CNA Surety Reports Strong Finish to 2004

Chicago-based CNA Surety Corp. reported net income for the fourth quarter of 2004 of $12.2 million, or $0.28 per share, compared to net income of $10.6 million, or $0.25 per share, for the same period in 2003. The increase in net income reflects higher net earned premium and higher net investment income.

“This is a strong finish to a very solid year for CNA Surety,” noted John Welch, president and CEO. “We have accomplished much in 2004 – growth in our core businesses, streamlining and strengthening of our organization and a significant increase in statutory surplus, a key measure of our financial condition. With this foundation in place, we are well positioned for 2005.”

For the quarter ended Dec. 31, 2004, gross written premiums increased slightly to $88.3 million compared to 88.0 million for the same period last year. Contract surety gross written premiums decreased 4.0 percent to $48.8 million primarily due to the decision made earlier in the year to close certain branches that concentrated exclusively on small contractors.

Commercial surety gross written premiums increased 4.7 percent to $32.0 million due to continued volume growth in small commercial products. Ceded written premiums increased slightly to $14.1 million for the fourth quarter of 2004 compared to the same period of last year. Net written premiums for the current quarter decreased slightly from the fourth quarter of 2003 to $74.2 million.

For the quarter ended Dec. 31, 2004, the loss, expense, and combined ratios were 27.5 percent, 61.3 percent and 88.8 percent, respectively, compared to 26.9 percent, 63.2 percent, and 90.1 percent, respectively, for the same period in 2003. The improved expense and combined ratios reflect expense savings from the actions taken earlier in the year to reorganize the company’s field office structure and the absence of expenses for post- employment benefit obligations for former executives that were recorded in the fourth quarter of 2003. These items were partially offset by the impact of higher reinsurance costs.

Net investment income for the quarter ended Dec. 31, 2004 was $8.1 million compared to $6.5 million for the fourth quarter of 2003 due primarily to a significant increase in invested assets. The annualized pretax yields were 4.4% and 4.3% for the three months ended December 31, 2004 and 2003, respectively. Net realized investment gains were $0.3 million for the fourth quarter of 2004. There were minimal net realized investment losses in the fourth quarter of 2003.

Net income for the year ended Dec. 31, 2004 was $39.7 million, or $0.92 per share, compared to a net loss of $14.2 million, or $0.33 per share, in 2003. The increase reflects the absence of material adverse loss development which occurred during the third quarter of 2003, higher net earned premium, and higher net investment income, partially offset by approximately $5 million of underwriting expenses incurred in the first quarter of 2004 related to an increase of the accrual for policyholder dividends.

For the year ended Dec. 31, 2004, gross written premiums increased 4.9 percent to $389.4 million compared to 2003. Gross written premiums for contract surety increased 6.3 percent to $221.6 million. This increase was primarily due to improving rates on large contract bonds.

Commercial surety premiums increased 1.6 percent to $135.9 million as continued strong volume growth in small commercial products was offset by the results of ongoing efforts to reduce aggregate exposures to large commercial accounts. Ceded written premiums increased $19.0 million to $71.1 million for the year ended December 31, 2004 compared to 2003 primarily due to the Company’s decision to reduce its per principal retention by purchasing additional reinsurance protection. Net written premiums in 2004 decreased slightly to $ 318.3 million compared to the prior year.

For the year ended Dec. 31, 2004, the loss, expense, and combined ratios were 27.5 percent, 65.2 percent and 92.7 percent, respectively, compared to 56.7 percent, 62.6 percent, and 119.3 percent, respectively, for the same period in 2003. The improved loss ratio reflects the absence of material adverse loss development which occurred during the third quarter of 2003. The expense ratio for 2004 was negatively impacted by higher reinsurance costs and the increase of the accrual for policyholder dividends.

For the year ended Dec. 31, 2004, net investment income increased 14.8 percent to $30.2 million compared to $26.3 million for the same period in 2003. The increase reflects the impact of higher overall invested assets. The annualized pretax yields were 4.5% and 4.4% for the year ended Dec. 31, 2004 and 2003, respectively. Net realized investment gains were $2.8 million for the year ended Dec. 31, 2004 compared to $1.8 million in the same period of 2003.

As of Dec. 31, 2004, stockholders’ equity increased by 8.8 percent from Dec. 31, 2003, to $446.4 million. Combined statutory surplus increased to $252.4 million at Dec. 31, 2004 from $190.4 million at Dec. 31, 2003. The net written premium to statutory surplus ratio at Dec. 31, 2004 was 1.3 to 1.0.

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.