Reinsurance, Investments Sink CNA Profit 20%

Chicago-based carrier CNA Surety Corp. reported a second-quarter profit of $10.3 million, or 24 cents per share, down from last year’s second quarter profit of $12.9 million, or 30 cents per share.

CNA attributed the reversal of fortunes to claims, higher reinsurance bills and lower investment income. Higher rates on policies were only able to offset some of these factors.

For the quarter ended June 30, 2003, gross written premiums increased two percent to $97.4 million. Contract surety gross written premiums increased approximately 10 percent to $59.2 million, primarily due to improving rates. Commercial surety premiums decreased 11 percent for the quarter to $31.2 million.

This decrease was primarily due to the company’s ongoing efforts to reduce aggregate exposures to large commercial accounts which was partially offset by continued strong bond volume growth of small commercial products and improving rates. Ceded written premiums increased $7.3 million to $16.3 million for the second 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 six percent to $81.1 million. For the quarter ended June 30, 2003, underwriting income decreased $4.0 million to $6.5 million.

The loss and combined ratios were 27.1 percent and 91.3 percent, respectively, for the second quarter of 2003, compared to 25.9 percent and 86.1 percent, respectively, for the same period in 2002. The higher loss and combined ratios in 2003 primarily relate to higher current year provisions for incurred losses on the Company’s branch contract and commercial business, as well as higher reinsurance costs.

The expense ratio increased to 64.2 percent for the second quarter of 2003 compared to 60.2 percent for the same period in 2002, primarily due to the effect of higher reinsurance costs on net earned premiums. For the quarter ended June 30, 2003, net investment income decreased seven percent to $6.7 million compared to $7.1 million for the second quarter of 2002. The decrease reflects the impact of lower investment yields and higher investment in tax-exempt securities.

The annualized pretax yields were 4.6 percent and 5 percent for the three months ended June 30, 2003 and 2002, respectively. Net realized investment gains were $1.1 million for the second quarter of 2003 compared to $1.6 million in the same period of 2002. Net income for the six months ended June 30, 2003 declined to $19.8 million, or 46 cents per share, from $23.5 million, or $0.55 per share, in 2002.

This decrease reflects higher current year provisions for incurred losses, the increased cost of reinsurance and lower investment income all of which were partially offset by improved product pricing. For the six months ended June 30, 2003, gross written premiums increased seven percent to $189.1 million. Gross written premiums for contract surety increased eight percent to $100.8 million and commercial surety premiums increased five percent to $73.2 million. These increases were primarily due to improving rates on large contract and commercial bonds along with the continued volume growth of small commercial products.

Ceded written premiums increased $4.1 million to $30.9 million for the first six months of 2003 compared to the same period last year primarily due to changes in the company’s reinsurance programs. Net written premiums increased five percent to $158.3 million. For the six months ended June 30, 2003, underwriting income decreased $7 million to $12.6 million. The loss and combined ratios were 27.0 percent and 91.2 percent, respectively, for the first six months of 2003, compared to 25.4 percent and 86.3 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 on the Company’s branch contract and commercial business, as well as higher reinsurance costs. The expense ratio increased to 64.2 percent for the first six months of 2003 compared to 60.9 percent for the same period in 2002, primarily due to the impact of higher reinsurance costs on net earned premiums.

For the six months ended June 30, 2003, net investment income decreased six percent to $13.4 million compared to $14.2 million for the same period in 2002. The decrease reflects the impact of lower investment yields and higher investment in tax-exempt securities. The annualized pretax yields were 4.6 percent and 5.0 percent for the six months ended June 30, 2003 and 2002, respectively. Net realized investment gains were $1.8 million for the first six months of 2003 compared to $1.3 million in the same period of 2002.

As of June 30, 2003, stockholders’ equity increased to $447.2 million, or $10.41 per share, up seven percent from December 31, 2002. Combined statutory surplus totaled $240.5 million at June 30, 2003, resulting in a net written premium to statutory surplus ratio of 1.3 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.

Although corporate defaults continue to remain above the long-term annual average, monthly default rates through June, 2003 continued to decline from their January, 2002 peak. Because the nature of our business is to insure against non-performance, our operations could be negatively impacted by adverse trends in corporate defaults. The company has not repurchased any of its shares in 2003. As of June 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.