##### 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, 2011
 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 oAccelerated 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, 2011 and at December 31, 2010
    
    
    3Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2011 and 2010
    
    
    4Condensed Consolidated Statements of Stockholders Equity for the Three Months Ended March 31, 2011 and 2010
    
    
    5Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    26Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    45Item 4. Controls and Procedures
    
    
    47PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    48Item 1A. Risk Factors
    
    
    48Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    48Item 3. Defaults Upon Senior Securities
    
    
    48Item 5. Other Information
    
    
    48Item 6. Exhibits
    
    
    48EX-31.(1)EX-31.(2)EX-32.(1)EX-32.(2)




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CNA SURETY CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 March 31,
    
    
    December 31,2011
    
    
    2010(Amounts in thousands, exceptper share data)AssetsInvested assets:Fixed income securities, at fair value (amortized cost: $1,384,865 and $1,353,347)
    
    $
    1,429,734
    
    
    $
    1,404,375Equity securities, at fair value (cost: $1,938 and $1,687)
    
    
    2,178
    
    
    
    1,916Short-term investments, at amortized cost (approximates fair value)
    
    
    44,386
    
    
    
    53,089Total invested assets
    
    
    1,476,298
    
    
    
    1,459,380Cash
    
    
    5,513
    
    
    
    7,313Deferred policy acquisition costs
    
    
    101,365
    
    
    
    98,572Insurance receivables:Premiums, including $8,917 and $10,840 from affiliates, (net of allowance for doubtful
accounts: $1,230 and $1,410)
    
    
    41,472
    
    
    
    33,378Reinsurance
    
    
    42,945
    
    
    
    41,453Deposit with affiliated ceding company
    
    
    17,391
    
    
    
    23,446Goodwill 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: $39,245
and $38,931)
    
    
    14,367
    
    
    
    15,645Prepaid reinsurance premiums
    
    
    151
    
    
    
    164Accrued investment income
    
    
    16,803
    
    
    
    17,307Other assets, including $162 and $0 from affiliates
    
    
    2,545
    
    
    
    2,291Total assets
    
    $
    1,857,635
    
    
    $
    1,837,734LiabilitiesReserves:Unpaid losses and loss adjustment expenses
    
    $
    401,103
    
    
    $
    389,089Unearned premiums
    
    
    253,946
    
    
    
    245,986Total reserves
    
    
    655,049
    
    
    
    635,075Long-term debt
    
    
    30,930
    
    
    
    30,930Deferred income taxes, net
    
    
    27,489
    
    
    
    29,098Reinsurance and other payables to affiliates
    
    
    141
    
    
    
    177Accrued expenses
    
    
    13,475
    
    
    
    21,726Liability for postretirement benefits
    
    
    12,577
    
    
    
    12,330Income tax payable
    
    
    6,820
    
    
    
    13,775Other liabilities
    
    
    23,079
    
    
    
    25,890Total liabilities
    
    
    769,560
    
    
    
    769,001Commitments and contingencies (See Notes 3, 5, 6 & 8)Stockholders EquityCommon stock, par value $.01 per share, 100,000 shares authorized; 46,327 shares issued and
44,970 shares outstanding at March 31, 2011 and 46,104 shares issued and 44,748 shares
outstanding at December 31, 2010
    
    
    463
    
    
    
    461Additional paid-in capital
    
    
    291,050
    
    
    
    288,471Retained earnings
    
    
    782,682
    
    
    
    761,925Accumulated other comprehensive income
    
    
    28,440
    
    
    
    32,436Treasury stock, 1,357 and 1,356 shares, at cost
    
    
    (14,560
    )
    
    
    (14,560
    )Total stockholders equity
    
    
    1,088,075
    
    
    
    1,068,733Total liabilities and stockholders equity
    
    $
    1,857,635
    
    
    $
    1,837,734
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CNA SURETY CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
 Three Months EndedMarch 31,2011
    
    
    2010(Amounts in thousands, exceptper share data)Revenues:Net earned premium
    
    $
    96,658
    
    
    $
    98,252Net investment income
    
    
    14,435
    
    
    
    13,377Net realized investment gains (losses):Other-than-temporary impairment losses
    
    
    
    
    
    
    Portion of other-than-temporary impairment
losses recognized in other comprehensive income (before
taxes)
    
    
    
    
    
    
    (94
    )Net impairment losses recognized in earnings
    
    
    
    
    
    
    (94
    )Net realized investment gains, excluding impairment losses
    
    
    313
    
    
    
    417Total net realized investment gains
    
    
    313
    
    
    
    323Total revenues
    
    
    111,406
    
    
    
    111,952Expenses:Net losses and loss adjustment expenses
    
    
    28,031
    
    
    
    28,581Net commissions, brokerage and other underwriting expenses
    
    
    52,266
    
    
    
    52,788Interest expense
    
    
    284
    
    
    
    281Other expense
    
    
    2,027
    
    
    
    Total expenses
    
    
    82,608
    
    
    
    81,650Income before income taxes
    
    
    28,798
    
    
    
    30,302Income tax expense
    
    
    8,041
    
    
    
    9,497Net income
    
    $
    20,757
    
    
    $
    20,805Earnings per common share
    
    $
    0.46
    
    
    $
    0.47Earnings per common share, assuming dilution
    
    $
    0.46
    
    
    $
    0.47Weighted average shares outstanding
    
    
    44,810
    
    
    
    44,280Weighted average shares outstanding, assuming dilution
    
    
    45,157
    
    
    
    44,421
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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, 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
    )
    
    $
    946,359Balance, January 1, 2011
    
    
    44,748
    
    
    $
    461
    
    
    $
    288,471
    
    
    
    
    
    
    $
    761,925
    
    
    $
    32,436
    
    
    $
    (14,560
    )
    
    $
    1,068,733Comprehensive income:Net income
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    20,757
    
    
    $
    20,757
    
    
    $
    
    
    
    $
    
    
    
    $
    20,757Other comprehensive income:Change in unrealized gains on
securities, after income tax
benefit of $2,154 (net of
reclassification adjustment
of $140, after income tax
expense of $76)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,000
    )
    
    
    
    
    
    
    (4,000
    )
    
    
    
    
    
    
    (4,000
    )Other-than-temporary
impairment losses not
recognized in the Condensed
Consolidated Statements of
Income, after income tax
expense of $2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    4Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    16,761
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    105
    
    
    
    1
    
    
    
    567
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    568Stock options exercised and other
    
    
    117
    
    
    
    1
    
    
    
    2,012
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,013Balance, March 31, 2011
    
    
    44,970
    
    
    $
    463
    
    
    $
    291,050
    
    
    
    
    
    
    $
    782,682
    
    
    $
    28,440
    
    
    $
    (14,560
    )
    
