##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 1-13277
 CNA SURETY CORPORATION
 (Exact name of Registrant as specified in its Charter)
 DELAWARE
    
    36-4144905(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)333 S. WABASH AVE., CHICAGO, ILLINOIS
    
    60604(Address of principal executive offices)
    
    (Zip Code)
 (312) 822-5000
(Registrants telephone number, including area code)
 þ o
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller Reporting Company o(Do not check if a smaller reporting company)
 o þ
 
 o o




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##### 



PagePART I. FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements (Unaudited):Condensed Consolidated Balance Sheets at September 30, 2009 and at December 31, 2008
    
    
    3Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2009 and 2008
    
    
    4Condensed Consolidated Statements of Stockholders Equity for the Nine Months Ended September 30, 2009 and 2008
    
    
    5Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    26Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    45Item 4. Controls and Procedures
    
    
    46PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    46Item 1A. Risk Factors
    
    
    46Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    46Item 3. Defaults Upon Senior Securities
    
    
    47Item 4. Submission of Matters to a Vote of Security Holders
    
    
    47Item 5. Other Information
    
    
    47Item 6. Exhibits
    
    
    47EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### Table of Contents



CNA SURETY CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 September 30,
    
    
    December 31,2009
    
    
    2008(Amounts in thousands, except pershare data)AssetsInvested assets:Fixed income securities, at fair value (amortized cost: $1,164,709 and $1,041,816)
    
    $
    1,229,282
    
    
    $
    1,034,646Equity securities, at fair value (cost: $1,379 and $1,231)
    
    
    1,553
    
    
    
    1,231Short-term investments, at cost (approximates fair value)
    
    
    70,472
    
    
    
    80,606Total invested assets
    
    
    1,301,307
    
    
    
    1,116,483Cash
    
    
    7,890
    
    
    
    9,596Deferred policy acquisition costs
    
    
    105,081
    
    
    
    102,092Insurance receivables:Premiums, including $9,657 and $14,303 from affiliates, (net of allowance for doubtful
accounts: $1,336 and $1,307)
    
    
    43,556
    
    
    
    36,948Reinsurance, including $768 and $46,122 from affiliates
    
    
    48,530
    
    
    
    91,452Deposit with affiliated ceding company
    
    
    27,368
    
    
    
    29,693Goodwill and other intangible assets (net of accumulated amortization: $25,523 and $25,523)
    
    
    138,785
    
    
    
    138,785Property and equipment, at cost (less accumulated depreciation and amortization: $37,433
and $33,506)
    
    
    18,592
    
    
    
    24,378Prepaid reinsurance premiums (including $0 and $105 from affiliates)
    
    
    266
    
    
    
    420Accrued investment income
    
    
    14,383
    
    
    
    13,464Other assets
    
    
    3,205
    
    
    
    2,208Total assets
    
    $
    1,708,963
    
    
    $
    1,565,519LiabilitiesReserves:Unpaid losses and loss adjustment expenses
    
    $
    428,286
    
    
    $
    428,724Unearned premiums
    
    
    262,616
    
    
    
    258,824Total reserves
    
    
    690,902
    
    
    
    687,548Long-term debt
    
    
    30,930
    
    
    
    30,892Deferred income taxes, net
    
    
    34,282
    
    
    
    9,647Reinsurance and other payables to affiliates
    
    
    90
    
    
    
    1,680Accrued expenses
    
    
    14,305
    
    
    
    20,056Liability for postretirement benefits
    
    
    10,443
    
    
    
    9,283Payable for securities purchased
    
    
    
    
    
    
    8,398Federal income tax payable
    
    
    1,621
    
    
    
    1,581Other liabilities
    
    
    41,628
    
    
    
    29,139Total liabilities
    
    
    824,201
    
    
    
    798,224Commitments and contingencies (See Notes 3, 5, & 8)Stockholders EquityCommon stock, par value $.01 per share, 100,000 shares authorized; 45,634 shares issued and
44,267 shares outstanding at September 30, 2009 and 45,544 shares issued and 44,168 shares
outstanding at December 31, 2008
    
    
    456
    
    
    
    455Additional paid-in capital
    
    
    278,849
    
    
    
    276,255Retained earnings
    
    
    578,199
    
    
    
    509,644Accumulated other comprehensive income (loss)
    
    
    41,929
    
    
    
    (4,286
    )Treasury stock, 1,367 and 1,376 shares, at cost
    
    
    (14,671
    )
    
    
    (14,773
    )Total stockholders equity
    
    
    884,762
    
    
    
    767,295Total liabilities and stockholders equity
    
    $
    1,708,963
    
    
    $
    1,565,519
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CNA SURETY CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Amount in thousands, except per share data)Revenues:Net earned premium
    
    $
    109,703
    
    
    $
    109,696
    
    
    $
    316,549
    
    
    $
    320,814Net investment income
    
    
    12,536
    
    
    
    11,781
    
    
    
    37,359
    
    
    
    35,292Net realized investment gains (losses):Other-than-temporary impairment losses
    
    
    
    
    
    
    (178
    )
    
    
    (1,870
    )
    
    
    (178
    )Portion of other-than-temporary impairment losses
recognized in other comprehensive income (before
taxes)
    
    
    
    
    
    
    
    
    
    
    1,708
    
    
    
    Net impairment losses recognized in earnings
    
    
    
    
    
    
    (178
    )
    
    
    (162
    )
    
    
    (178
    )Net realized investment gains (losses), excluding
impairment losses on available-for-sale securities
    
    
    1,056
    
    
    
    1
    
    
    
    1,105
    
    
    
    (29
    )Total net realized investment gains (losses)
    
    
    1,056
    
    
    
    (177
    )
    
    
    943
    
    
    
    (207
    )Total revenues
    
    
    123,295
    
    
    
    121,300
    
    
    
    354,851
    
    
    
    355,899Expenses:Net losses and loss adjustment expenses
    
    
    24,429
    
    
    
    8,745
    
    
    
    84,992
    
    
    
    62,103Net commissions, brokerage and other underwriting expenses
    
    
    62,169
    
    
    
    61,694
    
    
    
    172,364
    
    
    
    174,806Interest expense
    
    
    319
    
    
    
    508
    
    
    
    1,096
    
    
    
    1,659Total expenses
    
    
    86,917
    
    
    
    70,947
    
    
    
    258,452
    
    
    
    238,568Income before income taxes
    
    
    36,378
    
    
    
    50,353
    
    
    
    96,399
    
    
    
    117,331Income tax expense
    
    
    10,854
    
    
    
    16,020
    
    
    
    27,844
    
    
    
    36,046Net income
    
    $
    25,524
    
    
    $
    34,333
    
    
    $
    68,555
    
    
    $
    81,285Earnings per common share
    
    $
    0.58
    
    
    $
    0.78
    
    
    $
    1.55
    
    
    $
    1.84Earnings per common share, assuming dilution
    
    $
    0.57
    
    
    $
    0.78
    
    
    $
    1.54
    
    
    $
    1.84Weighted average shares outstanding
    
    
    44,263
    
    
    
    44,138
    
    
    
    44,240
    
    
    
    44,139Weighted average shares outstanding, assuming dilution
    
    
    44,411
    
    
    
    44,264
    
    
    
    44,397
    
    
    
    44,258
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CNA SURETY CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
 Common
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    AccumulatedStock
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    Treasury
    
    
    TotalShares
    
    
    Common
    
    
    Paid-in
    
    
    Comprehensive
    
    
    Retained
    
    
    Comprehensive
    
    
    Stock
    
    
    StockholdersOutstanding
    
    
    Stock
    
    
    Capital
    
    
    Income
    
    
    Earnings
    
    
    Income (Loss)
    
    
    At Cost
    
    
    EquityBalance, January 1, 2008
    
    
    44,121
    
    
    $
    455
    
    
    $
    274,069
    
    
    
    
    
    
    $
    399,241
    
    
    $
    8,800
    
    
    $
    (14,860
    )
    
    $
    667,705Comprehensive income:Net income
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    81,285
    
    
    
    81,285
    
    
    
    
    
    
    
    
    
