same terms on January 1, 2011 and expires on
December 31, 2011 and is annually renewable thereafter.
From January 1, 2005 to June 30, 2009, the Company and
CCC were parties to an excess of loss contract, and extensions
to that contract, that provided unlimited reinsurance coverage
in excess of $60 million retention for the life of bonds
either in force or written during the contract periods
exclusively for one large national contractor excluded from the
Companys third party reinsurance. Premiums for these
contracts totaled $8.6 million and included an initial
premium of $7.0 million and premiums of $1.6 million
based on the level of premiums written on bonds for the large
national contractor.
In 2009, the Company and CCC terminated the excess of loss
contract discussed in the preceding paragraph. Related to the
termination of this contract, the Company and CCC also commuted
the Quota Share Treaty as regards the premium and losses for the
large national contractor. The impact of this commutation was a
decrease of gross loss reserves of $51.8 million. Under the
terms of the agreements effecting this commutation, the Company
paid CCC $1.8 million. This settlement reflected the
difference between the Companys $60.0 million
retention under the excess of loss contract and the
$58.2 million paid by the Company for losses of the large
national contractor through 2009.
On January 1, 2010, the Company and CCC entered into
separate agreements that provide for the transfer of the
Canadian surety business of CCC to Western Surety. These
agreements, which include a quota share treaty (the
Canadian Quota Share Treaty) and a services and
indemnity agreement (the Canadian Services and Indemnity
Agreement), are substantially similar to the Quota Share
Treaty and the Services and Indemnity Agreement discussed above.
The Canadian Services and Indemnity Agreement provides Western
Surety with the authority to supervise various administrative,
underwriting and claim functions associated with the surety
business written by CCC, through its Canadian branch, on behalf
of the Company. Through the Canadian Quota Share Treaty, this
Canadian surety business is transferred to Western Surety.
Pursuant to these agreements, CCC will transfer the subject
premium and related liabilities of such business and pay to
Western Surety an amount equal to CCCs net written
premiums on all such business, minus a ceding commission of
33.5% of net written premiums. Further, Western Surety will pay
an additional ceding commission to CCC in the amount of actual
direct expense in producing such premium. These agreements
expired on December 31, 2010. These agreements were renewed
with the same terms on January 1, 2011 and expire on
December 31, 2011 and are annually renewable thereafter.
As of December 31, 2010 and December 31, 2009, CNA
Surety had an insurance receivable balance from CCC and CIC of
$10.8 million and $9.8 million, respectively,
comprised of premiums receivable. CNA Surety had no reinsurance
payables to CCC or CIC as of December 31, 2010 or 2009.
The Companys Consolidated Balance Sheets also include a
Deposit with affiliated ceding company of
$23.4 million and $26.9 million at December 31,
2010 and December 31, 2009, respectively. In 2005, pursuant
to an agreement with the claimant on a bond regarding certain
aspects of the claim resolution, the Company deposited
76
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$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. 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.
|
|
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,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Reserves at beginning of year:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
$
|
406,123
|
|
|
$
|
428,724
|
|
|
$
|
472,842
|
|
Ceded reinsurance
|
|
|
50,968
|
|
|
|
83,691
|
|
|
|
150,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserves at beginning of year
|
|
|
355,155
|
|
|
|
345,033
|
|
|
|
322,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net incurred loss and loss adjustment expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for insured events of current year
|
|
|
121,564
|
|
|
|
123,698
|
|
|
|
126,345
|
|
Decrease in provision for insured events of prior years
|
|
|
(76,329
|
)
|
|
|
(54,282
|
)
|
|
|
(45,501
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net incurred
|
|
|
45,235
|
|
|
|
69,416
|
|
|
|
80,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net payments attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year events
|
|
|
16,235
|
|
|
|
15,571
|
|
|
|
11,954
|
|
Prior year events
|
|
|
38,183
|
|
|
|
43,723
|
|
|
|
46,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net payments
|
|
|
54,418
|
|
|
|
59,294
|
|
|
|
58,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency transaction adjustments
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net reserves at end of year
|
|
|
346,082
|
|
|
|
355,155
|
|
|
|
345,033
|
|
Ceded reinsurance at end of year
|
|
|
43,007
|
|
|
|
50,968
|
|
|
|
83,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross reserves at end of year
|
|
$
|
389,089
|
|
|
$
|
406,123
|
|
|
$
|
428,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded net loss reserve development for prior
accident years which resulted in a decrease of the estimated
liability of $76.3 million, $54.3 million and
$45.5 million in 2010, 2009 and 2008, respectively.
Favorable development in 2010 was primarily related to accident
years 2008, 2007 and 2006. Loss experience for the 2007 and 2006
accident years continued to be lower than expected, particularly
for large losses.
Beginning in 2008, the Company began recording higher loss
provisions for the current accident year in response to the
severe deterioration in economic conditions that began in 2008.
The results of subsequent actuarial reviews indicated
redundancies for accident year 2008, but management believed
that the potential impacts of the economic downturn were not
fully recognized by the actuarial methodologies and maintained
their higher loss estimates. The actuarial review performed in
2010 indicated a larger redundancy for accident year 2008 than
at December 31, 2009. At December 31, 2010, management
believed that the experience for the 2008 accident year was
sufficiently mature to make the actuarial indication credible
and adjusted the reserves to the actuarial indication. In
retrospect, it appears that this deterioration in economic
conditions did not begin to impact loss activity until the 2009
accident year. The Companys estimates of losses for
accident years 2010 and 2009 continue to reflect the impact of
the difficult economic conditions.
The favorable development in 2009 resulted primarily from a
level of loss activity substantially below expectations for
accident years 2006 and 2007. This level of loss activity was
particularly influenced by a lower than
77
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
expected emergence of large claims. Significant case reserve
reductions and better than expected indemnification recoveries
for accident years 2005 and prior also contributed to the
favorable development in 2009. At December 31, 2009, the
Companys initial estimates of losses for accident year
2009 and the estimate for accident year 2008 reflected the
impact of less favorable economic conditions.
The favorable development in 2008 primarily resulted from
several significant case reserve reductions, favorable indemnity
recoveries and a low level of loss activity for accident years
2006 and prior. These favorable developments were somewhat
offset by adverse development related to the 2007 accident year,
which, along with the initial estimates of the 2008 accident
year, reflected the impact of deterioration of economic
conditions.
|
|
8.
|
Commitments
and Contingencies
|
At December 31, 2010 the future minimum commitments under
operating leases were as follows: 2011
$2.0 million; 2012 $1.1 million;
2013 $0.2 million; 2014
$0.2 million; 2015 $0.2 million. Total
rental expense was $4.3 million, $5.3 million and
$5.2 million for 2010, 2009, and 2008, respectively.
In addition to these operating lease commitments, in September
2010, CNA Surety entered into a lease agreement for a new
property to be occupied following the 2012 expiration of the
lease for its primary processing and service center in Sioux
Falls, South Dakota. The new lease includes various
contingencies including completion of construction of the
building and office space to be occupied. The lease term shall
be ten years from its commencement date as defined in the
agreement. Other specific lease terms such as final rental
square feet and cost will be finalized upon satisfaction of the
required contingencies.
