CNA Surety Posts 2Q Results

August 3, 2004

CNA Surety Corporation has reported net income for the second quarter of 2004 of $10.2 million, or $0.24 per share, compared to net income of $11.7 million, or $0.27 per share, for the same period in 2003. The decrease in net income reflects higher reinsurance costs and lower net realized investment gains, offset somewhat by higher net investment income.

For the quarter ended June 30, 2004, CNA Surety reported gross written premiums increased 5.8 percent to $103.1 million. Contract surety increased 3.8 percent to $61.4 million due to improved rates. Commercial surety increased 9.1 percent to $34.0 million due to continued strong volume growth in small commercial products. Ceded written premiums increased $2.8 million to $17.0 million for the second quarter of 2004 compared to the same period of last year. This increase reflects the higher gross written premiums and the company’s decision to purchase additional protection under its 2004 reinsurance program. Net written premiums increased 3.4 percent to $86.1 million.

For the quarter ended June 30, 2004, the loss, expense, and combined ratios were 27.5 percent, 63.6 percent and 91.1 percent, respectively, compared to 26.3 percent, 62.4 percent, and 88.7 percent, respectively, for the same period in 2003. The loss ratio for the second quarter of 2004 was impacted by a slight increase in current year provisions for incurred losses. The expense ratio was impacted by higher reinsurance costs.

Net investment income for the quarter ended June 30, 2004 was $7.5 million compared to $6.7 million during the second quarter of 2003 due to a significant increase in invested assets.

“These solid financial results are the culmination of an exciting quarter at CNA Surety,” commented John Welch, President and Chief Executive Officer. “We achieved a record level of gross written premium production, which was particularly encouraging as it followed on the heels of our field reorganization activities. We also increased our capital flexibility and strengthened statutory surplus at Western Surety Company to record levels.”

Net income for the six months ended June 30, 2004 was $16.6 million, or $0.39 per share, compared to $22.7 million, or $0.53 per share, in 2003. The decrease reflects higher underwriting expenses incurred in the first quarter of 2004 related to an accrual for policyholder dividends and severance costs related to the reorganization of the company’s field office structure. These costs were offset by higher net earned premium and higher net investment income.

For the six months ended June 30, 2004, gross written premiums increased 5.2 percent to $198.9 million. Gross written premiums for contract surety increased 10.3 percent to $111.2 million. This increase was primarily due to improving rates on large contract bonds. Commercial surety premiums decreased 2.5 percent to $71.3 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 $14.8 million to $41.3 million for the first six months of 2004 compared to the same period last year primarily due to the timing of reinsurance premium payments, but it also reflects higher gross written premium and the company’s decision to purchase additional reinsurance protection. Net written premiums decreased 3.1 percent to $157.7 million.

For the six months ended June 30, 2004, the loss, expense, and combined ratios were 27.5 percent, 68.5 percent and 96.0 percent, respectively, compared to 26.2 percent, 62.3 percent, and 88.5 percent, respectively, for the same period in 2003. The expense ratio for the first six months of 2004 was negatively impacted by 4.3 percentage points due to the increase of the accrual for policyholder dividends and costs related to the initiative to simplify and streamline the field organization.

For the six months ended June 30, 2004, net investment income increased 8.1 percent to $14.4 million compared to $13.4 million for the same period in 2003. Net realized investment gains were $2.3 million for the first six months of 2004 compared to $1.8 million in the same period of 2003.

During the quarter, the company issued $30 million of long-term debt as a participant in two pooled offerings, and used the proceeds to pay down $10 million of existing debt and to contribute $20 million to its subsidiary, Western Surety Company. An additional $5 million debt repayment was made in the first quarter.

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