    
    $
    81,285Other comprehensive income:Change in unrealized gains
(losses) on securities, after
income tax benefit of $15,779
(net of reclassification
adjustment of $8, after
income tax expense of $5)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29,304
    )
    
    
    
    
    
    
    (29,304
    )
    
    
    
    
    
    
    (29,304
    )Adjustment to recognize
re-measurement of accumulated
postretirement benefit
obligations, after income tax
expense of $778
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    828
    
    
    
    
    
    
    
    828
    
    
    
    
    
    
    
    828Net change related to
postretirement benefits, after
income tax benefit of $42
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (79
    )
    
    
    
    
    
    
    (79
    )
    
    
    
    
    
    
    (79
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    52,730
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    1,327
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,327Stock options exercised and other
    
    
    38
    
    
    
    
    
    
    
    382
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87
    
    
    
    469Balance, September 30, 2008
    
    
    44,159
    
    
    $
    455
    
    
    $
    275,778
    
    
    
    
    
    
    $
    480,526
    
    
    $
    (19,755
    )
    
    $
    (14,773
    )
    
    $
    722,231Balance, January 1, 2009
    
    
    44,168
    
    
    $
    455
    
    
    $
    276,255
    
    
    
    
    
    
    $
    509,644
    
    
    $
    (4,286
    )
    
    $
    (14,773
    )
    
    $
    767,295Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    68,555
    
    
    
    68,555
    
    
    
    
    
    
    
    
    
    
    
    68,555Other comprehensive income:Change in unrealized gains
(losses) on securities, after
income tax expense of $25,317
(net of reclassification
adjustment of ($2,550), after
income tax benefit of $1,373)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,016
    
    
    
    
    
    
    
    47,016
    
    
    
    
    
    
    
    47,016Other-than-temporary
impairment losses not
recognized in the Condensed
Consolidated Statements of
Income, after income tax
benefit of $146
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (270
    )
    
    
    
    
    
    
    (270
    )
    
    
    
    
    
    
    (270
    )Adjustment to recognize
re-measurement of accumulated
postretirement benefit
obligations, after income tax
benefit of $150
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (438
    )
    
    
    
    
    
    
    (438
    )
    
    
    
    
    
    
    (438
    )Net change related to
postretirement benefits, after
income tax benefit of $28
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (93
    )
    
    
    
    
    
    
    (93
    )
    
    
    
    
    
    
    (93
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    114,770
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    1,453
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,453Stock options exercised and other
    
    
    99
    
    
    
    1
    
    
    
    1,141
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102
    
    
    
    1,244Balance, September 30, 2009
    
    
    44,267
    
    
    $
    456
    
    
    $
    278,849
    
    
    
    
    
    
    $
    578,199
    
    
    $
    41,929
    
    
    $
    (14,671
    )
    
    $
    884,762
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CNA SURETY CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Nine Months EndedSeptember 30,2009
    
    
    2008(Amounts in thousands)Cash Flows from Operating Activities:Net income
    
    $
    68,555
    
    
    $
    81,285Adjustments to reconcile net income to net cash provided by operating activities:Provision for doubtful accounts
    
    
    543
    
    
    
    (38
    )Depreciation and amortization
    
    
    4,516
    
    
    
    4,238Amortization of bond premium, net
    
    
    3,534
    
    
    
    2,007Loss on disposal or impairment of property and equipment
    
    
    4,921
    
    
    
    1,130Net realized investment (gains) losses
    
    
    (943
    )
    
    
    207Stock-based compensation
    
    
    1,453
    
    
    
    1,327Changes in:Insurance receivables
    
    
    35,771
    
    
    
    23,965Reserve for unearned premiums
    
    
    3,792
    
    
    
    12,621Reserve for unpaid losses and loss adjustment expenses
    
    
    (438
    )
    
    
    (48,281
    )Deposit with affiliated ceding company
    
    
    2,325
    
    
    
    3,792Deferred policy acquisition costs
    
    
    (2,989
    )
    
    
    (2,681
    )Deferred income taxes, net
    
    
    (449
    )
    
    
    (202
    )Reinsurance and other payables to affiliates
    
    
    (1,590
    )
    
    
    (183
    )Prepaid reinsurance premiums
    
    
    154
    
    
    
    191Accrued expenses
    
    
    (5,751
    )
    
    
    (1,301
    )Other assets and liabilities
    
    
    (3,702
    )
    
    
    7,167Net cash provided by operating activities
    
    
    109,702
    
    
    
    85,244Cash Flows from Investing Activities:Fixed income securities:Purchases
    
    
    (260,383
    )
    
    
    (99,751
    )Maturities
    
    
    84,747
    
    
    
    25,602Sales
    
    
    50,115
    
    
    
    24,402Purchases of equity securities
    
    
    (715
    )
    
    
    (370
    )Proceeds from the sale of equity securities
    
    
    528
    
    
    
    460Changes in short-term investments
    
    
    10,209
    
    
    
    (32,830
    )Purchases of property and equipment, net
    
    
    (3,612
    )
    
    
    (4,882
    )Changes in receivables/payables for securities sold/purchased
    
    
    (8,398
    )
    
    
    Other, net
    
    
    
    
    
    
    200Net cash (used in) investing activities
    
    
    (127,509
    )
    
    
    (87,169
    )Cash Flows from Financing Activities:Employee stock option exercises and other
    
    
    1,244
    
    
    
    469Investment custody account bank overdraft
    
    
    14,857
    
    
    
    Net cash provided by financing activities
    
    
    16,101
    
    
    
    469Decrease in cash
    
    
    (1,706
    )
    
    
    (1,456
    )Cash at beginning of period
    
    
    9,596
    
    
    
    10,230Cash at end of period
    
    $
    7,890
    
    
    $
    8,774Supplemental Disclosure of Cash Flow Information:Cash paid during the period for:Interest
    
    $
    1,126
    
    
    $
    1,665Income taxes
    
    $
    28,059
    
    
    $
    27,741
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CNA SURETY CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(UNAUDITED)
 1. Significant Accounting Policies
 Formation of CNA Surety Corporation and Merger
  Principles of Consolidation
  Estimates
  Basis of Presentation
  Earnings Per Share
  7




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income
    
    $
    25,524
    
    
    $
    34,333
    
    
    $
    68,555
    
    
    $
    81,285Shares:Weighted average shares outstanding
    
    
    44,254
    
    
    
    44,132
    
    
    
    44,168
    
    
    
    44,121Weighted average shares of options exercised and additional stock issuance
    
    
    9
    
    
    
    6
    
    
    
    72
    
    
    
    18Total weighted average shares outstanding
    
    
    44,263
    
    
    
    44,138
    
    
    
    44,240
    
    
    
    44,139Effect of dilutive options
    
    
    148
    
    
    
    126
    
    
    
    157
    
    
    
    119Total weighted average shares outstanding, assuming dilution
    
    
    44,411
    
    
    
    44,264
    
    
    
    44,397
    
    
    
    44,258Earnings per share
    
    $
    0.58
    
    
    $
    0.78
    
    
    $
    1.55
    
    
    $
    1.84Earnings per share, assuming dilution
    
    $
    0.57
    
    
    $
    0.78
    
    
    $
    1.54
    
    
    $
    1.84
  Subsequent Events
  Adopted Accounting Pronouncements
     8




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##### Table of Contents



Pending Accounting Pronouncements
   9




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##### Table of Contents



2. Investments
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Investment income:Fixed income securities
    
    $
    12,763
    
    
    $
    11,407
    
    
    $
    37,790
    
    
    $
    34,211Equity securities
    
    
    8
    
    
    
    13
    
    
    
    27
    
    
    
    38Short-term investments
    
    
    26
    
    
    
    367
    
    
    
    110
    
    
    
    1,097Other
    
    
    14
    
    
    
    57
    
    
    
    48
    
    
    
    81Total investment income on available-for-sale securities
    
    
    12,811
    
    
    
    11,844
    
    
    
    37,975
    
    
    
    35,427Investment income on deposit with affiliated ceding company
    
    
    35
    
    
    
    224
    
    
    
    307
    
    
    