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.
The components of deferred income taxes as of December 31,
2010 and 2009 were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred tax assets related to:
|
|
|
|
|
|
|
|
|
Unearned premium reserve
|
|
$
|
17,345
|
|
|
$
|
17,478
|
|
Loss and loss adjustment expense reserve
|
|
|
4,057
|
|
|
|
4,251
|
|
Accrued expenses
|
|
|
2,212
|
|
|
|
2,005
|
|
Accumulated postretirement benefit obligation
|
|
|
4,349
|
|
|
|
4,322
|
|
Policyholder dividends
|
|
|
2,717
|
|
|
|
2,795
|
|
Other
|
|
|
2,629
|
|
|
|
2,893
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
33,309
|
|
|
|
33,744
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities related to:
|
|
|
|
|
|
|
|
|
Deferred policy acquisition costs
|
|
|
34,500
|
|
|
|
34,943
|
|
Intangible assets
|
|
|
5,650
|
|
|
|
5,650
|
|
Unrealized net gains on securities
|
|
|
17,940
|
|
|
|
16,496
|
|
Difference between book and tax depreciation
|
|
|
2,580
|
|
|
|
3,292
|
|
Other
|
|
|
1,737
|
|
|
|
1,428
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
62,407
|
|
|
|
61,809
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
29,098
|
|
|
$
|
28,065
|
|
|
|
|
|
|
|
|
|
|
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 Audit Committee of the
78
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Current tax expense
|
|
$
|
63,641
|
|
|
$
|
51,795
|
|
|
$
|
50,215
|
|
Deferred tax benefit
|
|
|
(973
|
)
|
|
|
(448
|
)
|
|
|
(1,406
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
62,668
|
|
|
$
|
51,347
|
|
|
$
|
48,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation from the federal statutory tax rate to the
effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Tax-exempt income deduction
|
|
|
(4.5
|
)
|
|
|
(5.3
|
)
|
|
|
(5.3
|
)
|
Non-deductible expenses
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
0.2
|
|
State income tax, net of federal income tax benefit
|
|
|
0.8
|
|
|
|
0.7
|
|
|
|
0.8
|
|
Other
|
|
|
0.4
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
|
31.8
|
%
|
|
|
30.3
|
%
|
|
|
30.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company is subject to taxation in the United States, Puerto
Rico and various state jurisdictions. The Companys tax
years 2007 through 2010 remain open as to the applicable statute
of limitations and are subject to examination by the Internal
Revenue Service.
The Company has not recognized any liabilities for uncertain
income taxes as of December 31, 2010 or December 31,
2009. Also, the Company does 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
$4.8 million, $4.8 million and $4.6 million for
the years ended December 31, 2010, 2009 and 2008,
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, nonqualified 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
79
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 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, 1992 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 at
December 31, 2010 or December 31, 2009.
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 in 2005. As such, the federal subsidy
to plan sponsors under the Medicare Modernization Act
(MMA) has been recognized in the accounting for that
plan. In 2010, enactment of the Patient Protection and
Affordable Care Act (the Act) and the Healthcare and
Education Affordability Reconciliation Act (the
Reconciliation Measure), which modifies certain
provisions of the Act, repeal the current rule permitting
deduction, for tax purposes, of the entire cost of providing
prescription drug benefits even though a portion is offset by
the federal subsidy. The impact of these provisions has been
recognized in the accounting for this postretirement benefit
plan. The impact included recognition of additional tax expense
of $0.5 million in 2010.
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):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Reconciliation of benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of the year
|
|
$
|
10,718
|
|
|
$
|
9,283
|
|
Service cost
|
|
|
222
|
|
|
|
228
|
|
Interest cost
|
|
|
617
|
|
|
|
572
|
|
Actuarial loss
|
|
|
890
|
|
|
|
681
|
|
Benefits and expenses paid
|
|
|
(199
|
)
|
|
|
(132
|
)
|
Plan participant contributions
|
|
|
61
|
|
|
|
60
|
|
Medicare subsidy received
|
|
|
21
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
12,330
|
|
|
$
|
10,718
|
|
|
|
|
|
|
|
|
|
|
The Companys postretirement medical benefit plans
accumulated postretirement benefit obligation as of
December 31, 2010 is $11.6 million.
The Companys postretirement sick leave plans
accumulated postretirement benefit obligation as of
December 31, 2010 is $0.7 million.
80
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following tables set forth the combined plans pre-tax
adjustment to accumulated other comprehensive income/loss
(AOCI) (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Amounts not yet recognized in net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net prior service benefit
|
|
$
|
(77
|
)
|
|
$
|
(187
|
)
|
|
$
|
(349
|
)
|
Net actuarial loss
|
|
|
1,858
|
|
|
|
968
|
|
|
|
288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pre-tax accumulated other comprehensive loss (income)
|
|
$
|
1,781
|
|
|
$
|
781
|
|
|
$
|
(61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax accumulated other comprehensive loss
(income) beginning of year related to
postretirement benefit obligation
|
|
$
|
781
|
|
|
$
|
(61
|
)
|
|
$
|
1,017
|
|
Reclassification adjustments recognized in net periodic benefit
cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
110
|
|
|
|
162
|
|
|
|
162
|
|
Amortization of net actuarial loss
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
Amounts recognized in AOCI arising during the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial losses (gains)
|
|
|
890
|
|
|
|
681
|
|
|
|
(1,240
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax accumulated other comprehensive loss
(income) end of year, related to postretirement
benefit obligation
|
|
$
|
1,781
|
|
|
$
|
781
|
|
|
$
|
(61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net actuarial loss in 2010 was driven primarily by the lower
discount rate used to measure the accumulated postretirement
benefit obligation. The net actuarial loss in 2009 was driven by
higher claim costs for the medical benefit plan. The net
actuarial gain in 2008 resulted primarily from lower per capita
claim costs as a result of the change in the plan provider.
