##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 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
    
    36-4144905(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)333 S. WABASH AVE., CHICAGO, ILLINOIS
    
    60604(Address of principal executive offices)
    
    (Zip Code)
 (312) 822-5000
(Registrants telephone number, including area code)
 þ o
 o o
  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 September 30, 2010 and at December 31, 2009
    
    
    3Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2010 and 2009
    
    
    4Condensed Consolidated Statements of Stockholders Equity for the Nine Months Ended September 30, 2010 and 2009
    
    
    5Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    25Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    43Item 4. Controls and Procedures
    
    
    45PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    45Item 1A. Risk Factors
    
    
    46Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    46Item 3. Defaults Upon Senior Securities
    
    
    46Item 4.
    
    
    46Item 5. Other Information
    
    
    46Item 6. Exhibits
    
    
    46EX-31.(1)EX-31.(2)EX-32.(1)EX-32.(2)
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##### Table of Contents



CNA SURETY CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 September 30,
    
    
    December 31,2010
    
    
    2009(Amounts in thousands, except pershare data)AssetsInvested assets:Fixed income securities, at fair value (amortized cost: $1,327,229 and $1,219,270)
    
    $
    1,428,878
    
    
    $
    1,266,223Equity securities, at fair value (cost: $1,736 and $1,429)
    
    
    1,947
    
    
    
    1,610Short-term investments, at amortized cost (approximates fair value)
    
    
    39,514
    
    
    
    48,999Total invested assets
    
    
    1,470,339
    
    
    
    1,316,832Cash
    
    
    7,600
    
    
    
    5,822Deferred policy acquisition costs
    
    
    102,698
    
    
    
    99,836Insurance receivables:Premiums, including $10,640 and $9,753 from affiliates, (net of allowance for doubtful
accounts: $1,315 and $1,110)
    
    
    44,664
    
    
    
    33,392Reinsurance
    
    
    49,486
    
    
    
    48,645Deposit with affiliated ceding company
    
    
    23,425
    
    
    
    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: $40,046
and $37,514)
    
    
    16,803
    
    
    
    19,681Prepaid reinsurance premiums
    
    
    180
    
    
    
    210Accrued investment income
    
    
    15,915
    
    
    
    15,832Other assets, including $359 and $0 receivables from affiliates
    
    
    2,458
    
    
    
    3,122Total assets
    
    $
    1,872,353
    
    
    $
    1,709,035LiabilitiesReserves:Unpaid losses and loss adjustment expenses
    
    $
    439,943
    
    
    $
    406,123Unearned premiums
    
    
    257,114
    
    
    
    247,776Total reserves
    
    
    697,057
    
    
    
    653,899Long-term debt
    
    
    30,930
    
    
    
    30,930Deferred income taxes, net
    
    
    46,751
    
    
    
    28,065Reinsurance and other payables to affiliates
    
    
    
    
    
    
    548Accrued expenses
    
    
    17,023
    
    
    
    18,586Liability for postretirement benefits
    
    
    11,007
    
    
    
    10,718Payable for securities purchased
    
    
    
    
    
    
    1,356Income tax payable
    
    
    3,816
    
    
    
    13,389Other liabilities
    
    
    24,917
    
    
    
    28,460Total liabilities
    
    
    831,501
    
    
    
    785,951Commitments and contingencies (See Notes 3, 5, & 8)Stockholders EquityCommon stock, par value $.01 per share, 100,000 shares authorized; 45,693 shares issued and
44,337 shares outstanding at September 30, 2010 and 45,635 shares issued and 44,268 shares
outstanding at December 31, 2009
    
    
    457
    
    
    
    456Additional paid-in capital
    
    
    281,448
    
    
    
    279,388Retained earnings
    
    
    707,422
    
    
    
    627,505Accumulated other comprehensive income
    
    
    66,085
    
    
    
    30,406Treasury stock, 1,356 and 1,367 shares, at cost
    
    
    (14,560
    )
    
    
    (14,671
    )Total stockholders equity
    
    
    1,040,852
    
    
    
    923,084Total liabilities and stockholders equity
    
    $
    1,872,353
    
    
    $
    1,709,035
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CNA SURETY CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Amount in thousands, except per share data)Revenues:Net earned premium
    
    $
    110,275
    
    
    $
    109,703
    
    
    $
    313,741
    
    
    $
    316,549Net investment income
    
    
    13,465
    
    
    
    12,536
    
    
    
    39,629
    
    
    
    37,359Net realized investment gains (losses):Other-than-temporary impairment losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,870
    )Portion of other-than-temporary impairment losses
recognized in other comprehensive income (before taxes)
    
    
    
    
    
    
    
    
    
    
    (122
    )
    
    
    1,708Net impairment losses recognized in earnings
    
    
    
    
    
    
    
    
    
    
    (122
    )
    
    
    (162
    )Net realized investment gains, excluding impairment losses
    
    
    8
    
    
    
    1,056
    
    
    
    1,191
    
    
    
    1,105Total net realized investment gains
    
    
    8
    
    
    
    1,056
    
    
    
    1,069
    
    
    
    943Total revenues
    
    
    123,748
    
    
    
    123,295
    
    
    
    354,439
    
    
    
    354,851Expenses:Net losses and loss adjustment expenses
    
    
    19,095
    
    
    
    24,429
    
    
    
    69,272
    
    
    
    84,992Net commissions, brokerage and other underwriting expenses
    
    
    59,609
    
    
    
    62,169
    
    
    
    168,202
    
    
    
    172,364Interest expense
    
    
    299
    
    
    
    319
    
    
    
    871
    
    
    
    1,096Total expenses
    
    
    79,003
    
    
    
    86,917
    
    
    
    238,345
    
    
    
    258,452Income before income taxes
    
    
    44,745
    
    
    
    36,378
    
    
    
    116,094
    
    
    
    96,399Income tax expense
    
    
    14,258
    
    
    
    10,854
    
    
    
    36,177
    
    
    
    27,844Net income
    
    $
    30,487
    
    
    $
    25,524
    
    
    $
    79,917
    
    
    $
    68,555Earnings per common share
    
    $
    0.69
    
    
    $
    0.58
    
    
    $
    1.80
    
    
    $
    1.55Earnings per common share, assuming dilution
    
    $
    0.69
    
    
    $
    0.57
    
    
    $
    1.80
    
    
    $
    1.54Weighted average shares outstanding
    
    
    44,327
    
    
    