    761Investment expenses
    
    
    (310
    )
    
    
    (287
    )
    
    
    (923
    )
    
    
    (896
    )Net investment income
    
    $
    12,536
    
    
    $
    11,781
    
    
    $
    37,359
    
    
    $
    35,292
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net realized investment gains (losses):Fixed income securities:Gross realized investment gains
    
    $
    1,448
    
    
    $
    
    
    
    $
    1,491
    
    
    $
    Gross realized investment losses:Other-than-temporary impairment losses
    
    
    
    
    
    
    
    
    
    
    (116
    )
    
    
    Realized losses from sales
    
    
    (392
    )
    
    
    
    
    
    
    (392
    )
    
    
    (19
    )Total gross realized investment losses
    
    
    (392
    )
    
    
    
    
    
    
    (508
    )
    
    
    (19
    )Net realized investment gains (losses) on fixed income securities
    
    
    1,056
    
    
    
    
    
    
    
    983
    
    
    
    (19
    )Equity securities:Gross realized investment gains
    
    
    
    
    
    
    1
    
    
    
    27
    
    
    
    11Gross realized investment losses:Other-than-temporary impairment losses
    
    
    
    
    
    
    (178
    )
    
    
    (46
    )
    
    
    (178
    )Realized losses from sales
    
    
    
    
    
    
    
    
    
    
    (20
    )
    
    
    (20
    )Total gross realized investment losses
    
    
    
    
    
    
    (177
    )
    
    
    (66
    )
    
    
    (198
    )Net realized investment gains (losses) on equity securities
    
    
    
    
    
    
    (177
    )
    
    
    (39
    )
    
    
    (187
    )Other
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Net realized investment gains (losses)
    
    $
    1,056
    
    
    $
    (177
    )
    
    $
    943
    
    
    $
    (207
    )Net change in unrealized gains (losses):Fixed income securities
    
    $
    46,768
    
    
    $
    (27,674
    )
    
    $
    71,743
    
    
    $
    (44,977
    )Equity securities
    
    
    93
    
    
    
    19
    
    
    
    174
    
    
    
    (106
    )Total net change in unrealized gains (losses)
    
    $
    46,861
    
    
    $
    (27,655
    )
    
    $
    71,917
    
    
    $
    (45,083
    )Net realized gains (losses) and change in unrealized gains (losses)
    
    $
    47,917
    
    
    $
    (27,832
    )
    
    $
    72,860
    
    
    $
    (45,290
    )
 10




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##### Table of Contents



Gross
    
    
    Gross Unrealized LossesAmortized Cost
    
    
    Unrealized
    
    
    Less Than
    
    
    More Than
    
    
    Estimated
    
    
    UnrealizedSeptember 30, 2009
    
    or Cost
    
    
    Gains
    
    
    12 Months
    
    
    12 Months
    
    
    Fair Value
    
    
    OTTI Losses(a)Fixed income securities:U.S. Treasury securities and obligations of U.S. Government and agencies:U.S. Treasury
    
    $
    17,377
    
    
    $
    1,115
    
    
    $
    
    
    
    $
    
    
    
    $
    18,492
    
    
    $
    U.S. Agencies
    
    
    24,303
    
    
    
    429
    
    
    
    
    
    
    
    
    
    
    
    24,732
    
    
    
    Collateralized mortgage obligations  residential
    
    
    31,626
    
    
    
    1,810
    
    
    
    
    
    
    
    
    
    
    
    33,436
    
    
    
    Mortgage pass-through securities  residential
    
    
    56,785
    
    
    
    2,572
    
    
    
    
    
    
    
    
    
    
    
    59,357
    
    
    
    Obligations of states and political subdivisions
    
    
    700,001
    
    
    
    48,091
    
    
    
    
    
    
    
    (2,271
    )
    
    
    745,821
    
    
    
    Corporate bonds
    
    
    292,550
    
    
    
    13,219
    
    
    
    (128
    )
    
    
    (633
    )
    
    
    305,008
    
    
    
    Collateralized mortgage obligations  commercial
    
    
    10,025
    
    
    
    
    
    
    
    
    
    
    
    (425
    )
    
    
    9,600
    
    
    
    Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    5,931
    
    
    
    
    
    
    
    
    
    
    
    (611
    )
    
    
    5,320
    
    
    
    (1,502
    )Consumer credit receivables
    
    
    16,386
    
    
    
    670
    
    
    
    
    
    
    
    
    
    
    
    17,056
    
    
    
    Other
    
    
    9,725
    
    
    
    735
    
    
    
    
    
    
    
    
    
    
    
    10,460
    
    
    
    Total fixed income securities
    
    
    1,164,709
    
    
    
    68,641
    
    
    
    (128
    )
    
    
    (3,940
    )
    
    
    1,229,282
    
    
    $
    (1,502
    )Equity securities
    
    
    1,379
    
    
    
    174
    
    
    
    
    
    
    
    
    
    
    
    1,553Total
    
    $
    1,166,088
    
    
    $
    68,815
    
    
    $
    (128
    )
    
    $
    (3,940
    )
    
    $
    1,230,835
 
 (a)
    
    The unrealized loss position of this security has improved  to $0.4 million at September 30, 2009. 11




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##### Table of Contents



Gross
    
    
    Gross Unrealized LossesAmortized Cost
    
    
    Unrealized
    
    
    Less Than
    
    
    More Than
    
    
    EstimatedDecember 31, 2008
    
    or Cost
    
    
    Gains
    
    
    12 Months
    
    
    12 Months
    
    
    Fair ValueFixed income securities:U.S. Treasury securities and obligations of U.S.
Government and agencies:U.S. Treasury
    
    $
    33,140
    
    
    $
    3,519
    
    
    $
    
    
    
    $
    
    
    
    $
    36,659U.S. Agencies
    
    
    36,476
    
    
    
    1,116
    
    
    
    
    
    
    
    
    
    
    
    37,592Collateralized mortgage obligations  residential
    
    
    35,671
    
    
    
    984
    
    
    
    
    
    
    
    
    
    
    
    36,655Mortgage pass-through securities  residential
    
    
    72,203
    
    
    
    1,489
    
    
    
    
    
    
    
    
    
    
    
    73,692Obligations of states and political subdivisions
    
    
    697,305
    
    
    
    19,730
    
    
    
    (6,929
    )
    
    
    (13,943
    )
    
    
    696,163Corporate bonds
    
    
    96,048
    
    
    
    1,711
    
    
    
    (2,430
    )
    
    
    (1,853
    )
    
    
    93,476Collateralized mortgage obligations  commercial
    
    
    35,025
    
    
    
    
    
    
    
    (2,040
    )
    
    
    (3,607
    )
    
    
    29,378Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    7,956
    
    
    
    
    
    
    
    (779
    )
    
    
    (2,180
    )
    
    
    4,997Consumer credit receivables
    
    
    17,239
    
    
    
    
    
    
    
    (1,708
    )
    
    
    
    
    
    
    15,531Other
    
    
    10,753
    
    
    
    23
    
    
    
    (273
    )
    
    
    
    
    
    
    10,503Total fixed income securities
    
    
    1,041,816
    
    
    
    28,572
    
    
    
    (14,159
    )
    
    
    (21,583
    )
    
    
    1,034,646Equity securities
    
    
    1,231
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,231Total
    
    $
    1,043,047
    
    
    $
    28,572
    
    
    $
    (14,159
    )
    
    $
    (21,583
    )
    
    $
    1,035,877
        12




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2009
    
    
    September 30, 2009Beginning balance
    
    $
    116
    
    
    $
    Credit losses for which an OTTI loss was not previously recognized
    
    
    
    
    
    
    116Credit losses for which an OTTI loss was previously recognized
    
    
    
    
    
    
    Ending balance
    
    $
    116
    
    
    $
    116
    September 30, 2009
    
    
    December 31, 2008Amortized
    
    
    Estimated Fair
    
    
    Amortized
    
    
    Estimated FairCost
    
    
    Value
    
    
    Cost
    
    
    ValueFixed income securities:Due within one year
    
    $
    7,525
    
    
    $
    7,592
    
    
    $
    4,535
    
    
    $
    4,590Due after one year but within five years
    
    
    305,493
    
    
    
