##### 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 March 31, 2010
 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
(State or other jurisdiction of 
incorporation or organization)
    
    36-4144905
(I.R.S. Employer
Identification No.)333 S. WABASH AVE., CHICAGO, ILLINOIS
(Address of principal executive offices)
    
    60604
(Zip Code)
 (312) 822-5000
(Registrants telephone number, including area code)
 þ o
 o þ
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller Reporting Company o
 o þ
 
 o o




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##### 



PagePART I. FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements (Unaudited):Condensed Consolidated Balance Sheets at March 31, 2010 and at December 31, 2009
    
    
    3Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2010 and 2009
    
    
    4Condensed Consolidated Statements of Stockholders Equity for the Three Months Ended March 31, 2010 and 2009
    
    
    5Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    39Item 4. Controls and Procedures
    
    
    41PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    41Item 1A. Risk Factors
    
    
    41Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    41Item 3. Defaults Upon Senior Securities
    
    
    42Item 4.
    
    
    42Item 5. Other Information
    
    
    42Item 6. Exhibits
    
    
    42EX-10.49EX-31.1EX-31.2EX-32.1EX-32.2
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CNA SURETY CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 March 31,
    
    
    December 31,2010
    
    
    2009(Amounts in thousands,except per share data)AssetsInvested assets:Fixed income securities, at fair value (amortized cost: $1,258,775 and $1,219,270)
    
    $
    1,308,297
    
    
    $
    1,266,223Equity securities, at fair value (cost: $1,650 and $1,429)
    
    
    1,852
    
    
    
    1,610Short-term investments, at amortized cost (approximates fair value)
    
    
    39,970
    
    
    
    48,999Total invested assets
    
    
    1,350,119
    
    
    
    1,316,832Cash
    
    
    2,018
    
    
    
    5,822Deferred policy acquisition costs
    
    
    102,660
    
    
    
    99,836Insurance receivables:Premiums, including $9,215 and $9,753 from affiliates, (net of allowance for doubtful
accounts: $1,112 and $1,110)
    
    
    43,089
    
    
    
    33,392Reinsurance
    
    
    49,144
    
    
    
    48,645Deposit with affiliated ceding company
    
    
    26,904
    
    
    
    26,878Goodwill 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: $38,603
and $37,514)
    
    
    18,936
    
    
    
    19,681Prepaid reinsurance premiums
    
    
    197
    
    
    
    210Accrued investment income
    
    
    14,724
    
    
    
    15,832Other assets
    
    
    2,548
    
    
    
    3,122Total assets
    
    $
    1,749,124
    
    
    $
    1,709,035LiabilitiesReserves:Unpaid losses and loss adjustment expenses
    
    $
    426,458
    
    
    $
    406,123Unearned premiums
    
    
    256,171
    
    
    
    247,776Total reserves
    
    
    682,629
    
    
    
    653,899Long-term debt
    
    
    30,930
    
    
    
    30,930Deferred income taxes, net
    
    
    29,663
    
    
    
    28,065Reinsurance and other payables to affiliates
    
    
    676
    
    
    
    548Accrued expenses
    
    
    12,169
    
    
    
    18,586Liability for postretirement benefits
    
    
    10,911
    
    
    
    10,718Payable for securities purchased
    
    
    3,426
    
    
    
    1,356Income tax payable
    
    
    7,781
    
    
    
    13,389Other liabilities
    
    
    24,580
    
    
    
    28,460Total liabilities
    
    
    802,765
    
    
    
    785,951Commitments and contingencies (See Notes 3, 5, & 8)Stockholders EquityCommon stock, par value $.01 per share, 100,000 shares authorized; 45,659 shares issued and
44,298 shares outstanding at March 31, 2010 and 45,635 shares issued and 44,268 shares
outstanding at December 31, 2009
    
    
    457
    
    
    
    456Additional paid-in capital
    
    
    280,126
    
    
    
    279,388Retained earnings
    
    
    648,310
    
    
    
    627,505Accumulated other comprehensive income
    
    
    32,072
    
    
    
    30,406Treasury stock, 1,361 and 1,367 shares, at cost
    
    
    (14,606
    )
    
    
    (14,671
    )Total stockholders equity
    
    
    946,359
    
    
    
    923,084Total liabilities and stockholders equity
    
    $
    1,749,124
    
    
    $
    1,709,035
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CNA SURETY CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
 Three Months EndedMarch 31,2010
    
    
    2009(Amounts in thousands,except per share data)Revenues:Net earned premium
    
    $
    98,252
    
    
    $
    101,151Net investment income
    
    
    13,377
    
    
    
    12,246Net realized investment gains (losses):Other-than-temporary impairment losses
    
    
    
    
    
    
    (46
    )Portion of other-than-temporary impairment losses recognized in other comprehensive income
(before taxes)
    
    
    (94
    )
    
    
    Net impairment losses recognized in earnings
    
    
    (94
    )
    
    
    (46
    )Net realized investment gains (losses), excluding impairment losses on available-for-sale securities
    
    
    417
    
    
    
    (20
    )Total net realized investment gains (losses)
    
    
    323
    
    
    
    (66
    )Total revenues
    
    
    111,952
    
    
    
    113,331Expenses:Net losses and loss adjustment expenses
    
    
    28,581
    
    
    
    29,588Net commissions, brokerage and other underwriting expenses
    
    
    52,788
    
    
    
    54,278Interest expense
    
    
    281
    
    
    
    418Total expenses
    
    
    81,650
    
    
    
    84,284Income before income taxes
    
    
    30,302
    
    
    
    29,047Income tax expense
    
    
    9,497
    
    
    
    8,183Net income
    
    $
    20,805
    
    
    $
    20,864Earnings per common share
    
    $
    0.47
    
    
    $
    0.47Earnings per common share, assuming dilution
    
    $
    0.47
    
    
    $
    0.47Weighted average shares outstanding
    
    
    44,280
    
    
    
    44,206Weighted average shares outstanding, assuming dilution
    
    
    44,421
    
    
    
    44,376
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CNA
SURETY CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(UNAUDITED)
 Common
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    AccumulatedStock
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    Treasury
    
    
    TotalShares
    
    
    Common
    
    
    Paid-in
    
    
    Comprehensive
    
    
    Retained
    
    
    Comprehensive
    
    
    Stock
    
    
    StockholdersOutstanding
    
    
    Stock
    
    
    Capital
    
    
    Income
    
    
    Earnings
    
    
    Income (Loss)
    
    
    At Cost
    
    
    Equity(Amounts in thousands)Balance, January 1, 2009
    
    
    44,168
    
    
    $
    455
    
    
    $
    276,255
    
    
    
    
    
