A.M. Best Affirms Ratings of CNA Surety Corporation Group and Revises Outlook to Stable; Assigns Issuer Credit Ratings

OLDWICK, N.J.--(BUSINESS WIRE)--June 21, 2005--A.M. Best Co. has affirmed the financial strength ratings of A (Excellent) of CNA Surety Corporation Group (CNA Surety) (Chicago, IL) and revised the outlook to stable from negative. Concurrently, A.M. Best has assigned an issuer credit rating (ICR) of "a" to CNA Surety's insurance subsidiaries. The ratings apply to Western Surety Company and its wholly owned subsidiaries, Surety Bonding Company of America and Universal Surety of America. A.M. Best has also assigned an ICR of "bbb" to CNA Surety Corporation (Chicago, IL) (NYSE: SUR). All ICRs were assigned a stable outlook.

These ratings reflect the group's solid capitalization, historically profitable operating results and leading market position in the contract and miscellaneous surety bond markets. Partially offsetting these positive rating factors are the group's year-over-year decline in operating results through 2003, adverse loss reserve development on prior accident years, a general increase in net retentions and costs for reinsurance and its exposure to a large principal that continues to be excluded from its third party reinsurance treaties. Nevertheless, the change in the rating outlook is supported by management's corrective actions, which led to improved operating results and strengthened overall capitalization in 2004. This strengthened capitalization reflects CNA Surety's potential exposure to loss on the aforementioned excluded principal up to the $60 million retention level that is currently in place.

The positive rating factors are derived from the group's well-defined market focus, extensive distribution network, renewed disciplined underwriting approach and strong servicing capabilities. In addition, the group maintains a well-diversified surety and fidelity book of business with respect to products, geography and market segments, which enables the group to leverage its broad-based expertise.

The rating also reflects management's corrective actions in recent years to improve operating results including implementing significant rate increases, reducing its aggregate exposures to large commercial accounts and continued productivity improvements and operating efficiencies. These initiatives, in conjunction with more favorable credit default rates, resulted in an improvement in operating results in 2004.

Finally, the group benefits from the reinsurance support provided by its majority owner, CNA Financial Corporation. The negative rating factors were driven by a decline in operating results through 2003 due to adverse loss reserve development; an increase in both severity and frequency of losses; an increase in both retention and costs associated with more restrictive reinsurance treaties; and an increase in corporate defaults. Although declining in 2003 and 2004, net retentions remain above historical amounts, and reinsurance costs continued to increase. However, the group's reinsurance costs have declined in 2005, and the terms and conditions are less restrictive as evidenced by only one large account, which remains excluded from its 2005 reinsurance treaty.

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