    320,562
    
    
    
    216,232
    
    
    
    222,344Due after five years but within ten years
    
    
    428,560
    
    
    
    459,319
    
    
    
    345,285
    
    
    
    355,171Due after ten years
    
    
    292,653
    
    
    
    306,580
    
    
    
    296,917
    
    
    
    281,7851,034,231
    
    
    
    1,094,053
    
    
    
    862,969
    
    
    
    863,890Mortgage pass-through securities,
collateralized mortgage obligations and
asset-backed securities
    
    
    130,478
    
    
    
    135,229
    
    
    
    178,847
    
    
    
    170,756$
    1,164,709
    
    
    $
    1,229,282
    
    
    $
    1,041,816
    
    
    $
    1,034,646
 13




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##### Table of Contents



% ofEstimated
    
    % ofFair
    
    UnrealizedContractual Maturity
    
    Value
    
    LossDue after one year through five years
    
    
    9
    %
    
    
    16
    %Due after five years through ten years
    
    
    41
    
    
    
    4Due after ten years
    
    
    35
    
    
    
    54Asset-backed securities
    
    
    15
    
    
    
    26Total
    
    
    100
    %
    
    
    100
    %
  September 30, 2009
    
    
    December 31, 2008Gross
    
    
    
    
    
    
    GrossEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    UnrealizedUnrealized Loss Aging
    
    Fair Value
    
    
    Loss
    
    
    Fair Value
    
    
    LossFixed income securities:Investment grade(a):0-6 months
    
    $
    31,910
    
    
    $
    84
    
    
    $
    109,973
    
    
    $
    3,0957-12 months
    
    
    4,937
    
    
    
    44
    
    
    
    121,419
    
    
    
    11,06413-24 months
    
    
    11,630
    
    
    
    261
    
    
    
    81,395
    
    
    
    12,010Greater than 24 months
    
    
    36,917
    
    
    
    2,099
    
    
    
    33,450
    
    
    
    9,573Total investment grade
    
    
    85,394
    
    
    
    2,488
    
    
    
    346,237
    
    
    
    35,742Non-investment grade:Greater than 24 months
    
    
    17,700
    
    
    
    1,580
    
    
    
    
    
    
    
    Total
    
    $
    103,094
    
    
    $
    4,068
    
    
    $
    346,237
    
    
    $
    35,742
 
 (a)
    
    Investment grade is determined by using the Standard &
Poors (S&P) rating. If a security is not rated by S&P,
the Moodys Investor Services (Moodys) rating is used.
As of September 30, 2009 and December 31, 2008, all of the
Companys fixed income securities were rated by S&P or
Moodys.  14




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##### Table of Contents



Gross Unrealized Losses
    
    
    EstimatedSeptember 30, 2009
    
    AAA
    
    
    AA
    
    
    A
    
    
    BBB
    
    
    Total
    
    
    Count
    
    
    Fair ValueFixed income securities:Investment grade(a):U.S. Treasury securities and obligations of U. S.
Government and agencies:Collateralized mortgage obligations  residential
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    1
    
    
    $
    1Obligations of states and political subdivisions
    
    
    389
    
    
    
    100
    
    
    
    618
    
    
    
    
    
    
    
    1,107
    
    
    
    5
    
    
    
    29,887Corporate bonds
    
    
    6
    
    
    
    14
    
    
    
    111
    
    
    
    630
    
    
    
    761
    
    
    
    10
    
    
    
    43,225Collateralized mortgage obligations  commercial
    
    
    425
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    425
    
    
    
    2
    
    
    
    9,600Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    195
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    195
    
    
    
    1
    
    
    
    2,681Total investment grade
    
    
    1,015
    
    
    
    114
    
    
    
    729
    
    
    
    630
    
    
    
    2,488
    
    
    
    19
    
    
    
    85,394Non-investment grade:Obligations of states and political subdivisions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,164
    
    
    
    2
    
    
    
    15,061Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    416
    
    
    
    1
    
    
    
    2,639Total non-investment grade
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,580
    
    
    
    3
    
    
    
    17,700Total
    
    $
    1,015
    
    
    $
    114
    
    
    $
    729
    
    
    $
    630
    
    
    $
    4,068
    
    
    
    22
    
    
    $
    103,094
 
 (a)
    
    Securities are categorized using the S&P rating. If a security is not rated by
S&P, the Moodys rating is used. At September 30, 2009, all of the Companys fixed income
securities were rated by S&P or Moodys.     15




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##### Table of Contents



3. Reinsurance
  Three Months Ended September 30,2009
    
    
    2008Written
    
    
    Earned
    
    
    Written
    
    
    EarnedDirect
    
    $
    90,472
    
    
    $
    91,994
    
    
    $
    94,407
    
    
    $
    94,163Assumed
    
    
    22,930
    
    
    
    24,813
    
    
    
    25,955
    
    
    
    27,267Ceded
    
    
    (7,041
    )
    
    
    (7,104
    )
    
    
    (11,557
    )
    
    
    (11,734
    )$
    106,361
    
    
    $
    109,703
    
    
    $
    108,805
    
    
    $
    109,696
 Nine Months Ended September 30,2009
    
    
    2008Written
    
    
    Earned
    
    
    Written
    
    
    EarnedDirect
    
    $
    271,619
    
    
    $
    262,628
    
    
    $
    280,784
    
    
    $
    267,087Assumed
    
    
    69,742
    
    
    
    74,941
    
    
    
    80,515
    
    
    
    81,591Ceded
    
    
    (20,866
    )
    
    
    (21,020
    )
    
    
    (27,673
    )
    
    
    (27,864
    )$
    320,495
    
    
    $
    316,549
    
    
    $
    333,626
    
    
    $
    320,814
 16




---



##### Table of Contents



Three Months Ended September 30,2009
    
    
    2008$
    
    
    Ratio
    
    
    $
    
    
    RatioGross losses and loss adjustment expenses
    
    $
    28,062
    
    
    
    24.0
    %
    
    $
    21
    
    
    
    0.2
    %Ceded amounts
    
    
    (3,633
    )
    
    
    51.6
    %
    
    
    8,724
    
    
    
    (74.3
    )%Net losses and loss adjustment expenses
    
    $
    24,429
    
    
    
    22.3
    %
    
    $
    8,745
    
    
    
    8.0
    %
 Nine Months Ended September 30,2009
    
    
    2008$
    
    
    Ratio
    
    
    $
    
    
    RatioGross losses and loss adjustment expenses
    
    $
    92,115
    
    
    
    27.3
    %
    
    $
    70,559
    
    
    
    20.2
    %Ceded amounts
    
    
    (7,123
    )
    
    
    33.9
    %
    
    
    (8,456
    )
    
    
    30.4
    %Net losses and loss adjustment expenses
    
    $
    84,992
    
    
    
    26.8
    %
    
    $
    62,103
    
    
    
    19.4
    %
   2009 Third Party Reinsurance
  17




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##### Table of Contents



2008 Third Party Reinsurance
  Related Party Reinsurance
      18




---



##### Table of Contents



19




---



##### Table of Contents



4. Fair Value of Financial Instruments
  
    
    Level 1  Quoted prices for identical instruments in active markets.
    
    Level 2  Quoted prices for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active; and model-derived
valuations in which all significant inputs are observable in active markets.
    