    $
    1,088,075
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CNA SURETY CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Three Months EndedMarch 31,2011
    
    
    2010(Amounts in thousands)Cash Flows from Operating Activities:Net income
    
    $
    20,757
    
    
    $
    20,805Adjustments to reconcile net income to net cash provided by operating activities:Provision for doubtful accounts
    
    
    (21
    )
    
    
    95Depreciation and amortization
    
    
    1,551
    
    
    
    1,476Amortization of bond premium, net
    
    
    1,709
    
    
    
    1,492Loss on disposal or impairment of property and equipment
    
    
    (12
    )
    
    
    (49
    )Net realized investment gains
    
    
    (313
    )
    
    
    (323
    )Stock-based compensation
    
    
    567
    
    
    
    441Deferred income tax expense
    
    
    242
    
    
    
    661Changes in:Insurance receivables
    
    
    (9,565
    )
    
    
    (10,291
    )Reserve for unearned premiums
    
    
    7,960
    
    
    
    8,395Reserve for unpaid losses and loss adjustment expenses
    
    
    12,014
    
    
    
    20,335Deposit with affiliated ceding company
    
    
    6,055
    
    
    
    (26
    )Deferred policy acquisition costs
    
    
    (2,793
    )
    
    
    (2,824
    )Reinsurance and other payables to affiliates
    
    
    (36
    )
    
    
    128Prepaid reinsurance premiums
    
    
    13
    
    
    
    13Accrued expenses
    
    
    (8,251
    )
    
    
    (6,417
    )Other assets and liabilities
    
    
    (8,966
    )
    
    
    (7,599
    )Net cash provided by operating activities
    
    
    20,911
    
    
    
    26,312Cash Flows from Investing Activities:Fixed income securities:Purchases
    
    
    (65,168
    )
    
    
    (63,950
    )Maturities
    
    
    26,749
    
    
    
    14,834Sales
    
    
    5,471
    
    
    
    8,422Purchases of equity securities
    
    
    (719
    )
    
    
    (274
    )Proceeds from the sale of equity securities
    
    
    490
    
    
    
    65Changes in short-term investments
    
    
    8,714
    
    
    
    9,036Purchases of property and equipment, net
    
    
    (262
    )
    
    
    (682
    )Changes in payables for securities purchased
    
    
    
    
    
    
    2,070Net cash (used in) investing activities
    
    
    (24,725
    )
    
    
    (30,479
    )Cash Flows from Financing Activities:Employee stock option exercises and other
    
    
    2,014
    
    
    
    363Net cash provided by financing activities
    
    
    2,014
    
    
    
    363(Decrease) in cash
    
    
    (1,800
    )
    
    
    (3,804
    )Cash at beginning of period
    
    
    7,313
    
    
    
    5,822Cash at end of period
    
    $
    5,513
    
    
    $
    2,018Supplemental Disclosure of Cash Flow Information:Cash paid during the period for:Interest
    
    $
    289
    
    
    $
    288Income taxes
    
    $
    14,437
    
    
    $
    14,404
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CNA SURETY CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
(UNAUDITED)
 1. General
 Formation of CNA Surety Corporation
  CNAF Proposal
  Subsequent Event  Merger Agreement and Tender Offer
   Principles of Consolidation
  Estimates
  7




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Basis of Presentation
  Earnings Per Share
   Three Months EndedMarch 31,2011
    
    
    2010Net income
    
    $
    20,757
    
    
    $
    20,805Shares:Weighted average shares outstanding
    
    
    44,748
    
    
    
    44,268Weighted average shares of options exercised and additional stock issuance
    
    
    62
    
    
    
    12Total weighted average shares outstanding
    
    
    44,810
    
    
    
    44,280Effect of dilutive securities:Common stock options
    
    
    271
    
    
    
    128Restricted common stock awards
    
    
    65
    
    
    
    Other
    
    
    11
    
    
    
    13Total effect of dilutive securities
    
    
    347
    
    
    
    141Total weighted average shares outstanding, assuming dilution
    
    
    45,157
    
    
    
    44,421Earnings per share
    
    $
    0.46
    
    
    $
    0.47Earnings per share, assuming dilution
    
    $
    0.46
    
    
    $
    0.47
  Adopted Accounting Pronouncements
  8




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Pending Accounting Pronouncements
  2. Investments
  Three Months EndedMarch 31,2011
    
    
    2010Investment income:Fixed income securities
    
    $
    14,750
    
    
    $
    13,666Equity securities
    
    
    9
    
    
    
    8Short-term investments
    
    
    18
    
    
    
    15Other
    
    
    10
    
    
    
    13Total investment income on available-for-sale securities
    
    
    14,787
    
    
    
    13,702Investment income on deposit with affiliated ceding company
    
    
    23
    
    
    
    26Investment expenses
    
    
    375
    
    
    
    351Net investment income
    
    $
    14,435
    
    
    $
    13,377
  9




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Three Months EndedMarch 31,2011
    
    
    2010Net realized investment gains (losses):Fixed income securities:Gross realized investment gains
    
    $
    295
    
    
    $
    425Gross realized investment losses:Other-than-temporary impairment losses
    
    
    
    
    
    
    (94
    )Realized losses from sales
    
    
    (4
    )
    
    
    (19
    )Total gross realized investment losses
    
    
    (4
    )
    
    
    (113
    )Net realized investment gains on fixed income securities
    
    
    291
    
    
    
    312Equity securities:Gross realized investment gains
    
    
    22
    
    
    
    11Gross realized investment losses:Other-than-temporary impairment losses
    
    
    
    
    
    
    Realized losses from sales
    
    
    
    
    
    
    Total gross realized investment losses
    
    
    
    
    
    
    Net realized investment gains on equity securities
    
    
    22
    
    
    
    11Net realized investment gains
    
    $
    313
    
    
    $
    323Net change in unrealized gains (losses)Fixed income securities
    
    $
    (6,159
    )
    
    $
    2,569Equity securities
    
    
    11
    
    
    
    21Total net change in unrealized gains (losses)
    
    $
    (6,148
    )
    
    $
    2,590Net realized gains and change in unrealized gains (losses)
    
    $
    (5,835
    )
    
    $
    2,913
  10




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Gross
    
    
    Gross Unrealized LossesAmortized Cost
    
    
    Unrealized
    
    
    Less Than
    
    
    More Than
    
    
    Estimated
    
    
    UnrealizedMarch 31, 2011
    
    or Cost
    
    
    Gains
    
    
    12 Months
    
    
    12 Months
    
    
    Fair Value
    
    
    OTTI LossesFixed income securities:U.S. Treasury securities and obligations of
U.S. Government and agencies:U.S. Treasury
    
    $
    17,289
    
    
    $
    775
    
    
    $
    
    
    
    $
    
    
    
