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, 2008
 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
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer   o
    
    Smaller Reporting Company o(Do not check if a smaller reporting company)
 o þ
 
 o o




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##### 



PagePART I. FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements (Unaudited):
    
    
    3Condensed Consolidated Balance Sheets at September 30, 2008 and at December 31, 2007
    
    
    3Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2008 and 2007
    
    
    4Condensed Consolidated Statements of Stockholders Equity for the Nine Months Ended September 30, 2008 and 2007
    
    
    5Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    35Item 4. Controls and Procedures
    
    
    36PART II. OTHER INFORMATION
    
    
    37Item 1. Legal Proceedings
    
    
    37Item 1A. Risk Factors
    
    
    37Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    37Item 3. Defaults Upon Senior Securities
    
    
    37Item 4. Submission of Matters to a Vote of Security Holders
    
    
    37Item 5. Other Information
    
    
    37Item 6. Exhibits
    
    
    37
  2




---



##### 



September 30,
    
    
    December 31,2008
    
    
    2007ASSETSInvested assets:Fixed income securities, at fair value (amortized cost: $996,802 and $949,708)
    
    $
    965,470
    
    
    $
    963,354Equity securities, at fair value (cost: $1,405 and $1,683)
    
    
    1,405
    
    
    
    1,789Short-term investments, at cost (approximates fair value)
    
    
    82,909
    
    
    
    49,453Total invested assets
    
    
    1,049,784
    
    
    
    1,014,596Cash
    
    
    8,774
    
    
    
    10,230Deferred policy acquisition costs
    
    
    106,961
    
    
    
    104,280Insurance receivables:Premiums, including $11,981 and $12,317 from affiliates, (net of allowance for
doubtful accounts: $965 and $1,145)
    
    
    45,149
    
    
    
    36,317Reinsurance, including $46,794 and $50,547 from affiliates
    
    
    94,360
    
    
    
    127,119Deposit with affiliated ceding company
    
    
    30,852
    
    
    
    34,644Intangible assets (net of accumulated amortization: $25,523 and $25,523)
    
    
    138,785
    
    
    
    138,785Current income taxes receivable
    
    
    
    
    
    
    1,960Property and equipment, at cost (less accumulated depreciation
and amortization: $32,011 and $29,467)
    
    
    23,878
    
    
    
    24,288Prepaid reinsurance premiums (including $108 and $322 from affiliates)
    
    
    319
    
    
    
    510Accrued investment income
    
    
    12,262
    
    
    
    12,242Other assets
    
    
    2,668
    
    
    
    2,683Total assets
    
    $
    1,513,792
    
    
    $
    1,507,654LIABILITIESReserves:Unpaid losses and loss adjustment expenses
    
    $
    424,561
    
    
    $
    472,842Unearned premiums
    
    
    271,551
    
    
    
    258,930Total reserves
    
    
    696,112
    
    
    
    731,772Debt
    
    
    30,867
    
    
    
    30,791Deferred income taxes, net
    
    
    2,552
    
    
    
    17,756Reinsurance and other payables to affiliates
    
    
    460
    
    
    
    643Accrued expenses
    
    
    16,972
    
    
    
    18,273Liability for postretirement benefits
    
    
    8,764
    
    
    
    10,001Federal income tax payable
    
    
    6,490
    
    
    
    Other liabilities
    
    
    29,344
    
    
    
    30,713Total liabilities
    
    
    791,561
    
    
    
    839,949Commitments and contingencies (See Notes 3, 4 & 7)STOCKHOLDERS EQUITYCommon stock, par value $.01 per share, 100,000 shares authorized; 45,535 shares
issued and 44,159 shares outstanding at September 30, 2008 and 45,505 shares
issued and 44,121 shares outstanding at December 31, 2007
    
    
    455
    
    
    
    455Additional paid-in capital
    
    
    275,778
    
    
    
    274,069Retained earnings
    
    
    480,526
    
    
    
    399,241Accumulated other comprehensive income (loss)
    
    
    (19,755
    )
    