    
    $
    509,644
    
    
    $
    (4,286
    )
    
    $
    (14,773
    )
    
    $
    767,295Comprehensive income:Net income
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    20,864
    
    
    $
    20,864
    
    
    $
    
    
    
    $
    
    
    
    $
    20,864Other comprehensive income:Change in unrealized gains on
securities, after income tax
expense of $4,455 (net of
reclassification adjustment
of $0, after income tax
benefit of $0)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,272
    
    
    
    
    
    
    
    8,272
    
    
    
    
    
    
    
    8,272Net change related to
postretirement benefits, after
income tax benefit of $12
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28
    )
    
    
    
    
    
    
    (28
    )
    
    
    
    
    
    
    (28
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    29,108
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    578
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    578Stock options exercised and other
    
    
    72
    
    
    
    1
    
    
    
    886
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41
    
    
    
    928Balance, March 31, 2009
    
    
    44,240
    
    
    $
    456
    
    
    $
    277,719
    
    
    
    
    
    
    $
    530,508
    
    
    $
    3,958
    
    
    $
    (14,732
    )
    
    $
    797,909Balance, January 1, 2010
    
    
    44,268
    
    
    $
    456
    
    
    $
    279,388
    
    
    
    
    
    
    $
    627,505
    
    
    $
    30,406
    
    
    $
    (14,671
    )
    
    $
    923,084Comprehensive income:Net income
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    20,805
    
    
    $
    20,805
    
    
    $
    
    
    
    $
    
    
    
    $
    20,805Other comprehensive income:Change in unrealized gains on
securities, after income tax
expense of $865 (net of
reclassification adjustment
of $228, after income tax
expense of $123)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,607
    
    
    
    
    
    
    
    1,607
    
    
    
    
    
    
    
    1,607Other-than-temporary
impairment losses not
recognized in the Condensed
Consolidated Statements of
Income, after income tax
expense of $41 (net of
reclassification adjustment of
($353), after income tax
benefit of $190)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77
    
    
    
    
    
    
    
    77
    
    
    
    
    
    
    
    77Net change related to
postretirement benefits, after
income tax benefit of $9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18
    )
    
    
    
    
    
    
    (18
    )
    
    
    
    
    
    
    (18
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    22,471
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    441
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    441Stock options exercised and other
    
    
    30
    
    
    
    1
    
    
    
    297
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65
    
    
    
    363Balance, March 31, 2010
    
    
    44,298
    
    
    $
    457
    
    
    $
    280,126
    
    
    
    
    
    
    $
    648,310
    
    
    $
    32,072
    
    
    $
    (14,606
    )
    
    $
    946,359
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CNA SURETY CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Three Months EndedMarch 31,2010
    
    
    2009(Amounts in thousands)Cash Flows from Operating Activities:Net income
    
    $
    20,805
    
    
    $
    20,864Adjustments to reconcile net income to net cash provided by operating activities:Provision for doubtful accounts
    
    
    95
    
    
    
    (48
    )Depreciation and amortization
    
    
    1,476
    
    
    
    1,524Amortization of bond premium, net
    
    
    1,492
    
    
    
    1,126Gain on disposal of property and equipment
    
    
    (49
    )
    
    
    (3
    )Net realized investment (gains) losses
    
    
    (323
    )
    
    
    66Stock-based compensation
    
    
    441
    
    
    
    578Deferred income tax expense
    
    
    661
    
    
    
    38Changes in:Insurance receivables
    
    
    (10,291
    )
    
    
    (8,273
    )Reserve for unearned premiums
    
    
    8,395
    
    
    
    2,908Reserve for unpaid losses and loss adjustment expenses
    
    
    20,335
    
    
    
    25,000Deposit with affiliated ceding company
    
    
    (26
    )
    
    
    2,382Deferred policy acquisition costs
    
    
    (2,824
    )
    
    
    (1,964
    )Reinsurance and other payables to affiliates
    
    
    128
    
    
    
    (1,609
    )Prepaid reinsurance premiums
    
    
    13
    
    
    
    (40
    )Accrued expenses
    
    
    (6,417
    )
    
    
    (8,439
    )Other assets and liabilities
    
    
    (7,599
    )
    
    
    (458
    )Net cash provided by operating activities
    
    
    26,312
    
    
    
    33,652Cash Flows from Investing Activities:Fixed income securities:Purchases
    
    
    (63,950
    )
    
    
    (68,727
    )Maturities
    
    
    14,834
    
    
    
    21,787Sales
    
    
    8,422
    
    
    
    Purchases of equity securities
    
    
    (274
    )
    
    
    (473
    )Proceeds from the sale of equity securities
    
    
    65
    
    
    
    336Changes in short-term investments
    
    
    9,036
    
    
    
    24,689Purchases of property and equipment, net
    
    
    (682
    )
    
    
    (1,592
    )Changes in payables for securities purchased
    
    
    2,070
    
    
    
    (8,398
    )Net cash (used in) investing activities
    
    
    (30,479
    )
    
    
    (32,378
    )Cash Flows from Financing Activities:Employee stock option exercises and other
    
    
    363
    
    
    
    928Net cash provided by financing activities
    
    
    363
    
    
    
    928(Decrease) increase in cash
    
    
    (3,804
    )
    
    
    2,202Cash at beginning of period
    
    
    5,822
    
    
    
    9,596Cash at end of period
    
    $
    2,018
    
    
    $
    11,798Supplemental Disclosure of Cash Flow Information:Cash paid during the period for:Interest
    
    $
    288
    
    
    $
    437Income taxes
    
    $
    14,404
    
    
    $
    2,312
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CNA SURETY CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
(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 EndedMarch 31,2010
    
    
    2009Net income
    
    $
    20,805
    
    
    $
    20,864Shares:Weighted average shares outstanding
    
    
    44,268
    
    
    
    44,168Weighted average shares of options exercised and additional stock issuance
    
    
    12
    
    
    
    38Total weighted average shares outstanding
    
    
    44,280
    
    
    
    44,206Effect of dilutive options
    
    
    141
    
    
    
    170Total weighted average shares outstanding, assuming dilution
    
    
    44,421
    
    
    
    44,376Earnings per share
    
    $
    0.47
    
    
    $
    0.47Earnings per share, assuming dilution
    
    $
    0.47
    
    
    $
    0.47
  Adopted Accounting Pronouncements
      8




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##### Table of Contents



2. Investments
  Three Months EndedMarch 31,2010
    
    
    2009Investment income:Fixed income securities
    
    $
    13,666
    
    
    $
    12,303Equity securities
    
    
    8
    
    
    
    9Short-term investments
    
    
    15
    
    
    
    48Other
    
    
    13
    
    
    
