##### Table of Contents



FORM 10-Q
 SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2007
 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
  DELAWARE
    
    36-4144905(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)333 S. WABASH AVE., CHICAGO, ILLINOIS
(Address of principal executive offices)
    
    60604
(Zip Code)
 
 þ o
  o þ o
 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, 2007 and at December 31, 2006
    
    
    3Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2007 and 2006
    
    
    4Condensed Consolidated Statements of Stockholders Equity for the Nine Months Ended September 30, 2007 and 2006
    
    
    5Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    35PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    35Item 1A. Risk Factors
    
    
    35Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    35Item 3. Defaults Upon Senior Securities
    
    
    35Item 4. Submission of Matters to a Vote of Security Holders
    
    
    35Item 5. Other Information
    
    
    35Item 6. Exhibits
    
    
    35CertificationCertificationCertificationCertification
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September 30,
    
    
    December 31,2007
    
    
    2006ASSETSInvested assets:Fixed income securities, at fair value (amortized cost: $877,796 and $773,178)
    
    $
    883,533
    
    
    $
    784,791Equity securities, at fair value (cost: $1,583 and $1,508)
    
    
    1,784
    
    
    
    1,668Short-term investments, at cost (approximates fair value)
    
    
    77,937
    
    
    
    103,640Other investments, at cost
    
    
    57
    
    
    
    22Total invested assets
    
    
    963,311
    
    
    
    890,121Cash
    
    
    16,574
    
    
    
    7,164Deferred policy acquisition costs
    
    
    108,800
    
    
    
    102,937Insurance receivables:Premiums, including $12,732 and $6,885 from affiliates, (net of allowance for
doubtful accounts: $1,230 and $1,369)
    
    
    48,478
    
    
    
    37,205Reinsurance,
including $50,055 and $55,023 from affiliates
    
    
    112,882
    
    
    
    118,412Deposit with affiliated ceding company
    
    
    34,279
    
    
    
    33,145Intangible assets (net of accumulated amortization: $25,523 and $25,523)
    
    
    138,785
    
    
    
    138,785Current income taxes receivable
    
    
    
    
    
    
    323Property and
equipment, at cost (less accumulated depreciation and amortization: $28,278 and $24,466)
    
    
    24,855
    
    
    
    24,807Prepaid reinsurance premiums (including $517 and $1,702 from affiliates)
    
    
    752
    
    
    
    2,165Accrued investment income
    
    
    10,916
    
    
    
    10,089Other assets
    
    
    2,090
    
    
    
    3,180Total assets
    
    $
    1,461,722
    
    
    $
    1,368,333LIABILITIESReserves:Unpaid losses and loss adjustment expenses
    
    $
    447,458
    
    
    $
    434,224Unearned premiums
    
    
    273,750
    
    
    
    253,803Total reserves
    
    
    721,208
    
    
    
    688,027Debt
    
    
    30,766
    
    
    
    30,690Deferred income taxes, net
    
    
    13,745
    
    
    
    17,298Current income taxes payable
    
    
    4,026
    
    
    
    Reinsurance and other payables to affiliates
    
    
    2,227
    
    
    
    166Accrued expenses
    
    
    15,084
    
    
    
    20,247Liability for postretirement benefits
    
    
    14,312
    
    
    
    12,466Other liabilities
    
    
    24,469
    
    
    
    33,537Total liabilities
    
    
    825,837
    
    
    
    802,431Commitments and contingencies (See Notes 3, 4, & 7)STOCKHOLDERS EQUITYCommon stock, par value $.01 per share, 100,000 shares authorized; 45,406 shares
issued and 44,022 shares outstanding at September 30, 2007 and 45,263 shares
issued and 43,872 shares outstanding at December 31, 2006
    
    
    454
    
    
    
    453Additional paid-in capital
    
    
    272,253
    
    
    
    268,651Retained earnings
    
    
    377,385
    
    
    
    306,745Accumulated other comprehensive income
    
    
    653
    
    
    
    4,993Treasury stock, 1,384 and 1,391 shares, at cost
    
    
    (14,860
    )
    
    
    (14,940
    )Total stockholders equity
    
    
    635,885
    
    
    
    565,902Total liabilities and stockholders equity
    
    $
    1,461,722
    
    
    $
    1,368,333
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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues:Net earned premium
    
    $
    113,617
    
    
    $
    102,798
    
    
    $
    317,607
    
    
    $
    291,727Net investment income
    
    
    11,328
    
    
    
    9,850
    
    
    
    32,792
    
    
    
    29,021Net realized investment gains (losses)
    
    
    65
    
    
    
    (999
    )
    
    
    (486
    )
    
    
    (894
    )Total revenues
    
    
    125,010
    
    
    
    111,649
    
    
    
    349,913
    
    
    
    319,854Expenses:Net losses and loss adjustment expenses
    
    
    23,835
    
    
    
    21,133
    
    
    
    75,632
    
    
    
    69,674Net commissions, brokerage and other underwriting expenses
    
    
    59,952
    
    
    
    56,527
    
    
    
    170,870
    
    
    
    160,954Interest expense
    
    
    745
    
    
    