    Level 3  Valuations derived from valuation techniques in which one or more significant
inputs are unobservable.
   Fixed Income Securities
  Equity Securities
  Short-Term Investments
  20




---



##### Table of Contents



September 30, 2009Fair Value Measurements UsingAssets at FairLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    ValueAssets:Fixed income securities:U.S. Treasury securities and obligations of U.S.
Government and agencies:U.S. Treasury
    
    $
    18,492
    
    
    $
    
    
    
    $
    
    
    
    $
    18,492U.S. Agencies
    
    
    
    
    
    
    24,732
    
    
    
    
    
    
    
    24,732Collateralized mortgage obligations  residential
    
    
    
    
    
    
    33,436
    
    
    
    
    
    
    
    33,436Mortgage pass-through securities  residential
    
    
    
    
    
    
    59,357
    
    
    
    
    
    
    
    59,357Obligations of states and political subdivisions
    
    
    
    
    
    
    745,821
    
    
    
    
    
    
    
    745,821Corporate bonds
    
    
    
    
    
    
    305,008
    
    
    
    
    
    
    
    305,008Collateralized mortgage obligations  commercial
    
    
    
    
    
    
    9,600
    
    
    
    
    
    
    
    9,600Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    
    
    
    
    5,320
    
    
    
    
    
    
    
    5,320Consumer credit receivables
    
    
    
    
    
    
    17,056
    
    
    
    
    
    
    
    17,056Other
    
    
    
    
    
    
    10,460
    
    
    
    
    
    
    
    10,460Total fixed income securities
    
    
    18,492
    
    
    
    1,210,790
    
    
    
    
    
    
    
    1,229,282Equity securities at fair value
    
    
    1,553
    
    
    
    
    
    
    
    
    
    
    
    1,553Short-term investments at fair value (a)
    
    
    22,524
    
    
    
    47,948
    
    
    
    
    
    
    
    70,472Total assets
    
    $
    42,569
    
    
    $
    1,258,738
    
    
    $
    
    
    
    $
    1,301,307
 
 (a)
    
    Includes commercial paper and money market funds. December 31, 2008Fair Value Measurements UsingAssets at FairLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    ValueAssets:Fixed income securities:U.S. Treasury securities and obligations of U.S.
Government and agencies:U.S. Treasury
    
    $
    36,659
    
    
    $
    
    
    
    $
    
    
    
    $
    36,659U.S. Agencies
    
    
    
    
    
    
    37,592
    
    
    
    
    
    
    
    37,592Collateralized mortgage obligations  residential
    
    
    
    
    
    
    36,655
    
    
    
    
    
    
    
    36,655Mortgage pass-through securities  residential
    
    
    
    
    
    
    73,692
    
    
    
    
    
    
    
    73,692Obligations of states and political subdivisions
    
    
    
    
    
    
    696,163
    
    
    
    
    
    
    
    696,163Corporate bonds
    
    
    
    
    
    
    93,476
    
    
    
    
    
    
    
    93,476Collateralized mortgage obligations  commercial
    
    
    
    
    
    
    29,378
    
    
    
    
    
    
    
    29,378Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    
    
    
    
    4,997
    
    
    
    
    
    
    
    4,997Consumer credit receivables
    
    
    
    
    
    
    15,531
    
    
    
    
    
    
    
    15,531Other
    
    
    
    
    
    
    10,503
    
    
    
    
    
    
    
    10,503Total fixed income securities
    
    
    36,659
    
    
    
    997,987
    
    
    
    
    
    
    
    1,034,646Equity securities at fair value
    
    
    1,231
    
    
    
    
    
    
    
    
    
    
    
    1,231Short-term investments at fair value (a)
    
    
    30,616
    
    
    
    49,990
    
    
    
    
    
    
    
    80,606Total assets
    
    $
    68,506
    
    
    $
    1,047,977
    
    
    $
    
    
    
    $
    1,116,483
 
 (a)
    
    Includes commercial paper and money market funds. 21




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##### Table of Contents



5. Reserves for Losses and Loss Adjustment Expenses
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Reserves at beginning of period:Gross
    
    $
    419,812
    
    
    $
    495,041
    
    
    $
    428,724
    
    
    $
    472,842Ceded reinsurance
    
    
    40,796
    
    
    
    152,296
    
    
    
    83,691
    
    
    
    150,496Net reserves at beginning of period
    
    
    379,016
    
    
    
    342,745
    
    
    
    345,033
    
    
    
    322,346Net incurred loss and loss adjustment expenses:Provision for insured events of current year
    
    
    32,291
    
    
    
    33,685
    
    
    
    92,907
    
    
    
    87,104Decrease in provision for insured events of prior years
    
    
    (7,862
    )
    
    
    (24,940
    )
    
    
    (7,915
    )
    
    
    (25,001
    )Total net incurred
    
    
    24,429
    
    
    
    8,745
    
    
    
    84,992
    
    
    
    62,103Net payments attributable to:Current year events
    
    
    6,717
    
    
    
    3,456
    
    
    
    10,323
    
    
    
    5,996Prior year events
    
    
    11,843
    
    
    
    5,854
    
    
    
    34,817
    
    
    
    36,273Total net payments
    
    
    18,560
    
    
    
    9,310
    
    
    
    45,140
    
    
    
    42,269Net reserves at end of period
    
    
    384,885
    
    
    
    342,180
    
    
    
    384,885
    
    
    
    342,180Ceded reinsurance at end of period
    
    
    43,401
    
    
    
    82,381
    
    
    
    43,401
    
    
    
    82,381Gross reserves at end of period
    
    $
    428,286
    
    
    $
    424,561
    
    
    $
    428,286
    
    
    $
    424,561
   6. Debt
    22




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7. Employee Benefits
   Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net periodic benefit cost:Service cost
    
    $
    65
    
    
    $
    26
    
    
    $
    171
    
    
    $
    144Interest cost
    
    
    160
    
    
    
    74
    
    
    
    429
    
    
    
    364Amortization of prior service cost (benefit)
    
    
    (40
    )
    
    
    (68
    )
    
    
    (121
    )
    
    
    (121
    )Net amortization of actuarial (gain) loss
    
    
    
    
    
    
    (12
    )
    
    
    
    
    
    
    Net periodic benefit cost
    
    $
    185
    
    
    $
    20
    
    
    $
    479
    
    
    $
    387
    8. Commitments and Contingencies
  23




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##### Table of Contents



9. Income Taxes
   10. Stockholders Equity
  Equity Compensation Plans
      24




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##### Table of Contents



WeightedAverageShares
    
    
    ExerciseSubject
    
    
    Price PerTo Option
    
    
    ShareOutstanding options at January 1, 2008
    
    
    1,054,588
    
    
    $
    14.53Options granted
    
    
    259,380
    
    
    $
    16.35Options forfeited
    
    
    (22,210
    )
    
    $
    16.99Options expired
    
    
    (6,125
    )
    
    $
    12.71Options exercised
    
    
    (29,800
    )
    
    $
    11.53Outstanding options at September 30, 2008
    
    
    1,255,833
    
    
    $
    14.94Outstanding options at January 1, 2009
    
    
    1,221,118
    
    
    $
    14.93Options granted
    
    
    217,960
    
    
    $
    18.85Options forfeited
    
    
    (10,900
    )
    
    $
    17.63Options expired
    
    
    (13,270
    )
    
    $
    14.34Options exercised
    
    
    (89,905
    )
    
    $
    11.51Outstanding options at September 30, 2009
    
    
    1,325,003
    
    
    $
    15.79
  WeightedShares
    
    
    AverageSubject
    
    
    Grant DateTo Option
    
    
    Fair ValueNon-vested options at January 1, 2008
    
    
    554,557
    
    
    $
    7.23Options granted
    
    
    259,380
    
    
    $
    6.32Options vested
    
    
    (80,785
    )
    
    $
    8.94Options forfeited
    
    
    (22,210
    )
    
    $
    6.95Non-vested options at September 30, 2008
    
    
    710,942
    
    
    $
    6.71Non-vested options at January 1, 2009
    
    
    545,095
    
    
    $
    7.29Options granted
    
    
    217,960
    
    
    $
    8.95Options vested
    
    
    (136,849
    )
    
    $
    7.82Options forfeited
    
    
    (10,900
    )
    
    $
    7.43Non-vested options at September 30, 2009
    
    
    615,306
    
    
    $
    7.76
  Options Vested or Expected to VestWeighted
    
    
    
    
    
    Weighted AverageAverage
    
    Aggregate
    
    RemainingNumber
    
    Exercise Price
    
    Intrinsic Value
    
    Contractual LifeSeptember 30, 2009
    
    
    1,250,036
    
    
    $
    15.62
    
    
    $
    2,483,307
    
    
    6.7 years
 Options ExercisableWeighted
    
    
    
    
    