    $
    18,064
    
    
    $
    U.S. Agencies
    
    
    5,515
    
    
    
    204
    
    
    
    
    
    
    
    
    
    
    
    5,719
    
    
    
    Collateralized mortgage obligations 
residential
    
    
    18,711
    
    
    
    1,510
    
    
    
    
    
    
    
    
    
    
    
    20,221
    
    
    
    Mortgage pass-through securities 
residential
    
    
    63,956
    
    
    
    2,854
    
    
    
    
    
    
    
    
    
    
    
    66,810
    
    
    
    Obligations of states and political
subdivisions
    
    
    742,575
    
    
    
    29,256
    
    
    
    (6,130
    )
    
    
    (2,083
    )
    
    
    763,618
    
    
    
    Corporate bonds
    
    
    494,708
    
    
    
    19,459
    
    
    
    (1,806
    )
    
    
    
    
    
    
    512,361
    
    
    
    Collateralized mortgage obligations 
commercial
    
    
    10,016
    
    
    
    581
    
    
    
    
    
    
    
    
    
    
    
    10,597
    
    
    
    Other asset-backed securities:Second mortgages/home equity loans 
residential
    
    
    1,931
    
    
    
    
    
    
    
    
    
    
    
    (267
    )
    
    
    1,664
    
    
    
    (873
    )(a)Consumer credit receivables
    
    
    10,000
    
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    10,036
    
    
    
    Other
    
    
    20,164
    
    
    
    523
    
    
    
    (43
    )
    
    
    
    
    
    
    20,644
    
    
    
    Total fixed income securities
    
    
    1,384,865
    
    
    
    55,198
    
    
    
    (7,979
    )
    
    
    (2,350
    )
    
    
    1,429,734
    
    
    $
    (873
    )Equity securities
    
    
    1,938
    
    
    
    240
    
    
    
    
    
    
    
    
    
    
    
    2,178Total
    
    $
    1,386,803
    
    
    $
    55,438
    
    
    $
    (7,979
    )
    
    $
    (2,350
    )
    
    $
    1,431,912
 
 (a)
    
    The unrealized loss position of this security was $0.3 million at March 31, 2011. 11




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##### Table of Contents



Gross
    
    
    Gross Unrealized LossesAmortized Cost
    
    
    Unrealized
    
    
    Less Than
    
    
    More Than
    
    
    Estimated
    
    
    UnrealizedDecember 31, 2010
    
    or Cost
    
    
    Gains
    
    
    12 Months
    
    
    12 Months
    
    
    Fair Value
    
    
    OTTI LossesFixed income securities:U.S. Treasury securities and obligations of
U.S. Government and agencies:U.S. Treasury
    
    $
    17,288
    
    
    $
    914
    
    
    $
    
    
    
    $
    
    
    
    $
    18,202
    
    
    $
    U.S. Agencies
    
    
    6,518
    
    
    
    250
    
    
    
    
    
    
    
    
    
    
    
    6,768
    
    
    
    Collateralized mortgage obligations 
residential
    
    
    20,769
    
    
    
    1,558
    
    
    
    
    
    
    
    
    
    
    
    22,327
    
    
    
    Mortgage pass-through securities 
residential
    
    
    68,727
    
    
    
    3,320
    
    
    
    
    
    
    
    
    
    
    
    72,047
    
    
    
    Obligations of states and political
subdivisions
    
    
    746,514
    
    
    
    30,932
    
    
    
    (5,096
    )
    
    
    (1,742
    )
    
    
    770,608
    
    
    
    Corporate bonds
    
    
    456,963
    
    
    
    21,164
    
    
    
    (1,249
    )
    
    
    (5
    )
    
    
    476,873
    
    
    
    Collateralized mortgage obligations 
commercial
    
    
    10,018
    
    
    
    567
    
    
    
    
    
    
    
    
    
    
    
    10,585
    
    
    
    Other asset-backed securities:Second mortgages/home equity loans 
residential
    
    
    3,878
    
    
    
    
    
    
    
    (84
    )
    
    
    (272
    )
    
    
    3,522
    
    
    
    (927
    )(a)Consumer credit receivables
    
    
    9,998
    
    
    
    158
    
    
    
    
    
    
    
    
    
    
    
    10,156
    
    
    
    Other
    
    
    12,674
    
    
    
    617
    
    
    
    (4
    )
    
    
    
    
    
    
    13,287
    
    
    
    Total fixed income securities
    
    
    1,353,347
    
    
    
    59,480
    
    
    
    (6,433
    )
    
    
    (2,019
    )
    
    
    1,404,375
    
    
    $
    (927
    )Equity securities
    
    
    1,687
    
    
    
    229
    
    
    
    
    
    
    
    
    
    
    
    1,916Total
    
    $
    1,355,034
    
    
    $
    59,709
    
    
    $
    (6,433
    )
    
    $
    (2,019
    )
    
    $
    1,406,291
 
 (a)
    
    The unrealized loss position of this security was $0.3 million at December 31, 2010.      12




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##### Table of Contents



Three Months Ended March 31,2011
    
    
    2010Beginning balance
    
    $
    238
    
    
    $
    116Credit losses for which an OTTI loss was not previously recognized
    
    
    
    
    
    
    Credit losses for which an OTTI loss was previously recognized
    
    
    
    
    
    
    94Ending balance
    
    $
    238
    
    
    $
    210
 13




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##### Table of Contents



March 31, 2011
    
    
    December 31, 2010Amortized
    
    
    Estimated Fair
    
    
    Amortized
    
    
    Estimated FairCost
    
    
    Value
    
    
    Cost
    
    
    ValueFixed income securities:Due within one year
    
    $
    43,703
    
    
    $
    44,313
    
    
    $
    39,649
    
    
    $
    40,035Due after one year but within five years
    
    
    418,872
    
    
    
    437,713
    
    
    
    422,319
    
    
    
    441,895Due after five years but within ten years
    
    
    529,294
    
    
    
    552,111
    
    
    
    480,548
    
    
    
    507,793Due after ten years
    
    
    268,218
    
    
    
    265,625
    
    
    
    284,767
    
    
    
    282,7281,260,087
    
    
    
    1,299,762
    
    
    
    1,227,283
    
    
    
    1,272,451Mortgage pass-through securities,
collateralized mortgage obligations and
asset-backed securities
    
    
    124,778
    
    
    
    129,972
    
    
    
    126,064
    
    
    
    131,924$
    1,384,865
    
    
    $
    1,429,734
    
    
    $
    1,353,347
    
    
    $
    1,404,375
  % ofEstimated
    
    % ofFair
    
    UnrealizedContractual Maturity
    
    Value
    
    LossDue after one year through five years
    
    
    16
    %
    
    
    6
    %Due after five years through ten years
    
    
    37
    
    
    