    
    8,800Treasury stock, 1,376 and 1,384 shares, at cost
    
    
    (14,773
    )
    
    
    (14,860
    )Total stockholders equity
    
    
    722,231
    
    
    
    667,705Total liabilities and stockholders equity
    
    $
    1,513,792
    
    
    $
    1,507,654
  3




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##### 



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:Net earned premium
    
    $
    109,696
    
    
    $
    113,617
    
    
    $
    320,814
    
    
    $
    317,607Net investment income
    
    
    11,781
    
    
    
    11,328
    
    
    
    35,292
    
    
    
    32,792Net realized investment (losses) gains
    
    
    (177
    )
    
    
    65
    
    
    
    (207
    )
    
    
    (486
    )Total revenues
    
    
    121,300
    
    
    
    125,010
    
    
    
    355,899
    
    
    
    349,913Expenses:Net losses and loss adjustment expenses
    
    
    8,745
    
    
    
    23,835
    
    
    
    62,103
    
    
    
    75,632Net commissions, brokerage and other underwriting expenses
    
    
    61,694
    
    
    
    59,952
    
    
    
    174,806
    
    
    
    170,870Interest expense
    
    
    508
    
    
    
    745
    
    
    
    1,659
    
    
    
    2,194Total expenses
    
    
    70,947
    
    
    
    84,532
    
    
    
    238,568
    
    
    
    248,696Income before income taxes
    
    
    50,353
    
    
    
    40,478
    
    
    
    117,331
    
    
    
    101,217Income tax expense
    
    
    16,020
    
    
    
    12,481
    
    
    
    36,046
    
    
    
    30,577Net income
    
    $
    34,333
    
    
    $
    27,997
    
    
    $
    81,285
    
    
    $
    70,640Earnings per common share
    
    $
    0.78
    
    
    $
    0.64
    
    
    $
    1.84
    
    
    $
    1.61Earnings per common share, assuming dilution
    
    $
    0.78
    
    
    $
    0.63
    
    
    $
    1.84
    
    
    $
    1.60Weighted average shares outstanding
    
    
    44,138
    
    
    
    43,954
    
    
    
    44,139
    
    
    
    43,975Weighted average shares outstanding, assuming dilution
    
    
    44,264
    
    
    
    44,194
    
    
    
    44,258
    
    
    
    44,248
  4




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##### 



Common
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    AccumulatedStock
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    Treasury
    
    
    TotalShares
    
    
    Common
    
    
    Paid-In
    
    
    Comprehensive
    
    
    Retained
    
    
    Comprehensive
    
    
    Stock
    
    
    StockholdersOutstanding
    
    
    Stock
    
    
    Capital
    
    
    Income (Loss)
    
    
    Earnings
    
    
    Income (Loss)
    
    
    At Cost
    
    
    EquityBalance, December 31, 2006
    
    
    43,872
    
    
    $
    453
    
    
    $
    268,651
    
    
    
    
    
    
    $
    306,745
    
    
    $
    4,993
    
    
    $
    (14,940
    )
    
    $
    565,902Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    70,640
    
    
    
    70,640
    
    
    
    
    
    
    
    
    
    
    
    70,640Other comprehensive income:Change in unrealized gains on
securities, after income tax
benefit of $2,042 (net of
reclassification adjustment of
($120), after income tax
benefit of $65)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,793
    )
    
    
    
    
    
    
    (3,793
    )
    
    
    
    
    
    
    (3,793
    )Adjustment to recognize

re-measurement of accumulated
postretirement benefit
obligations, net of tax
benefit of $563
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (684
    )
    
    
    
    
    
    
    (684
    )
    
    
    
    
    
    
    (684
    )Adjustment to postretirement
benefit plan net periodic
cost, after income tax expense
of $74
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    137
    
    
    
    
    
    
    
    137
    
    
    
    
    
    
    
    137Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    66,300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    1,456
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,456Stock options exercised and other
    
    
    150
    
    
    
    1
    
    
    
    2,146
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80
    
    
    
    2,227Balance, September 30, 2007
    
    
    44,022
    
    
    $
    454
    
    
    $
    272,253
    
    
    
