CNA Surety Unveils Q3 Numbers

November 4, 2003

Chicago-based CNA Surety Corporation reported a net loss for the third quarter of 2003 of $48.8 million, or $1.14 per share, compared to net income of $2.6 million, or $0.06 per share, for the same period in 2002. The decrease reflects material adverse claim developments in the quarter which resulted in higher current year provisions for incurred losses and net unfavorable loss reserve development for prior accident years.

For the quarter ended Sept. 30, 2003, underwriting losses increased $83.5 million to $85.8 million. The loss and combined ratios were 148.9 percent and 213.5 percent, respectively, for the third quarter of 2003, compared to 44.7 percent and 102.8 percent, respectively, for the same period in 2002.

The higher loss and combined ratios in 2003 primarily relate to net reserve additions in the quarter of approximately $88 million, which included approximately $49 million for the current accident year and $39 million for net adverse loss reserve development for prior accident years on the company’s branch commercial and contract business.

The net additions to reserves for the current accident year primarily relate to two large claims totaling $23 million incurred in the quarter (including a $15 million net loss payment on an insurance program bond announced earlier in the quarter) and changes in estimates of potential additional large losses resulting from this material adverse claim activity. The net adverse development on prior accident years includes changes in estimates of $17 million with respect to another insurance program bond for which the company received a payment demand in early October and $8 million pertaining to self insured workers compensation bonds that the company issued in the 1980s on behalf of now bankrupt companies. The expense ratio for the third quarter of 2003 of 64.6 percent was negatively impacted by higher reinsurance costs of $8.1 million.

For the quarter ended Sept. 30, 2003, gross written premiums decreased three percent to $94.2 million. Contract surety increased approximately two percent to $56.9 million, primarily due to improving rates. Commercial surety decreased 13 percent to $30.0 million. This was primarily due to the company’s ongoing efforts to reduce aggregate exposures to large commercial accounts that were partially offset by continued strong volume growth in small commercial products and improving rates.

Ceded written premiums increased $3.6 million to $14.2 million for the third quarter of 2003 compared to the same period of last year primarily due to changes in the company’s reinsurance programs. Net written premiums decreased seven percent to $80.0 million.

For the quarter ended Sept. 30, 2003, net investment income decreased nine percent to $6.4 million compared to $7.0 million for the third quarter of 2002. The decrease reflects the impact of lower investment yields primarily due to greater investment in tax-exempt securities. The annualized pretax yields were 4.3 percent and 4.8 percent for the three months ended Sept. 30, 2003 and 2002, respectively.

For the nine months ended Sept. 30, 2003, the net loss was $29.0 million, or $0.68 per share, compared to net income of $26.1 million, or $0.61 per share, in 2002. This decrease primarily reflects material adverse claim developments during the third quarter that resulted in higher current year provisions for incurred losses and net unfavorable loss reserve development for prior accident years.

For the nine months ended Sept. 30, 2003, the company had an underwriting loss of $73.2 million compared to underwriting income of $17.4 million in the prior period. The loss and combined ratios were 69.0 percent and 133.4 percent, respectively, for the first nine months of 2003, compared to 32.2 percent and 92.2 percent, respectively, for the same period in 2002.

The higher loss and combined ratios in 2003 principally relate to higher current year provisions for incurred losses and prior year net loss reserve development on the company’s branch commercial and contract business, as well as higher reinsurance costs. The expense ratio increased to 64.4 percent for the first nine months of 2003 compared to 60.0 percent for the same period in 2002, primarily due to the impact of higher reinsurance costs on net earned premiums.

For the nine months ended Sept. 30, 2003, gross written premiums increased three percent to $283.3 million. Premiums for contract increased six percent to $157.7 million due primarily to improving rates. Commercial premiums decreased one percent to $103.1 million due to the company’s ongoing efforts to reduce aggregate exposures to large commercial accounts that were partially offset by continued strong bond volume growth in small commercial products and improving rates.

Ceded written premiums increased $7.7 million to $45.1 million for the first nine months of 2003 compared to the same period last year primarily due to changes in the company’s reinsurance programs. Net written premiums increased one percent to $238.2 million.

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