The amounts recognized in the Consolidated Balance Sheets for
postretirement benefit obligations at December 31, 2010 and
2009 were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Liability for postretirement benefits
|
|
$
|
12,330
|
|
|
$
|
10,718
|
|
Deferred income taxes, net
|
|
|
(4,349
|
)
|
|
|
(4,322
|
)
|
Accumulated other comprehensive loss, net of tax
|
|
|
881
|
|
|
|
231
|
|
The liabilities for postretirement benefits at December 31,
2010 and 2009 were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Difference Due to
|
|
|
|
Including Effects
|
|
|
Without Effects of
|
|
|
Effects of
|
|
|
|
of Tax-Free Subsidy
|
|
|
Tax-Free Subsidy
|
|
|
Tax-Free Subsidy
|
|
|
December 31, 2010
|
|
$
|
12,330
|
|
|
$
|
14,170
|
|
|
$
|
1,840
|
|
December 31, 2009
|
|
$
|
10,718
|
|
|
$
|
12,349
|
|
|
$
|
1,631
|
|
The plans combined net periodic postretirement benefit
cost for the last three fiscal years included the following
components (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
222
|
|
|
$
|
228
|
|
|
$
|
192
|
|
Interest cost
|
|
|
617
|
|
|
|
572
|
|
|
|
486
|
|
Amortization of prior service cost (benefit)
|
|
|
(110
|
)
|
|
|
(162
|
)
|
|
|
(162
|
)
|
Net amortization of actuarial loss
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
729
|
|
|
$
|
639
|
|
|
$
|
516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Key Assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.560
|
%
|
|
|
5.960
|
%
|
|
|
5.870
|
%
|
Rate of compensation increases (postretirement sick leave plan
only)
|
|
|
3.0
|
%
|
|
|
3.0
|
%
|
|
|
5.0
|
%
|
Initial health care cost trend rate, pre-Medicare
|
|
|
9.0
|
%
|
|
|
9.0
|
%
|
|
|
9.0
|
%
|
Initial health care cost trend rate, post-Medicare
|
|
|
9.0
|
%
|
|
|
9.0
|
%
|
|
|
9.0
|
%
|
Ultimate health care cost trend rate
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
Year in which ultimate trend rate is reached
|
|
|
2019
|
|
|
|
2018
|
|
|
|
2017
|
|
Mortality
|
|
|
IRS Prescribed 2010
Generational
Mortality
|
|
|
|
IRS Prescribed 2008
Generational
Mortality
|
|
|
|
RP 2000 Projected
|
|
Average remaining service life postretirement
medical benefit plan
|
|
|
11.5 Years
|
|
|
|
11.8 Years
|
|
|
|
12.3 Years
|
|
Average life expectancy postretirement medical
benefit plan
|
|
|
14.3 Years
|
|
|
|
14.0 Years
|
|
|
|
14.0 Years
|
|
Average remaining service life sick leave plan
|
|
|
10.8 Years
|
|
|
|
11.4 Years
|
|
|
|
12.3 Years
|
|
At December 31, 2010 and 2009, respectively, the Company
selected a discount rate of 5.56% and 5.96% to measure the
accumulated postretirement benefit obligation. The
Companys analysis is based on projecting cash outflows for
the postretirement benefit plans and discounting those cash
outflows using published spot rates corresponding to the time
period that the cash outflow is expected. As a result of this
analysis, the Company selected 5.56% as the discount rate at
December 31, 2010. This rate remains consistent with the
Citigroup Pension Liability Index (CPLI) which was
5.54% at December 31, 2010. In 2009, the weighted average
resulting from the analysis was nearly identical to the CPLI,
which was used as the discount rate in 2009 for measurement of
the postretirement benefit obligation.
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 obligation as of
December 31, 2010 by $2.4 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, 2010 by
$1.9 million and decrease the aggregate of service cost and
interest cost for the year then ended by $0.1 million.
Estimated cost expected to be recognized from AOCI into net
periodic benefit cost in 2011 (dollars in thousands):
|
|
|
|
|
Amortization of prior service cost (benefit)
|
|
$
|
(57
|
)
|
Amortization of net actuarial loss
|
|
|
64
|
|
|
|
|
|
|
Total estimated cost to be recognized
|
|
$
|
7
|
|
|
|
|
|
|
82
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company expects to contribute $0.2 million to the
postretirement benefit plans to pay benefits in 2011. 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
|
|
2011
|
|
$
|
248
|
|
|
$
|
215
|
|
2012
|
|
|
287
|
|
|
|
251
|
|
2013
|
|
|
339
|
|
|
|
299
|
|
2014
|
|
|
465
|
|
|
|
419
|
|
2015
|
|
|
529
|
|
|
|
482
|
|
2016-2020
|
|
|
3,388
|
|
|
|
3,070
|
|
The compensation expense recorded for the Companys
stock-based compensation plan in 2010, 2009 and 2008 was
$1.8 million, $2.0 million and $1.7 million,
respectively. The total income tax benefit recognized in the
income statement for stock-based compensation arrangements was
$0.6 million, $0.7 million and $0.6 million in
2010, 2009 and 2008, respectively. The amount of cash received
from the exercise of stock options was $8.1 million,
$1.2 million and $0.5 million in 2010, 2009 and 2008,
respectively.
Equity
Compensation Plans
The Company reserved shares of its common stock for issuance to
directors, officers, employees and certain advisors of the
Company through incentive stock options, nonqualified stock
options, restricted stock, bonus shares or stock appreciation
rights to be granted under the CNA Surety 2006 Long-Term Equity
Compensation Plan (the 2006 Plan), approved by
shareholders on April 25, 2006. 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 the Compensation Committee of
the Board of Directors (the Committee), 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 grant for
incentive stock options and may not be less than the par value
of the Companys common stock for nonqualified stock
options.
The 2006 Plan provides for the granting of incentive stock
options as defined under Section 409A of the Internal
Revenue Code of 1986, as amended. All nonqualified 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 5, 2010, 281,260 options were granted under the
2006 Plan. The fair market value (at grant date) per option
granted was $7.25 for these options. The fair value of these
options was estimated at the grant date using a Black-Scholes
option pricing model with the following weighted average
assumptions: risk free interest rate of 2.32%; dividend yield of
0.0%; expected option life of 5.3 years and volatility of
55.5%, which was based on historical volatility. The Company
estimated the expected option life of the 2010 grant based on
its analysis of past exercise patterns for similar options. As
of December 31, 2010, the number of shares available for
granting of options under the 2006 Plan was 2,009,145.
On February 6, 2009, 217,960 options were granted under the
2006 Plan. The fair market value (at grant date) per option
granted was $8.95 for these options. The fair value of these
options was estimated at the grant date using a
83
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Black-Scholes option pricing model with the following weighted
average assumptions: risk free interest rate of 1.95%; dividend
yield of 0.0%; expected option life of 5.3 years and
volatility of 51.8%, which was based on historical volatility.
The Company estimated the expected option life of the 2009 grant
based on its analysis of past exercise patterns for similar
options. As of December 31, 2009, the number of shares
available for granting of options under the 2006 Plan was
2,252,920.
On February 8, 2008, 259,380 options were granted under the
2006 Plan. The fair market value (at grant date) per option
granted was $6.32 for these options. The fair value of these
options was estimated at the grant date using a Black-Scholes
option pricing model with the following weighted average
assumptions: risk free interest rate of 2.7%; dividend yield of
0.0%; expected option life of 5.3 years and volatility of
38.3%, which was based on historical volatility. The Company
estimated the expected option life of the 2008 grant based on
its analysis of past exercise patterns for similar options.