    
    
    
    $
    377,385
    
    
    $
    653
    
    
    $
    (14,860
    )
    
    $
    635,885Balance, December 31, 2007
    
    
    44,121
    
    
    $
    455
    
    
    $
    274,069
    
    
    
    
    
    
    $
    399,241
    
    
    $
    8,800
    
    
    $
    (14,860
    )
    
    $
    667,705Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    81,285
    
    
    
    81,285
    
    
    
    
    
    
    
    
    
    
    
    81,285Other comprehensive income:Change in unrealized gains
(losses) on securities, after
income tax benefit of $15,779
(net of reclassification
adjustment of $8, after income
tax expense of $5)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29,304
    )
    
    
    
    
    
    
    (29,304
    )
    
    
    
    
    
    
    (29,304
    )Adjustment to recognize 

re-measurement of accumulated
postretirement benefit
obligations, after income tax
expense of $778
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    828
    
    
    
    
    
    
    
    828
    
    
    
    
    
    
    
    828Net change related to
postretirement benefits, after
income tax benefit of $42
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (79
    )
    
    
    
    
    
    
    (79
    )
    
    
    
    
    
    
    (79
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    52,730
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    1,327
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,327Stock options exercised and other
    
    
    38
    
    
    
    
    
    
    
    382
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87
    
    
    
    469Balance, September 30, 2008
    
    
    44,159
    
    
    $
    455
    
    
    $
    275,778
    
    
    
    
    
    
    $
    480,526
    
    
    $
    (19,755
    )
    
    $
    (14,773
    )
    
    $
    722,231
  5




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##### 



Nine Months EndedSeptember 30,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    81,285
    
    
    $
    70,640Adjustments to reconcile net income to net cash provided by operating activities:Provision for doubtful accounts
    
    
    (38
    )
    
    
    332Depreciation and amortization
    
    
    4,238
    
    
    
    4,723Amortization (accretion) of bond premium (discount), net
    
    
    2,007
    
    
    
    (70
    )Loss on disposal of property and equipment
    
    
    1,130
    
    
    
    1Net realized investment losses
    
    
    207
    
    
    
    486Stock-based compensation
    
    
    1,327
    
    
    
    1,456Changes in:Insurance receivables
    
    
    23,965
    
    
    
    (6,075
    )Reserve for unearned premiums
    
    
    12,621
    
    
    
    19,947Reserve for unpaid losses and loss adjustment expenses
    
    
    (48,281
    )
    
    
    13,234Deposits with affiliated ceding company
    
    
    3,792
    
    
    
    (1,134
    )Deferred policy acquisition costs
    
    
    (2,681
    )
    
    
    (5,863
    )Deferred income taxes, net
    
    
    (202
    )
    
    
    (1,097
    )Reinsurance and other payables to affiliates
    
    
    (183
    )
    
    
    2,061Prepaid reinsurance premiums
    
    
    191
    
    
    
    1,413Accrued expenses
    
    
    (1,301
    )
    
    
    (5,163
    )Other assets and liabilities
    
    
    7,167
    
    
    
    (3,570
    )Net cash provided by operating activities
    
    
    85,244
    
    
    
    91,321CASH FLOWS FROM INVESTING ACTIVITIES:Fixed income securities:Purchases
    
    
    (99,751
    )
    
    
    (224,087
    )Maturities
    
    
    25,602
    
    
    
    46,459Sales
    
    
    24,402
    
    
    
    70,103Purchases of equity securities
    
    
    (370
    )
    
    
    (714
    )Proceeds from the sale of equity securities
    
    
    460
    
    
    
    757Changes in short-term investments
    
    
    (32,830
    )
    
    
    28,069Purchases of property and equipment, net
    
    
    (4,882
    )
    
    
    (4,696
    )Other, net
    
    
    200
    
    
    
    (29
    )Net cash used in investing activities
    
    
    (87,169
    )
    
    
    (84,138
    )CASH FLOWS FROM FINANCING ACTIVITIES:Employee stock option exercises and other
    