    24Due after ten years
    
    
    43
    
    
    
    67Asset-backed securities
    
    
    4
    
    
    
    3Total
    
    
    100
    %
    
    
    100
    %
  March 31, 2011
    
    
    December 31, 2010Gross
    
    
    
    
    
    
    GrossEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    UnrealizedUnrealized Loss Aging
    
    Fair Value
    
    
    Loss
    
    
    Fair Value
    
    
    LossFixed income securities:Investment grade (a):0-6 months
    
    $
    281,785
    
    
    $
    7,945
    
    
    $
    223,778
    
    
    $
    6,350Greater than 24 months
    
    
    4,785
    
    
    
    760
    
    
    
    7,903
    
    
    
    663Total investment grade
    
    
    286,570
    
    
    
    8,705
    
    
    
    231,681
    
    
    
    7,013Non-investment grade:0-6 months
    
    
    6,208
    
    
    
    25
    
    
    
    11,256
    
    
    
    837-12 months
    
    
    1,532
    
    
    
    9
    
    
    
    
    
    
    
    Greater than 24 months
    
    
    11,168
    
    
    
    1,590
    
    
    
    11,522
    
    
    
    1,356Total non-investment grade
    
    
    18,908
    
    
    
    1,624
    
    
    
    22,778
    
    
    
    1,439Total
    
    $
    305,478
    
    
    $
    10,329
    
    
    $
    254,459
    
    
    $
    8,452
 
 (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, 2011
and December 31, 2010, all of the Companys fixed income
securities were rated by S&P or Moodys.  14




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##### Table of Contents



Gross Unrealized Losses
    
    
    EstimatedMarch 31, 2011
    
    AAA
    
    
    AA
    
    
    A
    
    
    BBB
    
    
    Total
    
    
    Count
    
    
    Fair ValueFixed income securities:Investment grade(a):Obligations of states and political subdivisions
    
    $
    577
    
    
    $
    4,170
    
    
    $
    2,143
    
    
    $
    
    
    
    $
    6,890
    
    
    
    34
    
    
    $
    173,884Corporate bonds
    
    
    
    
    
    
    39
    
    
    
    1,405
    
    
    
    328
    
    
    
    1,772
    
    
    
    22
    
    
    
    102,232Other asset-backed securities:Other
    
    
    43
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43
    
    
    
    2
    
    
    
    10,454Total investment grade
    
    
    620
    
    
    
    4,209
    
    
    
    3,548
    
    
    
    328
    
    
    
    8,705
    
    
    
    58
    
    
    
    286,570Non-investment grade:Obligations of states and political subdivisions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,323
    
    
    
    1
    
    
    
    9,504Corporate bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34
    
    
    
    5
    
    
    
    7,740Other asset-backed securities:Second mortgages/home equity loans 
residential
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    267
    
    
    
    1
    
    
    
    1,664Total non-investment grade
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,624
    
    
    
    7
    
    
    
    18,908Total
    
    $
    620
    
    
    $
    4,209
    
    
    $
    3,548
    
    
    $
    328
    
    
    $
    10,329
    
    
    
    65
    
    
    $
    305,478
 
 (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, 2011, all of the Companys fixed income securities
were rated by S&P or Moodys.     15




---



##### Table of Contents



16




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##### Table of Contents



3. Reinsurance
    Three Months Ended March 31,2011
    
    
    2010Written
    
    
    Earned
    
    
    Written
    
    
    EarnedDirect
    
    $
    88,882
    
    
    $
    80,602
    
    
    $
    91,963
    
    
    $
    81,879Assumed
    
    
    21,209
    
    
    
    21,529
    
    
    
    20,564
    
    
    
    22,253Ceded
    
    
    (5,461
    )
    
    
    (5,473
    )
    
    
    (5,867
    )
    
    
    (5,880
    )Net premiums
    
    $
    104,630
    
    
    $
    96,658
    
    
    $
    106,660
    
    
    $
    98,252
     Three Months Ended March 31,2011
    
    
    2010$
    
    
    Ratio
    
    
    $
    
    
    RatioGross losses and loss adjustment expenses
    
    $
    29,618
    
    
    
    29.0
    %
    
    $
    27,815
    
    
    
    26.7
    %Ceded amounts
    
    
    (1,587
    )
    
    
    29.0
    %
    
    
    766
    
    
    
    (13.0
    )%Net losses and loss adjustment expenses
    
    $
    28,031
    
    
    
    29.0
    %
    
    $
    28,581
    
    
    
    29.1
    %
  17




---



##### Table of Contents



Excess of Loss Reinsurance
  2010 Third Party Reinsurance
  2011 Third Party Reinsurance
  Related Party Reinsurance
     18




---



##### 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.
  19




---



##### Table of Contents



Fixed Income Securities
  Equity Securities
  Short-Term Investments
   March 31, 2011Fair 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
    
    $
    18,064
    
    
    $
    
    
    
    $
    
    
    
    $
    18,064U.S. Agencies
    
    
    
    
    
    
    5,719
    
    
    
    
    
    
    
    5,719Collateralized mortgage obligations  residential
    
    
    
    
    
    
    20,221
    
    
    
    
    
    
    
    20,221Mortgage pass-through securities  residential
    
    
    
    
    
    
    66,810
    
    
    
    
    
    
    
    66,810Obligations of states and political subdivisions
    
    
    
    
    
    
    763,618
    
    
    
    
    
    
    
    763,618Corporate bonds
    
    
    
    
    
    
    512,361
    
    
    
    
    
    
    
    512,361Collateralized mortgage obligations  commercial
    
    
    
    
    
    
    10,597
    
    
    
    
    
    
    
    10,597Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    
    
    
    
    1,664
    
    
    
    
    
    
    
    1,664Consumer credit receivables
    
    
    
    
    
    
    10,036
    
    
    
    
    
    
    
    10,036Other
    
    
    
    
    
    
    20,644
    
    
    
    
    
    
    
    20,644Total fixed income securities
    
    
    18,064
    
    
    
    1,411,670
    
    
    
    
    
    
    
    1,429,734Equity securities at fair value
    
    
    2,178
    
    
    
    
    
    
    
    
    
    
    
    2,178Short-term investments at fair value (a)
    
    
    24,397
    
    
    
    19,989
    
    
    
    
    
    
    
    44,386Total assets
    
    $
    44,639
    
    
    $
    1,431,659
    
    
    $
    
    
    
    $
    1,476,298
 
 (a)
    
    Includes commercial paper, U.S. Government agency discount notes and money market
funds. 20




---



##### Table of Contents



December 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
    
    $
    18,202
    
    
    $
    
    
    
    $
    
    
    
    $
    18,202U.S. Agencies
    
    
    
    
    
    
    6,768
    
    
    