    Weighted AverageAverage
    
    Aggregate
    
    RemainingNumber
    
    Exercise Price
    
    Intrinsic Value
    
    Contractual LifeSeptember 30, 2009
    
    
    709,697
    
    
    $
    13.97
    
    
    $
    2,259,472
    
    
    5.6 years
  2009  $0.4 million; 2010
 $0.8 million; 2011  $0.4 million; and 2012  $0.1 million.
 25




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##### Table of Contents



CNA SURETY CORPORATION AND SUBSIDIARIES
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 General
  Critical Accounting Policies
  Reserves for Unpaid Losses and Loss Adjustment Expenses and Reinsurance
      Gross Case Loss
    
    
    Gross IBNR Loss
    
    
    Total Grossand LAE Reserves
    
    
    and LAE Reserves
    
    
    ReservesContract
    
    $
    43,287
    
    
    $
    260,977
    
    
    $
    304,264Commercial
    
    
    51,814
    
    
    
    57,498
    
    
    
    109,312Fidelity and other
    
    
    3,600
    
    
    
    11,110
    
    
    
    14,710Total
    
    $
    98,701
    
    
    $
    329,585
    
    
    $
    428,286
 26




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##### Table of Contents




    
    Current claim activity, including the frequency and severity of current claims;
    
    Changes in underwriting standards and business mix such as the Companys efforts to
reduce exposures to large commercial bonds;
    
    Changes in the claims handling process;
    
    Potential changes in the Companys reinsurance program; and
    
    Current economic conditions, especially corporate default rates and the condition of the construction economy.
   27




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Investments
      Intangible Assets
   28




---



##### Table of Contents



Insurance Premiums
  Deferred Policy Acquisitions Costs
  Results of Operations
 Financial Measures
     29




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##### Table of Contents



Comparison of CNA Surety Actual Results for the Three and Nine Months Ended September 30, 2009 and 2008
 Analysis of Net Income
    Results of Insurance Operations
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Gross written premiums
    
    $
    113,402
    
    
    $
    120,362
    
    
    $
    341,361
    
    
    $
    361,299Net written premiums
    
    $
    106,361
    
    
    $
    108,805
    
    
    $
    320,495
    
    
    $
    333,626Net earned premiums
    
    $
    109,703
    
    
    $
    109,696
    
    
    $
    316,549
    
    
    $
    320,814Net losses and loss adjustment expenses
    
    $
    24,429
    
    
    $
    8,745
    
    
    $
    84,992
    
    
    $
    62,103Net commissions, brokerage and other underwriting expenses
    
    $
    62,169
    
    
    $
    61,694
    
    
    $
    172,364
    
    
    $
    174,806Loss ratio
    
    
    22.3
    %
    
    
    8.0
    %
    
    
    26.8
    %
    
    
    19.4
    %Expense ratio
    
    
    56.7
    
    
    
    56.2
    
    
    
    54.5
    
    
    
    54.5Combined ratio
    
    
    79.0
    %
    
    
    64.2
    %
    
    
    81.3
    %
    
    
    73.9
    %
 Premiums Written/Earned
   30




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Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Contract
    
    $
    71,817
    
    
    $
    78,418
    
    
    $
    215,301
    
    
    $
    233,766Commercial
    
    
    34,163
    
    
    
    34,331
    
    
    
    102,579
    
    
    
    103,192Fidelity and other
    
    
    7,422
    
    
    
    7,613
    
    
    
    23,481
    
    
    
    24,341$
    113,402
    
    
    $
    120,362
    
    
    $
    341,361
    
    
    $
    361,299
     Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Contract
    
    $
    65,674
    
    
    $
    67,692
    
    
    $
    196,826
    
    
    $
    208,490Commercial
    
    
    33,265
    
    
    
    33,500
    
    
    
    100,188
    
    
    
    100,795Fidelity and other
    
    
    7,422
    
    
    
    7,613
    
    
    
    23,481
    
    
    
    24,341$
    106,361
    
    
    $
    108,805
    
    
    $
    320,495
    
    
    $
    333,626
    Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Contract
    
    $
    68,815
    
    
    $
    68,274
    
    
    $
    195,314
    
    
    $
    198,772Commercial
    
    
    33,208
    
    
    
    33,493
    
    
    
    98,246
    
    
    
    98,487Fidelity and other
    
    
    7,680
    
    
    
    7,929
    
    
    
    22,989
    
    
    
    23,555$
    109,703
    
    
    $
    109,696
    
    
    $
    316,549
    
    
    $
    320,814
  31




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Net Loss Ratio
 .
   Expense Ratio
  Investment Income and Realized Investment Gains/Losses
   32




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net realized investment gains (losses):Fixed income securities:Gross realized investment gains
    
    $
    1,448
    
    
    $
    
    
    
    $
    1,491
    
    
    $
    Gross realized investment losses:Other-than-temporary impairment losses
    
    
    
    
    
    
    
    
    
    
    (116
    )
    
    
    Realized losses from sales
    
    
    (392
    )
    
    
    
    
    
    
    (392
    )
    
    
    (19
    )Total gross realized investment losses
    
    
    (392
    )
    
    
    
    
    
    
    (508
    )
    
    
    (19
    )Net realized investment gains (losses) on fixed income securities
    
    
    1,056
    
    
    
    
    
    
    
    983
    
    
    
    (19
    )Equity securities:Gross realized investment gains
    
    
    
    
    
    
    1
    
    
    
    27
    
    
    
    11Gross realized investment losses:Other-than-temporary impairment losses
    
    
    
    
    
    
    (178
    )
    
    
    (46
    )
    
    
    (178
    )Realized losses from sales
    
    
    
    
    
    
    
    
    
    
    (20
    )
    
    
    (20
    )Total gross realized investment losses
    
    
    
    
    
    
    (178
    )
    
    
    (66
    )
    
    
    (198
    )Net realized investment gains (losses) on equity securities
    
    
    
    
    
    
    (177
    )
    
    
    (39
    )
    
    
    (187
    )Other
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Net realized investment gains (losses)
    
    $
    1,056
    
    
    $
    (177
    )
    
    $
    943
    
    
    $
    (207
    )
  Interest Expense
  Income Taxes
  Exposure Management
  33




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Excess of Loss Reinsurance
  2009 Third Party Reinsurance
  2008 Third Party Reinsurance
  Related Party Reinsurance
    34




---



##### Table of Contents



35




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##### Table of Contents



Liquidity and Capital Resources
        36




---



##### Table of Contents



Contractual Obligations as of September 30, 2009
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    Thereafter
    
    
    TotalDebt (a)
    
    $
    0.3
    
    
    $
    1.2
    
    
    $
    1.2
    
    
    $
    1.2
    
    
    $
    1.2
    
    
    $
    54.9
    
    
    $
    60.0Operating leases
    
    
    0.6
    
    
    
    2.0
    
    
    
    1.9
    
    
    
    0.9
    
    
    
    
    
    
    
    
    
    
    
    5.4Loss and loss adjustment expense reserves
    
    
    31.0
    
    
    
    135.7
    
    
    
    100.0
    
    
    
    54.2
    
    
    
    34.2
    
    
    
    73.2
    
    
    
    428.3Other long-term liabilities (b)
    
    
    0.2
    
    
    
    1.2
    
    
    
    1.0
    
    
    
    0.6
    
    
    
    0.4
    
    
    
    9.9
    
    
    
    13.3Total
    
    $
    32.1
    
    
    $
    140.1
    
    
    $
    104.1
    
    
    $
    56.9
    
    
    $
    35.8
    
    
    $
    138.0
    
    
    $
    507.0
 
 (a)
    
    Reflects expected principal and interest payments.(b)
    
    Reflects unfunded postretirement benefit plans and long-term incentive plan payments to certain executives.  37




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Insurance Regulation and Supervision
  38




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##### Table of Contents



Financial Condition
 Investment Portfolio
  Gross
    
    
    Gross Unrealized LossesAmortized Cost
    
    
    Unrealized
    
    
    Less Than
    
    
    More Than
    
    
    Estimated
    
    
    UnrealizedSeptember 30, 2009
    
    or Cost
    
    
    Gains
    
    
    12 Months
    
    
    12 Months
    
    
    Fair Value
    
    
    OTTI Losses(a)Fixed income securities:U.S. Treasury securities and obligations of
U.S. Government and agencies:U.S. Treasury
    