    967
    
    
    
    2,194
    
    
    
    2,931Total expenses
    
    
    84,532
    
    
    
    78,627
    
    
    
    248,696
    
    
    
    233,559Income before income taxes
    
    
    40,478
    
    
    
    33,022
    
    
    
    101,217
    
    
    
    86,295Income tax expense
    
    
    12,481
    
    
    
    9,402
    
    
    
    30,577
    
    
    
    25,185Net income
    
    $
    27,997
    
    
    $
    23,620
    
    
    $
    70,640
    
    
    $
    61,110Earnings per common share
    
    $
    0.64
    
    
    $
    0.54
    
    
    $
    1.61
    
    
    $
    1.40Earnings per common share, assuming dilution
    
    $
    0.63
    
    
    $
    0.54
    
    
    $
    1.60
    
    
    $
    1.39Weighted average shares outstanding
    
    
    43,954
    
    
    
    43,558
    
    
    
    43,975
    
    
    
    43,602Weighted average shares outstanding, assuming dilution
    
    
    44,194
    
    
    
    43,897
    
    
    
    44,248
    
    
    
    43,879
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Common
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    AccumulatedStock
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    Treasury
    
    
    TotalShares
    
    
    Common
    
    
    Paid-In
    
    
    Comprehensive
    
    
    Retained
    
    
    Comprehensive
    
    
    Stock
    
    
    StockholdersOutstanding
    
    
    Stock
    
    
    Capital
    
    
    Income (Loss)
    
    
    Earnings
    
    
    Income (Loss)
    
    
    At Cost
    
    
    EquityBalance, December 31, 2005
    
    
    43,334
    
    
    $
    447
    
    
    $
    259,684
    
    
    
    
    
    
    $
    223,927
    
    
    $
    7,546
    
    
    $
    (15,029
    )
    
    $
    476,575Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    61,110
    
    
    
    61,110
    
    
    
    
    
    
    
    
    
    
    
    61,110Other comprehensive income:Change in unrealized gains on
securities, after income tax
expense of $166 (net of
reclassification adjustment of
$892, after income tax expense
of $480)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    308
    
    
    
    
    
    
    
    308
    
    
    
    
    
    
    
    308Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    61,418Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    983
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    983Stock options exercised and other
    
    
    411
    
    
    
    4
    
    
    
    5,892
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    89
    
    
    
    5,985Balance, September 30, 2006
    
    
    43,745
    
    
    $
    451
    
    
    $
    266,559
    
    
    
    
    
    
    $
    285,037
    
    
    $
    7,854
    
    
    $
    (14,940
    )
    
    $
    544,961Balance, December 31, 2006
    
    
    43,872
    
    
    $
    453
    
    
    $
    268,651
    
    
    
    
    
    
    $
    306,745
    
    
    $
    4,993
    
    
    $
    (14,940
    )
    
    $
    565,902Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    70,640
    
    
    
    70,640
    
    
    
    
    
    
    
    
    
    
    
    70,640Other comprehensive income:Change in unrealized gains on
securities, after income tax
benefit of $2,042 (net of
reclassification adjustment of
($120), after income tax
benefit of $65)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,793
    )
    
    
    
    
    
    
    (3,793
    )
    
    
    
    
    
    
    (3,793
    )Adjustment to recognize
re-measurement of accumulated
postretirement benefit
obligations, net of tax
benefit of $563
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (684
    )
    
    
    
    
    
    
    (684
    )
    
    
    
    
    
    
    (684
    )Adjustment to postretirement
benefit plan net periodic
cost, after income tax expense
of $74
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    137
    
    
    
    
    
    
    
    137
    
    
    
    
    
    
    
    137Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    66,300Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    1,456
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,456Stock options exercised and other
    
    
    150
    
    
    
    1
    
    
    
    2,146
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80
    
    
    
    2,227Balance, September 30, 2007
    
    
    44,022
    
    
    $
    454
    
    
    $
    272,253
    
    
    
    
    
    
    $
    377,385
    
    
    $
    653
    
    
    $
    (14,860
    )
    
    $
    635,885
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Nine Months EndedSeptember 30,2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    70,640
    
    
    $
    61,110Adjustments to reconcile net income to net cash provided by operating activities:Provision for doubtful accounts
    
    
    332
    
    
    
    657Depreciation and amortization
    
    
    4,723
    
    
    
    3,911Amortization (accretion) of bond premium (discount), net
    
    
    (70
    )
    
    
    119Loss on disposal of property and equipment
    
    
    1
    
    
    
    149Net realized investment losses
    
    
    486
    
    
    
    894Stock-based compensation
    
    
    1,456
    
    
    
    983Changes in:Insurance receivables
    
    
    (6,075
    )
    
    
    (10,041
    )Reserve for unearned premiums
    
    
    19,947
    
    
    
    22,221Reserve for unpaid losses and loss adjustment expenses
    
    
    13,234
    
    
    
    (4,212
    )Deposits with affiliated ceding company
    
    
    (1,134
    )
    
    
    654Deferred policy acquisition costs
    
    
    (5,863
    )
    