    19Total investment income on available-for-sale securities
    
    
    13,702
    
    
    
    12,379Investment income on deposit with affiliated ceding company
    
    
    26
    
    
    
    157Investment expenses
    
    
    351
    
    
    
    290Net investment income
    
    
    13,377
    
    
    
    12,246
  Three Months EndedMarch 31,2010
    
    
    2009Net realized investment gains (losses):Fixed income securities:Gross realized investment gains
    
    $
    425
    
    
    $
    Gross realized investment losses:Other-than-temporary impairment losses
    
    
    (94
    )
    
    
    Realized losses from sales
    
    
    (19
    )
    
    
    Total gross realized investment losses
    
    
    (113
    )
    
    
    Net realized investment gains on fixed income securities
    
    
    312
    
    
    
    Equity securities:Gross realized investment gains
    
    
    11
    
    
    
    Gross realized investment losses:Other-than-temporary impairment losses
    
    
    
    
    
    
    (46
    )Realized losses from sales
    
    
    
    
    
    
    (20
    )Total gross realized investment losses
    
    
    
    
    
    
    (66
    )Net realized investment gains (losses) on equity securities
    
    
    11
    
    
    
    (66
    )Other
    
    
    
    
    
    
    Net realized investment gains (losses)
    
    
    323
    
    
    
    (66
    )Net change in unrealized gains (losses)Fixed income securities
    
    $
    2,569
    
    
    $
    (12,727
    )Equity securities
    
    
    21
    
    
    
    Total net change in unrealized gains (losses)
    
    $
    2,590
    
    
    $
    (12,727
    )Net realized gains (losses) and change in unrealized gains (losses)
    
    $
    2,913
    
    
    $
    (12,793
    )
 9




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Gross
    
    
    Gross Unrealized LossesAmortized Cost
    
    
    Unrealized
    
    
    Less Than
    
    
    More Than
    
    
    Estimated
    
    
    UnrealizedMarch 31, 2010
    
    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
    
    $
    18,085
    
    
    $
    977
    
    
    $
    
    
    
    $
    
    
    
    $
    19,062
    
    
    $
    U.S. Agencies
    
    
    6,528
    
    
    
    315
    
    
    
    
    
    
    
    
    
    
    
    6,843
    
    
    
    Collateralized mortgage obligations  residential
    
    
    29,832
    
    
    
    1,715
    
    
    
    
    
    
    
    
    
    
    
    31,547
    
    
    
    Mortgage pass-through securities  residential
    
    
    87,012
    
    
    
    2,638
    
    
    
    (45
    )
    
    
    
    
    
    
    89,605
    
    
    
    Obligations of states and political subdivisions
    
    
    699,069
    
    
    
    33,738
    
    
    
    (866
    )
    
    
    (2,505
    )
    
    
    729,436
    
    
    
    Corporate bonds
    
    
    382,765
    
    
    
    13,572
    
    
    
    (714
    )
    
    
    (150
    )
    
    
    395,473
    
    
    
    Collateralized mortgage obligations  commercial
    
    
    10,022
    
    
    
    163
    
    
    
    
    
    
    
    
    
    
    
    10,185
    
    
    
    Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    4,989
    
    
    
    
    
    
    
    
    
    
    
    (553
    )
    
    
    4,436
    
    
    
    (1,207
    )Consumer credit receivables
    
    
    10,767
    
    
    
    482
    
    
    
    
    
    
    
    
    
    
    
    11,249
    
    
    
    Other
    
    
    9,706
    
    
    
    755
    
    
    
    
    
    
    
    
    
    
    
    10,461
    
    
    
    Total fixed income securities
    
    
    1,258,775
    
    
    
    54,355
    
    
    
    (1,625
    )
    
    
    (3,208
    )
    
    
    1,308,297
    
    
    $
    (1,207
    )Equity securities
    
    
    1,650
    
    
    
    202
    
    
    
    
    
    
    
    
    
    
    
    1,852Total
    
    $
    1,260,425
    
    
    $
    54,557
    
    
    $
    (1,625
    )
    
    $
    (3,208
    )
    
    $
    1,310,149
 
 (a)
    
    The unrealized loss position of this security was $0.4 million at March 31, 2010.  Gross
    
    
    Gross Unrealized LossesAmortized Cost
    
    
    Unrealized
    
    
    Less Than
    
    
    More Than
    
    
    Estimated
    
    
    UnrealizedDecember 31, 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
    
    $
    17,378
    
    
    $
    970
    
    
    $
    
    
    
    $
    
    
    
    $
    18,348
    
    
    $
    U.S. Agencies
    
    
    9,794
    
    
    
    337
    
    
    
    
    
    
    
    
    
    
    
    10,131
    
    
    
    Collateralized mortgage obligations  residential
    
    
    30,709
    
    
    
    1,383
    
    
    
    
    
    
    
    
    
    
    
    32,092
    
    
    
    Mortgage pass-through securities  residential
    
    
    94,453
    
    
    
    2,336
    
    
    
    (232
    )
    
    
    
    
    
    
    96,557
    
    
    
    Obligations of states and political subdivisions
    
    
    696,505
    
    
    
    35,847
    
    
    
    (882
    )
    
    
    (2,902
    )
    
    
    728,568
    
    
    
    Corporate bonds
    
    
    334,136
    
    
    
    11,478
    
    
    
    (1,248
    )
    
    
    (257
    )
    
    
    344,109
    
    
    
    Collateralized mortgage obligations  commercial
    
    
    10,024
    
    
    
    
    
    
    
    
    
    
    
    (351
    )
    
    
    9,673
    
    
    
    Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    5,501
    
    
    
    
    
    
    
    
    
    
    
    (740
    )
    
    
    4,761
    
    
    
    (1,399
    )Consumer credit receivables
    
    
    11,055
    
    
    
    528
    
    
    
    
    
    
    
    
    
    
    
    11,583
    
    
    
    Other
    
    
    9,715
    
    
    
    686
    
    
    
    
    
    
    
    
    
    
    
    10,401
    
    
    
    Total fixed income securities
    
    
    1,219,270
    
    
    
    53,565
    
    
    
    (2,362
    )
    
    
    (4,250
    )
    
    
    1,266,223
    
    
    $
    (1,399
    )Equity securities
    
    
    1,429
    
    
    
    181
    
    
    
    
    
    
    
    
    
    
    
    1,610Total
    
    $
    1,220,699
    
    
    $
    53,746
    
    
    $
    (2,362
    )
    
    $
    (4,250
    )
    
    $
    1,267,833
 
 (a)
    
    The unrealized loss position of this security was $0.5 million at December 31, 2009.   10