    44,263
    
    
    
    44,305
    
    
    
    44,240Weighted average shares outstanding, assuming dilution
    
    
    44,487
    
    
    
    44,411
    
    
    
    44,458
    
    
    
    44,397
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##### Table of Contents



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
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    68,555
    
    
    $
    68,555
    
    
    $
    
    
    
    $
    
    
    
    $
    68,555Other comprehensive income:Change in unrealized gains
(losses) on securities, after
income tax expense of $25,317
(net of reclassification
adjustment of ($2,550), after
income tax benefit of $1,373)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,016
    
    
    
    
    
    
    
    47,016
    
    
    
    
    
    
    
    47,016Other-than-temporary
impairment losses not
recognized in the Condensed
Consolidated Statements of
Income, after income tax
benefit of $146
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (270
    )
    
    
    
    
    
    
    (270
    )
    
    
    
    
    
    
    (270
    )Net change related to
postretirement benefits, after
income tax benefit of $178
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (531
    )
    
    
    
    
    
    
    (531
    )
    
    
    
    
    
    
    (531
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    114,770
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    1,453
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,453Stock options exercised and other
    
    
    99
    
    
    
    1
    
    
    
    1,141
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102
    
    
    
    1,244Balance, September 30, 2009
    
    
    44,267
    
    
    $
    456
    
    
    $
    278,849
    
    
    
    
    
    
    $
    578,199
    
    
    $
    41,929
    
    
    $
    (14,671
    )
    
    $
    884,762Balance, January 1, 2010
    
    
    44,268
    
    
    $
    456
    
    
    $
    279,388
    
    
    
    
    
    
    $
    627,505
    
    
    $
    30,406
    
    
    $
    (14,671
    )
    
    $
    923,084Comprehensive income:Net income
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    79,917
    
    
    $
    79,917
    
    
    $
    
    
    
    $
    
    
    
    $
    79,917Other comprehensive income:Change in unrealized gains on
securities, after income tax
expense of $19,049 (net of
reclassification adjustment
of $828, after income tax
expense of $445)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,376
    
    
    
    
    
    
    
    35,376
    
    
    
    
    
    
    
    35,376Other-than-temporary
impairment losses not
recognized in the Condensed
Consolidated Statements of
Income, after income tax
expense of $105 (net of
reclassification adjustment of
($79), after income tax
benefit of $43)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    196
    
    
    
    
    
    
    
    196
    
    
    
    
    
    
    
    196Net change related to
postretirement benefits, after
income tax expense of $57
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    107
    
    
    
    
    
    
    
    107
    
    
    
    
    
    
    
    107Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    115,596
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    1,322
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,322Stock options exercised and other
    
    
    69
    
    
    
    1
    
    
    
    738
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    111
    
    
    
    850Balance, September 30, 2010
    
    
    44,337
    
    
    $
    457
    
    
    $
    281,448
    
    
    
    
    
    
    $
    707,422
    
    
    $
    66,085
    
    
    $
    (14,560
    )
    
    $
    1,040,852
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##### Table of Contents



CNA SURETY CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Nine Months EndedSeptember 30,2010
    
    
    2009(Amounts in thousands)Cash Flows from Operating Activities:Net income
    
    $
    79,917
    
    
    $
    68,555Adjustments to reconcile net income to net cash provided by operating activities:Provision for doubtful accounts
    
    
    422
    
    
    
    543Depreciation and amortization
    
    
    4,622
    
    
    
    4,516Amortization of bond premium, net
    
    
    5,443
    
    
    
    3,534(Gain) loss on disposal or impairment of property and equipment
    
    
    (77
    )
    
    
    4,921Net realized investment gains
    
    
    (1,069
    )
    
    
    (943
    )Deferred income taxes, net
    
    
    (622
    )
    
    
    (449
    )Stock-based compensation
    
    
    1,322
    
    
    
    1,453Changes in:Insurance receivables
    
    
    (12,535
    )
    
    
    35,771Reserve for unearned premiums
    
    
    9,338
    
    
    
    3,792Reserve for unpaid losses and loss adjustment expenses
    
    
    33,820
    
    
    
    (438
    )Deposit with affiliated ceding company
    
    
    3,453
    
    
    
    2,325Deferred policy acquisition costs
    
    
    (2,862
    )
    
    
    (2,989
    )Reinsurance and other payables to/receivables from affiliates
    
    
    (907
    )
    
    
    (1,590
    )Prepaid reinsurance premiums
    
    
    30
    
    
    
    154Accrued expenses
    
    
    (1,563
    )
    
    
    (5,751
    )Other assets and liabilities
    
    
    (11,627
    )
    
    
    (3,702
    )Net cash provided by operating activities
    
    
    107,105
    
    
    
    109,702Cash Flows from Investing Activities:Fixed income securities:Purchases
    
    
    (182,941
    )
    
    
    (260,383
    )Maturities
    
    
    45,251
    
    
    
    84,747Sales
    
    
    25,295
    
    
    
    50,115Purchases of equity securities
    
    
    (373
    )
    
    
    (715
    )Proceeds from the sale of equity securities
    
    
    86
    
    
    
    528Changes in short-term investments
    
    
    9,529
    
    
    
    10,209Purchases of property and equipment, net
    
    
    (1,667
    )
    
    
    (3,612
    )Changes in receivables/payables for securities sold/purchased
    
    
    (1,357
    )
    
    
    (8,398
    )Net cash (used in) investing activities
    
    
    (106,177
    )
    
    
    (127,509
    )Cash Flows from Financing Activities:Employee stock option exercises and other
    
    
    850
    
    
    
    1,244Investment custody account bank overdraft
    
    
    
    
    
    
    14,857Net cash provided by financing activities
    
    
    850
    
    
    
    16,101Increase (decrease) in cash
    
    
    1,778
    
    
    
    (1,706
    )Cash at beginning of period
    
    
    5,822
    
    
    
    9,596Cash at end of period
    
    $
    7,600
    
    
    $
    7,890Supplemental Disclosure of Cash Flow Information:Cash paid during the period for:Interest
    