    
    (3,757
    )Deferred income taxes, net
    
    
    (1,097
    )
    
    
    (1,887
    )Reinsurance and other payables to affiliates
    
    
    2,061
    
    
    
    (2
    )Prepaid reinsurance premiums
    
    
    1,413
    
    
    
    2,222Accrued expenses
    
    
    (5,163
    )
    
    
    (304
    )Other assets and liabilities
    
    
    (3,570
    )
    
    
    7,808Net cash provided by operating activities
    
    
    91,321
    
    
    
    80,525CASH FLOWS FROM INVESTING ACTIVITIES:Fixed income securities:Purchases
    
    
    (224,087
    )
    
    
    (210,631
    )Maturities
    
    
    46,459
    
    
    
    18,730Sales
    
    
    70,103
    
    
    
    124,077Purchases of equity securities
    
    
    (714
    )
    
    
    (1,117
    )Proceeds from the sale of equity securities
    
    
    757
    
    
    
    962Changes in short-term investments
    
    
    28,069
    
    
    
    7,428Purchases of property and equipment, net
    
    
    (4,696
    )
    
    
    (8,444
    )Other, net
    
    
    (29
    )
    
    
    631Net cash used in investing activities
    
    
    (84,138
    )
    
    
    (68,364
    )CASH FLOWS FROM FINANCING ACTIVITIES:Principal payments on debt
    
    
    
    
    
    
    (20,000
    )Employee stock option exercises and other
    
    
    2,227
    
    
    
    5,985Net cash provided by financing activities
    
    
    2,227
    
    
    
    (14,015
    )Increase (decrease) in cash
    
    
    9,410
    
    
    
    (1,854
    )Cash at beginning of period
    
    
    7,164
    
    
    
    8,323Cash at end of period
    
    $
    16,574
    
    
    $
    6,469Supplemental Disclosure of Cash Flow Information:Cash paid during the period for:Interest
    
    $
    2,110
    
    
    $
    2,913Income taxes
    
    
    26,898
    
    
    
    27,938
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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    27,997
    
    
    $
    23,620
    
    
    $
    70,640
    
    
    $
    61,110Shares:Weighted average shares outstanding
    
    
    43,938
    
    
    
    43,519
    
    
    
    43,872
    
    
    
    43,334Weighted average shares of options exercised and
additional stock issuance
    
    
    16
    
    
    
    39
    
    
    
    103
    
    
    
    268Total weighted average shares outstanding
    
    
    43,954
    
    
    
    43,558
    
    
    
    43,975
    
    
    
    43,602Effect of dilutive options
    
    
    240
    
    
    
    339
    
    
    
    273
    
    
    
    277Total weighted average shares outstanding, assuming dilution
    
    
    44,194
    
    
    
    43,897
    
    
    
    44,248
    
    
    
    43,879Earnings per share
    
    $
    0.64
    
    
    $
    0.54
    
    
    $
    1.61
    
    
    $
    1.40Earnings per share, assuming dilution
    
    $
    0.63
    
    
    $
    0.54
    
    
    $
    1.60
    
    
    $
    1.39
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Gross
    
    
    Gross Unrealized LossesAmortized Cost
    
    
    Unrealized
    
    
    Less Than
    
    
    More Than
    
    
    EstimatedSeptember 30, 2007
    
    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
    
    $
    14,789
    
    
    $
    67
    
    
    $
    
    
    
    $
    (44
    )
    
    $
    14,812U.S. Agencies
    
    
    28,026
    
    
    
    206
    
    
    
    
    
    
    
    (79
    )
    
    
    28,153Collateralized mortgage obligations
    
    
    30,777
    
    
    
    373
    
    
    
    (102
    )
    
    
    (297
    )
    
    
    30,751Mortgage pass-through securities
    
    
    41,849
    
    
    
    145
    
    
    
    
    
    
    
    (1,153
    )
    
    
    40,841Obligations of states and political subdivisions
    
    
    645,678
    
    
    
    11,387
    
    
    
    (3,533
    )
    
    
    (5
    )
    
    
    653,527Corporate bonds
    
    
    43,622
    
    
    
    877
    
    
    
    
    
    
    
    (1,458
    )
    
    
    43,041Non-agency collateralized mortgage obligations
    
    
    35,025
    
    
    
    194
    
    
    
    
    
    
    
    (912
    )
    
    
    34,307Other asset-backed securities:Second mortgages/home equity loans
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    (112
    )
    
    
    9,888Credit card receivables
    
    
    17,233
    
    
    
    207
    
    
    
    
    
    
    
    
    
    
    
    17,440Other
    
    
    10,797
    
    
    
    103
    
    
    
    
    
    
    
    (127
    )
    
    
    10,773Total fixed income securities
    
    
    877,796
    
    
    
    13,559
    
    
    
    (3,635
    )
    
    
    (4,187
    )
    
    
    883,533Equity securities
    
    
    1,583
    
    
    
    201
    
    
    
    
    
    
    
    
    
    
    
    1,784Total
    
    $
    879,379
    
    
    $
    13,760
    
    
    $
    (3,635
    )
    