    $
    17,377
    
    
    $
    1,115
    
    
    $
    
    
    
    $
    
    
    
    $
    18,492
    
    
    $
    U.S. Agencies
    
    
    24,303
    
    
    
    429
    
    
    
    
    
    
    
    
    
    
    
    24,732
    
    
    
    Collateralized mortgage obligations  residential
    
    
    31,626
    
    
    
    1,810
    
    
    
    
    
    
    
    
    
    
    
    33,436
    
    
    
    Mortgage pass-through securities  residential
    
    
    56,785
    
    
    
    2,572
    
    
    
    
    
    
    
    
    
    
    
    59,357
    
    
    
    Obligations of states and political subdivisions
    
    
    700,001
    
    
    
    48,091
    
    
    
    
    
    
    
    (2,271
    )
    
    
    745,821
    
    
    
    Corporate bonds
    
    
    292,550
    
    
    
    13,219
    
    
    
    (128
    )
    
    
    (633
    )
    
    
    305,008
    
    
    
    Collateralized mortgage obligations  commercial
    
    
    10,025
    
    
    
    
    
    
    
    
    
    
    
    (425
    )
    
    
    9,600
    
    
    
    Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    5,931
    
    
    
    
    
    
    
    
    
    
    
    (611
    )
    
    
    5,320
    
    
    
    (1,502
    )Consumer credit receivables
    
    
    16,386
    
    
    
    670
    
    
    
    
    
    
    
    
    
    
    
    17,056
    
    
    
    Other
    
    
    9,725
    
    
    
    735
    
    
    
    
    
    
    
    
    
    
    
    10,460
    
    
    
    Total fixed income securities
    
    
    1,164,709
    
    
    
    68,641
    
    
    
    (128
    )
    
    
    (3,940
    )
    
    
    1,229,282
    
    
    $
    (1,502
    )Equity securities
    
    
    1,379
    
    
    
    174
    
    
    
    
    
    
    
    
    
    
    
    1,553Total
    
    $
    1,166,088
    
    
    $
    68,815
    
    
    $
    (128
    )
    
    $
    (3,940
    )
    
    $
    1,230,835
 
 (a)
    
    The unrealized loss position
of this security has improved  to $0.4 million at September 30, 2009.  Gross
    
    
    Gross Unrealized LossesAmortized Cost
    
    
    Unrealized
    
    
    Less Than
    
    
    More Than
    
    
    EstimatedDecember 31, 2008
    
    or Cost
    
    
    Gains
    
    
    12 Months
    
    
    12 Months
    
    
    Fair ValueFixed income securities:U.S. Treasury securities and obligations of
U.S. Government and agencies:U.S. Treasury
    
    $
    33,140
    
    
    $
    3,519
    
    
    $
    
    
    
    $
    
    
    
    $
    36,659U.S. Agencies
    
    
    36,476
    
    
    
    1,116
    
    
    
    
    
    
    
    
    
    
    
    37,592Collateralized mortgage obligations  residential
    
    
    35,671
    
    
    
    984
    
    
    
    
    
    
    
    
    
    
    
    36,655Mortgage pass-through securities  residential
    
    
    72,203
    
    
    
    1,489
    
    
    
    
    
    
    
    
    
    
    
    73,692Obligations of states and political subdivisions
    
    
    697,305
    
    
    
    19,730
    
    
    
    (6,929
    )
    
    
    (13,943
    )
    
    
    696,163Corporate bonds
    
    
    96,048
    
    
    
    1,711
    
    
    
    (2,430
    )
    
    
    (1,853
    )
    
    
    93,476Collateralized mortgage obligations  commercial
    
    
    35,025
    
    
    
    
    
    
    
    (2,040
    )
    
    
    (3,607
    )
    
    
    29,378Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    7,956
    
    
    
    
    
    
    
    (779
    )
    
    
    (2,180
    )
    
    
    4,997Consumer credit receivables
    
    
    17,239
    
    
    
    
    
    
    
    (1,708
    )
    
    
    
    
    
    
    15,531Other
    
    
    10,753
    
    
    
    23
    
    
    
    (273
    )
    
    
    
    
    
    
    10,503Total fixed income securities
    
    
    1,041,816
    
    
    
    28,572
    
    
    
    (14,159
    )
    
    
    (21,583
    )
    
    
    1,034,646Equity securities
    
    
    1,231
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,231Total
    
    $
    1,043,047
    
    
    $
    28,572
    
    
    $
    (14,159
    )
    
    $
    (21,583
    )
    
    $
    1,035,877
 39




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##### Table of Contents



% ofEstimated
    
    % ofFair
    
    UnrealizedContractual Maturity
    
    Value
    
    LossDue after one year through five years
    
    
    9
    %
    
    
    16
    %Due after five years through ten years
    
    
    41
    
    
    
    4Due after ten years
    
    
    35
    
    
    
    54Asset-backed securities
    
    
    15
    
    
    
    26Total
    
    
    100
    %
    
    
    100
    %
  September 30, 2009
    
    
    December 31, 2008Gross
    
    
    
    
    
    
    GrossEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    UnrealizedUnrealized Loss Aging
    
    Fair Value
    
    
    Loss
    
    
    Fair Value
    
    
    LossFixed income securities:Investment grade(a):0-6 months
    
    $
    31,910
    
    
    $
    84
    
    
    $
    109,973
    
    
    $
    3,0957-12 months
    
    
    4,937
    
    
    
    44
    
    
    
    121,419
    
    
    
    11,06413-24 months
    
    
    11,630
    
    
    
    261
    
    
    
    81,395
    
    
    
    12,010Greater than 24 months
    
    
    36,917
    
    
    
    2,099
    
    
    
    33,450
    
    
    
    9,573Total investment grade
    
    
    85,394
    
    
    
    2,488
    
    
    
    346,237
    
    
    
    35,742Non-investment grade:Greater than 24 months
    
    
    17,700
    
    
    
    1,580
    
    
    
    
    
    
    
    Total
    
    $
    103,094
    
    
    $
    4,068
    
    
    $
    346,237
    
    
    $
    35,742
 
 (a)
    
    Investment grade is determined by using the Standard & Poors (S&P) rating.
If a security is not rated by S&P, the Moodys Investor Services (Moodys)
rating is used. As of September 30, 2009 and December 31, 2008, all of the
Companys fixed income securities were rated by S&P or Moodys.      40




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41




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Gross Unrealized Losses
    
    
    EstimatedSeptember 30, 2009
    
    AAA
    
    
    AA
    
    
    A
    
    
    BBB
    
    
    Total
    
    
    Count
    
    
    Fair ValueFixed income securities:Investment grade(a):U.S. Treasury securities and obligations of U. S.
Government and agencies:Collateralized mortgage obligations  residential
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    1
    
    
    $
    1Obligations of states and political subdivisions
    
    
    389
    
    
    
    100
    
    
    
    618
    
    
    
    
    
    
    
    1,107
    
    
    
    5
    
    
    
    29,887Corporate bonds
    
    
    6
    
    
    
    14
    
    
    
    111
    
    
    
    630
    
    
    
    761
    
    
    
    10
    
    
    
    43,225Collateralized mortgage obligations  commercial
    
    
    425
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    425
    
    
    
    2
    
    
    
    9,600Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    195
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    195
    
    
    
    1
    
    
    
    2,681Total investment grade
    
    
    1,015
    
    
    
    114
    
    
    
    729
    
    
    
    630
    
    
    
    2,488
    
    
    
    19
    
    
    
    85,394Non-investment grade:Obligations of states and political subdivisions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,164
    
    
    
    2
    
    
    
    15,061Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    416
    
    
    
    1
    
    
    
    2,639Total non-investment grade
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,580
    
    
    
    3
    
    
    
    17,700Total
    
    $
    1,015
    
    
    $
    114
    
    
    $
    729
    
    
    $
    630
    
    
    $
    4,068
    
    
    