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11




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##### Table of Contents



Beginning balance at January 1, 2010
    
    $
    116Credit losses for which an OTTI loss was not previously recognized
    
    
    Credit losses for which an OTTI loss was previously recognized
    
    
    94Ending balance at March 31, 2010
    
    $
    210
   March 31, 2010
    
    
    December 31, 2009Amortized
    
    
    Estimated Fair
    
    
    Amortized
    
    
    Estimated FairCost
    
    
    Value
    
    
    Cost
    
    
    ValueFixed income securities:Due within one year
    
    $
    33,239
    
    
    $
    34,664
    
    
    $
    13,006
    
    
    $
    13,224Due after one year but within five years
    
    
    337,092
    
    
    
    352,962
    
    
    
    304,654
    
    
    
    321,144Due after five years but within ten years
    
    
    450,617
    
    
    
    473,081
    
    
    
    447,485
    
    
    
    468,254Due after ten years
    
    
    285,499
    
    
    
    290,107
    
    
    
    292,668
    
    
    
    298,5341,106,447
    
    
    
    1,150,814
    
    
    
    1,057,813
    
    
    
    1,101,156Mortgage pass-through securities,
collateralized mortgage obligations and
asset-backed securities
    
    
    152,328
    
    
    
    157,483
    
    
    
    161,457
    
    
    
    165,067$
    1,258,775
    
    
    $
    1,308,297
    
    
    $
    1,219,270
    
    
    $
    1,266,223
  % ofEstimated
    
    
    % ofFair
    
    
    UnrealizedContractual Maturity
    
    Value
    
    
    LossDue after one year through five years
    
    
    20
    %
    
    
    6
    %Due after five years through ten years
    
    
    33
    
    
    
    19Due after ten years
    
    
    39
    
    
    
    63Asset-backed securities
    
    
    8
    
    
    
    12Total
    
    
    100
    %
    
    
    100
    %
 12




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##### Table of Contents



March 31, 2010
    
    
    December 31, 2009Gross
    
    
    
    
    
    
    GrossEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    UnrealizedUnrealized Loss Aging
    
    Fair Value
    
    
    Loss
    
    
    Fair Value
    
    
    LossFixed income securities:Investment grade (a):0-6 months
    
    $
    143,354
    
    
    $
    1,625
    
    
    $
    162,087
    
    
    $
    2,3627-12 months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13-24 months
    
    
    
    
    
    
    
    
    
    
    11,176
    
    
    
    469Greater than 24 months
    
    
    34,695
    
    
    
    1,656
    
    
    
    32,932
    
    
    
    2,065Total investment grade
    
    
    178,049
    
    
    
    3,281
    
    
    
    206,195
    
    
    
    4,896Non-investment grade:Greater than 24 months
    
    
    17,205
    
    
    
    1,552
    
    
    
    17,346
    
    
    
    1,716Total
    
    $
    195,254
    
    
    $
    4,833
    
    
    $
    223,541
    
    
    $
    6,612
 
 (a)
    
    Investment grade is determined by using the S&P rating. If
a security is not rated by S&P, the Moodys Investor
Services (Moodys) rating is used. As of March 31, 2010
and December 31, 2009, all of the Companys fixed income
securities were rated by S&P or Moodys.   Gross Unrealized Losses
    
    
    EstimatedMarch 31, 2010
    
    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:Mortgage pass-through securities  residential
    
    $
    45
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    45
    
    
    
    1
    
    
    $
    10,529Obligations of states and political subdivisions
    
    
    457
    
    
    
    997
    
    
    
    791
    
    
    
    
    
    
    
    2,245
    
    
    
    16
    
    
    
    82,271Corporate bonds
    
    
    10
    
    
    
    181
    
    
    
    394
    
    
    
    279
    
    
    
    864
    
    
    
    19
    
    
    
    82,955Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    127
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    127
    
    
    
    1
    
    
    
    2,294Total investment grade
    
    
    639
    
    
    
    1,178
    
    
    
    1,185
    
    
    
    279
    
    
    
    3,281
    
    
    
    37
    
    
    
    178,049Non-investment grade:Obligations of states and political subdivisions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,126
    
    
    
    2
    
    
    
    15,063Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    426
    
    
    
    1
    
    
    
    2,142Total non-investment grade
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,552
    
    
    
    3
    
    
    
    17,205Total
    
    $
    639
    
    
    $
    1,178
    
    
    $
    1,185
    
    
    $
    279
    
    
    $
    4,833
    
    
    
    40
    
    
    $
    195,254
 
 (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 March 31, 2010, all of the Companys fixed income
securities were rated by S&P or Moodys.   13




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14




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##### Table of Contents



3. Reinsurance
  Three Months Ended March 31,2010
    
    
    2009Written
    
    
    Earned
    
    
    Written
    
    
    EarnedDirect
    
    $
    91,963
    
    
    $
    81,879
    
    
    $
    89,128
    
    
    $
    83,341Assumed
    
    
    20,564
    
    
    
    22,253
    
    
    
    21,997
    
    
    
    24,876Ceded
    
    
    (5,867
    )
    
    
    (5,880
    )
    
    
    (7,106
    )
    
    
    (7,066
    )Net premiums
    
    $
    106,660
    
    
    $
    98,252
    
    
    $
    104,019
    
    
    $
    101,151
     Three Months Ended March 31,2010
    
    
    2009$
    
    
    Ratio
    
    
    $
    
    
    RatioGross losses and loss adjustment expenses
    
    $
    27,815
    
    
    
    26.7
    %
    
    $
    31,308
    
    
    
    28.9
    %Ceded amounts
    
    
    766
    
    
    
    (13.0
    )%
    
    
    (1,720
    )
    
    
    24.3
    %Net losses and loss adjustment expenses
    
    $
    28,581
    
    
    
    29.1
    %
    
    $
    29,588
    
    
    
    29.3
    %
  Excess of Loss Reinsurance
  2009 Third Party Reinsurance
  15




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##### Table of Contents



2010 Third Party Reinsurance
  Related Party Reinsurance
      16




---



##### 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.
  17




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##### Table of Contents



Fixed Income Securities
  Equity Securities
  Short-Term Investments
   March 31, 2010Fair Value Measurement Using
    
    
    Assets 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
    
    $
    19,062
    
    
    $
    
    
    
    $
    
    
    
    $
    19,062U.S. Agencies
    
    
    
    
    
    
    6,843
    
    
    
    
    
    
    
    6,843Collateralized mortgage obligations  residential
    
    
    
    
    
    
    31,547
    
    
    
    
    
    
    
    31,547Mortgage pass-through securities  residential
    
    
    
    
    
    
    89,605
    
    
    
    
    
    
    
    89,605Obligations of states and political subdivisions
    
    
    
