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CNA Surety Announces Third Quarter 2003 Results CHICAGO, November 3, 2003 -- CNA Surety Corporation (NYSE:SUR) today reported a net loss for the third quarter of 2003 of $48.8 million, or $1.14 per share, compared to net income of $2.6 million, or $0.06 per share, for the same period in 2002. This decrease reflects material adverse claim developments in the quarter which resulted in higher current year provisions for incurred losses and net unfavorable loss reserve development for prior accident years. For the quarter ended September 30, 2003, underwriting losses increased $83.5 million to $85.8 million. The loss and combined ratios were 148.9 percent and 213.5 percent, respectively, for the third quarter of 2003, compared to 44.7 percent and 102.8 percent, respectively, for the same period in 2002. The higher loss and combined ratios in 2003 primarily relate to net reserve additions in the quarter of approximately $88 million, which included approximately $49 million for the current accident year and $39 million for net adverse loss reserve development for prior accident years on the Company’s branch commercial and contract business. The net additions to reserves for the current accident year primarily relate to two large claims totaling $23 million incurred in the quarter (including a $15 million net loss payment on an insurance program bond announced earlier in the quarter) and changes in estimates of potential additional large losses resulting from this material adverse claim activity. The net adverse development on prior accident years includes changes in estimates of $17 million with respect to another insurance program bond for which the Company received a payment demand in early October and $8 million pertaining to self insured workers compensation bonds that the Company issued in the 1980s on behalf of now bankrupt companies. The expense ratio for the third quarter of 2003 of 64.6 percent was negatively impacted by higher reinsurance costs of $8.1 million. For the quarter ended September 30, 2003, gross written premiums decreased three percent to $94.2 million. Contract surety increased approximately two percent to $56.9 million, primarily due to improving rates. Commercial surety decreased 13 percent to $30.0 million. This was primarily due to the Company’s ongoing efforts to reduce aggregate exposures to large commercial accounts that were partially offset by continued strong volume growth in small commercial products and improving rates. Ceded written premiums increased $3.6 million to $14.2 million for the third quarter of 2003 compared to the same period of last year primarily due to changes in the Company’s reinsurance programs. Net written premiums decreased seven percent to $80.0 million. For the quarter ended September 30, 2003, net investment income decreased nine percent to $6.4 million compared to $7.0 million for the third quarter of 2002. The decrease reflects the impact of lower investment yields primarily due to greater investment in tax-exempt securities. The annualized pretax yields were 4.3% and 4.8% for the three months ended September 30, 2003 and 2002, respectively. For the nine months ended September 30, 2003, the net loss was $29.0 million, or $0.68 per share, compared to net income of $26.1 million, or $0.61 per share, in 2002. This decrease primarily reflects material adverse claim developments during the third quarter that resulted in higher current year provisions for incurred losses and net unfavorable loss reserve development for prior accident years. For the nine months ended September 30, 2003, the Company had an underwriting loss of $73.2 million compared to underwriting income of $17.4 million in the prior period. The loss and combined ratios were 69.0 percent and 133.4 percent, respectively, for the first nine months of 2003, compared to 32.2 percent and 92.2 percent, respectively, for the same period in 2002. The higher loss and combined ratios in 2003 principally relate to higher current year provisions for incurred losses and prior year net loss reserve development on the Company’s branch commercial and contract business, as well as higher reinsurance costs. The expense ratio increased to 64.4 percent for the first nine months of 2003 compared to 60.0 percent for the same period in 2002, primarily due to the impact of higher reinsurance costs on net earned premiums. For the nine months ended September 30, 2003, gross written premiums increased three percent to $283.3 million. Premiums for contract increased six percent to $157.7 million due primarily to improving rates. Commercial premiums decreased one percent to $103.1 million due to the Company’s ongoing efforts to reduce aggregate exposures to large commercial accounts that were partially offset by continued strong bond volume growth in small commercial products and improving rates. Ceded written premiums increased $7.7 million to $45.1 million for the first nine months of 2003 compared to the same period last year primarily due to changes in the Company’s reinsurance programs. Net written premiums increased one percent to $238.2 million. For the nine months ended September 30, 2003, net investment income decreased seven percent to $19.8 million compared to $21.3 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 4.5% and 4.9% for the nine months ended September 30, 2003 and 2002, respectively. As of September 30, 2003, stockholders’ equity decreased to $393.8 million, or $9.16 per share, down six percent from December 31, 2002. Combined statutory surplus totaled $161.2 million at September 30, 2003, resulting in a net written premium to statutory surplus ratio of 1.9 to 1. The Company’s business is subject to certain risks and uncertainties associated with the current economic environment and corporate credit conditions. The Company’s performance, much like that of other surety companies and commercial credit providers, has been materially impacted by the significant increase in corporate defaults on a worldwide basis. Because the nature of the business is to insure against non-performance, future results of operation could be negatively impacted by continued adverse trends in corporate defaults. The Company has not repurchased any of its shares in 2003. As of September 30, 2003, the Company had repurchased approximately 1.5 million of its shares at an aggregate cost of $15.6 million since the inception of the Company's share repurchase program in 1999. 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. A more detailed discussion and analysis of the Company’s results of operations, liquidity and capital resources and financial condition as of and for the period ended September 30, 2003 will be contained in the Company’s Form 10Q to be filed with the Securities and Exchange Commission by November 14, 2003. 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 November 4, 2003. On the conference call will be John F. Welch, President and Chief Executive Officer of CNA Surety Corporation, John S. Heneghan, Chief Financial Officer of CNA Surety Corporation, and John F. Corcoran, Senior Vice President 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 11:00 a.m. Central time on November 4, 2003 until 11:00 a.m. on November 11, 2003 by dialing 800-839-6713, passcode 5927605 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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