A summary of option activity for the year ended
December 31, 2010 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average Option
|
|
|
|
Shares Subject
|
|
|
Price per
|
|
|
|
to Option
|
|
|
Share
|
|
|
Outstanding options at January 1, 2010
|
|
|
1,318,288
|
|
|
$
|
15.78
|
|
Options granted
|
|
|
281,260
|
|
|
$
|
14.32
|
|
Options forfeited
|
|
|
(31,595
|
)
|
|
$
|
16.83
|
|
Options expired
|
|
|
(5,515
|
)
|
|
$
|
20.02
|
|
Options exercised
|
|
|
(469,257
|
)
|
|
$
|
15.04
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at December 31, 2010
|
|
|
1,093,181
|
|
|
$
|
15.67
|
|
|
|
|
|
|
|
|
|
|
A summary of the status of the Companys non-vested options
as of December 31, 2010 and changes during the year then
ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Shares Subject
|
|
|
Grant Date
|
|
|
|
to Option
|
|
|
Fair Value
|
|
|
Non-vested options at January 1, 2010
|
|
|
539,396
|
|
|
$
|
8.10
|
|
Options granted
|
|
|
281,260
|
|
|
$
|
7.25
|
|
Options vested
|
|
|
(185,202
|
)
|
|
$
|
8.14
|
|
Options forfeited
|
|
|
(31,595
|
)
|
|
$
|
7.73
|
|
|
|
|
|
|
|
|
|
|
Non-vested options at December 31, 2010
|
|
|
603,859
|
|
|
$
|
7.71
|
|
|
|
|
|
|
|
|
|
|
The total fair value of stock options vested was
$1.5 million in 2010 and $1.4 million in both 2009 and
2008.
The following table summarizes information about stock options
outstanding at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $10.58
|
|
|
112,750
|
|
|
|
2.6 years
|
|
|
$
|
9.63
|
|
|
|
112,750
|
|
|
$
|
9.63
|
|
$12.06 to $14.61
|
|
|
451,005
|
|
|
|
7.2 years
|
|
|
|
13.66
|
|
|
|
181,625
|
|
|
|
12.67
|
|
$16.35 and above
|
|
|
529,426
|
|
|
|
7.1 years
|
|
|
|
18.67
|
|
|
|
194,947
|
|
|
|
19.14
|
|
84
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the options vested or expected to vest and options
exercisable as of December 31, 2010 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Vested or Expected to Vest
|
|
|
|
|
Weighted
|
|
|
|
Weighted Average
|
|
|
|
|
Average
|
|
Aggregate
|
|
Remaining
|
|
|
Number
|
|
Exercise Price
|
|
Intrinsic Value
|
|
Contractual Life
|
|
December 31, 2010
|
|
|
1,040,805
|
|
|
$
|
15.62
|
|
|
$
|
8,387,873
|
|
|
|
6.6 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable
|
|
|
|
|
Weighted
|
|
|
|
Weighted Average
|
|
|
|
|
Average
|
|
Aggregate
|
|
Remaining
|
|
|
Number
|
|
Exercise Price
|
|
Intrinsic Value
|
|
Contractual Life
|
|
December 31, 2010
|
|
|
489,322
|
|
|
$
|
14.55
|
|
|
$
|
4,468,969
|
|
|
|
4.9 years
|
|
The total intrinsic value of options exercised was
$3.3 million, $0.6 million and $0.2 million for
2010, 2009 and 2008, respectively. The tax benefits recognized
by the Company for these exercises were $1.2 million for
2010, $0.2 million for 2009 and less than $0.1 million
for 2008.
As of December 31, 2010, there was $1.4 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: 2011 $0.9 million;
2012 $0.4 million; 2013
$0.1 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 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, 2010 and
2009 were 11,401 and 11,771, respectively.
The Company is a leading provider of surety and fidelity bonds
in the United States. According to the Surety and Fidelity
Association of America (SFAA), the surety and
fidelity segment of the domestic property and casualty insurance
industry aggregates approximately $6.3 billion in direct
written premiums, comprised of approximately $5.2 billion
in surety premiums and $1.1 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.
85
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
|
|
|
|
2010
|
|
|
Total
|
|
|
2009
|
|
|
Total
|
|
|
2008
|
|
|
Total
|
|
|
Contract
|
|
$
|
278,375
|
|
|
|
63.2
|
%
|
|
$
|
274,848
|
|
|
|
62.7
|
%
|
|
$
|
300,236
|
|
|
|
64.3
|
%
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License and permit
|
|
|
75,133
|
|
|
|
17.1
|
|
|
|
75,594
|
|
|
|
17.3
|
|
|
|
80,291
|
|
|
|
17.2
|
|
Judicial and fiduciary
|
|
|
22,250
|
|
|
|
5.1
|
|
|
|
22,941
|
|
|
|
5.2
|
|
|
|
23,227
|
|
|
|
5.0
|
|
Public official
|
|
|
25,111
|
|
|
|
5.7
|
|
|
|
25,707
|
|
|
|
5.9
|
|
|
|
23,466
|
|
|
|
5.0
|
|
Other
|
|
|
8,822
|
|
|
|
2.0
|
|
|
|
9,306
|
|
|
|
2.1
|
|
|
|
9,015
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial
|
|
|
131,316
|
|
|
|
29.9
|
|
|
|
133,548
|
|
|
|
30.5
|
|
|
|
135,999
|
|
|
|
29.1
|
|
Fidelity and other
|
|
|
30,463
|
|
|
|
6.9
|
|
|
|
29,909
|
|
|
|
6.8
|
|
|
|
30,892
|
|
|
|
6.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
440,154
|
|
|
|
100.0
|
%
|
|
$
|
438,305
|
|
|
|
100.0
|
%
|
|
$
|
467,127
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
430,901
|
|
|
|
97.9
|
%
|
|
$
|
432,260
|
|
|
|
98.6
|
%
|
|
$
|
461,998
|
|
|
|
98.9
|
%
|
International
|
|
|
9,253
|
|
|
|
2.1
|
|
|
|
6,045
|
|
|
|
1.4
|
|
|
|
5,129
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
440,154
|
|
|
|
100.0
|
%
|
|
$
|
438,305
|
|
|
|
100.0
|
%
|
|
$
|
467,127
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Written Premiums
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
2010
|
|
|
Total
|
|
|
2009
|
|
|
Total
|
|
|
2008
|
|
|
Total
|
|
|
Contract
|
|
$
|
257,410
|
|
|
|
61.8
|
%
|
|
$
|
250,793
|
|
|
|
61.0
|
%
|
|
$
|
268,085
|
|
|
|
62.1
|
%
|
Commercial
|
|
|
128,401
|
|
|
|
30.9
|
|
|
|
130,332
|
|
|
|
31.7
|
|
|
|
132,702
|
|
|
|
30.7
|
|
Fidelity and other
|
|
|
30,463
|
|
|
|
7.3
|
|
|
|
29,909
|
|
|
|
7.3
|
|
|
|
30,892
|
|
|
|
7.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
416,274
|
|
|
|
100.0
|
%
|
|
$
|
411,034
|
|
|
|
100.0
|
%
|
|
$
|
431,679
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
407,021
|
|
|
|
97.8
|
%
|
|
$
|
404,989
|
|
|
|
98.5
|
%
|
|
$
|
426,570
|
|
|
|
98.8
|
%
|
International
|
|
|
9,253
|
|
|
|
2.2
|
|
|
|
6,045
|
|
|
|
1.5
|
|
|
|
5,109
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
416,274
|
|
|
|
100.0
|
%
|
|
$
|
411,034
|
|
|
|
100.0
|
%
|
|
$
|
431,679
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2010, approximately $93.3 million, or 21.2%, of gross
written premiums were generated from national insurance brokers,
with the single largest national broker production comprising
$22.9 million, or 5.2%, of gross written premiums. In 2009,
approximately $86.1 million, or 19.7%, of gross written
premiums were generated from national insurance brokers, with
the single largest national broker production comprising
$20.6 million, or 4.7%, of gross written premiums. In 2008,
approximately $85.3 million, or 18.3%, of gross written
premiums were generated from national insurance brokers, with
the single largest national broker production comprising
$14.3 million, or 3.1%, of gross written premiums.