    $
    (4,187
    )
    
    $
    885,317
 Gross
    
    
    Gross Unrealized LossesAmortized Cost
    
    
    Unrealized
    
    
    Less Than
    
    
    More Than
    
    
    EstimatedDecember 31, 2006
    
    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
    
    $
    14,832
    
    
    $
    
    
    
    $
    
    
    
    $
    (327
    )
    
    $
    14,505U.S. Agencies
    
    
    62,106
    
    
    
    14
    
    
    
    (96
    )
    
    
    (260
    )
    
    
    61,764Collateralized mortgage obligations
    
    
    16,969
    
    
    
    294
    
    
    
    
    
    
    
    (326
    )
    
    
    16,937Mortgage pass-through securities
    
    
    38,851
    
    
    
    77
    
    
    
    
    
    
    
    (1,129
    )
    
    
    37,799Obligations of states and political subdivisions
    
    
    492,640
    
    
    
    13,833
    
    
    
    (118
    )
    
    
    (10
    )
    
    
    506,345Corporate bonds
    
    
    66,943
    
    
    
    1,375
    
    
    
    (5
    )
    
    
    (1,059
    )
    
    
    67,254Non-agency collateralized mortgage obligations
    
    
    37,069
    
    
    
    210
    
    
    
    
    
    
    
    (817
    )
    
    
    36,462Other asset-backed securities:Second mortgages/home equity loans
    
    
    20,925
    
    
    
    
    
    
    
    (26
    )
    
    
    (150
    )
    
    
    20,749Credit card receivables
    
    
    17,230
    
    
    
    211
    
    
    
    
    
    
    
    
    
    
    
    17,441Other
    
    
    5,613
    
    
    
    62
    
    
    
    
    
    
    
    (140
    )
    
    
    5,535Total fixed income securities
    
    
    773,178
    
    
    
    16,076
    
    
    
    (245
    )
    
    
    (4,218
    )
    
    
    784,791Equity securities
    
    
    1,508
    
    
    
    160
    
    
    
    
    
    
    
    
    
    
    
    1,668Total
    
    $
    774,686
    
    
    $
    16,236
    
    
    $
    (245
    )
    
    $
    (4,218
    )
    
    $
    786,459
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Three Months Ended September 30,2007
    
    
    2006Written
    
    
    Earned
    
    
    Written
    
    
    EarnedDirect
    
    $
    93,169
    
    
    $
    93,729
    
    
    $
    85,663
    
    
    $
    85,766Assumed
    
    
    30,380
    
    
    
    29,735
    
    
    
    30,241
    
    
    
    28,933Ceded
    
    
    (9,572
    )
    
    
    (9,847
    )
    
    
    (10,837
    )
    
    
    (11,901
    )$
    113,977
    
    
    $
    113,617
    
    
    $
    105,067
    
    
    $
    102,798
 Nine Months Ended September 30,2007
    
    
    2006Written
    
    
    Earned
    
    
    Written
    
    
    EarnedDirect
    
    $
    280,916
    
    
    $
    262,353
    
    
    $
    259,015
    
    
    $
    240,823Assumed
    
    
    86,986
    
    
    
    85,602
    
    
    
    88,932
    
    
    
    84,903Ceded
    
    
    (28,935
    )
    
    
    (30,348
    )
    
    
    (31,777
    )
    
    
    (33,999
    )$
    338,967
    
    
    $
    317,607
    
    
    $
    316,170
    
    
    $
    291,727
  - 10 -




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Three Months Ended September 30,2007
    
    
    2006$
    
    
    Ratio
    
    
    $
    
    
    RatioGross losses and loss adjustment expenses
    
    $
    20,828
    
    
    
    16.9
    %
    
    $
    9,900
    
    
    
    8.6
    %Ceded amounts
    
    
    3,007
    
    
    
    (30.5
    )%
    
    
    11,233
    
    
    
    (94.4
    %)Net losses and loss adjustment expenses
    
    $
    23,835
    
    
    
    21.0
    %
    
    $
    21,133
    
    
    
    20.6
    %
 Nine Months Ended September 30,2007
    
    
    2006$
    
    
    Ratio
    
    
    $
    
    
    RatioGross losses and loss adjustment expenses
    
    $
    79,401
    
    
    
    22.8
    %
    
    $
    65,082
    
    
    
    20.0
    %Ceded amounts
    
    
    (3,769
    )
    
    
    12.4
    %
    
    
    4,592
    
    
    
    (13.5
    %)Net losses and loss adjustment expenses
    
    $
    75,632
    
    
    
    23.8
    %
    
    $
    69,674
    
    
    
    23.9
    %
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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Reserves at beginning of period:Gross
    
    $
    435,569
    
    
    $
    435,725
    
    
    $
    434,224
    
    
    $
    424,449Ceded reinsurance
    
    
    142,976
    
    
    
    155,237
    
    
    
    144,858
    
    
    
    147,435Net reserves at beginning of period
    
    
    292,593
    
    
    
    280,488
    
    
    
    289,366
    
    
    
    277,014Net incurred loss and loss adjustment expenses:Provision for insured events of current period
    