    
    
    
    
    6,768Collateralized mortgage obligations  residential
    
    
    
    
    
    
    22,327
    
    
    
    
    
    
    
    22,327Mortgage pass-through securities  residential
    
    
    
    
    
    
    72,047
    
    
    
    
    
    
    
    72,047Obligations of states and political subdivisions
    
    
    
    
    
    
    770,608
    
    
    
    
    
    
    
    770,608Corporate bonds
    
    
    
    
    
    
    476,873
    
    
    
    
    
    
    
    476,873Collateralized mortgage obligations  commercial
    
    
    
    
    
    
    10,585
    
    
    
    
    
    
    
    10,585Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    
    
    
    
    3,522
    
    
    
    
    
    
    
    3,522Consumer credit receivables
    
    
    
    
    
    
    10,156
    
    
    
    
    
    
    
    10,156Other
    
    
    
    
    
    
    13,287
    
    
    
    
    
    
    
    13,287Total fixed income securities
    
    
    18,202
    
    
    
    1,386,173
    
    
    
    
    
    
    
    1,404,375Equity securities at fair value
    
    
    1,916
    
    
    
    
    
    
    
    
    
    
    
    1,916Short-term investments at fair value (a)
    
    
    16,842
    
    
    
    36,247
    
    
    
    
    
    
    
    53,089Total assets
    
    $
    36,960
    
    
    $
    1,422,420
    
    
    $
    
    
    
    $
    1,459,380
 
 (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 31,2011
    
    
    2010Reserves at beginning of period:Gross
    
    $
    389,089
    
    
    $
    406,123Ceded reinsurance
    
    
    43,007
    
    
    
    50,968Net reserves at beginning of period
    
    
    346,082
    
    
    
    355,155Net incurred loss and loss adjustment expenses:Provision for insured events of current year
    
    
    28,031
    
    
    
    28,581Increase (decrease) in provision for insured events of prior years
    
    
    
    
    
    
    Total net incurred
    
    
    28,031
    
    
    
    28,581Net payments attributable to:Current year events
    
    
    778
    
    
    
    690Prior year events
    
    
    16,568
    
    
    
    8,092Total net payments
    
    
    17,346
    
    
    
    8,782Foreign currency transaction adjustments
    
    
    98
    
    
    
    74Net reserves at end of period
    
    
    356,865
    
    
    
    375,028Ceded reinsurance at end of period
    
    
    44,238
    
    
    
    51,430Gross reserves at end of period
    
    $
    401,103
    
    
    $
    426,458
 6. Debt
  21




---



##### Table of Contents



7. Employee Benefits
    Three Months EndedMarch 31,2011
    
    
    2010Net periodic benefit cost:Service cost
    
    $
    66
    
    
    $
    61Interest cost
    
    
    169
    
    
    
    158Amortization of prior service cost (benefit)
    
    
    (14
    )
    
    
    (28
    )Net amortization of actuarial loss
    
    
    16
    
    
    
    1Net periodic benefit cost
    
    $
    237
    
    
    $
    192
  8. Commitments and Contingencies
   22




---



##### Table of Contents



9. Income Taxes
   10. Stockholders Equity
        23




---



##### Table of Contents



WeightedAverage OptionShares Subject
    
    
    Price perto Option
    
    
    ShareOutstanding options at January 1, 2011
    
    
    1,093,181
    
    
    $
    15.67Options granted
    
    
    
    
    
    
    Options forfeited
    
    
    
    
    
    
    Options expired
    
    
    
    
    
    
    Options exercised
    
    
    (116,993
    )
    
    $
    17.01Outstanding options at March 31, 2011
    
    
    976,188
    
    
    $
    15.51
  WeightedAverageShares Subject
    
    
    Grant Dateto Option
    
    
    Fair ValueNon-vested options at January 1, 2011
    
    
    603,859
    
    
    $
    7.71Options granted
    
    
    
    
    
    
    Options vested
    
    
    (243,984
    )
    
    $
    7.90Options forfeited
    
    
    
    
    
    
    Non-vested options at March 31, 2011
    
    
    359,875
    
    
    $
    7.58
  Options Vested or Expected to VestWeighted
    
    
    
    
    
    Weighted AverageAverage
    
    Aggregate
    
    RemainingNumber
    
    Exercise Price
    
    Intrinsic Value
    
    Contractual LifeMarch 31, 2011
    
    
    938,153
    
    
    $
    15.49
    
    
    $
    9,166,415
    
    
    6.3 years
 Options ExercisableWeighted
    
    
    
    
    
    Weighted AverageAverage
    
    Aggregate
    
    RemainingNumber
    
    Exercise Price
    
    Intrinsic Value
    
    Contractual LifeMarch 31, 2011
    
    
    616,313
    
    
    $
    15.27
    
    
    $
    2,728,695
    
    
    5.3 years
 24




---



##### Table of Contents



Shares Subject
    
    
    Weighted
Average
Grant Dateto Grant
    
    
    Fair ValueNon-vested restricted stock awards at January 1, 2011
    
    
    
    
    
    
    Restricted shares granted
    
    
    104,876
    
    
    $
    25.08Restricted shares vested
    
    
    
    
    
    
    Restricted shares forfeited
    
    
    (292
    )
    
    $
    25.08Non-vested restricted stock awards at March 31, 2011
    
    
    104,584
    
    
    $
    25.08
  25




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##### Table of Contents



CNA SURETY CORPORATION AND SUBSIDIARIES
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 General
  CNAF Merger Agreement and Tender Offer
    Critical Accounting Policies
  Reserves for Unpaid Losses and Loss Adjustment Expenses and Reinsurance
   26




---



##### Table of Contents



Gross Case Loss
    
    
    Gross IBNR Loss
    
    
    Total GrossReserves
    
    
    and LAE Reserves
    
    
    ReservesContract
    
    $
    57,719
    
    
    $
    213,785
    
    
    $
    271,504Commercial
    
    
    38,688
    
    
    
    79,941
    
    
    
    118,629Fidelity and other
    
    
    2,265
    
    
    
    8,705
    
    
    
    10,970Total
    
    $
    98,672
    
    
    $
    302,431
    
    
    $
    401,103
   
    
    Current claim activity, including the frequency and severity of current claims;
    
    Changes in underwriting standards and business mix such as the Companys efforts to
reduce exposures to large commercial bonds;
    
    Changes in the claims handling process;
    
    Potential changes in the Companys reinsurance program; and
    
    Current economic conditions, especially corporate default rates and the condition of the construction economy.
   27




---



##### Table of Contents



Investments
       28




---



##### Table of Contents



Goodwill and Other Intangible Assets
   Insurance Premiums
   Deferred Policy Acquisitions Costs
  Results of Operations
 Financial Measures
  29