    $
    867
    
    
    $
    1,126Income taxes
    
    $
    46,279
    
    
    $
    28,059
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##### Table of Contents



CNA SURETY CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income
    
    $
    30,487
    
    
    $
    25,524
    
    
    $
    79,917
    
    
    $
    68,555Shares:Weighted average shares outstanding
    
    
    44,313
    
    
    
    44,254
    
    
    
    44,268
    
    
    
    44,168Weighted average shares of options exercised and additional
stock issuance
    
    
    14
    
    
    
    9
    
    
    
    37
    
    
    
    72Total weighted average shares outstanding
    
    
    44,327
    
    
    
    44,263
    
    
    
    44,305
    
    
    
    44,240Effect of dilutive options
    
    
    160
    
    
    
    148
    
    
    
    153
    
    
    
    157Total weighted average shares outstanding, assuming dilution
    
    
    44,487
    
    
    
    44,411
    
    
    
    44,458
    
    
    
    44,397Earnings per share
    
    $
    0.69
    
    
    $
    0.58
    
    
    $
    1.80
    
    
    $
    1.55Earnings per share, assuming dilution
    
    $
    0.69
    
    
    $
    0.57
    
    
    $
    1.80
    
    
    $
    1.54
  Adopted Accounting Pronouncements
      8




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##### Table of Contents



Pending Accounting Pronouncements
  2. Investments
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Investment income:Fixed income securities
    
    $
    13,766
    
    
    $
    12,763
    
    
    $
    40,499
    
    
    $
    37,790Equity securities
    
    
    10
    
    
    
    8
    
    
    
    28
    
    
    
    27Short-term investments
    
    
    27
    
    
    
    26
    
    
    
    63
    
    
    
    110Other
    
    
    11
    
    
    
    14
    
    
    
    35
    
    
    
    48Total investment income on available-for-sale securities
    
    
    13,814
    
    
    
    12,811
    
    
    
    40,625
    
    
    
    37,975Investment income on deposit with affiliated ceding company
    
    
    21
    
    
    
    35
    
    
    
    72
    
    
    
    307Investment expenses
    
    
    (370
    )
    
    
    (310
    )
    
    
    (1,068
    )
    
    
    (923
    )Net investment income
    
    $
    13,465
    
    
    $
    12,536
    
    
    $
    39,629
    
    
    $
    37,359
 9




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net realized investment gains (losses):Fixed income securities:Gross realized investment gains
    
    $
    4
    
    
    $
    1,448
    
    
    $
    1,197
    
    
    $
    1,491Gross realized investment losses:Other-than-temporary impairment losses
    
    
    
    
    
    
    
    
    
    
    (122
    )
    
    
    (116
    )Realized losses from sales
    
    
    (5
    )
    
    
    (392
    )
    
    
    (26
    )
    
    
    (392
    )Total gross realized investment losses
    
    
    (5
    )
    
    
    (392
    )
    
    
    (148
    )
    
    
    (508
    )Net realized investment (losses) gains on fixed income securities
    
    
    (1
    )
    
    
    1,056
    
    
    
    1,049
    
    
    
    983Equity securities:Gross realized investment gains
    
    
    8
    
    
    
    
    
    
    
    20
    
    
    
    27Gross 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
    
    
    8
    
    
    
    
    
    
    
    20
    
    
    
    (39
    )Other
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Net realized investment gains
    
    $
    8
    
    
    $
    1,056
    
    
    $
    1,069
    
    
    $
    943Net change in unrealized gains:Fixed income securities
    
    $
    29,656
    
    
    $
    46,768
    
    
    $
    54,696
    
    
    $
    71,743Equity securities
    
    
    68
    
    
    
    93
    
    
    
    30
    
    
    
    174Total net change in unrealized gains
    
    $
    29,724
    
    
    $
    46,861
    
    
    $
    54,726
    
    
    $
    71,917Net realized gains and change in unrealized gains
    
    $
    29,732
    
    
    $
    47,917
    
    
    $
    55,795
    
    
    $
    72,860
  10




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Gross
    
    
    Gross Unrealized LossesAmortized Cost
    
    
    Unrealized
    
    
    Less Than
    
    
    More Than
    
    
    Estimated
    
    
    UnrealizedSeptember 30, 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
    
    $
    17,287
    
    
    $
    1,080
    
    
    $
    
    
    
    $
    
    
    
    $
    18,367
    
    
    $
    U.S. Agencies
    
    
    6,521
    
    
    
    309
    
    
    
    
    
    
    
    
    
    
    
    6,830
    
    
    
    Collateralized mortgage obligations  residential
    
    
    24,268
    
    
    
    1,814
    
    
    
    
    
    
    
    
    
    
    
    26,082
    
    
    
    Mortgage pass-through securities  residential
    
    
    75,569
    
    
    
    3,426
    
    
    
    
    
    
    
    
    
    
    
    78,995
    
    
    
    Obligations of states and political subdivisions
    
    
    711,165
    
    
    
    60,100
    
    
    
    
    
    
    
    (786
    )
    
    
    770,479
    
    
    
    Corporate bonds
    
    
    458,489
    
    
    
    34,253
    
    
    
    (25
    )
    
    
    (74
    )
    
    
    492,643
    
    
    
    Collateralized mortgage obligations  commercial
    
    
    10,019
    
    
    
    770
    
    
    
    
    
    
    
    
    
    
    
    10,789
    
    
    
    Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    4,228
    
    
    
    
    
    
    
    
    
    
    
    (242
    )
    
    
    3,986
    
    
    
    (1,021
    ) (a)Consumer credit receivables
    
    
    9,997
    
    
    
    282
    
    
    
    
    
    
    
    
    
    
    
    10,279
    
    
    
    Other
    
    
    9,686
    
    
    
    742
    
    
    
    
    
    
    
    
    
    
    
    10,428
    
    
    
    Total fixed income securities
    
    
    1,327,229
    
    
    
    102,776
    
    
    
    (25
    )
    
    
    (1,102
    )
    
    
    1,428,878
    
    
    $
    (1,021
    )Equity securities
    
    
    1,736
    
    
    
    211
    
    
    
    
    
    
    
    
    