    
    28,863
    
    
    
    26,266
    
    
    
    80,710
    
    
    
    74,974Decrease in provision for insured events of prior periods
    
    
    (5,028
    )
    
    
    (5,133
    )
    
    
    (5,078
    )
    
    
    (5,300
    )Total net incurred
    
    
    23,835
    
    
    
    21,133
    
    
    
    75,632
    
    
    
    69,674Net payments attributable to:Current period events
    
    
    1,470
    
    
    
    2,525
    
    
    
    7,044
    
    
    
    4,076Prior period events
    
    
    5,852
    
    
    
    21,929
    
    
    
    48,848
    
    
    
    65,445Total net payments
    
    
    7,322
    
    
    
    24,454
    
    
    
    55,892
    
    
    
    69,521Net reserves at end of period
    
    
    309,106
    
    
    
    277,167
    
    
    
    309,106
    
    
    
    277,167Ceded reinsurance at end of period
    
    
    138,352
    
    
    
    143,070
    
    
    
    138,352
    
    
    
    143,070Gross reserves at end of period
    
    $
    447,458
    
    
    $
    420,237
    
    
    $
    447,458
    
    
    $
    420,237
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Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net periodic benefit cost:Service cost
    
    $
    97
    
    
    $
    46
    
    
    $
    250
    
    
    $
    194Interest cost
    
    
    227
    
    
    
    152
    
    
    
    572
    
    
    
    438Prior service cost
    
    
    
    
    
    
    (41
    )
    
    
    (80
    )
    
    
    (121
    )Recognized net actuarial loss
    
    
    127
    
    
    
    78
    
    
    
    290
    
    
    
    203Net periodic benefit cost
    
    $
    451
    
    
    $
    235
    
    
    $
    1,032
    
    
    $
    714
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WeightedAverageShares
    
    ExerciseSubject
    
    Price PerTo Option
    
    ShareOutstanding options at January 1, 2006
    
    
    1,587,909
    
    
    $
    12.41Options granted
    
    
    
    
    
    
    Options forfeited
    
    
    (29,175
    )
    
    $
    12.32Options expired
    
    
    (21,275
    )
    
    $
    14.04Options exercised
    
    
    (401,859
    )
    
    $
    13.21Outstanding options at September 30, 2006
    
    
    1,135,600
    
    
    $
    12.09Outstanding options at January 1, 2007
    
    
    1,008,525
    
    
    $
    12.02Options granted
    
    
    334,100
    
    
    $
    20.70Options forfeited
    
    
    (32,075
    )
    
    $
    14.36Options expired
    
    
    (790
    )
    
    $
    15.20Options exercised
    
    
    (141,160
    )
    
    $
    12.49Outstanding options at September 30, 2007
    
    
    1,168,600
    
    
    $
    14.38
  WeightedShares
    
    AverageSubject
    
    Grant DateTo Option
    
    Fair ValueNon-vested options at January 1, 2006
    
    
    785,845
    
    
    $
    4.40Options granted
    
    
    
    
    
    
    Options vested
    
    
    (14,750
    )
    
    $
    3.73Options forfeited
    
    
    (29,175
    )
    
    $
    4.53Non-vested options at September 30, 2006
    
    
    741,920
    
    
    $
    4.41Non-vested options at January 1, 2007
    
    
    481,613
    
    
    $
    4.51Options granted
    
    
    334,100
    
    
    $
    9.04Options vested
    
    
    (14,750
    )
    
    $
    3.73Options forfeited
    
    
    (32,075
    )
    
    $
    5.67Non-vested options at September 30, 2007
    
    
    768,888
    
    
    $
    6.45
  Options Vested or Expected to VestWeighted
    
    
    
    
    
    Weighted AverageAverage
    
    Aggregate
    
    RemainingNumber
    
    Exercise Price
    
    Intrinsic Value
    
    Contractual LifeSeptember 30, 2007
    
    
    1,099,242
    
    
    $
    14.01
    
    
    $
    4,803,674
    
    
    7.2 years
 Options ExercisableWeighted
    
    
    
    
    
    Weighted AverageAverage
    
    Aggregate
    
    RemainingNumber
    
    Exercise Price
    
    Intrinsic Value
    
    Contractual LifeSeptember 30, 2007
    
    
    399,712
    
    
    $
    11.51
    
    
    $
    2,444,597
    
    
    5.4 years
  - 15 -




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Gross Case Loss
    
    
    Gross IBNR Loss
    
    
    Total Grossand LAE Reserves
    
    
    and LAE Reserves
    
    
    ReservesContract
    
    $
    115,343
    
    
    $
    158,073
    
    
    $
    273,416Commercial
    
    
    104,596
    
    
    
    57,338
    
    
    
    161,934Fidelity and other
    
    
    4,015
    
    
    
    8,093
    
    
    
