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CNA Surety Announces Second Quarter 2004 Results CHICAGO, August 2, 2004 -- CNA Surety Corporation (NYSE:SUR) today 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. "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." For the quarter ended June 30, 2004, 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. The annualized pretax yields were 4.5% and 4.7% for the three months ended June 30, 2004 and 2003, respectively. Net realized investment gains were $0.1 million for the second quarter of 2004 compared to $1.1 million in the same period of 2003. 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 re-organization 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. The increase reflects the impact of higher overall invested assets, offset by lower investment yields. The annualized pretax yields were 4.5% and 4.6% for the six months ended June 30, 2004 and 2003, respectively. 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. As of June 30, 2004, stockholders' equity increased to $413.0 million or 0.7 percent from December 31, 2003. Combined statutory surplus totaled $228.9 million at June 30, 2004, resulting in a net written premium to statutory surplus ratio of 1.4 to 1.0. 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. 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. CNA Surety Corporation is the largest publicly traded surety company in the country. Through its principal subsidiaries, Western Surety Company and Universal Surety of America, CNA Surety provides surety and fidelity bonds in all 50 states through a combined network of approximately 34,000 independent agencies. The Company's Securities and Exchange Commission filings are available at www.sec.gov or visit us at www.cnasurety.com on the World Wide Web for a direct link to the SEC web site. CNA is a registered service mark, trade name and domain name of CNA Financial Corporation. NOTE: A conference call for investors and the professional investment community will be held at 10:00 a.m. Central time on August 3, 2004. On the conference call will be John F. Welch, President and Chief Executive Officer of CNA Surety Corporation and John F. Corcoran, Chief Financial Officer of CNA Surety Corporation. It will also be broadcast live on the Internet or go to the investor relations pages of the CNA Surety web site for further details. The call is available to the media, but questions will be restricted to investors and the professional investment community. A taped replay of the call will be available beginning at 12:00 pm Central time on August 3rd until 12:00 pm on August 10th by dialing 1-800-839-6713, passcode 6501678 or over the Internet at the foregoing web sites. "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: The statements which are not historical facts contained in this release are forward-looking statements that involve risks and uncertainties, including, but not limited to, product and policy demand and market response risks, the effect of economic conditions, the impact of significant increases in corporate defaults on a national or global basis, the impact of competitive products, policies and pricing, product and policy development, regulatory changes and conditions including underwriting limitations imposed by the U.S. Department of Treasury, rating agency policies and practices, development of claims and the effect on loss reserves, the performance of reinsurance companies under reinsurance contracts with the Company, the cost and availability of reinsurance contracts on reasonable terms, investment portfolio developments and reaction to market conditions, the results of financing efforts, the actual closing of contemplated transactions and agreements, the effect of the Company's accounting policies, and other risks detailed in the Company's Securities and Exchange Commission filings. No assurance can be given that the actual results of operations and financial condition will conform to the forward-looking statements contained herein. # # # -- Chart follows -- CNA
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