    
    
    1,947Total
    
    $
    1,328,965
    
    
    $
    102,987
    
    
    $
    (25
    )
    
    $
    (1,102
    )
    
    $
    1,430,825
 
 (a)
    
    The unrealized loss position of this security was $0.2 million at September 30, 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 LossesFixed 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
    ) (a)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.   11




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12




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Three Months
    
    
    Nine Months EndedEnded September 30
    
    
    September 30Beginning balance
    
    $
    238
    
    
    $
    116Credit losses for which an OTTI loss was not previously recognized
    
    
    
    
    
    
    Credit losses for which an OTTI loss was previously recognized
    
    
    
    
    
    
    122Ending balance
    
    $
    238
    
    
    $
    238
  Three Months
    
    
    Six Months EndedEnded September 30
    
    
    September 30Beginning balance
    
    $
    116
    
    
    $
    Credit losses for which an OTTI loss was not previously recognized
    
    
    
    
    
    
    116Credit losses for which an OTTI loss was previously recognized
    
    
    
    
    
    
    Ending balance
    
    $
    116
    
    
    $
    116
   September 30, 2010
    
    
    December 31, 2009Amortized
    
    
    Estimated Fair
    
    
    Amortized
    
    
    Estimated FairCost
    
    
    Value
    
    
    Cost
    
    
    ValueFixed income securities:Due within one year
    
    $
    31,719
    
    
    $
    32,419
    
    
    $
    13,006
    
    
    $
    13,224Due after one year but within five years
    
    
    410,562
    
    
    
    436,300
    
    
    
    304,654
    
    
    
    321,144Due after five years but within ten years
    
    
    464,094
    
    
    
    514,311
    
    
    
    447,485
    
    
    
    468,254Due after ten years
    
    
    287,087
    
    
    
    305,289
    
    
    
    292,668
    
    
    
    298,5341,193,462
    
    
    
    1,288,319
    
    
    
    1,057,813
    
    
    
    1,101,156Mortgage pass-through securities,
collateralized mortgage obligations and
asset-backed securities
    
    
    133,767
    
    
    
    140,559
    
    
    
    161,457
    
    
    
    165,067$
    1,327,229
    
    
    $
    1,428,878
    
    
    $
    1,219,270
    
    
    $
    1,266,223
  % ofEstimated
    
    
    % ofFair
    
    
    UnrealizedContractual Maturity
    
    Value
    
    
    LossDue after one year through five years
    
    
    29
    %
    
    
    9
    %Due after five years through ten years
    
    
    49
    
    
    
    65Due after ten years
    
    
    16
    
    
    
    5Asset-backed securities
    
    
    6
    
    
    
    21Total
    
    
    100
    %
    
    
    100
    %
 13




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September 30, 2010
    
    
    December 31, 2009Gross
    
    
    
    
    
    
    GrossEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    UnrealizedUnrealized Loss Aging
    
    Fair Value
    
    
    Loss
    
    
    Fair Value
    
    
    LossFixed income securities:Investment grade(a):0-6 months
    
    $
    
    
    
    $
    
    
    
    $
    162,087
    
    
    $
    2,36213-24 months
    
    
    
    
    
    
    
    
    
    
    11,176
    
    
    
    469Greater than 24 months
    
    
    8,155
    
    
    
    422
    
    
    
    32,932
    
    
    
    2,065Total investment grade
    
    
    8,155
    
    
    
    422
    
    
    
    206,195
    
    
    
    4,896Non-investment grade:0-6 months
    
    
    6,235
    
    
    
    25
    
    
    
    
    
    
    
    Greater than 24 months
    
    
    17,700
    
    
    
    680
    
    
    
    17,346
    
    
    
    1,716Total non-investment grade
    
    
    23,935
    
    
    
    705
    
    
    
    17,346
    
    
    
    1,716Total
    
    $
    32,090
    
    
    $
    1,127
    
    
    $
    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 September 30,
2010 and December 31, 2009, all of the Companys fixed
income securities were rated by S&P or Moodys.   Gross Unrealized Losses
    
    
    EstimatedSeptember 30, 2010
    
    A
    
    
    BBB
    
    
    Total
    
    
    Count
    
    
    Fair ValueFixed income securities:Investment grade(a):Obligations of states and political subdivisions
    
    $
    348
    
    
    $
    
    
    
    $
    348
    
    
    
    1
    
    
    $
    5,215Corporate bonds
    
    
    
    
    
    
    74
    
    
    
    74
    
    
    
    1
    
    
    
    2,940Total investment grade
    
    
    348
    
    
    
    74
    
    
    
    422
    
    
    
    2
    
    
    
    8,155Non-investment grade:Obligations of states and political subdivisions
    
    
    
    
    
    
    
    
    
    
    438
    
    
    
    2
    
    
    
    15,716Corporate bonds
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    4
    
    
    
    6,235Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    
    
    
    
    
    
    
    
    242
    
    
    
    1
    
    
    
    1,984Total non-investment grade
    
    
    
    
    
    
    
    
    
    
    705
    
    
    
    7
    
    
    
    23,935Total
    
    $
    348
    
    
    $
    74
    
    
    $
    1,127
    
    
    
    9
    
    
    $
    32,090
 
 (a)
    
    Securities are categorized using the S&P rating. If a security is not rated by
S&P, the Moodys rating is used. At September 30, 2010, all of the Companys fixed income
securities were rated by S&P or Moodys.  14




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15




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3. Reinsurance
  Three Months Ended September 30,2010
    
    
    2009Written
    
    
    Earned
    
    
    Written
    
    
    EarnedDirect
    
    $
    91,299
    
    
    $
    93,107
    
    
    $
    90,472
    
    
    $
    91,994Assumed
    
    
    22,485
    
    
    
    23,269
    
    
    
    22,930
    
    
    
    24,813Ceded
    
    
    (6,079
    )
    
    
    (6,101
    )
    
    
    (7,041
    )
    
    
    (7,104
    )$
    107,705
    
    
    $
    110,275
    
    
    $
    106,361
    
    
    $
    109,703
 Nine Months Ended September 30,2010
    
    
    2009Written
    
    
    Earned
    
    
    Written
    
    
    EarnedDirect
    
    $
    274,578
    
    
    $
    262,968
    
    
    $
    271,619
    
    
    $
    262,628Assumed
    
    
    66,680
    
    
    