    
    
    
    729,436
    
    
    
    
    
    
    
    729,436Corporate bonds
    
    
    
    
    
    
    395,473
    
    
    
    
    
    
    
    395,473Collateralized mortgage obligations  commercial
    
    
    
    
    
    
    10,185
    
    
    
    
    
    
    
    10,185Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    
    
    
    
    4,436
    
    
    
    
    
    
    
    4,436Consumer credit receivables
    
    
    
    
    
    
    11,249
    
    
    
    
    
    
    
    11,249Other
    
    
    
    
    
    
    10,461
    
    
    
    
    
    
    
    10,461Total fixed income securities
    
    
    19,062
    
    
    
    1,289,235
    
    
    
    
    
    
    
    1,308,297Equity securities at fair value
    
    
    1,852
    
    
    
    
    
    
    
    
    
    
    
    1,852Short-term investments at fair value (a)
    
    
    34,900
    
    
    
    5,070
    
    
    
    
    
    
    
    39,970Total assets
    
    $
    55,814
    
    
    $
    1,294,305
    
    
    $
    
    
    
    $
    1,350,119
 
 (a)
    
    Includes commercial paper, U.S. Government agency discount notes and money market
funds. 18




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##### Table of Contents



December 31, 2009Fair Value Measurement Using
    
    
    Assets 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
    
    $
    18,348
    
    
    $
    
    
    
    $
    
    
    
    $
    18,348U.S. Agencies
    
    
    
    
    
    
    10,131
    
    
    
    
    
    
    
    10,131Collateralized mortgage obligations  residential
    
    
    
    
    
    
    32,092
    
    
    
    
    
    
    
    32,092Mortgage pass-through securities  residential
    
    
    
    
    
    
    96,557
    
    
    
    
    
    
    
    96,557Obligations of states and political subdivisions
    
    
    
    
    
    
    728,568
    
    
    
    
    
    
    
    728,568Corporate bonds
    
    
    
    
    
    
    344,109
    
    
    
    
    
    
    
    344,109Collateralized mortgage obligations  commercial
    
    
    
    
    
    
    9,673
    
    
    
    
    
    
    
    9,673Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    
    
    
    
    4,761
    
    
    
    
    
    
    
    4,761Consumer credit receivables
    
    
    
    
    
    
    11,583
    
    
    
    
    
    
    
    11,583Other
    
    
    
    
    
    
    10,401
    
    
    
    
    
    
    
    10,401Total fixed income securities
    
    
    18,348
    
    
    
    1,247,875
    
    
    
    
    
    
    
    1,266,223Equity securities at fair value
    
    
    1,610
    
    
    
    
    
    
    
    
    
    
    
    1,610Short-term investments at fair value (a)
    
    
    15,412
    
    
    
    33,587
    
    
    
    
    
    
    
    48,999Total assets
    
    $
    35,370
    
    
    $
    1,281,462
    
    
    $
    
    
    
    $
    1,316,832
 
 (a)
    
    Includes commercial paper, U.S. Government agency discount notes and money market
funds.  5. Reserves for Losses and Loss Adjustment Expenses
  Three Months EndedMarch 31,2010
    
    
    2009Reserves at beginning of period:Gross
    
    $
    406,123
    
    
    $
    428,724Ceded reinsurance
    
    
    50,968
    
    
    
    83,691Net reserves at beginning of period
    
    
    355,155
    
    
    
    345,033Net incurred loss and loss adjustment expenses:Provision for insured events of current year
    
    
    28,581
    
    
    
    29,637(Decrease) increase in provision for insured events of prior years
    
    
    
    
    
    
    (49
    )Total net incurred
    
    
    28,581
    
    
    
    29,588Net payments attributable to:Current year events
    
    
    690
    
    
    
    781Prior year events
    
    
    8,092
    
    
    
    11,775Total net payments
    
    
    8,782
    
    
    
    12,556Foreign currency transaction adjustments
    
    
    74
    
    
    
    Net reserves at end of period
    
    
    375,028
    
    
    
    362,065Ceded reinsurance at end of period
    
    
    51,430
    
    
    
    91,659Gross reserves at end of period
    
    $
    426,458
    
    
    $
    453,724
 6. Debt
  19




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##### Table of Contents



7. Employee Benefits
    Three Months EndedMarch 31,2010
    
    
    2009Net periodic benefit cost:Service cost
    
    $
    61
    
    
    $
    53Interest cost
    
    
    158
    
    
    
    134Amortization of prior service cost
    
    
    (28
    )
    
    
    (40
    )Net amortization of actuarial loss
    
    
    1
    
    
    
    Net periodic benefit cost
    
    $
    192
    
    
    $
    147
  8. Commitments and Contingencies
  20




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##### Table of Contents



9. Income Taxes
    10. Stockholders Equity
  Equity Compensation Plans
      21




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##### Table of Contents



WeightedAverageShares
    
    
    ExerciseSubject
    
    
    Price PerTo Option
    
    
    ShareOutstanding options at January 1, 2009
    
    
    1,221,118
    
    
    $
    14.93Options granted
    
    
    217,960
    
    
    $
    18.85Options forfeited
    
    
    (570
    )
    
    $
    16.35Options expired
    
    
    (1,090
    )
    
    $
    13.09Options exercised
    
    
    (68,305
    )
    
    $
    11.50Outstanding options at March 31, 2009
    
    
    1,369,113
    
    
    $
    15.72Outstanding options at January 1, 2010
    
    
    1,318,288
    
    
    $
    15.78Options granted
    
    
    281,260
    
    
    $
    14.32Options forfeited
    
    
    (6,685
    )
    
    $
    18.01Options expired
    
    
    (1,445
    )
    
    $
    19.76Options exercised
    
    
    (23,775
    )
    
    $
    12.23Outstanding options at March 31, 2010
    
    
    1,567,643
    
    
    $
    15.56
  WeightedShares
    
    
    AverageSubject
    
    
    Grant DateTo Option
    
    
    Fair ValueNon-vested options at January 1, 2009
    
    
    545,095
    
    
    $
    7.29Options granted
    
    
    217,960
    
    
    $
    8.95Options vested
    
    
    (136,849
    )
    
    $
    7.82Options forfeited
    
    
    (570
    )
    
    $
    6.32Non-vested options at March 31, 2009
    
    
    625,636
    
    
    $
    7.76Non-vested options at January 1, 2010
    
    
    539,396
    
    
    $
    8.10Options granted
    
    
    281,260
    
    
    $
    7.25Options vested
    
    
    (185,202
    )
    
    $
    8.14Options forfeited
    
    
    (6,685
    )
    
