CNA Surety Announces 4Q Decrease in Net Income

February 12, 2002

CNA Surety Corporation reported that net income for the fourth quarter of 2001 decreased to $0.6 million, or $0.01 per share, from $12.0 million, or $0.28 per share, for the same period in 2000. Operating earnings, after income taxes, decreased to $0.9 million, or $0.02 per share, from $11.8 million, or $0.27 per share, in 2000.

The decreases reflect lower underwriting and investment income, partially offset by the favorable impact of decreased interest expense. Underwriting results declined $17.4 million to an underwriting loss of $3.6 million, primarily due to net loss reserve strengthening for current and prior accident years of $13.4 million before income taxes, or $0.20 per share. This reserve strengthening includes approximately $8.0 million, or $0.12 per share, related to the company’s previously announced loss exposure to Enron Corporation. In addition, operating expenses for the fourth quarter include pretax charges of $2.2 million, or $0.03 per share, primarily associated with asset write-offs.

Net income for the year ended Dec. 31, 2001 decreased to $36.9 million, or $0.86 per share, from $53.6 million, or $1.25 per share, in 2000. Operating earnings, after income taxes, declined to $36.9 million, or $0.86 per share, from $53.6 million, or $1.25 per share, in 2000. These decreases were primarily attributable to reduced underwriting income, partially offset by reduced interest expense. Underwriting income declined $27.3 million to $37.2 million primarily due to the aforementioned net loss reserve strengthening in the fourth quarter and generally higher incurred loss experience for the year.

For the year ended Dec. 31, 2001, gross written premiums increased five percent to $333.0 million even after this change and the discontinuance of the CNA Re assumed international credit and surety business of $6.0 million. Gross processed premiums, excluding international reinsurance business assumed from CNA Re, increased 10 percent to $341.0 million. Contract and commercial surety processed premiums increased 12 percent and seven percent, respectively. These increases were primarily due to continued strength in public construction spending for contract surety and favorable trends in the commercial segment including increased small transactional business and beneficial pricing actions on large commercial accounts.

Gross written premiums for contract surety increased 12 percent for the year ended Dec. 31, 2001 to $180.6 million. Core direct commercial surety written premiums increased two percent to $125.0 million. For the full year of 2001, net written premiums increased four percent to $315.8 million reflecting the aforementioned gross production changes partially offset by higher reinsurance costs. Ceded written premiums increased $5.0 million to $17.2 million for the full year of 2001 compared to the same period of last year.

For the year ended Dec. 31, 2001, underwriting income decreased $27.3 million to $37.2 million. The loss and combined ratios were 25.2 percent and 88.4 percent, respectively, for the full year of 2001, compared to 18.4 percent and 78.6 percent, respectively, for the same period in 2000. The loss and combined ratios for the full year of 2001 and the comparable period of 2000 include the effect of net adverse loss reserve development of $4.8 million and net favorable loss reserve development of $7.1 million, respectively. In addition, the loss and combined ratios in 2001 reflect net losses of approximately $8.0 million in 2001 related to the company’s exposure to Enron Corporation. The expense ratio increased to 63.2 percent for the full year of 2001 compared to 60.2 percent for the same period in 2000, primarily due to higher reinsurance costs and operating expenses. Operating expenses reflect higher technology related expenditures and $2.2 million of pretax charges, primarily associated with asset write-offs.

The company is in the process of finalizing its reinsurance program for 2002. As a result of current reinsurance market conditions in the aftermath of Sept. 11, recent bankruptcy activity and continuing pressures on the U.S. and world economies, the company’s net retentions will increase in 2002 along with an increase in reinsurance premium costs.

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