    68,952
    
    
    
    69,742
    
    
    
    74,941Ceded
    
    
    (18,149
    )
    
    
    (18,179
    )
    
    
    (20,866
    )
    
    
    (21,020
    )$
    323,109
    
    
    $
    313,741
    
    
    $
    320,495
    
    
    $
    316,549
     Three Months Ended September 30,2010
    
    
    2009$
    
    
    Ratio
    
    
    $
    
    
    RatioGross losses and loss adjustment expenses
    
    $
    16,959
    
    
    
    14.6
    %
    
    $
    28,062
    
    
    
    24.0
    %Ceded amounts
    
    
    2,136
    
    
    
    (35.0
    )%
    
    
    (3,633
    )
    
    
    51.6
    %Net losses and loss adjustment expenses
    
    $
    19,095
    
    
    
    17.3
    %
    
    $
    24,429
    
    
    
    22.3
    %
 Nine Months Ended September 30,2010
    
    
    2009$
    
    
    Ratio
    
    
    $
    
    
    RatioGross losses and loss adjustment expenses
    
    $
    68,081
    
    
    
    20.5
    %
    
    $
    92,115
    
    
    
    27.3
    %Ceded amounts
    
    
    1,191
    
    
    
    (6.6
    )%
    
    
    (7,123
    )
    
    
    33.9
    %Net losses and loss adjustment expenses
    
    $
    69,272
    
    
    
    22.1
    %
    
    $
    84,992
    
    
    
    26.8
    %
 16




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##### Table of Contents



Excess of Loss Reinsurance
  2009 Third Party Reinsurance
  2010 Third Party Reinsurance
  Related Party Reinsurance
    17




---



##### Table of Contents



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.
   Fixed Income Securities
  Equity Securities
  Short-Term Investments
  19




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##### Table of Contents



September 30, 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
    
    $
    18,367
    
    
    $
    
    
    
    $
    
    
    
    $
    18,367U.S. Agencies
    
    
    
    
    
    
    6,830
    
    
    
    
    
    
    
    6,830Collateralized mortgage obligations  residential
    
    
    
    
    
    
    26,082
    
    
    
    
    
    
    
    26,082Mortgage pass-through securities  residential
    
    
    
    
    
    
    78,995
    
    
    
    
    
    
    
    78,995Obligations of states and political subdivisions
    
    
    
    
    
    
    770,479
    
    
    
    
    
    
    
    770,479Corporate bonds
    
    
    
    
    
    
    492,643
    
    
    
    
    
    
    
    492,643Collateralized mortgage obligations  commercial
    
    
    
    
    
    
    10,789
    
    
    
    
    
    
    
    10,789Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    
    
    
    
    3,986
    
    
    
    
    
    
    
    3,986Consumer credit receivables
    
    
    
    
    
    
    10,279
    
    
    
    
    
    
    
    10,279Other
    
    
    
    
    
    
    10,428
    
    
    
    
    
    
    
    10,428Total fixed income securities
    
    
    18,367
    
    
    
    1,410,511
    
    
    
    
    
    
    
    1,428,878Equity securities at fair value
    
    
    1,947
    
    
    
    
    
    
    
    
    
    
    
    1,947Short-term investments at fair value (a)
    
    
    16,042
    
    
    
    23,472
    
    
    
    
    
    
    
    39,514Total assets
    
    $
    36,356
    
    
    $
    1,433,983
    
    
    $
    
    
    
    $
    1,470,339
 
 (a)
    
    Includes commercial paper, U.S. Government agency discount notes and money
market funds. 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.  20




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##### Table of Contents



5. Reserves for Losses and Loss Adjustment Expenses
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Reserves at beginning of period:Gross
    
    $
    439,344
    
    
    $
    419,812
    
    
    $
    406,123
    
    
    $
    428,724Ceded reinsurance
    
    
    53,040
    
    
    
    40,796
    
    
    
    50,968
    
    
    
    83,691Net reserves at beginning of period
    
    
    386,304
    
    
    
    379,016
    
    
    
    355,155
    
    
    
    345,033Net incurred loss and loss adjustment expenses:Provision for insured events of current year
    
    
    32,088
    
    
    
    32,291
    
    
    
    91,265
    
    
    
    92,907(Decrease) in provision for insured events of prior years
    
    
    (12,993
    )
    
    
    (7,862
    )
    
    
    (21,993
    )
    
    
    (7,915
    )Total net incurred
    
    
    19,095
    
    
    
    24,429
    
    
    
    69,272
    
    
    
    84,992Net payments attributable to:Current year events
    
    
    5,643
    
    
    
    6,717
    
    
    
    9,736
    
    
    
    10,323Prior year events
    
    
    11,568
    
    
    
    11,843
    
    
    
    26,483
    
    
    
    34,817Total net payments
    
    
    17,211
    
    
    
    18,560
    
    
    
    36,219
    
    
    
    45,140Foreign currency transaction adjustments
    
    
    67
    
    
    
    
    
    
    
    47
    
    
    
    Net reserves at end of period
    
    
    388,255
    
    
    
    384,885
    
    
    
    388,255
    
    
    
    384,885Ceded reinsurance at end of period
    
    
    51,688
    
    
    
    43,401
    
    
    
    51,688
    
    
    
    43,401Gross reserves at end of period
    
    $
    439,943
    
    
    $
    428,286
    
    
    $
    439,943
    
    
    $
    428,286
    6. Debt
    21




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##### Table of Contents



7. Employee Benefits
    Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net periodic benefit cost:Service cost
    
    $
    45
    
    
    $
    65
    
    
    $
    167
    
    
    $
    171Interest cost
    
    
    147
    
    
    
    160
    
    
    
    463
    
    
    
    429Amortization of prior service cost (benefit)
    
    
    (28
    )
    
    
    (40
    )
    
    
    (83
    )
    
    
    (121
    )Net amortization of actuarial (gain) loss
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    Net periodic benefit cost
    
