CNA Surety Releases Q4 and Year-End 2003 Results

February 16, 2004

CNA Surety Corporation reported net income for the fourth quarter of 2003 of $10.6 million, or $0.25 per share, compared to net income of $4.0 million, or $0.09 per share, for the same period in 2002. The fourth quarter and full year 2002 results include a restatement of previously reported results related to the accounting for ceded premium in connection with a multiple-year reinsurance treaty.

The improvement in the fourth quarter 2003 results reflects lower realized investment losses and higher underwriting income. Net realized investment losses for the current quarter were insignificant, while pre-tax net realized investment losses in the fourth quarter of 2002 were $8.2 million.

For the quarter ended Dec. 31, 2003, underwriting income increased
$0.9 million to $7.8 million. The loss, expense, and combined ratios were 26.9 percent, 63.2 percent and 90.1 percent, respectively, for the fourth quarter of 2003, compared to 29.6 percent, 61.3 percent, and 90.9 percent, respectively, for the same period in 2002. The loss ratio in the current quarter benefited from a favorable change in business mix and from a decrease in adverse reserve development related to prior years.

For the current quarter, a greater proportion of earned premium came from small commercial products that typically have lower loss costs. The expense ratio for the fourth quarter of 2003 was negatively impacted by two percentage points due to a charge related to post-employment benefit obligations for three former senior executives.

For the quarter ended Dec. 31, 2003, gross written premiums increased three percent to $88.0 million. Contract surety increased four percent to $50.8 million, primarily due to improving rates. Commercial surety increased four percent to $30.6 million. This was primarily due to continued strong volume growth in small commercial products and improving rates on large commercial products. Ceded written premiums decreased $2.2 million to $13.6 million for the fourth quarter of 2003 compared to the same period of last year primarily due to the timing of reinsurance premium payments. As a
result, net written premiums increased seven percent to $74.4 million.

For both quarters ended Dec. 31, 2003 and 2002, net investment income was $6.5 million. The annualized pretax yields were 4.3% and 4.4% for the three months ended Dec. 31, 2003 and 2002, respectively.

For the year ended Dec. 31, 2003, the net loss was $14.2 million, or
$0.33 per share, compared to net income of $30.1 million, or $0.70 per share, in 2002. This decrease primarily reflects significant adverse claim developments during the third quarter that resulted in higher current year provisions for incurred losses and net unfavorable loss reserve development related to prior accident years.

For the year ended Dec. 31, 2003, the company had an underwriting loss of $58.8 million compared to underwriting income of $24.3 million in the prior period. The loss, expense and combined ratios were 56.7 percent, 62.6 percent and 119.3 percent, respectively, for the year ended Dec. 31, 2003, compared to 31.6 percent, 60.3 percent and 91.9 percent, respectively, for the same period in 2002. The higher loss and combined ratios in 2003 are due principally to higher current year provisions for incurred losses and prior year net loss reserve development on the company’s branch commercial and contract business, and higher reinsurance costs. The expense ratio increase is
primarily due to the impact of higher reinsurance costs on net earned
premiums.

In numbers for the year ended Dec. 31, 2003, gross written premiums increased three percent to $371.4 million. Premiums for contract surety increased five percent to $208.5 million due primarily to improving rates. Commercial surety premiums decreased slightly to $133.7 million due to the company’s ongoing effort to reduce aggregate exposures on large commercial accounts that was
partially offset by continued strong bond volume growth in small commercial products and improving rates on large commercial products. Ceded written premiums decreased $1.0 million to $52.2 million for the year ended Dec. 31, 2003. For 2003, the company reduced its net retention for most principals from $20 million to $15 million. Net written premiums increased four percent to $319.2 million.

For the year ended Dec, 31, 2003, net investment income decreased five percent to $26.3 million compared to $27.8 million for the same period in 2002. The decrease reflects the impact of lower investment yields and greater investment in tax-exempt securities. The annualized pretax yields were 4.4% and 4.8% for the years ended Dec. 31, 2003 and 2002, respectively.

In numbers for the year ended Dec. 31, 2003, net cash provided by operations decreased to $25.2 million compared to $85.5 million for 2002. This decrease was primarily driven by increased claim payments that included the payment of the company’s obligations related to the Enron bankruptcy.

As of Dec. 31, 2003, stockholders’ equity decreased to $410.1 million
or two percent from Dec. 31, 2002. Combined statutory surplus totaled $190.4 million at Dec. 31, 2003, resulting in a net written premium to statutory surplus ratio of 1.7 to 1.

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