    $
    7.97Non-vested options at March 31, 2010
    
    
    628,769
    
    
    $
    7.71
  Options Vested or Expected to VestWeighted
    
    
    
    
    
    
    Weighted AverageAverage
    
    
    Aggregate
    
    
    RemainingNumber
    
    
    Exercise Price
    
    
    Intrinsic Value
    
    
    Contractual LifeMarch 31, 2010
    
    
    1,490,357
    
    
    $
    15.50
    
    
    $
    4,430,612
    
    
    6.9 years
 Options ExercisableWeighted
    
    
    
    
    
    
    Weighted AverageAverage
    
    
    Aggregate
    
    
    RemainingNumber
    
    
    Exercise Price
    
    
    Intrinsic Value
    
    
    Contractual LifeMarch 31, 2010
    
    
    938,874
    
    
    $
    14.88
    
    
    $
    3,427,235
    
    
    5.7 years
   22




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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
    
    $
    58,973
    
    
    $
    246,042
    
    
    $
    305,015Commercial
    
    
    56,677
    
    
    
    53,175
    
    
    
    109,852Fidelity and other
    
    
    3,550
    
    
    
    8,041
    
    
    
    11,591Total
    
    $
    119,200
    
    
    $
    307,258
    
    
    $
    426,458
 23




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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.
     Investments
   24




---



##### Table of Contents



Goodwill and Other Intangible Assets
   Insurance Premiums
   25




---



##### Table of Contents



Deferred Policy Acquisitions Costs
  Results of Operations
 Financial Measures
     Comparison of CNA Surety Actual Results for the Three Months Ended March 31, 2010 and 2009
 Analysis of Net Income
   26




---



##### Table of Contents



Results of Insurance Operations
  Three Months Ended March 31,2010
    
    
    2009Gross written premiums
    
    $
    112,527
    
    
    $
    111,125Net written premiums
    
    $
    106,660
    
    
    $
    104,019Net earned premiums
    
    $
    98,252
    
    
    $
    101,151Net losses and loss adjustment expenses
    
    $
    28,581
    
    
    $
    29,588Net commissions, brokerage and other underwriting expenses
    
    $
    52,788
    
    
    $
    54,278Loss ratio
    
    
    29.1
    %
    
    
    29.3
    %Expense ratio
    
    
    53.7
    
    
    
    53.7Combined ratio
    
    
    82.8
    %
    
    
    83.0
    %
 Premiums Written/Earned
     Three Months Ended March 31,2010
    
    
    2009Contract
    
    $
    68,457
    
    
    $
    67,355Commercial
    
    
    35,221
    
    
    
    34,978Fidelity and other
    
    
    8,849
    
    
    
    8,792Total
    
    $
    112,527
    
    
    $
    111,125
   27




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##### Table of Contents



Three Months Ended March 31,2010
    
    
    2009Contract
    
    $
    63,313
    
    
    $
    61,025Commercial
    
    
    34,498
    
    
    
    34,202Fidelity and other
    
    
    8,849
    
    
    
    8,792Total
    
    $
    106,660
    
    
    $
    104,019
   Three Months Ended March 31,2010
    
    
    2009Contract
    
    $
    58,526
    
    
    $
    61,292Commercial
    
    
    32,276
    
    
    
    32,217Fidelity and other
    
    
    7,450
    
    
    
    7,642$
    98,252
    
    
    $
    101,151
  Net Loss Ratio
  Expense Ratio
  Investment Income and Realized Investment Gains/Losses
  28




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##### Table of Contents



Three Months EndedMarch 31,2010
    
    
    2009Net realized investment gains (losses):Fixed income securities:Gross realized investment gains
    
    $
    425
    
    
    $
    Gross realized investment losses:Other-than-temporary impairment losses
    
    
    (94
    )
    
    
    Realized losses from sales
    
    
    (19
    )
    
    
    Total gross realized investment losses
    
    
    (113
    )
    
    
    Net realized investment gains on fixed income securities
    
    
    312
    
    
    
    Equity securities:Gross realized investment gains
    
    
    11
    
    
    
    Gross realized investment losses:Other-than-temporary impairment losses
    
    
    
    
    
    
    (46
    )Realized losses from sales
    
    
    
    
    
    
    (20
    )Total gross realized investment losses
    
    
    
    
    
    
    (66
    )Net realized investment gains (losses) on equity securities
    
    
    11
    
    
    
    (66
    )Other
    
    
    
    
    
    
    Net realized investment gains (losses)
    
    
    323
    
    
    
    (66
    )Net change in unrealized gains (losses)Fixed income securities
    
    $
    2,569
    
    
    $
    (12,727
    )Equity securities
    
    
    21
    
    
    
    Total net change in unrealized gains (losses)
    
    $
    2,590
    
    
    $
    (12,727
    )Net realized gains (losses) and change in unrealized gains (losses)
    
    $
    2,913
    
    
    $
    (12,793
    )
  Interest Expense
  Income Taxes
   29




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##### Table of Contents



Exposure Management
    Excess of Loss Reinsurance
  2009 Third Party Reinsurance
  2010 Third Party Reinsurance
  Related Party Reinsurance
  30




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##### Table of Contents



31




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##### Table of Contents



Liquidity and Capital Resources
        32




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##### Table of Contents



Contractual Obligations as of March 31, 2010
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    2014
    
    
    Thereafter
    
    
    TotalDebt (a)
    
    $
    0.9
    
    
    $
    1.1
    
    
    $
    1.1
    
    
    $
    1.1
    
    
    $
    1.1
    
    
    $
    52.7
    
    
    $
    58.0Operating leases
    
    
    1.5
    
    
    
    1.9
    
    
    
    0.9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.3Loss and loss adjustment expense reserves
    
    
    83.5
    
    
    
    107.8
    
    
    
    79.6
    
    
    
    52.9
    
    
    
    38.5
    
    
    
    64.2
    
    
    
    426.5Other long-term liabilities (b)
    
    
    0.3
    
    
    
    1.3
    
    
    
    1.0
    
    
    
    0.5
    
    
    
    0.4
    
    
    
    10.2
    
    
    
    13.7Total
    
    $
    86.2
    
    
    $
    112.1
    
    
    $
    82.6
    
    
    $
    54.5
    
    
    $
    40.0
    
    
    $
    127.1
    
    
    $
    502.5
 
 (a)
    
    Reflects expected principal and interest payments.(b)
    
    Reflects unfunded postretirement benefit plans and long-term incentive plan payments
to certain executives.     33




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##### Table of Contents



Insurance Regulation and Supervision
  Financial Condition
 Investment Portfolio
  Gross
    