    $
    163
    
    
    $
    185
    
    
    $
    547
    
    
    $
    479
  8. Commitments and Contingencies
  9. Income Taxes
   22




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##### Table of Contents



10. Stockholders Equity
  Equity Compensation Plans
      23




---



##### 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
    
    
    (10,900
    )
    
    $
    17.63Options expired
    
    
    (13,270
    )
    
    $
    14.34Options exercised
    
    
    (89,905
    )
    
    $
    11.51Outstanding options at September 30, 2009
    
    
    1,325,003
    
    
    $
    15.79Outstanding options at January 1, 2010
    
    
    1,318,288
    
    
    $
    15.78Options granted
    
    
    281,260
    
    
    $
    14.32Options forfeited
    
    
    (14,005
    )
    
    $
    17.30Options expired
    
    
    (5,355
    )
    
    $
    20.05Options exercised
    
    
    (57,746
    )
    
    $
    12.58Outstanding options at September 30, 2010
    
    
    1,522,442
    
    
    $
    15.60
  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
    
    
    (10,900
    )
    
    $
    7.43Non-vested options at September 30, 2009
    
    
    615,306
    
    
    $
    7.76Non-vested options at January 1, 2010
    
    
    539,396
    
    
    $
    8.10Options granted
    
    
    281,260
    
    
    $
    7.25Options vested
    
    
    (185,202
    )
    
    $
    8.14Options forfeited
    
    
    (14,005
    )
    
    $
    7.84Non-vested options at September 30, 2010
    
    
    621,449
    
    
    $
    7.71
  Options Vested or Expected to VestWeighted
    
    
    
    
    
    
    Weighted AverageAverage
    
    
    Aggregate
    
    
    RemainingNumber
    
    
    Exercise Price
    
    
    Intrinsic Value
    
    
    Contractual LifeSeptember 30, 2010
    
    
    1,452,476
    
    
    $
    15.55
    
    
    $
    4,389,302
    
    
    6.4 years
 Options ExercisableWeighted
    
    
    
    
    
    
    Weighted AverageAverage
    
    
    Aggregate
    
    
    RemainingNumber
    
    
    Exercise Price
    
    
    Intrinsic Value
    
    
    Contractual LifeSeptember 30, 2010
    
    
    900,993
    
    
    $
    14.93
    
    
    $
    3,340,444
    
    
    5.2 years
   24




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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
     25




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##### Table of Contents



Gross Case Loss
    
    
    Gross IBNR Loss
    
    
    Total Grossand LAE Reserves
    
    
    and LAE Reserves
    
    
    ReservesContract
    
    $
    76,981
    
    
    $
    240,687
    
    
    $
    317,668Commercial
    
    
    50,052
    
    
    
    60,800
    
    
    
    110,852Fidelity and other
    
    
    3,983
    
    
    
    7,440
    
    
    
    11,423Total
    
    $
    131,016
    
    
    $
    308,927
    
    
    $
    439,943
   
    
    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
  26




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##### Table of Contents



Goodwill and Other Intangible Assets
   Insurance Premiums
  27




---



##### Table of Contents



Deferred Policy Acquisitions Costs
  Results of Operations
 Financial Measures
     28




---



##### Table of Contents



Comparison of CNA Surety Actual Results for the Three and Nine Months Ended September 30, 2010
and 2009
 Analysis of Net Income
    Results of Insurance Operations
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Gross written premiums
    
    $
    113,784
    
    
    $
    113,402
    
    
    $
    341,258
    
    
    $
    341,361Net written premiums
    
    $
    107,705
    
    
    $
    106,361
    
    
    $
    323,109
    
    
    $
    320,495Net earned premiums
    
    $
    110,275
    
    
    $
    109,703
    
    
    $
    313,741
    
    
    $
    316,549Net losses and loss adjustment expenses
    
    $
    19,095
    
    
    $
    24,429
    
    
    $
    69,272
    
    
    $
    84,992Net commissions, brokerage and other underwriting expenses
    
    $
    59,609
    
    
    $
    62,169
    
    
    $
    168,202
    
    
    $
    172,364Loss ratio
    
    
    17.3
    %
    
    
    22.3
    %
    
    
    22.1
    %
    
    
    26.8
    %Expense ratio
    
    
    54.1
    
    
    
    56.7
    
    
    
    53.6
    
    
    
    54.5Combined ratio
    
    
    71.4
    %
    
    
    79.0
    %
    
    
    75.7
    %
    
    
    81.3
    %
 Premiums Written/Earned
    29




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##### Table of Contents



Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Contract
    
    $
    73,653
    
    
    $
    71,817
    
    
    $
    217,002
    
    
    $
    215,301Commercial
    
    
    32,616
    
    
    
    34,163
    
    
    
    100,459
    
    
    
    102,579Fidelity and other
    
    
    7,515
    
    
    
    7,422
    
    
    
    23,797
    
    
    
    23,481$
    113,784
    
    
    $
    113,402
    
    
    $
    341,258
    
    
    $
    341,361
     Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Contract
    
    $
    68,310
    
    
    $
    65,674
    
    
    $
    201,047
    
    
    $
    196,826Commercial
    
    
    31,880
    
    
    
    33,265
    
    
    
    98,265
    
    
    
    100,188Fidelity and other
    
    
    7,515
    
    
    
    7,422
    
    
    
    23,797
    
    
    
    23,481$
    107,705
    
    
    $
    106,361
    
    
    $
    323,109
    
    
    $
    320,495
    Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Contract
    
    $
    69,852
    
    
    $
    68,815
    
    
    $
    193,388
    
    
    $
    195,314Commercial
    
    
    32,781
    
    
    
    33,208
    
    
    
    97,699
    
    
    
    98,246Fidelity and other
    
    
    7,642
    
    
    
    7,680
    
    
    
    22,654
    
    
    
    22,989$
    110,275
    
    
    $
    109,703
    
    
    $
    313,741
    
    
    $
    316,549
  30




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##### Table of Contents



Net Loss Ratio
 .
 Expense Ratio
  Investment Income and Realized Investment Gains/Losses
    Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net realized investment gains (losses):Fixed income securities:Gross realized investment gains
    
    $
    4
    
    
    $
    1,448
    
    
    $
    1,197
    
    
    $
    1,491Gross realized investment losses:Other-than-temporary impairment losses
    
    
    
    
    
    
    