    
    469
    
    
    
    2,227Net cash provided by financing activities
    
    
    469
    
    
    
    2,227(Decrease) increase in cash
    
    
    (1,456
    )
    
    
    9,410Cash at beginning of period
    
    
    10,230
    
    
    
    7,164Cash at end of period
    
    $
    8,774
    
    
    $
    16,574Supplemental Disclosure of Cash Flow Information:Cash paid during the period for:Interest
    
    $
    1,665
    
    
    $
    2,110Income taxes
    
    $
    27,741
    
    
    $
    26,898
  6




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##### 



CNA SURETY CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2008
(UNAUDITED)
 1. Significant Accounting Policies
 Formation of CNA Surety Corporation and Merger
  Principles of Consolidation
  Estimates
  Basis of Presentation
  Earnings Per Share
  7




---



##### 



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income
    
    $
    34,333
    
    
    $
    27,997
    
    
    $
    81,285
    
    
    $
    70,640Shares:Weighted average shares outstanding
    
    
    44,132
    
    
    
    43,938
    
    
    
    44,121
    
    
    
    43,872Weighted average shares of options exercised and
additional stock issuance
    
    
    6
    
    
    
    16
    
    
    
    18
    
    
    
    103Total weighted average shares outstanding
    
    
    44,138
    
    
    
    43,954
    
    
    
    44,139
    
    
    
    43,975Effect of dilutive options
    
    
    126
    
    
    
    240
    
    
    
    119
    
    
    
    273Total weighted average shares outstanding, assuming dilution
    
    
    44,264
    
    
    
    44,194
    
    
    
    44,258
    
    
    
    44,248Earnings per share
    
    $
    0.78
    
    
    $
    0.64
    
    
    $
    1.84
    
    
    $
    1.61Earnings per share, assuming dilution
    
    $
    0.78
    
    
    $
    0.63
    
    
    $
    1.84
    
    
    $
    1.60
  Accounting Pronouncements
   8




---



##### 



2. Investments
  Gross
    
    
    Gross Unrealized LossesAmortized Cost
    
    
    Unrealized
    
    
    Less Than
    
    
    More Than
    
    
    EstimatedSeptember 30, 2008
    
    or Cost
    
    
    Gains
    
    
    12 Months
    
    
    12 Months
    
    
    Fair ValueFixed income securities:U.S. Treasury securities and obligations of
U.S. Government and agencies:U.S. Treasury
    
    $
    17,744
    
    
    $
    820
    
    
    $
    
    
    
    $
    
    
    
    $
    18,564U.S. Agencies
    
    
    54,599
    
    
    
    504
    
    
    
    (9
    )
    
    
    
    
    
    
    55,094Collateralized mortgage obligations
    
    
    30,331
    
    
    
    395
    
    
    
    (235
    )
    
    
    
    
    
    
    30,491Mortgage pass-through securities
    
    
    73,648
    
    
    
    423
    
    
    
    (266
    )
    
    
    (386
    )
    
    
    73,419Obligations of states and political subdivisions
    
    
    651,811
    
    
    
    7,027
    
    
    
    (12,110
    )
    
    
    (14,648
    )
    
    
    632,080Corporate bonds
    
    
    97,033
    
    
    
    219
    
    
    
    (4,830
    )
    
    
    (4,077
    )
    
    
    88,345Non-agency collateralized mortgage obligations
    
    
    35,036
    
    
    
    
    
    
    
    (442
    )
    
    
    (2,096
    )
    
    
    32,498Other asset-backed securities:Second mortgages/home equity loans
    
    
    8,600
    
    
    
    
    
    
    
    (118
    )
    
    
    (472
    )
    
    
    8,010Credit card receivables
    
    
    17,238
    
    
    
    1
    
    
    
    (794
    )
    
    
    
    
    
    
    16,445Other
    
    
    10,762
    
    
    
    25
    
    
    
    (263
    )
    
    
    
    
    
    
    10,524Total fixed income securities
    
    
    996,802
    
    
    
    9,414
    
    
    