    22
    
    
    $
    103,094
 
 (a)
    
    Securities are categorized using the S&P rating. If a security is not rated by S&P, the
Moodys rating is used. At September 30, 2009, all of the Companys fixed income securities
were rated by S&P or Moodys.    42




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Impact of Pending Accounting Standards
    43




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##### Table of Contents



FORWARD-LOOKING STATEMENTS
    
    
    general economic and business conditions;
    
    changes in financial markets such as fluctuations in interest rates, long-term periods of
low interest rates, credit conditions and currency, commodity and stock prices;
    
    the ability of the Companys contract principals to fulfill their bonded obligations;
    
    the effects of corporate bankruptcies on surety bond claims, as well as on capital
markets;
    
    changes in foreign or domestic political, social and economic conditions;
    
    regulatory initiatives and compliance with governmental regulations, judicial decisions,
including interpretation of policy provisions, decisions regarding coverage, trends in
litigation and the outcome of any litigation involving the Company, and rulings and changes
in tax laws and regulations;
    
    regulatory limitations, impositions and restrictions upon the Company, including the
effects of assessments and other surcharges for guaranty funds and other mandatory pooling
arrangements;
    
    the impact of competitive products, policies and pricing and the competitive environment
in which the Company operates, including changes in the Companys books of business;
    
    product and policy availability and demand and market responses, including the level of
ability to obtain rate increases and decline or non-renew underpriced accounts, to achieve
premium targets and profitability and to realize growth and retention estimates;
    
    development of claims and the impact on loss reserves, including changes in claim
settlement practices;
    
    the performance of reinsurance companies under reinsurance contracts with the Company;
    
    results of financing efforts, including the Companys ability to access capital markets;
    
    changes in the Companys composition of operating segments;
    
    the sufficiency of the Companys loss reserves and the possibility of future increases in
reserves;
    
    the risks and uncertainties associated with the Companys loss reserves; and,
    
    the possibility of further changes in the Companys ratings by ratings agencies,
including the inability to access certain markets or distribution channels and the required
collateralization of future payment obligations as a result of such changes, and changes in
rating agency policies and practices.
 44




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TEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   HypotheticalEstimated Fair
    
    
    PercentageHypothetical
    
    
    Value After
    
    
    IncreaseFair Value at
    
    
    Change in
    
    
    Hypothetical
    
    
    (Decrease) inSeptember 30,
    
    
    Interest Rate
    
    
    Change in
    
    
    Stockholders2009
    
    
    (bp=basis points)
    
    
    Interest Rate
    
    
    Equity(Dollars in thousands)U.S. Government and government agencies and
authorities
    
    $
    136,017
    
    
    200 bp increase
    
    $
    128,504
    
    
    
    (0.6
    )%150 bp increase
    
    
    130,735
    
    
    
    (0.4
    )100 bp increase
    
    
    132,828
    
    
    
    (0.2
    )50 bp increase
    
    
    134,628
    
    
    
    (0.1
    )States, municipalities and political subdivisions
    
    
    745,821
    
    
    200 bp increase
    
    
    656,703
    
    
    
    (6.5
    )150 bp increase
    
    
    677,733
    
    
    
    (5.0
    )100 bp increase
    
    
    699,591
    
    
    
    (3.4
    )50 bp increase
    
    
    722,285
    
    
    
    (1.7
    )Corporate bonds
    
    
    305,008
    
    
    200 bp increase
    
    
    274,816
    
    
    
    (2.2
    )150 bp increase
    
    
    281,956
    
    
    
    (1.7
    )100 bp increase
    
    
    289,360
    
    
    
    (1.1
    )50 bp increase
    
    
    297,040
    
    
    
    (0.6
    )Mortgage-backed and asset-backed
    
    
    42,436
    
    
    200 bp increase
    
    
    40,203
    
    
    
    (0.2
    )150 bp increase
    
    
    40,743
    
    
    
    (0.1
    )100 bp increase
    
    
    41,295
    
    
    
    (0.1
    )50 bp increase
    
    
    41,859
    
    
    
    Total fixed income securities available-for-sale
    
    $
    1,229,282
    
    
    200 bp increase
    
    
    1,100,226
    
    
    
    (9.5
    )150 bp increase
    
    
    1,131,167
    
    
    
    (7.2
    )100 bp increase
    
    
    1,163,074
    
    
    
    (4.9
    )50 bp increase
    
    
    1,195,812
    
    
    
    (2.5
    )
 45




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##### Table of Contents



HypotheticalEstimated Fair
    
    
    PercentageHypothetical
    
    
    Value After
    
    
    IncreaseFair Value at
    
    
    Change in
    
    
    Hypothetical
    
    
    (Decrease) inDecember 31,
    
    
    Interest Rate
    
    
    Change in
    
    
    Stockholders2008
    
    
    (bp=basis points)
    
    
    Interest Rate
    
    
    Equity(Dollars in thousands)U.S. Government and government agencies and
authorities
    
    $
    184,598
    
    
    200 bp increase
    
    $
    172,966
    
    
    
    (1.0
    )%100 bp increase
    
    
    179,485
    
    
    
    (0.4
    )100 bp decrease
    
    
    187,485
    
    
    
    0.2200 bp decrease
    
    
    189,197
    
    
    
    0.4States, municipalities and political subdivisions
    
    
    696,163
    
    
    200 bp increase
    
    
    613,030
    
    
    
    (7.0
    )100 bp increase
    
    
    652,614
    
    
    
    (3.7
    )100 bp decrease
    
    
    743,635
    
    
    
    4.0200 bp decrease
    
    
    786,829
    
    
    
    7.7Corporate bonds
    
    
    93,476
    
    
    200 bp increase
    
    
    84,743
    
    
    
    (0.7
    )100 bp increase
    
    
    88,962
    
    
    
    (0.4
    )100 bp decrease
    
    
    98,115
    
    
    
    0.4200 bp decrease
    
    
    101,424
    
    
    
    0.7Mortgage-backed and asset-backed
    
    
    60,409
    
    
    200 bp increase
    
    
    56,769
    
    
    
    (0.3
    )100 bp increase
    
    
    58,563
    
    
    
    (0.2
    )100 bp decrease
    
    
    62,039
    
    
    
    0.1200 bp decrease
    
    
    62,557
    
    
    
    0.2Total fixed income securities available-for-sale
    
    $
    1,034,646
    
    
    200 bp increase
    
    
    927,508
    
    
    
    (9.1
    )100 bp increase
    
    
    979,624
    
    
    
    (4.7
    )100 bp decrease
    
    
    1,091,274
    
    
    
    4.8200 bp decrease
    
    
    1,140,007
    
    
    
    8.9
 
 ITEM 4. CONTROLS AND PROCEDURES
    
 PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 
 ITEM 1A. RISK FACTORS
 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS  None
 46




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##### Table of Contents



ITEM 3. DEFAULTS UPON SENIOR SECURITIES  None.
 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS  None.
 
 ITEM 5. OTHER INFORMATION  Reports on Form 8-K:
  
 ITEM 6. EXHIBITS
 Exhibit NumberCertification of Chief Executive Officer pursuant to Rule
13a14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
    
    
    31(1
    )Certification of Chief Financial Officer pursuant to Rule
13a14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
    
    
    31(2
    )Certification of Chief Executive Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
    
    
    32(1
    )*Certification of Chief Financial Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
    
    
    32(2
    )*
 
 *
    
    Exhibits 32(1) and 32(2) are being furnished and shall not be deemed filed for the purpose
of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the
liabilities of that Section. These Exhibits shall not be incorporated by reference into any
registration statement or other document pursuant to the Securities Act of 1933, as amended. 47




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CNA SURETY CORPORATION (Registrant)/s/ John F. Welch

John F. WelchPresident and Chief Executive Officer/s/ John F. Corcoran

John F. CorcoranSenior Vice President and Chief Financial OfficerDate: October 30, 2009




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##### Table of Contents



31(1)
    
    Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  Chief Executive Officer.31(2)
    
    Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  Chief Financial Officer.32(1)
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  Chief Executive Officer.32(2)
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  Chief Financial Officer.