    
    
    
    (122
    )
    
    
    (116
    )Realized losses from sales
    
    
    (5
    )
    
    
    (392
    )
    
    
    (26
    )
    
    
    (392
    )Total gross realized investment losses
    
    
    (5
    )
    
    
    (392
    )
    
    
    (148
    )
    
    
    (508
    )Net realized investment (losses) gains on fixed income securities
    
    
    (1
    )
    
    
    1,056
    
    
    
    1,049
    
    
    
    983Equity securities:Gross realized investment gains
    
    
    8
    
    
    
    
    
    
    
    20
    
    
    
    27Gross 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
    
    
    8
    
    
    
    
    
    
    
    20
    
    
    
    (39
    )Other
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    (1
    )Net realized investment gains
    
    $
    8
    
    
    $
    1,056
    
    
    $
    1,069
    
    
    $
    943
 31




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##### Table of Contents



Interest Expense
  Income Taxes
  Exposure Management
    Excess of Loss Reinsurance
  2009 Third Party Reinsurance
  32




---



##### Table of Contents



2010 Third Party Reinsurance
  Related Party Reinsurance
      33




---



##### Table of Contents



Liquidity and Capital Resources
   34




---



##### Table of Contents



35




---



##### Table of Contents



Contractual Obligations as of September 30, 2010
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    2014
    
    
    Thereafter
    
    
    TotalDebt (a)
    
    $
    0.3
    
    
    $
    1.2
    
    
    $
    1.2
    
    
    $
    1.2
    
    
    $
    1.2
    
    
    $
    53.3
    
    
    $
    58.4Operating leases
    
    
    0.5
    
    
    
    1.9
    
    
    
    1.0
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    
    
    
    
    3.6Loss and loss adjustment expense reserves
    
    
    20.6
    
    
    
    130.9
    
    
    
    87.5
    
    
    
    61.5
    
    
    
    56.1
    
    
    
    83.3
    
    
    
    439.9Other long-term liabilities(b)
    
    
    0.1
    
    
    
    1.6
    
    
    
    1.2
    
    
    
    0.7
    
    
    
    0.4
    
    
    
    10.4
    
    
    
    14.4Total
    
    $
    21.5
    
    
    $
    135.6
    
    
    $
    90.9
    
    
    $
    63.5
    
    
    $
    57.8
    
    
    $
    147.0
    
    
    $
    516.3
 
 (a)
    
    Reflects expected principal and interest payments.(b)
    
    Reflects unfunded postretirement benefit plans and long-term incentive plan payments
to certain executives.      36




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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
    
    
    UnrealizedSeptember 30, 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
    
    $
    17,287
    
    
    $
    1,080
    
    
    $
    
    
    
    $
    
    
    
    $
    18,367
    
    
    $
    U.S. Agencies
    
    
    6,521
    
    
    
    309
    
    
    
    
    
    
    
    
    
    
    
    6,830
    
    
    
    Collateralized mortgage obligations  residential
    
    
    24,268
    
    
    
    1,814
    
    
    
    
    
    
    
    
    
    
    
    26,082
    
    
    
    Mortgage pass-through securities  residential
    
    
    75,569
    
    
    
    3,426
    
    
    
    
    
    
    
    
    
    
    
    78,995
    
    
    
    Obligations of states and political subdivisions
    
    
    711,165
    
    
    
    60,100
    
    
    
    
    
    
    
    (786
    )
    
    
    770,479
    
    
    
    Corporate bonds
    
    
    458,489
    
    
    
    34,253
    
    
    
    (25
    )
    
    
    (74
    )
    
    
    492,643
    
    
    
    Collateralized mortgage obligations  commercial
    
    
    10,019
    
    
    
    770
    
    
    
    
    
    
    
    
    
    
    
    10,789
    
    
    
    Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    4,228
    
    
    
    
    
    
    
    
    
    
    
    (242
    )
    
    
    3,986
    
    
    
    (1,021
    ) (a)Consumer credit receivables
    
    
    9,997
    
    
    
    282
    
    
    
    
    
    
    
    
    
    
    
    10,279
    
    
    
    Other
    
    
    9,686
    
    
    
    742
    
    
    
    
    
    
    
    
    
    
    
    10,428
    
    
    
    Total fixed income securities
    
    
    1,327,229
    
    
    
    102,776
    
    
    
    (25
    )
    
    
    (1,102
    )
    
    
    1,428,878
    
    
    $
    (1,021
    )Equity securities
    
    
    1,736
    
    
    
    211
    
    
    
    
    
    
    
    
    
    
    
    1,947Total
    
    $
    1,328,965
    
    
    $
    102,987
    
    
    $
    (25
    )
    
    $
    (1,102
    )
    
    $
    1,430,825
 
 (a)
    
    The unrealized loss position of this security was $0.2 million at September 30, 2010. 37




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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 LossesFixed 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
    ) (a)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
    
    
    29
    %
    
    
    9
    %Due after
five years through ten years
    
    
    49
    
    
    
    65Due after ten years
    
    
    16
    
    
    
    5Asset-backed securities
    
    
    6
    
    
    
    21Total
    
    
    100
    %
    
    
    100
    %
 38




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##### Table of Contents



September 30, 2010
    
    
    December 31, 2009Gross
    
    
    
    
    
    
    GrossEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    UnrealizedUnrealized Loss Aging
    
    Fair Value
    
    
    Loss
    
    
    Fair Value
    
    
    LossFixed income securities:Investment grade (a):0-6 months
    
    $
    
    
    
    $
    
    
    
    $
    162,087
    
    
    $
    2,36213-24 months
    
    
    
    
    
    
    
    
    
    
    11,176
    
    
    
    469Greater than 24 months
    
    
    8,155
    
    
    
    422
    
    
    
    32,932
    
    
    
    2,065Total investment grade
    
    
    8,155
    
    
    
    422
    
    
    
    206,195
    
    
    
    4,896Non-investment grade:0-6 months
    
    
    6,235
    
    
    
    25
    
    
    
    
    
    
    
    Greater than 24 months
    
    
    17,700
    
    
    
    680
    
    
    
    17,346
    
    
    
    1,716Total non-investment grade
    
    
    23,935
    
    
    
    705
    
    
    