86
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
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 at and for the years ended
December 31, 2010 and 2009. 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.
The following table reconciles consolidated stockholders
equity at December 31, 2010 and 2009 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):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Consolidated equity per GAAP
|
|
$
|
1,068,733
|
|
|
$
|
923,084
|
|
Impact of non-insurance companies and eliminations
|
|
|
13,139
|
|
|
|
16,820
|
|
|
|
|
|
|
|
|
|
|
Insurance company equity per GAAP
|
|
|
1,081,872
|
|
|
|
939,904
|
|
Intangible assets
|
|
|
(133,361
|
)
|
|
|
(133,361
|
)
|
Net unrealized (gain) on fixed income securities
|
|
|
(52,467
|
)
|
|
|
(48,669
|
)
|
Deferred policy acquisition costs
|
|
|
(98,572
|
)
|
|
|
(99,836
|
)
|
Deferred income taxes, net
|
|
|
48,296
|
|
|
|
48,513
|
|
Accumulated postretirement benefit obligations
|
|
|
1,781
|
|
|
|
781
|
|
Non-admitted assets
|
|
|
(21,910
|
)
|
|
|
(28,030
|
)
|
|
|
|
|
|
|
|
|
|
Total statutory capital and surplus per statutory accounting
practices
|
|
$
|
825,639
|
|
|
$
|
679,302
|
|
|
|
|
|
|
|
|
|
|
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, 2010 each of CNA Suretys insurance
subsidiaries had a Ratio that was in compliance with the minimum
RBC requirements.
87
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, Western Surety may pay dividends of
$140.2 million to CNA Surety in 2011. Combined statutory
surplus for the insurance subsidiaries at December 31, 2010
was $825.6 million.
|
|
14.
|
Related
Party Transactions
|
In addition to those described in
Note 6. Reinsurance, the Company has the
following related party transactions.
CNA Surety and CCC are parties to an Administrative Services
Agreement (ASA), which has been in effect since
July 1, 2004, that allows the Company to purchase
and/or have
access to certain services provided by CCC and its affiliates,
including the leasing of executive and branch offices. Pursuant
to the ASA, the Company paid CCC $4.6 million for leased
office space and services for 2010. For both 2009 and 2008, the
Company paid CCC $6.9 million for leased office space and
services in addition to an annual management fee of
$2.1 million. The Company was also charged
$0.2 million for the years ended December 31, 2010,
2009 and 2008 for direct costs incurred by CCC on the
Companys behalf. As provided by the ASA, CCC paid the
Company $1.3 million, $1.4 million and
$1.3 million for the years ended December 31, 2010,
2009 and 2008, respectively, for insurance agent licensing
services provided by the Company. This agreement shall remain in
effect until CNAF or its affiliates or shareholders cease being
a majority shareholder of CNA Surety unless otherwise terminated
by either party. This agreement is approved annually by the
Audit Committee of the Companys Board of Directors
(Audit Committee). The Company had a payable balance
to CCC related to the ASA of less than $0.1 million at
December 31, 2010. At December 31, 2009, the Company
had a $0.4 million payable balance to CCC related to the
ASA.
Pursuant to procedures approved by the Audit Committee, the
Company from time to time provides license and permit bonds and
appeal bonds for CCC and its affiliates as well as for clients
of CCC and its affiliates. As of December 31, 2010, the
aggregate outstanding liability of these bonds was approximately
$27.8 million. The premium for all such bonds written was
$0.3 million in 2010 and 2009. The premium for all such
bonds written was $0.6 million in 2008.
From time to time, Western Surety also has liability, either
directly or through assumed reinsurance, under bonds written for
Loews and certain of its subsidiaries. As of December 31,
2010, the aggregate liability under all such bonds was
approximately $79.9 million. This is comprised of the
liability for bonds written for Mexdrill Offshore, S. DE R.L. DE
C. V., which is a subsidiary of Diamond Offshore Drilling, Inc.
(Diamond Offshore). As of December 31, 2010,
Loews owns 50.4% of Diamond Offshore. Premiums for bonds written
for Loews and its subsidiaries were less than $0.1 million
in 2010, $0.2 million in 2009 and less than
$0.1 million in 2008. All bonds were written with the
approval of the Audit Committee.
88
CNA
SURETY CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
15.
|
Selected
Quarterly Financial Data (unaudited)
|
The following is a summary of the quarterly results of
operations for the years ended December 31, 2010 and 2009
(dollars in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
111,952
|
|
|
$
|
118,739
|
|
|
$
|
123,748
|
|
|
$
|
118,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
30,302
|
|
|
$
|
41,047
|
|
|
$
|
44,745
|
|
|
$
|
80,994
|
|
Income tax expense
|
|
|
9,497
|
|
|
|
12,422
|
|
|
|
14,258
|
|
|
|
26,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
20,805
|
|
|
$
|
28,625
|
|
|
$
|
30,487
|
|
|
$
|
54,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.47
|
|
|
$
|
0.65
|
|
|
$
|
0.69
|
|
|
$
|
1.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$
|
0.47
|
|
|
$
|
0.64
|
|
|
$
|
0.69
|
|
|
$
|
1.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
113,331
|
|
|
$
|
118,225
|
|
|
$
|
123,295
|
|
|
$
|
118,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
29,047
|
|
|
$
|
30,974
|
|
|
$
|
36,378
|
|
|
$
|
72,809
|
|
Income tax expense
|
|
|
8,183
|
|
|
|
8,807
|
|
|
|
10,854
|
|
|
|
23,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
20,864
|
|
|
$
|
22,167
|
|
|
$
|
25,524
|
|
|
$
|
49,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.47
|
|
|
$
|
0.50
|
|
|
$
|
0.58
|
|
|
$
|
1.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$
|
0.47
|
|
|
$
|
0.50
|
|
|
$
|
0.57
|
|
|
$
|
1.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the fourth quarter of 2010, the Company recorded net loss
reserve development for prior accident years which resulted in a
decrease of the estimated liability for unpaid loss and loss
adjustment expense of $54.3 million with a corresponding
increase to income before income taxes.
89
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
As of December 31, 2010, 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, 2010.
Managements report and the independent registered public
accounting firms attestation report are included in the
Companys 2010 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, 2010 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.
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.