    
    Gross Unrealized LossesAmortized Cost
    
    
    Unrealized
    
    
    Less Than
    
    
    More Than
    
    
    Estimated
    
    
    UnrealizedMarch 31, 2010
    
    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
    
    $
    18,085
    
    
    $
    977
    
    
    $
    
    
    
    $
    
    
    
    $
    19,062
    
    
    $
    U.S. Agencies
    
    
    6,528
    
    
    
    315
    
    
    
    
    
    
    
    
    
    
    
    6,843
    
    
    
    Collateralized mortgage obligations  residential
    
    
    29,832
    
    
    
    1,715
    
    
    
    
    
    
    
    
    
    
    
    31,547
    
    
    
    Mortgage pass-through securities  residential
    
    
    87,012
    
    
    
    2,638
    
    
    
    (45
    )
    
    
    
    
    
    
    89,605
    
    
    
    Obligations of states and political subdivisions
    
    
    699,069
    
    
    
    33,738
    
    
    
    (866
    )
    
    
    (2,505
    )
    
    
    729,436
    
    
    
    Corporate bonds
    
    
    382,765
    
    
    
    13,572
    
    
    
    (714
    )
    
    
    (150
    )
    
    
    395,473
    
    
    
    Collateralized mortgage obligations  commercial
    
    
    10,022
    
    
    
    163
    
    
    
    
    
    
    
    
    
    
    
    10,185
    
    
    
    Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    4,989
    
    
    
    
    
    
    
    
    
    
    
    (553
    )
    
    
    4,436
    
    
    
    (1,207
    )Consumer credit receivables
    
    
    10,767
    
    
    
    482
    
    
    
    
    
    
    
    
    
    
    
    11,249
    
    
    
    Other
    
    
    9,706
    
    
    
    755
    
    
    
    
    
    
    
    
    
    
    
    10,461
    
    
    
    Total fixed income securities
    
    
    1,258,775
    
    
    
    54,355
    
    
    
    (1,625
    )
    
    
    (3,208
    )
    
    
    1,308,297
    
    
    $
    (1,207
    )Equity securities
    
    
    1,650
    
    
    
    202
    
    
    
    
    
    
    
    
    
    
    
    1,852Total
    
    $
    1,260,425
    
    
    $
    54,557
    
    
    $
    (1,625
    )
    
    $
    (3,208
    )
    
    $
    1,310,149
 
 (a)
    
    The unrealized loss position of this security was $0.4 million at March 31, 2010. 34




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##### Table of Contents



Gross
    
    
    Gross Unrealized LossesAmortized Cost
    
    
    Unrealized
    
    
    Less Than
    
    
    More Than
    
    
    Estimated
    
    
    UnrealizedDecember 31, 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
    
    $
    17,378
    
    
    $
    970
    
    
    $
    
    
    
    $
    
    
    
    $
    18,348
    
    
    $
    U.S. Agencies
    
    
    9,794
    
    
    
    337
    
    
    
    
    
    
    
    
    
    
    
    10,131
    
    
    
    Collateralized mortgage obligations  residential
    
    
    30,709
    
    
    
    1,383
    
    
    
    
    
    
    
    
    
    
    
    32,092
    
    
    
    Mortgage pass-through securities  residential
    
    
    94,453
    
    
    
    2,336
    
    
    
    (232
    )
    
    
    
    
    
    
    96,557
    
    
    
    Obligations of states and political subdivisions
    
    
    696,505
    
    
    
    35,847
    
    
    
    (882
    )
    
    
    (2,902
    )
    
    
    728,568
    
    
    
    Corporate bonds
    
    
    334,136
    
    
    
    11,478
    
    
    
    (1,248
    )
    
    
    (257
    )
    
    
    344,109
    
    
    
    Collateralized mortgage obligations  commercial
    
    
    10,024
    
    
    
    
    
    
    
    
    
    
    
    (351
    )
    
    
    9,673
    
    
    
    Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    5,501
    
    
    
    
    
    
    
    
    
    
    
    (740
    )
    
    
    4,761
    
    
    
    (1,399
    )Consumer credit receivables
    
    
    11,055
    
    
    
    528
    
    
    
    
    
    
    
    
    
    
    
    11,583
    
    
    
    Other
    
    
    9,715
    
    
    
    686
    
    
    
    
    
    
    
    
    
    
    
    10,401
    
    
    
    Total fixed income securities
    
    
    1,219,270
    
    
    
    53,565
    
    
    
    (2,362
    )
    
    
    (4,250
    )
    
    
    1,266,223
    
    
    $
    (1,399
    )Equity securities
    
    
    1,429
    
    
    
    181
    
    
    
    
    
    
    
    
    
    
    
    1,610Total
    
    $
    1,220,699
    
    
    $
    53,746
    
    
    $
    (2,362
    )
    
    $
    (4,250
    )
    
    $
    1,267,833
 
 (a)
    
    The unrealized loss position of this security was $0.5 million at December 31, 2009.  % ofEstimated
    
    
    % ofFair
    
    
    UnrealizedContractual Maturity
    
    Value
    
    
    LossDue after one year through five years
    
    
    20
    %
    
    
    6
    %Due after five years through ten years
    
    
    33
    
    
    
    19Due after ten years
    
    
    39
    
    
    
    63Asset-backed securities
    
    
    8
    
    
    
    12Total
    
    
    100
    %
    
    
    100
    %
  March 31, 2010
    
    
    December 31, 2009Gross
    
    
    
    
    
    
    GrossEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    UnrealizedUnrealized Loss Aging
    
    Fair Value
    
    
    Loss
    
    
    Fair Value
    
    
    LossFixed income securities:Investment grade (a):0-6 months
    
    $
    143,354
    
    
    $
    1,625
    
    
    $
    162,087
    
    
    $
    2,3627-12 months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13-24 months
    
    
    
    
    
    
    
    
    
    
    11,176
    
    
    
    469Greater than 24 months
    
    
    34,695
    
    
    
    1,656
    
    
    
    32,932
    
    
    
    2,065Total investment grade
    
    
    178,049
    
    
    
    3,281
    
    
    
    206,195
    
    
    
    4,896Non-investment grade:Greater than 24 months
    
    
    17,205
    
    
    
    1,552
    
    
    
    17,346
    
    
    
    1,716Total
    
    $
    195,254
    
    
    $
    4,833
    
    
    $
    223,541
    
    
    $
    6,612
 
 (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 March 31, 2010 and December 31, 2009, all of the
Companys fixed income securities were rated by S&P or
Moodys. 35




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36




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##### Table of Contents



Gross Unrealized Losses
    
    
    EstimatedMarch 31, 2010
    
    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:Mortgage pass-through securities  residential
    
    $
    45
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    45
    
    
    
    1
    
    
    $
    10,529Obligations of states and political subdivisions
    
    
    457
    
    
    