    12,108Total
    
    $
    223,954
    
    
    $
    223,504
    
    
    $
    447,458
    -
    
    Historical development method, sometimes referred to as a link ratio method;-
    
    Bornhuetter-Ferguson method on both a paid and incurred basis;-
    
    Average hindsight outstanding projection method;-
    
    Frequency-severity method; and-
    
    Loss ratio method.
        - 17 -




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-
    
    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;
 - 18 -




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-
    
    Changes in the claims handling process; and-
    
    Current economic conditions, especially corporate default rates and the condition of the construction economy.
   Gross Basis:Recorded loss reserves at December 31, 2006
    
    $
    434,224Actuarial point estimate at December 31, 2006
    
    
    438,313Difference at December 31, 2006
    
    $
    (4,089
    )Difference as a % of actuarial point estimate
    
    
    (0.9
    )%Recorded loss reserves at June 30, 2007
    
    $
    435,569Actuarial point estimate at June 30, 2007
    
    
    422,169Difference at June 30, 2007
    
    $
    13,400Difference as a % of actuarial point estimate
    
    
    3.2
    %Recorded loss reserves at September 30, 2007
    
    $
    447,458Net Basis:Recorded loss reserves at December 31, 2006
    
    $
    289,366Actuarial point estimate at December 31, 2006
    
    
    292,703Difference at December 31, 2006
    
    $
    (3,337
    )Difference as a % of actuarial point estimate
    
    
    (1.1
    )%Recorded loss reserves at June 30, 2007
    
    $
    292,593Actuarial point estimate at June 30, 2007
    
    
    284,975Difference at June 30, 2007
    
    $
    7,618Difference as a % of actuarial point estimate
    
    
    2.7
    %Recorded loss reserves at September 30, 2007
    
    $
    309,106
    - 19 -




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Gross written premiums
    
    $
    123,549
    
    
    $
    115,904
    
    
    $
    367,902
    
    
    $
    347,947Net written premiums
    
    $
    113,977
    
    
    $
    105,067
    
    
    $
    338,967
    
    
    $
    316,170Net earned premiums
    
    $
    113,617
    
    
    $
    102,798
    
    
    $
    317,607
    
    
    $
    291,727Net losses and loss adjustment expenses
    
    $
    23,835
    
    
    $
    21,133
    
    
    $
    75,632
    
    
    $
    69,674Net commissions, brokerage and other expenses
    
    $
    59,952
    
    
    $
    56,527
    
    
    $
    170,870
    
    
    $
    160,954Loss ratio
    
    
    21.0
    %
    
    
    20.6
    %
    
    
    23.8
    %
    
    
    23.9
    %Expense ratio
    
    
    52.8
    
    
    
    55.0
    
    
    
    53.8
    
    
    
    55.2Combined ratio
    
    
    73.8
    %
    
    
    75.6
    %
    
    
    77.6
    %
    
    
    79.1
    %
     Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Contract
    
    $
    82,381
    
    
    $
    74,444
    
    
    $
    240,397
    
    
    $
    220,646Commercial
    
    
    33,361
    
    
    
    33,862
    
    
    
    103,048
    
    
    
    102,734Fidelity and other
    
    
    7,807
    
    
    
    7,598
    
    
    
    24,457
    
    
    
    24,567$
    123,549
    
    
    $
    115,904
    
    
    $
    367,902
    
    
    $
    347,947
   - 23 -




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Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Contract
    
    $
    73,824
    
    
    $
    64,896
    
    
    $
    214,344
    
    
    $
    192,299Commercial
    
    
    32,346
    
    
    
    32,573
    
    
    
    100,166
    
    
    
    99,304Fidelity and other
    
    
    7,807
    
    
    
    7,598
    
    
    
    24,457
    
    
    
    24,567$
    113,977
    
    
    $
    105,067
    
    
    $
    338,967
    
    
    $
    316,170
    Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Contract
    
    $
    72,482
    
    
    $
    61,553
    
    
    $
    196,424
    
    
    $
    170,046Commercial
    
    
    33,162
    
    
    
    32,848
    
    
    
    97,545
    
    
    
    96,261Fidelity and other
    
    
    7,973
    
    
    
    8,397
    
    
    
    23,638
    
    
    
    25,420$
    113,617
    
    
    $
    102,798
    
    
    $
    317,607
    
    
    $
    291,727
          - 24 -




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Gross realized investment gains
    
    $
    123
    
    
    $
    41
    
    
    $
    514
    
    
    $
    155Gross realized investment losses
    
    
    (58
    )
    
    
    (1,040
    )
    
    
    (1,000
    )
    
    
    (1,049
    )Net realized investment gains (losses)
    
    $
    65
    
    
    $
    (999
    )
    
    $
    (486
    )
    
    $
    (894
    )
   - 26 -




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Contractual Obligations as of September 30, 2007
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    Thereafter
    
    
    TotalDebt (a)
    
    $
    0.7
    
    
    $
    2.8
    
    
    $
    2.8
    
    
    $
    2.8
    
    
    $
    2.8
    
    
    $
    92.9
    
    
    $
    104.8Operating leases
    
    
    0.5
    
    
    
    2.0
    
    
    
    2.0
    
    
    
    1.9
    
    
    
    1.8
    
    
    
    0.8
    
    
    
    9.0Loss and loss adjustment expense reserves
    
    
    32.9
    
    
    