90
PART IV.
|
|
ITEM 15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
|
|
|
|
|
|
|
Page
|
|
Financial Statement Schedules:
|
|
|
|
|
|
|
|
92
|
|
|
|
|
93
|
|
|
|
|
97
|
|
|
|
|
98
|
|
|
|
|
99
|
|
|
|
|
100
|
|
|
|
|
101
|
|
91
SCHEDULE I
CNA
SURETY CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
As of December 31, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010
|
|
|
|
Cost or
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Carrying
|
|
|
|
Cost
|
|
|
Value
|
|
|
Value
|
|
|
|
(Amounts in thousands)
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and government agencies and authorities
|
|
$
|
113,302
|
|
|
$
|
119,344
|
|
|
$
|
119,344
|
|
States, municipalities and political subdivisions
|
|
|
746,514
|
|
|
|
770,608
|
|
|
|
770,608
|
|
All other bonds, including corporate bonds and other
asset-backed securities
|
|
|
493,531
|
|
|
|
514,423
|
|
|
|
514,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
1,353,347
|
|
|
|
1,404,375
|
|
|
|
1,404,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
1,687
|
|
|
|
1,916
|
|
|
|
1,916
|
|
Short-term investments
|
|
|
53,089
|
|
|
|
|
|
|
|
53,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
1,408,123
|
|
|
|
|
|
|
$
|
1,459,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
Cost or
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Carrying
|
|
|
|
Cost
|
|
|
Value
|
|
|
Value
|
|
|
|
(Amounts in thousands)
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and government agencies and authorities
|
|
$
|
152,334
|
|
|
$
|
157,128
|
|
|
$
|
157,128
|
|
States, municipalities and political subdivisions
|
|
|
696,505
|
|
|
|
728,568
|
|
|
|
728,568
|
|
All other bonds, including corporate bonds and other
asset-backed securities
|
|
|
370,431
|
|
|
|
380,527
|
|
|
|
380,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
1,219,270
|
|
|
|
1,266,223
|
|
|
|
1,266,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
1,429
|
|
|
|
1,610
|
|
|
|
1,610
|
|
Short-term investments
|
|
|
48,999
|
|
|
|
|
|
|
|
48,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
1,269,698
|
|
|
|
|
|
|
$
|
1,316,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
SCHEDULE II
CNA
SURETY CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY)
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Amounts in thousands)
|
|
|
Assets
|
Investments in and advances to subsidiaries
|
|
$
|
1,076,874
|
|
|
$
|
933,907
|
|
Equity investments (cost: $1,687 and $1,429)
|
|
|
1,916
|
|
|
|
1,610
|
|
Short-term investments, at cost (which approximates fair value)
|
|
|
13,428
|
|
|
|
12,071
|
|
Cash
|
|
|
3,265
|
|
|
|
1,894
|
|
Other assets
|
|
|
7,892
|
|
|
|
7,220
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,103,375
|
|
|
$
|
956,702
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
Long-term debt
|
|
$
|
30,930
|
|
|
$
|
30,930
|
|
Other liabilities
|
|
|
3,712
|
|
|
|
2,688
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
34,642
|
|
|
|
33,618
|
|
Stockholders Equity
|
Common stock
|
|
|
461
|
|
|
|
456
|
|
Additional paid-in capital
|
|
|
288,471
|
|
|
|
279,388
|
|
Retained earnings
|
|
|
761,925
|
|
|
|
627,505
|
|
Accumulated other comprehensive income
|
|
|
32,436
|
|
|
|
30,406
|
|
Treasury stock, at cost
|
|
|
(14,560
|
)
|
|
|
(14,671
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,068,733
|
|
|
|
923,084
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,103,375
|
|
|
$
|
956,702
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
financial statements.
93
SCHEDULE II
CNA
SURETY CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY) (Continued)
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Amounts in thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
100
|
|
|
$
|
121
|
|
|
$
|
347
|
|
Net realized investment gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary
impairment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
Portion of
other-than-temporary
impairment losses recognized in other comprehensive income
(before taxes)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses), excluding impairment
losses
|
|
|
38
|
|
|
|
(40
|
)
|
|
|
(376
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized investment gains (losses)
|
|
|
38
|
|
|
|
(40
|
)
|
|
|
(376
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
138
|
|
|
|
81
|
|
|
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
1,164
|
|
|
|
1,391
|
|
|
|
2,148
|
|
Corporate expense
|
|
|
6,135
|
|
|
|
8,581
|
|
|
|
6,968
|
|
Other expense
|
|
|
1,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
8,773
|
|
|
|
9,972
|
|
|
|
9,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations before income taxes and equity in net
income of subsidiaries
|
|
|
(8,635
|
)
|
|
|
(9,891
|
)
|
|
|
(9,145
|
)
|
Income tax benefit
|
|
|
(3,137
|
)
|
|
|
(3,515
|
)
|
|
|
(3,161
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before equity in net income of subsidiaries
|
|
|
(5,498
|
)
|
|
|
(6,376
|
)
|
|
|
(5,984
|
)
|
Equity in net income of subsidiaries
|
|
|
139,918
|
|
|
|
124,237
|
|
|
|
116,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
134,420
|
|
|
$
|
117,861
|
|
|
$
|
110,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
financial statements.
94
SCHEDULE II
CNA
SURETY CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY) (Continued)
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Amounts in thousands)
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
134,420
|
|
|
$
|
117,861
|
|
|
$
|
110,403
|
|
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net income of subsidiaries
|
|
|
(139,918
|
)
|
|
|
(124,237
|
)
|
|
|
(116,387
|
)
|
Depreciation and amortization
|
|
|
|
|
|
|
38
|
|
|
|
101
|
|
Net realized investment (gains) losses
|
|
|
(38
|
)
|
|
|
40
|
|
|
|
376
|
|
Stock-based compensation
|
|
|
1,758
|
|
|
|
1,990
|
|
|
|
1,693
|
|
Deferred income tax benefit
|
|
|
(709
|
)
|
|
|
(752
|
)
|
|
|
(490
|
)
|
Cash dividends from subsidiaries
|
|
|
500
|
|
|
|
5,000
|
|
|
|
3,000
|
|
Tax payments received from subsidiaries
|
|
|
61,881
|
|
|
|
41,273
|
|
|
|
48,570
|
|
Federal income tax payments
|
|
|
(60,500
|
)
|
|
|
(38,718
|
)
|
|
|
(45,248
|
)
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
|
1,173
|
|
|
|
409
|
|
|
|
(701
|
)
|
Other assets and liabilities
|
|
|
(2,714
|
)
|
|
|
(2,840
|
)
|
|
|
(2,048
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(4,147
|
)
|
|
|
64
|
|
|
|
(731
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net advances (to) from subsidiaries
|
|
|
(346
|
)
|
|
|
(246
|
)
|
|
|
1,152
|
|
Purchases of equity securities
|
|
|
(413
|
)
|
|
|
(868
|
)
|
|
|
(550
|
)
|
Proceeds from sales of equity securities
|
|
|
193
|
|
|
|
631
|
|
|
|
626
|
|
Changes in short-term investments
|
|
|
(1,357
|
)
|
|
|
(3,538
|
)
|
|
|
(1,239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) investing activities
|
|
|
(1,923
|
)
|
|
|
(4,021
|
)
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock option exercises and other
|
|
|
7,441
|
|
|
|
1,246
|
|
|
|
580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
7,441
|
|
|
|
1,246
|
|
|
|
580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash
|
|
|
1,371
|
|
|
|
(2,711
|
)
|
|
|
(162
|
)
|
Cash at beginning of period
|
|
|
1,894
|
|
|
|
4,605
|
|
|
|
4,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
3,265
|
|
|
$
|
1,894
|
|
|
$
|
4,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
financial statements.