    997
    
    
    
    791
    
    
    
    
    
    
    
    2,245
    
    
    
    16
    
    
    
    82,271Corporate bonds
    
    
    10
    
    
    
    181
    
    
    
    394
    
    
    
    279
    
    
    
    864
    
    
    
    19
    
    
    
    82,955Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    127
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    127
    
    
    
    1
    
    
    
    2,294Total investment grade
    
    
    639
    
    
    
    1,178
    
    
    
    1,185
    
    
    
    279
    
    
    
    3,281
    
    
    
    37
    
    
    
    178,049Non-investment grade:Obligations of states and political subdivisions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,126
    
    
    
    2
    
    
    
    15,063Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    426
    
    
    
    1
    
    
    
    2,142Total non-investment grade
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,552
    
    
    
    3
    
    
    
    17,205Total
    
    $
    639
    
    
    $
    1,178
    
    
    $
    1,185
    
    
    $
    279
    
    
    $
    4,833
    
    
    
    40
    
    
    $
    195,254
 
 (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 March 31, 2010, all of the Companys fixed income
securities were rated by S&P or Moodys.    37




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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;
 38




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##### Table of Contents




    
    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.
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   39




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##### Table of Contents



Estimated Fair
    
    HypotheticalHypothetical
    
    Value After
    
    PercentageFair Value at
    
    Change in
    
    Hypothetical
    
    Decrease inMarch 31,
    
    Interest Rate
    
    Change in
    
    Stockholders2010
    
    (bp=basis points)
    
    Interest Rate
    
    Equity(Dollars in thousands)U.S. Government and government agencies and
authorities
    
    
    $
    147,057
    
    
    200 bp increase
    
    $
    136,332
    
    
    
    (0.7
    )%150 bp increase
    
    
    139,343
    
    
    
    (0.5
    )100 bp increase
    
    
    142,282
    
    
    
    (0.3
    )50 bp increase
    
    
    145,056
    
    
    
    (0.1
    )States, municipalities and political subdivisions
    
    
    
    729,436
    
    
    200 bp increase
    
    
    652,292
    
    
    
    (5.3
    )150 bp increase
    
    
    672,523
    
    
    
    (3.9
    )100 bp increase
    
    
    693,550
    
    
    
    (2.5
    )50 bp increase
    
    
    715,376
    
    
    
    (1.0
    )Corporate bonds
    
    
    
    395,473
    
    
    200 bp increase
    
    
    362,963
    
    
    
    (2.2
    )150 bp increase
    
    
    371,515
    
    
    
    (1.6
    )100 bp increase
    
    
    380,360
    
    
    
    (1.0
    )50 bp increase
    
    
    389,509
    
    
    
    (0.4
    )Mortgage-backed and asset-backed
    
    
    
    36,331
    
    
    200 bp increase
    
    
    34,774
    
    
    
    (0.1
    )150 bp increase
    
    
    35,201
    
    
    
    (0.1
    )100 bp increase
    
    
    35,638
    
    
    
    50 bp increase
    
    
    36,084
    
    
    
    Total fixed income securities available-for-sale
    
    
    $
    1,308,297
    
    
    200 bp increase
    
    
    1,186,361
    
    
    
    (8.3
    )150 bp increase
    
    
    1,218,582
    
    
    
    (6.1
    )100 bp increase
    
    
    1,251,830
    
    
    
    (3.8
    )50 bp increase
    
    
    1,286,025
    
    
    
    (1.5
    )
 40




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##### Table of Contents



Estimated Fair
    
    HypotheticalHypothetical
    
    Value After
    
    PercentageFair Value at
    
    Change in
    
    Hypothetical
    
    Decrease inDecember 31,
    
    Interest Rate
    
    Change in
    
    Stockholders2009
    
    (bp=basis points)
    
    Interest Rate
    
    Equity(Dollars in thousands)U.S. Government and government agencies and
authorities
    
    
    $
    157,128
    
    
    200 bp increase
    
    $
    144,937
    
    
    
    (0.9
    )%150 bp increase
    
    
    148,310
    
    
    
    (0.6
    )100 bp increase
    
    
    151,570
    
    
    
    (0.4
    )50 bp increase
    
    
    154,580
    
    
    
    (0.2
    )States, municipalities and political subdivisions
    
    
    
    728,568
    
    
    200 bp increase
    
    
    641,122
    
    
    
    (6.2
    )150 bp increase
    
    
    661,735
    
    
    
    (4.7
    )100 bp increase
    
    
    683,176
    
    
    
    (3.2
    )50 bp increase
    
    
    705,453
    
    
    
    (1.6
    )Corporate bonds
    
    
    
    344,109
    
    
    200 bp increase
    
    
    310,703
    
    
    
    (2.4
    )150 bp increase
    
    
    318,610
    
    
    
    (1.8
    )100 bp increase
    
    
    326,806
    
    
    
    (1.2
    )50 bp increase
    
    
    335,301
    
    
    
    (0.6
    )Mortgage-backed and asset-backed
    
    
    
    36,418
    
    
    200 bp increase
    
    
    34,525
    
    
    
    (0.1
    )150 bp increase
    
    
    34,982
    
    
    
    (0.1
    )100 bp increase
    
    
    35,450
    
    
    
    (0.1
    )50 bp increase
    
    
    35,928
    
    
    
    Total fixed income securities available-for-sale
    
    
    $
    1,266,223
    
    
    200 bp increase
    
    
    1,131,287
    
    
    
    (9.6
    )150 bp increase
    
    
    1,163,637
    
    
    
    (7.2
    )100 bp increase
    
    
    1,197,002
    
    
    
    (4.9
    )50 bp increase
    
    
    1,231,262
    
    
    
    (2.4
    )
 
 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
 41




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ITEM 3. DEFAULTS UPON SENIOR SECURITIES  None.
 
 ITEM 4.   None.
 
 ITEM 5. OTHER INFORMATION  Reports on Form 8-K:
   
 ITEM 6. EXHIBITS
 Exhibit NumberForm of Administrative Services Agreement by and
between CNA Surety Corporation and Continental Casualty
Company.
    
    
    10
    (49)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
    (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
Financial Officer.
    
    
    31
    (2)Certification pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 - Chief Executive Officer.
    
    
    32
    (1)*Certification pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 - Chief Financial Officer.
    
    
    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. 42




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/s/ John F. WelchJohn F. WelchPresident and Chief Executive Officer/s/ John F. CorcoranJohn F. CorcoranSenior Vice President and Chief Financial Officer  43




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10(49)
    
    Form of Administrative Services Agreement by and between CNA Surety Corporation and
Continental Casualty Company.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.
 44