---



##### Table of Contents



Comparison of CNA Surety Actual Results for the Three Months Ended March 31, 2011 and 2010
 Analysis of Net Income
   Results of Insurance Operations
  Three Months Ended March 31,2011
    
    
    2010Gross written premiums
    
    $
    110,091
    
    
    $
    112,527Net written premiums
    
    $
    104,630
    
    
    $
    106,660Net earned premiums
    
    $
    96,658
    
    
    $
    98,252Net losses and loss adjustment expenses
    
    $
    28,031
    
    
    $
    28,581Net commissions, brokerage and other underwriting expenses
    
    $
    52,266
    
    
    $
    52,788Loss ratio
    
    
    29.0
    %
    
    
    29.1
    %Expense ratio
    
    
    54.1
    
    
    
    53.7Combined ratio
    
    
    83.1
    %
    
    
    82.8
    %
 Premiums Written/Earned
  30




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##### Table of Contents



Three Months Ended March 31,2011
    
    
    2010Contract
    
    $
    66,212
    
    
    $
    68,457Commercial
    
    
    34,994
    
    
    
    35,221Fidelity and other
    
    
    8,885
    
    
    
    8,849Total
    
    $
    110,091
    
    
    $
    112,527
    Three Months Ended March 31,2011
    
    
    2010Contract
    
    $
    61,439
    
    
    $
    63,313Commercial
    
    
    34,306
    
    
    
    34,498Fidelity and other
    
    
    8,885
    
    
    
    8,849Total
    
    $
    104,630
    
    
    $
    106,660
  31




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##### Table of Contents



Three Months Ended March 31,2011
    
    
    2010Contract
    
    $
    57,223
    
    
    $
    58,526Commercial
    
    
    31,937
    
    
    
    32,276Fidelity and other
    
    
    7,498
    
    
    
    7,450Total
    
    $
    96,658
    
    
    $
    98,252
  Net Loss Ratio
  Expense Ratio
  Other Expense
  Investment Income and Realized Investment Gains/Losses
  32




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##### Table of Contents



Three Months EndedMarch 31,2011
    
    
    2010Net realized investment gains (losses):Fixed income securities:Gross realized investment gains
    
    $
    295
    
    
    $
    425Gross realized investment losses:Other-than-temporary impairment losses
    
    
    
    
    
    
    (94
    )Realized losses from sales
    
    
    (4
    )
    
    
    (19
    )Total gross realized investment losses
    
    
    (4
    )
    
    
    (113
    )Net realized investment gains on fixed income securities
    
    
    291
    
    
    
    312Equity securities:Gross realized investment gains
    
    
    22
    
    
    
    11Gross realized investment losses:Other-than-temporary impairment losses
    
    
    
    
    
    
    Realized losses from sales
    
    
    
    
    
    
    Total gross realized investment losses
    
    
    
    
    
    
    Net realized investment gains on equity securities
    
    
    22
    
    
    
    11Net realized investment gains
    
    $
    313
    
    
    $
    323
  Interest Expense
  Income Taxes
   Exposure Management
  33




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##### Table of Contents



Excess of Loss Reinsurance
  2010 Third Party Reinsurance
  2011 Third Party Reinsurance
  Related Party Reinsurance
   34




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##### Table of Contents



Liquidity and Capital Resources
  35




---



##### Table of Contents



36




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##### Table of Contents



Contractual Obligations as of March 31, 2011
    
    2011
    
    
    2012
    
    
    2013
    
    
    2014
    
    
    2015
    
    
    Thereafter
    
    
    Total(In millions)Debt(a)
    
    $
    0.9
    
    
    $
    1.1
    
    
    $
    1.1
    
    
    $
    1.1
    
    
    $
    1.1
    
    
    $
    52.1
    
    
    $
    57.4Operating leases
    
    
    1.6
    
    
    
    1.1
    
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.2
    
    
    
    
    
    
    
    3.3Loss and loss adjustment expense reserves
    
    
    84.1
    
    
    
    101.4
    
    
    
    73.9
    
    
    
    47.2
    
    
    
    30.1
    
    
    
    64.4
    
    
    
    401.1Other long-term liabilities(b)
    
    
    0.3
    
    
    
    1.4
    
    
    
    1.0
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    11.6
    
    
    
    15.3Total
    
    $
    86.9
    
    
    $
    105.0
    
    
    $
    76.2
    
    
    $
    49.0
    
    
    $
    31.9
    
    
    $
    128.1
    
    
    $
    477.1
 
 (a)
    
    Reflects expected principal and interest payments.(b)
    
    Reflects unfunded postretirement benefit plans and long-term incentive plan payments
to certain executives.       37




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##### Table of Contents



Insurance Regulation and Supervision
   Financial Condition
 Investment Portfolio
  Gross
    
    
    Gross Unrealized LossesAmortized Cost
    
    
    Unrealized
    
    
    Less Than
    
    
    More Than
    
    
    Estimated
    
    
    UnrealizedMarch 31, 2011
    
    or Cost
    
    
    Gains
    
    
    12 Months
    
    
    12 Months
    
    
    Fair Value
    
    
    OTTI LossesFixed income securities:U.S. Treasury securities and obligations of
U.S. Government and agencies:U.S. Treasury
    
    $
    17,289
    
    
    $
    775
    
    
    $
    
    
    
    $
    
    
    
    $
    18,064
    
    
    $
    U.S. Agencies
    
    
    5,515
    
    
    
    204
    
    
    
    
    
    
    
    
    
    
    
    5,719
    
    
    
    Collateralized mortgage obligations 
residential
    
    
    18,711
    
    
    
    1,510
    
    
    
    
    
    
    
    
    
    
    
    20,221
    
    
    
    Mortgage pass-through securities 
residential
    
    
    63,956
    
    
    
    2,854
    
    
    
    
    
    
    
    
    
    
    
    66,810
    
    
    
    Obligations of states and political
subdivisions
    
    
    742,575
    
    
    
    29,256
    
    
    
    (6,130
    )
    
    
    (2,083
    )
    
    
    763,618
    
    
    
    Corporate bonds
    
    
    494,708
    
    
    
    19,459
    
    
    
    (1,806
    )
    
    
    
    
    
    
    512,361
    
    
    
    Collateralized mortgage obligations 
commercial
    
    
    10,016
    
    
    
    581
    
    
    
    
    
    
    
    
    
    
    
    10,597
    
    
    
    Other asset-backed securities:Second mortgages/home equity loans 
residential
    
    
    1,931
    
    
    
    
    
    
    
    
    
    
    
    (267
    )
    
    
    1,664
    
    
    
    (873
    )(a)Consumer credit receivables
    
    
    10,000
    
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    10,036
    
    
    
    Other
    
    
    20,164
    
    
    
    523
    
    
    