95
SCHEDULE II
CNA
SURETY CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(PARENT COMPANY) (Continued)
NOTES TO CONDENSED FINANCIAL INFORMATION
The condensed financial information of CNA Surety Corporation
(CNAS or the Company) should be read in
conjunction with the Consolidated Financial Statements of CNA
Surety and Notes thereto included in Part II, Item 8,
Financial Statements and Supplementary Data of this
Form 10-K.
CNASs subsidiaries are accounted for using the equity
method of accounting. Equity in net income of these affiliates
is presented in the Condensed Statements of Income. CNA
Financial Corporation owned approximately 61% of the outstanding
common stock of CNAS as of December 31, 2010.
|
|
2.
|
Cash and
Short-Term Investments
|
As of December 31, 2010 and 2009, cash included
$3.2 million and $1.9 million, respectively, and
short-term investments included $8.3 million and
$9.2 million, respectively, of cash and short-term
investments ultimately due to the Companys insurance
subsidiaries related to premium collections and claim payments.
In May 2004, the Company, through a wholly-owned trust,
privately issued $30.0 million of preferred securities
through two pooled transactions. These securities, issued by CNA
Surety Capital Trust I (the Issuer Trust), bear
interest at the London Interbank Offered Rate
(LIBOR) plus 337.5 basis points with a
30-year
term. As of May 2009, the Company may redeem these securities,
in whole or in part, at par value at any scheduled quarterly
interest payment date. As of December 31, 2010, none of
these preferred securities have been redeemed.
The Companys investment of $0.9 million in the Issuer
Trust is carried at cost in Other assets in the
Companys Condensed Balance Sheets. The sole asset of the
Issuer Trust consists of a $30.9 million junior
subordinated debenture issued by the Company to the Issuer
Trust. Due to the underlying characteristics of this debt, the
carrying value of the debenture approximates its estimated fair
value.
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 approximately
$55.7 million, consisting of annual dividend payments of
approximately $1.1 million until maturity and the
redemption value of the preferred securities 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 junior subordinated debenture bears interest at a rate of
LIBOR plus 337.5 basis points and matures in April 2034. As
of December 31, 2010 and 2009, the interest rate on the
junior subordinated debenture was 3.66% and 3.65%, respectively.
|
|
4.
|
Commitments
and Contingencies
|
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.
96
CNA
SURETY CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
As of and for the Years Ended
December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Amounts in thousands)
|
|
|
Deferred policy acquisition costs
|
|
$
|
98,572
|
|
|
$
|
99,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid loss and loss adjustment expense reserves
|
|
$
|
389,089
|
|
|
$
|
406,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned premiums
|
|
$
|
245,986
|
|
|
$
|
247,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premium revenue
|
|
$
|
418,017
|
|
|
$
|
421,872
|
|
|
$
|
431,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
53,591
|
|
|
$
|
50,371
|
|
|
$
|
47,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, claims, losses and settlement expenses
|
|
$
|
45,235
|
|
|
$
|
69,416
|
|
|
$
|
80,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred policy acquisition costs
|
|
$
|
168,019
|
|
|
$
|
168,690
|
|
|
$
|
173,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses
|
|
$
|
59,713
|
|
|
$
|
64,737
|
|
|
$
|
62,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
416,274
|
|
|
$
|
411,034
|
|
|
$
|
431,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97
CNA
SURETY CORPORATION AND SUBSIDIARIES
REINSURANCE
For the
Years Ended December 31, 2010, 2009 and 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance
|
|
$
|
347,896
|
|
|
$
|
23,880
|
|
|
$
|
92,258
|
|
|
$
|
416,274
|
|
|
|
22.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums written
|
|
$
|
347,896
|
|
|
$
|
23,880
|
|
|
$
|
92,258
|
|
|
$
|
416,274
|
|
|
|
22.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance
|
|
$
|
349,718
|
|
|
$
|
23,926
|
|
|
$
|
92,225
|
|
|
$
|
418,017
|
|
|
|
22.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums earned
|
|
$
|
349,718
|
|
|
$
|
23,926
|
|
|
$
|
92,225
|
|
|
$
|
418,017
|
|
|
|
22.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance
|
|
$
|
347,646
|
|
|
$
|
27,271
|
|
|
$
|
90,659
|
|
|
$
|
411,034
|
|
|
|
22.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums written
|
|
$
|
347,646
|
|
|
$
|
27,271
|
|
|
$
|
90,659
|
|
|
$
|
411,034
|
|
|
|
22.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance
|
|
$
|
351,519
|
|
|
$
|
27,480
|
|
|
$
|
97,833
|
|
|
$
|
421,872
|
|
|
|
23.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums earned
|
|
$
|
351,519
|
|
|
$
|
27,480
|
|
|
$
|
97,833
|
|
|
$
|
421,872
|
|
|
|
23.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance
|
|
$
|
358,625
|
|
|
$
|
35,448
|
|
|
$
|
108,502
|
|
|
$
|
431,679
|
|
|
|
25.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums written
|
|
$
|
358,625
|
|
|
$
|
35,448
|
|
|
$
|
108,502
|
|
|
$
|
431,679
|
|
|
|
25.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and casualty insurance
|
|
$
|
357,771
|
|
|
$
|
35,538
|
|
|
$
|
109,463
|
|
|
$
|
431,696
|
|
|
|
25.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums earned
|
|
$
|
357,771
|
|
|
$
|
35,538
|
|
|
$
|
109,463
|
|
|
$
|
431,696
|
|
|
|
25.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Primarily from affiliates. |
98
CNA
SURETY CORPORATION AND SUBSIDIARIES
VALUATION
AND QUALIFYING ACCOUNTS
As of and
for the Years Ended December 31, 2010, 2009 and
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts on premiums receivable
|
|
$
|
1,110
|
|
|
$
|
655
|
|
|
$
|
|
|
|
$
|
355
|
|
|
$
|
1,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts on reinsurance receivable
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts on premiums receivable
|
|
$
|
1,307
|
|
|
$
|
564
|
|
|
$
|
|
|
|
$
|
761
|
|
|
$
|
1,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts on reinsurance receivable
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts on premiums receivable
|
|
$
|
1,145
|
|
|
$
|
443
|
|
|
$
|
|
|
|
$
|
281
|
|
|
$
|
1,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts on reinsurance receivable
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Write-offs charged against allowance. |
99
CNA
SURETY CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY
INSURANCE OPERATIONS
As of and for the Years Ended December 31, 2010, 2009 and
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Amounts in thousands)
|
|
|
Deferred policy acquisition costs
|
|
$
|
98,572
|
|
|
$
|
99,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves for unpaid claims and claim adjustment expenses
|
|
$
|
389,089
|
|
|
$
|
406,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount (if any) deducted
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned premiums
|
|
$
|
245,986
|
|
|
$
|
247,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premium revenue
|
|
$
|
418,017
|
|
|
$
|
421,872
|
|
|
$
|
431,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
53,591
|
|
|
$
|
50,371
|
|
|
$
|
47,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net claims and claim expenses incurred related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
$
|
121,564
|
|
|
$
|
123,698
|
|
|
$
|
126,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior years
|
|
$
|
(76,329
|
)
|
|
$
|
(54,282
|
)
|
|
$
|
(45,501
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred policy acquisition costs
|
|
$
|
168,019
|
|
|
$
|
168,690
|
|
|
$
|
173,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net paid claims and claim adjustment expenses
|
|
$
|
54,418
|
|
|
$
|
59,294
|
|
|
$
|
58,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
416,274
|
|
|
$
|
411,034
|
|
|
$
|
431,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
|
|
|
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
|
(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).
