CNA Surety Reports Q1 Results

May 4, 2004

Chicago-based CNA Surety Corporation reported net income for the first quarter of 2004 of $6.4 million, or $0.15 per share, compared to net income of $11.0 million, or $0.26 per share, for the same period in 2003.

The decrease in net income reflects higher underwriting expenses including a $3.2 million after-tax increase in the accrual for policyholder dividends primarily related to premiums earned in 2002 and prior. Expenses also include $1.1 million after tax of severance costs related to the re-organization of the company’s field office structure. These higher expenses were partially offset by higher net investment gains.

“Although our results were impacted by these severance and dividend accrual costs, we are pleased by the underlying trends of the quarter,” noted John Welch, CNA Surety president and CEO. “Gross written premiums continued to grow in alignment with our expectations for both volume and business mix. In addition, we have implemented our plan to streamline our field structure to more efficiently service our customers and agents.”

For the quarter ended March 31, 2004, gross written premiums increased 4.6 percent to $95.9 million. Contract surety increased 19.6 percent to $49.8 million, due to improved rates and higher business volume. Commercial surety decreased 11.1 percent to $37.3 million as continued strong volume growth in small commercial products was more than offset by the results of ongoing efforts to reduce aggregate exposures to large commercial accounts. Ceded written premiums increased $12.0 million to $24.3 million for the first quarter of 2004 compared to the same period of last year. This increase was primarily due to the timing of reinsurance premium payments, but it also reflects the company’s decision to purchase additional reinsurance protection. As a result, net written premiums decreased 9.8 percent to $71.6 million.

For the quarter ended March 31, 2004, the loss, expense, and combined ratios were 27.4 percent, 73.6 percent and 101.0 percent, respectively, compared to 26.1 percent, 62.2 percent, and 88.3 percent, respectively, for the same period in 2003. The expense ratio for the first quarter of 2004 was negatively impacted by 6.5 percentage points due to the increase of the accrual for policyholder dividends on certain contract surety business.

This increase resulted from the implementation of an improved methodology for estimating the ultimate dividend obligation on premiums that have been earned to date. This increase in the accrual primarily relates to premiums earned in 2002 and prior. The expense ratio was further impacted by 2.3 percentage points related to costs for the initiative to simplify and streamline the field organization.

Net investment income for the quarter ended March 31, 2004 was $7.0 million compared to $6.7 million during the first quarter of 2003. The annualized pretax yields were 4.4% and 4.7 % for the three months ended March 31, 2004 and 2003, respectively. For the quarter ended March 31, 2004, net investment gains increased by $1.5 million to $2.2 million due to sales of fixed income securities.

Business environment

The company’s business is subject to certain risks and uncertainties associated with the current economic environment and corporate credit conditions. In the past, the company’s performance has been materially impacted by a significant increase in corporate defaults on a worldwide basis. Because the nature of the business is to insure against non-performance, future results of operations could be negatively impacted by adverse trends in corporate defaults.

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