    (43
    )
    
    
    
    
    
    
    20,644
    
    
    
    Total fixed income securities
    
    
    1,384,865
    
    
    
    55,198
    
    
    
    (7,979
    )
    
    
    (2,350
    )
    
    
    1,429,734
    
    
    $
    (873
    )Equity securities
    
    
    1,938
    
    
    
    240
    
    
    
    
    
    
    
    
    
    
    
    2,178Total
    
    $
    1,386,803
    
    
    $
    55,438
    
    
    $
    (7,979
    )
    
    $
    (2,350
    )
    
    $
    1,431,912
 
 (a)
    
    The unrealized loss position of this security was $0.3 million at March 31, 2011. 38




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##### Table of Contents



Gross
    
    
    Gross Unrealized LossesAmortized Cost
    
    
    Unrealized
    
    
    Less Than
    
    
    More Than
    
    
    Estimated
    
    
    UnrealizedDecember 31, 2010
    
    or Cost
    
    
    Gains
    
    
    12 Months
    
    
    12 Months
    
    
    Fair Value
    
    
    OTTI LossesFixed income securities:U.S. Treasury securities and obligations of
U.S. Government and agencies:U.S. Treasury
    
    $
    17,288
    
    
    $
    914
    
    
    $
    
    
    
    $
    
    
    
    $
    18,202
    
    
    $
    U.S. Agencies
    
    
    6,518
    
    
    
    250
    
    
    
    
    
    
    
    
    
    
    
    6,768
    
    
    
    Collateralized mortgage obligations 
residential
    
    
    20,769
    
    
    
    1,558
    
    
    
    
    
    
    
    
    
    
    
    22,327
    
    
    
    Mortgage pass-through securities 
residential
    
    
    68,727
    
    
    
    3,320
    
    
    
    
    
    
    
    
    
    
    
    72,047
    
    
    
    Obligations of states and political
subdivisions
    
    
    746,514
    
    
    
    30,932
    
    
    
    (5,096
    )
    
    
    (1,742
    )
    
    
    770,608
    
    
    
    Corporate bonds
    
    
    456,963
    
    
    
    21,164
    
    
    
    (1,249
    )
    
    
    (5
    )
    
    
    476,873
    
    
    
    Collateralized mortgage obligations 
commercial
    
    
    10,018
    
    
    
    567
    
    
    
    
    
    
    
    
    
    
    
    10,585
    
    
    
    Other asset-backed securities:Second mortgages/home equity loans 
residential
    
    
    3,878
    
    
    
    
    
    
    
    (84
    )
    
    
    (272
    )
    
    
    3,522
    
    
    
    (927
    )(a)Consumer credit receivables
    
    
    9,998
    
    
    
    158
    
    
    
    
    
    
    
    
    
    
    
    10,156
    
    
    
    Other
    
    
    12,674
    
    
    
    617
    
    
    
    (4
    )
    
    
    
    
    
    
    13,287
    
    
    
    Total fixed income securities
    
    
    1,353,347
    
    
    
    59,480
    
    
    
    (6,433
    )
    
    
    (2,019
    )
    
    
    1,404,375
    
    
    $
    (927
    )Equity securities
    
    
    1,687
    
    
    
    229
    
    
    
    
    
    
    
    
    
    
    
    1,916Total
    
    $
    1,355,034
    
    
    $
    59,709
    
    
    $
    (6,433
    )
    
    $
    (2,019
    )
    
    $
    1,406,291
 
 (a)
    
    The unrealized loss position of this security was $0.3 million at December 31, 2010.   March 31, 2011
    
    
    December 31, 2010Credit Rating(a)
    

Estimated
Fair Value
    
    
    % of Total
    
    
    Estimated
Fair Value
    
    
    % of TotalAAA
    
    $
    373,210
    
    
    
    26.1
    %
    
    $
    377,757
    
    
    
    26.9
    %AA
    
    
    586,965
    
    
    
    41.1
    
    
    
    597,065
    
    
    
    42.5A
    
    
    389,320
    
    
    
    27.2
    
    
    
    360,128
    
    
    
    25.7BBB
    
    
    35,829
    
    
    
    2.5
    
    
    
    31,439
    
    
    
    2.2Non-investment grade
    
    
    44,410
    
    
    
    3.1
    
    
    
    37,986
    
    
    
    2.7Total
    
    $
    1,429,734
    
    
    
    100.0
    %
    
    $
    1,404,375
    
    
    
    100.0
    %
 
 (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, 2011 and December 31, 2010, all of the Companys fixed income securities were rated by S&P or Moodys. 39




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##### Table of Contents



% ofEstimated
    
    % ofFair
    
    UnrealizedContractual Maturity
    
    Value
    
    LossDue after one year through five years
    
    
    16
    %
    
    
    6
    %Due after five years through ten years
    
    
    37
    
    
    
    24Due after ten years
    
    
    43
    
    
    
    67Asset-backed securities
    
    
    4
    
    
    
    3Total
    
    
    100
    %
    
    
    100
    %
  March 31, 2011
    
    
    December 31, 2010Gross
    
    
    
    
    
    
    GrossEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    UnrealizedUnrealized Loss Aging
    
    Fair Value
    
    
    Loss
    
    
    Fair Value
    
    
    LossFixed income securities:Investment grade (a):0-6 months
    
    $
    281,785
    
    
    $
    7,945
    
    
    $
    223,778
    
    
    $
    6,350Greater than 24 months
    
    
    4,785
    
    
    
    760
    
    
    
    7,903
    
    
    
    663Total investment grade
    
    
    286,570
    
    
    
    8,705
    
    
    
    231,681
    
    
    
    7,013Non-investment grade:0-6 months
    
    
    6,208
    
    
    
    25
    
    
    
    11,256
    
    
    
    837-12 months
    
    
    1,532
    
    
    
    9
    
    
    
    
    
    
    
    Greater than 24 months
    
    
    11,168
    
    
    
    1,590
    
    
    
    11,522
    
    
    
    1,356Total non-investment grade
    
    
    18,908
    
    
    
    1,624
    
    
    
    22,778
    
    
    
    1,439Total
    
    $
    305,478
    
    
    $
    10,329
    
    
    $
    254,459
    
    
    $
    8,452
 
 (a)
    
    Investment grade is determined by using the S&P rating. If a security is not rated by S&P, the
Moodys rating is used. As of March 31, 2011 and December 31, 2010, all of the Companys fixed income securities were rated by S&P or Moodys. 40




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41




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##### Table of Contents



Gross Unrealized LossesEstimatedMarch 31, 2011
    
    AAA
    
    
    AA
    
    
    A
    
    
    BBB
    
    
    Total
    
    
    Count
    
    
    Fair ValueFixed income securities:Investment grade(a):Obligations of states and political subdivisions
    