|
|
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
|
(36)
|
|
CNA Surety Corporation 2006 Long-Term Equity Compensation Plan
(filed on December 21, 2006 as Exhibit 10(36) 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 as Exhibit 10(37) to CNA Surety Corporations
Registration Statement on
Form S-8
POS (Registration
No. 333-37207),
and incorporated herein by reference).
|
101
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
(38)
|
|
Form of Surety Quota Share Reinsurance Contract by and between
Western Surety Company and Continental Casualty Company (filed
on February 19, 2008 as Exhibit 10(38) to CNA Surety
Corporations
Form 10-K
and incorporated herein by reference).
|
|
10
|
(39)
|
|
Form of Employment Agreement dated as of January 1, 2009 by
and between CNA Surety Corporation and John F. Welch (filed on
October 28, 2008 as Exhibit 10(39) to CNA Surety
Corporations
Form 8-K,
and incorporated herein by reference).
|
|
10
|
(40)
|
|
Form of Commutation and Release Agreement as respects certain
business under the Surety Quota Share Reinsurance Contract by
and between Western Surety Company and Continental Casualty
Company (filed on February 19, 2008 as Exhibit 10(38)
to CNA Surety Corporations
Form 10-K,
and incorporated herein by reference).
|
|
10
|
(41)
|
|
Form of Termination Addendum to Surety Excess of Loss
Reinsurance Contract by and between Western Surety Company,
Universal Surety of America and Surety Bonding Company of
America and Continental Casualty Company (filed on March 1,
2005 as Exhibit 10(13) to CNA Surety Corporations
Form 10-K,
and incorporated herein by reference).
|
|
10
|
(42)
|
|
Form of Addendum No. 1 to the 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
|
(43)
|
|
Form of Administrative Services Agreement by and between Western
Surety Company and Continental Casualty Company (filed on
July 31, 2009 as Exhibit 10(43) to CNA Surety
Corporations
Form 10-Q,
and incorporated herein by reference).
|
|
10
|
(44)
|
|
Form of First Amendment to the Employment Agreement with CNA
Surety Corporation and John F. Corcoran, Senior Vice President
and Chief Financial Officer (filed on February 8, 2010 as
Exhibit 10(44) to CNA Surety Corporations
Form 8-K,
and incorporated herein by reference).
|
|
10
|
(45)
|
|
Form of First Amendment to the Employment Agreement with CNA
Surety Corporation and Douglas W. Hinkle, Senior Vice President
and Chief Underwriting Officer (filed on February 8, 2010
as Exhibit 10(45) to CNA Surety Corporations
Form 8-K,
and incorporated herein by reference).
|
|
10
|
(46)
|
|
Form of Surety Quota Share Reinsurance Contract by and between
Western Surety Company and Continental Casualty Company (filed
on February 19, 2010 as Exhibit 10(46) to CNA Surety
Corporations
Form 10-K,
and incorporated herein by reference).
|
|
10
|
(47)
|
|
Form of Canadian Services and Indemnity Agreement by and between
Western Surety Company and Continental Casualty Company (filed
on February 19, 2010 as Exhibit 10(47) to CNA Surety
Corporations
Form 10-K,
and incorporated herein by reference).
|
|
10
|
(48)
|
|
Form of Surety Canada Quota Share Treaty by and between Western
Surety Company and Continental Casualty Company (filed on
February 19, 2010 as Exhibit 10(48) to CNA Surety
Corporations
Form 10-K,
and incorporated herein by reference).
|
|
10
|
(49)
|
|
Form of Administrative Services Agreement by and between Western
Surety Company and Continental Casualty Company (filed on
April 30, 2010 as Exhibit 10(49) to CNA Surety
Corporations
Form 10-Q,
and incorporated herein by reference).
|
|
10
|
(50)
|
|
Form of General Release and Settlement Agreement with CNA Surety
Corporation and Thomas Pottle, Senior Vice President (filed on
October 6, 2010 as Exhibit 10(49) to CNA Surety
Corporations
Form 8-K,
and incorporated herein by reference).
|
|
10
|
(51)
|
|
Form of Surety Quota Share Treaty effective January 1, 2011
by and between Western Surety Company and Continental Casualty
Company.
|
|
10
|
(52)
|
|
Form of Surety Canada Quota Share Treaty effective
January 1, 2011 by and between Western Surety Company and
Continental Casualty Company.
|
|
10
|
(53)
|
|
Form of Services and Indemnity Agreement effective
January 1, 2011 by and between Western Surety Company and
Continental Casualty Company.
|
|
10
|
(54)
|
|
Form of Canadian Services and Indemnity Agreement effective
January 1, 2011 by and between Western Surety Company and
Continental Casualty Company.
|
102
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
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 18, 2011.
|
|
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)
|
|
Written Statement Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002-Chief Executive Officer.
|
|
32
|
(2)
|
|
Written Statement Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002-Chief Financial Officer.
|
103
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 18, 2011
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 18, 2011
|
|
Chairman of the Board
and Director
|
|
/s/ DAVID
B. EDELSON
David
B. Edelson
|
|
|
|
|
|
February 18, 2011
|
|
Director
|
|
/s/ PHILIP
H. BRITT
Philip
H. Britt
|
|
|
|
|
|
February 18, 2011
|
|
Director
|
|
/s/ ANTHONY
S. CLEBERG
Anthony
S. Cleberg
|
|
|
|
|
|
February 18, 2011
|
|
Director
|
|
/s/ D.
CRAIG MENSE
D.
Craig Mense
|
|
|
|
|
|
February 18, 2011
|
|
Director
|
|
/s/ ROBERT
A. TINSTMAN
Robert
A. Tinstman
|
|
|
|
|
|
February 18, 2011
|
|
Director
|
|
/s/ JOHN
F. WELCH
John
F. Welch
|
|
|
|
|
|
February 18, 2011
|
|
Director
|
|
/s/ PETER
W. WILSON
Peter
W. Wilson
|
104