    17,346
    
    
    
    1,716Total
    
    $
    32,090
    
    
    $
    1,127
    
    
    $
    223,541
    
    
    $
    6,612
 
 (a)
    
    Investment grade is determined by using the Standard and
Poors (S&P) rating. If
a security is not rated by S&P, the
Moodys Investor Services (Moodys) rating is used. As of
September 30, 2010 and December 31, 2009, all of the
Companys fixed income securities were rated by S&P or
Moodys.       39




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##### Table of Contents



Gross Unrealized LossesEstimatedSeptember 30, 2010
    
    A
    
    
    BBB
    
    
    Total
    
    
    Count
    
    
    Fair ValueFixed income securities:Investment grade(a):Obligations of states and political subdivisions
    
    $
    348
    
    
    $
    
    
    
    $
    348
    
    
    
    1
    
    
    $
    5,215Corporate bonds
    
    
    
    
    
    
    74
    
    
    
    74
    
    
    
    1
    
    
    
    2,940Total investment grade
    
    
    348
    
    
    
    74
    
    
    
    422
    
    
    
    2
    
    
    
    8,155Non-investment grade:Obligations of states and political subdivisions
    
    
    
    
    
    
    
    
    
    
    438
    
    
    
    2
    
    
    
    15,716Corporate bonds
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    4
    
    
    
    6,235Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    
    
    
    
    
    
    
    
    242
    
    
    
    1
    
    
    
    1,984Total non-investment grade
    
    
    
    
    
    
    
    
    
    
    705
    
    
    
    7
    
    
    
    23,935Total
    
    $
    348
    
    
    $
    74
    
    
    $
    1,127
    
    
    
    9
    
    
    $
    32,090
 
 (a)
    
    Securities are categorized using the S&P rating. If a security is not rated by
S&P, the Moodys rating is used. At September 30, 2010, all of the Companys fixed income
securities were rated by S&P or Moodys.   40




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##### Table of Contents



Impact of Pending Accounting Standards
  41




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##### Table of Contents



FORWARD-LOOKING STATEMENTS
   Some examples of these risks and uncertainties are:
 
    
    general economic and business conditions;
    
    changes in financial markets such as fluctuations in interest rates, long-term periods of
low interest rates, credit conditions and currency, commodity and stock prices;
    
    the ability of the Companys contract principals to fulfill their bonded obligations;
    
    the effects of corporate bankruptcies on surety bond claims, as well as on capital
markets;
    
    changes in foreign or domestic political, social and economic conditions;
    
    regulatory initiatives and compliance with governmental regulations, judicial decisions,
including interpretation of policy provisions, decisions regarding coverage, trends in
litigation and the outcome of any litigation involving the Company, and rulings and changes
in tax laws and regulations;
    
    regulatory limitations, impositions and restrictions upon the Company, including the
effects of assessments and other surcharges for guaranty funds and other mandatory pooling
arrangements;
    
    the impact of competitive products, policies and pricing and the competitive environment
in which the Company operates, including changes in the Companys books of business;
    
    product and policy availability and demand and market responses, including the level of
ability to obtain rate increases and decline or non-renew underpriced accounts, to achieve
premium targets and profitability and to realize growth and retention estimates;
    
    development of claims and the impact on loss reserves, including changes in claim
settlement practices;
    
    the performance of reinsurance companies under reinsurance contracts with the Company;
    
    results of financing efforts, including the Companys ability to access capital markets;
    
    changes in the Companys composition of operating segments;
    
    the sufficiency of the Companys loss reserves and the possibility of future increases in
reserves;
    
    the risks and uncertainties associated with the Companys loss reserves; and,
 42




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##### Table of Contents




    
    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
  43




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##### Table of Contents



Estimated Fair
    
    
    HypotheticalHypothetical
    
    
    Value After
    
    
    PercentageFair Value at
    
    
    Change in
    
    
    Hypothetical
    
    
    Decrease inSeptember 30,
    
    
    Interest Rate
    
    
    Change in
    
    
    Stockholders2010
    
    
    (bp=basis points)
    
    
    Interest Rate
    
    
    Equity(Dollars in thousands)U.S. Government and government agencies and authorities
    
    $
    130,274200 bp increase
    
    $
    123,338
    
    
    
    (0.4
    )%150 bp increase
    
    
    125,628
    
    
    
    (0.3
    )100 bp increase
    
    
    127,720
    
    
    
    (0.2
    )50 bp increase
    
    
    129,545
    
    
    
    States, municipalities and political subdivisions
    
    
    770,479200 bp increase
    
    
    690,318
    
    
    
    (5.0
    )150 bp increase
    
    
    711,369
    
    
    
    (3.7
    )100 bp increase
    
    
    733,201
    
    
    
    (2.3
    )50 bp increase
    
    
    755,838
    
    
    
    (0.9
    )Corporate bonds
    
    
    492,643200 bp increase
    
    
    453,757
    
    
    
    (2.4
    )150 bp increase
    
    
    464,203
    
    
    
    (1.8
    )100 bp increase
    
    
    474,992
    
    
    
    (1.1
    )50 bp increase
    
    
    486,134
    
    
    
    (0.4
    )Mortgage-backed and asset-backed
    
    
    35,482200 bp increase
    
    
    34,086
    
    
    
    (0.1
    )150 bp increase
    
    
    34,473
    
    
    
    (0.1
    )100 bp increase
    
    
    34,869
    
    
    
    50 bp increase
    
    
    35,273
    
    
    
    Total fixed income securities available-for-sale
    
    $
    1,428,878200 bp increase
    
    
    1,301,499
    
    
    
    (8.0
    )150 bp increase
    
    
    1,335,673
    
    
    
    (5.8
    )100 bp increase
    
    
    1,370,782
    
    
    
    (3.6
    )50 bp increase
    
    
    1,406,790
    
    
    
    (1.4
    )
 44




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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
    
    $
    157,128200 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
    
    
    728,568200 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
    
    
    344,109200 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
    
    
    36,418200 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
    
    $
    1,266,223200 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
 45




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##### Table of Contents



ITEM 1A. RISK FACTORS
 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS  None
 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES  None.
 
 ITEM 4.  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. 46




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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  47




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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).
 48