    $
    577
    
    
    $
    4,170
    
    
    $
    2,143
    
    
    $
    
    
    
    $
    6,890
    
    
    
    34
    
    
    $
    173,884Corporate bonds
    
    
    
    
    
    
    39
    
    
    
    1,405
    
    
    
    328
    
    
    
    1,772
    
    
    
    22
    
    
    
    102,232Other asset-backed securities:Other
    
    
    43
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43
    
    
    
    2
    
    
    
    10,454Total investment grade
    
    
    620
    
    
    
    4,209
    
    
    
    3,548
    
    
    
    328
    
    
    
    8,705
    
    
    
    58
    
    
    
    286,570Non-investment grade:Obligations of states and political subdivisions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,323
    
    
    
    1
    
    
    
    9,504Corporate bonds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34
    
    
    
    5
    
    
    
    7,740Other asset-backed securities:Second mortgages/home equity loans 
residential
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    267
    
    
    
    1
    
    
    
    1,664Total non-investment grade
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,624
    
    
    
    7
    
    
    
    18,908Total
    
    $
    620
    
    
    $
    4,209
    
    
    $
    3,548
    
    
    $
    328
    
    
    $
    10,329
    
    
    
    65
    
    
    $
    305,478
 
 (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, 2011, all of the Companys fixed income securities
were rated by S&P or Moodys.  Obligations of States and Political Subdivisions
  42




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##### Table of Contents



Corporate Bonds
   Other Asset-backed Securities
   Pending Accounting Pronouncements
  43




---



##### Table of Contents



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




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##### Table of Contents




    
    changes in the Companys composition of operating segments;
    
    the actual closing of contemplated transactions and agreements;
    
    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 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
  45




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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2011
    
    
    (bp=basis points)
    
    
    Interest Rate
    
    
    Equity(Dollars in thousands)U.S. Government and government agencies and
authorities
    
    $
    110,814200 bp increase
    
    $
    102,644
    
    
    
    (0.5
    )%150 bp increase
    
    
    104,855
    
    
    
    (0.4
    )100 bp increase
    
    
    107,004
    
    
    
    (0.2
    )50 bp increase
    
    
    109,021
    
    
    
    (0.1
    )States, municipalities and political subdivisions
    
    
    763,618200 bp increase
    
    
    678,213
    
    
    
    (5.1
    )150 bp increase
    
    
    698,418
    
    
    
    (3.9
    )100 bp increase
    
    
    719,395
    
    
    
    (2.6
    )50 bp increase
    
    
    741,128
    
    
    
    (1.3
    )Corporate bonds
    
    
    512,361200 bp increase
    
    
    468,782
    
    
    
    (2.6
    )150 bp increase
    
    
    479,193
    
    
    
    (2.0
    )100 bp increase
    
    
    489,925
    
    
    
    (1.3
    )50 bp increase
    
    
    500,984
    
    
    
    (0.7
    )Mortgage-backed and asset-backed
    
    
    42,941200 bp increase
    
    
    41,264
    
    
    
    (0.1
    )150 bp increase
    
    
    41,672
    
    
    
    (0.1
    )100 bp increase
    
    
    42,087
    
    
    
    (0.1
    )50 bp increase
    
    
    42,510
    
    
    
    Total fixed income securities available-for-sale
    
    $
    1,429,734200 bp increase
    
    
    1,290,903
    
    
    
    (8.3
    )150 bp increase
    
    
    1,324,138
    
    
    
    (6.3
    )100 bp increase
    
    
    1,358,411
    
    
    
    (4.3
    )50 bp increase
    
    
    1,393,643
    
    
    
    (2.2
    )
 46




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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2010
    
    
    (bp=basis points)
    
    
    Interest Rate
    
    
    Equity(Dollars in thousands)U.S. Government and government agencies and
authorities
    
    $
    119,344200 bp increase
    
    $
    111,034
    
    
    
    (0.5
    )%150 bp increase
    
    
    113,329
    
    
    
    (0.4
    )100 bp increase
    
    
    115,538
    
    
    
    (0.2
    )50 bp increase
    
    
    117,578
    
    
    
    (0.1
    )States, municipalities and political subdivisions
    
    
    770,608200 bp increase
    
    
    682,531
    
    
    
    (5.4
    )150 bp increase
    
    
    703,332
    
    
    
    (4.1
    )100 bp increase
    
    
    724,944
    
    
    
    (2.8
    )50 bp increase
    
    
    747,360
    
    
    
    (1.4
    )Corporate bonds
    
    
    476,873200 bp increase
    
    
    436,507
    
    
    
    (2.5
    )150 bp increase
    
    
    446,132
    
    
    
    (1.9
    )100 bp increase
    
    
    456,064
    
    
    
    (1.3
    )50 bp increase
    
    
    466,309
    
    
    
    (0.6
    )Mortgage-backed and asset-backed
    
    
    37,550200 bp increase
    
    
    36,031
    
    
    
    (0.1
    )150 bp increase
    
    
    36,400
    
    
    
    (0.1
    )100 bp increase
    
    
    36,776
    
    
    
    50 bp increase
    
    
    37,159
    
    
    
    Total fixed income securities available-for-sale
    
    $
    1,404,375200 bp increase
    
    
    1,266,103
    
    
    
    (8.4
    )150 bp increase
    
    
    1,299,193
    
    
    
    (6.4
    )100 bp increase
    
    
    1,333,322
    
    
    
    (4.3
    )50 bp increase
    
    
    1,368,406
    
    
    
    (2.2
    )
 
 ITEM 4. CONTROLS AND PROCEDURES
    47




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 
 ITEM 1A. RISK FACTORS
 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS  None
 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES  None.
 
 ITEM 5. OTHER INFORMATION  Reports on Form 8-K:
  
 ITEM 6. EXHIBITS
 Exhibit NumberCertification 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)Written Statement of the Chief Executive Officer of
CNA Surety Corporation pursuant to 18 U.S.C. 1350 (as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002).
    
    
    32
    (1)*Written Statement of the Chief Financial Officer of
CNA Surety Corporation 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. 48




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##### Table of Contents



CNA SURETY CORPORATION (Registrant)/s/ John F. WelchJohn F. WelchPresident and Chief Executive Officer/s/ John F. CorcoranJohn F. CorcoranSenior Vice President and Chief Financial Officer  49




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##### Table of Contents



31(1)
    
    Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  Chief Executive Officer.31(2)
    
    Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  Chief Financial Officer.32(1)
    
    Written Statement of the Chief Executive Officer of CNA Surety Corporation pursuant to 18
U.S.C. 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002).32(2)
    
    Written Statement of the Chief Financial Officer of CNA Surety Corporation pursuant to 18
U.S.C. 1350 (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002).
 50