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CNA Surety Announces Fourth Quarter and 2006 Year-end Results CHICAGO, February 13, 2007 -- CNA Surety Corporation (NYSE:SUR) today reported net income for the fourth quarter of 2006 of $21.7 million, or $0.49 per diluted share, compared to $16.5 million, or $0.38 per diluted share, for the same period in 2005. The increase in net income reflects higher earned premium, higher investment income, and the impacts of lower loss and expense ratios. "With our strong fourth quarter results, we complete a record year for CNA Surety", said John F. Welch, President and Chief Executive Officer. "Over the last several years, we have worked hard to grow and improve our business. Those efforts weren’t always evident in our financial results as we had to put some tough issues behind us. Now we can clearly see the results of our efforts and demonstrate the true earnings power of CNA Surety." For the quarter ended December 31, 2006, gross written premiums increased 9.8 percent to $103.4 million as compared to the quarter ended December 31, 2005. Gross written premiums for contract surety increased 18.4 percent to $64.5 million primarily due to increased demand as a result of the strong construction economy and growth in contract size due to cost inflation within the construction industry. Commercial surety gross written premiums increased 1.5 percent to $32.1 million due to growth in large commercial products. Small commercial gross written premiums decreased slightly as a decline in production of notary bonds resulting from a loss of a large notary program offset growth in other commercial products. Fidelity and other gross written premiums decreased by 16.1 percent, due to a decline in production of notary errors and omissions policies related to the notary program noted above. Net written premiums increased 12.0 percent to $93.5 million from the fourth quarter of 2005. For the quarters ended December 31, 2006 and 2005, the loss ratio was 25.7 percent. For the quarter ended December 31, 2006, the expense and combined ratios improved to 54.6 percent and 80.3 percent, respectively, compared to 56.8 percent and 82.5 percent, respectively, for the same period in 2005. The expense ratio improved as a result of strong premium growth achieved with a minimal increase in underwriting expense. Net investment income for the quarter ended December 31, 2006 was $10.3 million compared to $9.0 million during the fourth quarter of 2005 due to the increase in invested assets and higher yields. The annualized pre-tax yields were 4.6% and 4.4% for the three months ended December 31, 2006 and 2005, respectively. Full-Year Results Net income for 2006 was $82.8 million, or $1.89 per diluted share, compared to $38.4 million or $0.89 per diluted share, for 2005. The increase in net income primarily reflects the absence of a $60.0 million pre-tax ($39.0 million after-tax) charge in 2005 to establish a reserve for contract surety losses related to the large national contractor described in the Company’s previous public filings. Other positive impacts included higher earned premium, higher investment income, and a lower expense ratio. These impacts were partially offset by lower favorable reserve development in 2006. For 2006, gross written premiums increased 8.1 percent to $451.4 million as compared to 2005. Gross written premiums for contract surety increased 14.7 percent to $285.2 million primarily due to increased demand as a result of the strong construction economy and growth in contract size due to cost inflation within the construction industry. Commercial surety and related fidelity and other gross written premiums decreased 1.6 percent to $166.2 million as a decline in production of notary bonds and notary errors and omissions policies resulting from the loss of a large notary program discussed above offset growth in other commercial and related products. Ceded written premiums decreased $9.9 million to $41.7 million for 2006 compared to 2005. This decrease reflects the Company’s decision not to renew a high-level excess of loss reinsurance treaty and cost savings on the core reinsurance program. Net written premiums increased 11.9 percent to $409.6 million. For 2006, the loss, expense, and combined ratios improved to 24.3 percent, 55.0 percent, and 79.3 percent, respectively, compared to 36.7 percent, 58.1 percent, and 94.8 percent, respectively, for 2005. The improvement in the loss ratio primarily reflects the absence of the reserve charge related to the large national contractor that was partially offset by lower favorable reserve development in 2006. The improvement in the expense ratio reflects the strong premium growth achieved with a minimal increase in underwriting expenses. For 2006, net investment income increased 16.5 percent to $39.3 million compared to $33.7 million for 2005. The increase reflects the impact of higher overall invested assets and higher yields. The annualized pre-tax yields were 4.5% and 4.4% for 2006 and 2005, respectively. Net realized investment losses were $1.3 million for 2006 compared to net realized investment gains of $2.0 million in 2005. The net realized losses in the current year were due to the recognition of impairment losses and additional losses on the subsequent sale of certain fixed income securities. The decrease compared to 2005 results from these losses and the absence of the realized investment gain from the Company’s sale of its interest in De Montfort Group, Ltd. in 2005. As of December 31, 2006, stockholders’ equity increased by 18.7 percent from December 31, 2005, to $565.9 million driven by net income and an increase in additional paid-in-capital of $9.0 million primarily due to proceeds from employee stock option exercises. Combined statutory surplus totaled $349.0 million at December 31, 2006, resulting in a net written premium to statutory surplus ratio of 1.2 to 1. 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 subsidiary, Western Surety Company, CNA Surety provides surety and fidelity bonds in all 50 states through a combined network of approximately 36,000 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 February 13, 2007. 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. The call may be accessed by dialing 800-289-0552. 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 p.m. Central time on February 13th until 12:00 p.m. on February 27, 2007 by dialing 888-203-1112, pass code 7401234 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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