    186.2
    
    
    
    100.8
    
    
    
    52.3
    
    
    
    25.7
    
    
    
    49.6
    
    
    
    447.5Other long-term liabilities (b)
    
    
    0.1
    
    
    
    1.2
    
    
    
    1.1
    
    
    
    0.7
    
    
    
    0.6
    
    
    
    13.5
    
    
    
    17.2Total
    
    $
    34.2
    
    
    $
    192.2
    
    
    $
    106.7
    
    
    $
    57.7
    
    
    $
    30.9
    
    
    $
    156.8
    
    
    $
    578.5
 
 (a)
    
    Reflects expected principal and interest payments.(b)
    
    Reflects unfunded postretirement benefit plans and long-term incentive plan payments to
certain executives.  - 28 -




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Gross
    
    
    Gross Unrealized LossesAmortized Cost
    
    Unrealized
    

Less Than
    

More Than
    
    EstimatedSeptember 30, 2007
    
    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
    
    $
    14,789
    
    
    $
    67
    
    
    $
    
    
    
    $
    (44
    )
    
    $
    14,812U.S. Agencies
    
    
    28,026
    
    
    
    206
    
    
    
    
    
    
    
    (79
    )
    
    
    28,153Collateralized mortgage obligations
    
    
    30,777
    
    
    
    373
    
    
    
    (102
    )
    
    
    (297
    )
    
    
    30,751Mortgage pass-through securities
    
    
    41,849
    
    
    
    145
    
    
    
    
    
    
    
    (1,153
    )
    
    
    40,841Obligations of states and political subdivisions
    
    
    645,678
    
    
    
    11,387
    
    
    
    (3,533
    )
    
    
    (5
    )
    
    
    653,527Corporate bonds
    
    
    43,622
    
    
    
    877
    
    
    
    
    
    
    
    (1,458
    )
    
    
    43,041Non-agency collateralized mortgage obligations
    
    
    35,025
    
    
    
    194
    
    
    
    
    
    
    
    (912
    )
    
    
    34,307Other asset-backed securities:Second mortgages/home equity loans
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    (112
    )
    
    
    9,888Credit card receivables
    
    
    17,233
    
    
    
    207
    
    
    
    
    
    
    
    
    
    
    
    17,440Other
    
    
    10,797
    
    
    
    103
    
    
    
    
    
    
    
    (127
    )
    
    
    10,773Total fixed income securities
    
    
    877,796
    
    
    
    13,559
    
    
    
    (3,635
    )
    
    
    (4,187
    )
    
    
    883,533Equity securities
    
    
    1,583
    
    
    
    201
    
    
    
    
    
    
    
    
    
    
    
    1,784Total
    
    $
    879,379
    
    
    $
    13,760
    
    
    $
    (3,635
    )
    
    $
    (4,187
    )
    
    $
    885,317
 Gross
    
    
    Gross Unrealized LossesAmortized Cost
    
    Unrealized
    
    Less Than
    
    More Than
    
    EstimatedDecember 31, 2006
    
    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
    
    $
    14,832
    
    
    $
    
    
    
    $
    
    
    
    $
    (327
    )
    
    $
    14,505U.S. Agencies
    
    
    62,106
    
    
    
    14
    
    
    
    (96
    )
    
    
    (260
    )
    
    
    61,764Collateralized mortgage obligations
    
    
    16,969
    
    
    
    294
    
    
    
    
    
    
    
    (326
    )
    
    
    16,937Mortgage pass-through securities
    
    
    38,851
    
    
    
    77
    
    
    
    
    
    
    
    (1,129
    )
    
    
    37,799Obligations of states and political subdivisions
    
    
    492,640
    
    
    
    13,833
    
    
    
    (118
    )
    
    
    (10
    )
    
    
    506,345Corporate bonds
    
    
    66,943
    
    
    
    1,375
    
    
    
    (5
    )
    
    
    (1,059
    )
    
    
    67,254Non-agency collateralized mortgage obligations
    
    
    37,069
    
    
    
    210
    
    
    
    
    
    
    
    (817
    )
    
    
    36,462Other asset-backed securities:Second mortgages/home equity loans
    
    
    20,925
    
    
    
    
    
    
    
    (26
    )
    
    
    (150
    )
    
    
    20,749Credit card receivables
    
    
    17,230
    
    
    
    211
    
    
    
    
    
    
    
    
    
    
    
    17,441Other
    
    
    5,613
    
    
    
    62
    
    
    
    
    
    
    
    (140
    )
    
    
    5,535Total fixed income securities
    
    
    773,178
    
    
    
    16,076
    
    
    
    (245
    )
    
    
    (4,218
    )
    
    
    784,791Equity securities
    
    
    1,508
    
    
    
    160
    
    
    
    
    
    
    
    
    
    
    
    1,668Total
    
    $
    774,686
    
    
    $
    16,236
    
    
    $
    (245
    )
    
    $
    (4,218
    )
    
    $
    786,459
 - 30 -




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September 30, 2007
    
    
    December 31, 2006Estimated
    
    
    Gross
    
    
    Estimated
    
    
    GrossUnrealized Loss Aging
    
    Fair Value
    
    
    Unrealized Loss
    
    
    Fair Value
    
    
    Unrealized LossFixed income securities:Investment grade:0-6 months
    
    $
    92,097
    
    
    $
    1,484
    
    
    $
    75,215
    
    
    $
    2057-12 months
    
    
    77,850
    
    
    
    2,151
    
    
    
    10,104
    
    
    
    4013-24 months
    
    
    22,396
    
    
    
    339
    
    
    
    137,954
    
    
    
    3,457Greater than 24 months
    
    
    86,341
    
    
    
    3,650
    
    
    
    16,206
    
    
    
    684Total investment grade
    
    
    278,684
    
    
    
    7,624
    
    
    
    239,479
    
    
    
    4,386Non-investment grade
    
    
    3,833
    
    
    
    198
    
    
    
    3,960
    
    
    
    77Total
    
    $
    282,517
    
    
    $
    7,822
    
    
    $
    243,439
    
    
    $
    4,463
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
    
    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 availability of bank credit facilities;
    
    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.
  
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HypotheticalEstimated Fair
    
    
    PercentageHypothetical
    
    
    Value After
    
    
    IncreaseFair Value at
    
    
    Change in
    
    
    Hypothetical
    
    
    (Decrease) inSeptember 30,
    
    
    Interest Rate
    
    
    Change in
    
    
    Stockholders2007
    
    
    (bp=basis points)
    
    
    Interest Rate
    
    
    Equity(Dollars in thousands)U.S. Government and government agencies and authorities
    
    $
    114,557
    
    
    200 bp increase
    
    $
    103,243
    
    
    
    (1.2
    )%100 bp increase
    
    
    109,289
    
    
    
    (0.5
    )100 bp decrease
    
    
    118,112
    
    
    
    0.4200 bp decrease
    
    
    119,995
    
    
    
    0.6States, municipalities and political subdivisions
    
    
    653,527
    
    
    200 bp increase
    
    
    579,365
    
    
    
    (7.6
    )100 bp increase
    
    
    615,409
    
    
    
    (3.9
    )100 bp decrease
    
    
    693,820
    
    
    
    4.1200 bp decrease
    
    
    737,200
    
    
    
    8.6Corporate bonds and all other
    
    
    115,449
    
    
    200 bp increase
    
    
    106,647
    
    
    
    (0.9
    )100 bp increase
    
    
    110,928
    
    
    
    (0.5
    )100 bp decrease
    
    
    120,225
    
    
    
    0.5200 bp decrease
    
    
    125,226
    
    
    
    1.0Total fixed income securities available-for-sale
    
    $
    883,533
    
    
    200 bp increase
    
    
    789,255
    
    
    
    (9.6
    )100 bp increase
    
    
    835,626
    
    
    
    (4.9
    )100 bp decrease
    
    
    932,167
    
    
    
    5.0200 bp decrease
    
    
    982,421
    
    
    
    10.1
 HypotheticalEstimated Fair
    
    
    PercentageHypothetical
    
    
    Value After
    
    
    IncreaseFair Value at
    
    
    Change in
    
    
    Hypothetical
    
    
    (Decrease) inDecember 31,
    
    
    Interest Rate
    
    
    Change in
    
    
    Stockholders2006
    
    
    (bp=basis points)
    
    
    Interest Rate
    
    
    Equity(Dollars in thousands)U.S. Government and government agencies and authorities
    
    $
    131,005
    
    
    200 bp increase
    
    $
    120,310
    
    
    
    (1.2
    )%100 bp increase
    
    
    126,070
    
    
    
    (0.6
    )100 bp decrease
    
    
    134,299
    
    
    
    0.4200 bp decrease
    
    
    136,143
    
    
    
    0.6States, municipalities and political subdivisions
    
    
    506,345
    
    
    200 bp increase
    
    
    447,610
    
    
    
    (6.7
    )100 bp increase
    
    
    476,768
    
    
    
    (3.4
    )100 bp decrease
    
    
    537,633
    
    
    
    3.6200 bp decrease
    
    
    571,614
    
    
    
    7.5Corporate bonds and all other
    
    
    147,441
    
    
    200 bp increase
    
    
    136,456
    
    
    
    (1.3
    )100 bp increase
    
    
    141,804
    
    
    
    (0.6
    )100 bp decrease
    
    
    153,399
    
    
    
    0.7200 bp decrease
    
    
    159,611
    
    
    
    1.4Total fixed income securities available-for-sale
    
    $
    784,791
    
    
    200 bp increase
    
    
    704,376
    
    
    
    (9.2
    )100 bp increase
    
    
    744,642
    
    
    
    (4.6
    )100 bp decrease
    
    
    825,331
    
    
    
    4.7200 bp decrease
    
    
    867,368
    
    
    
    9.5
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Exhibit NumberCertification of Chief Executive Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
    
    
    31.1Certification of Chief Financial Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
    
    
    31.2Certification of Chief Executive Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
    
    
    32.1Certification 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. - 35 -




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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 26, 2007
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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.
 - 37 -