    (19,067
    )
    
    
    (21,679
    )
    
    
    965,470Equity securities
    
    
    1,405
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,405Total
    
    $
    998,207
    
    
    $
    9,414
    
    
    $
    (19,067
    )
    
    $
    (21,679
    )
    
    $
    966,875Gross
    
    
    Gross Unrealized LossesAmortized Cost
    
    
    Unrealized
    
    
    Less Than
    
    
    More Than
    
    
    EstimatedDecember 31, 2007
    
    or Cost
    
    
    Gains
    
    
    12 Months
    
    
    12 Months
    
    
    Fair ValueFixed income securities:U.S. Treasury securities and obligations of
U.S. Government and agencies:U.S. Treasury
    
    $
    17,790
    
    
    $
    485
    
    
    $
    
    
    
    $
    
    
    
    $
    18,275U.S. Agencies
    
    
    52,617
    
    
    
    706
    
    
    
    
    
    
    
    (15
    )
    
    
    53,308Collateralized mortgage obligations
    
    
    30,086
    
    
    
    502
    
    
    
    (11
    )
    
    
    (107
    )
    
    
    30,470Mortgage pass-through securities
    
    
    54,659
    
    
    
    401
    
    
    
    
    
    
    
    (586
    )
    
    
    54,474Obligations of states and political subdivisions
    
    
    625,858
    
    
    
    15,408
    
    
    
    (2,500
    )
    
    
    (641
    )
    
    
    638,125Corporate bonds
    
    
    95,714
    
    
    
    1,493
    
    
    
    (97
    )
    
    
    (1,408
    )
    
    
    95,702Non-agency collateralized mortgage obligations
    
    
    35,011
    
    
    
    232
    
    
    
    
    
    
    
    (699
    )
    
    
    34,544Other asset-backed securities:Second mortgages/home equity loans
    
    
    9,951
    
    
    
    
    
    
    
    
    
    
    
    (50
    )
    
    
    9,901Credit card receivables
    
    
    17,234
    
    
    
    451
    
    
    
    
    
    
    
    
    
    
    
    17,685Other
    
    
    10,788
    
    
    
    157
    
    
    
    
    
    
    
    (75
    )
    
    
    10,870Total fixed income securities
    
    
    949,708
    
    
    
    19,835
    
    
    
    (2,608
    )
    
    
    (3,581
    )
    
    
    963,354Equity securities
    
    
    1,683
    
    
    
    106
    
    
    
    
    
    
    
    
    
    
    
    1,789Total
    
    $
    951,391
    
    
    $
    19,941
    
    
    $
    (2,608
    )
    
    $
    (3,581
    )
    
    $
    965,143
    9




---



##### 



3. Reinsurance
  Three Months Ended September 30,2008
    
    
    2007Written
    
    
    Earned
    
    
    Written
    
    
    EarnedDirect
    
    $
    94,407
    
    
    $
    94,163
    
    
    $
    93,169
    
    
    $
    93,729Assumed
    
    
    25,955
    
    
    
    27,267
    
    
    
    30,380
    
    
    
    29,735Ceded
    
    
    (11,557
    )
    
    
    (11,734
    )
    
    
    (9,572
    )
    
    
    (9,847
    )$
    108,805
    
    
    $
    109,696
    
    
    $
    113,977
    
    
    $
    113,617
 Nine Months Ended September 30,2008
    
    
    2007Written
    
    
    Earned
    
    
    Written
    
    
    EarnedDirect
    
    $
    280,784
    
    
    $
    267,087
    
    
    $
    280,916
    
    
    $
    262,353Assumed
    
    
    80,515
    
    
    
    81,591
    
    
    
    86,986
    
    
    
    85,602Ceded
    
    
    (27,673
    )
    
    
    (27,864
    )
    
    
    (28,935
    )
    
    
    (30,348
    )$
    333,626
    
    
    $
    320,814
    
    
    $
    338,967
    
    
    $
    317,607
  10




---



##### 



Three Months Ended September 30,2008
    
    
    2007$
    
    
    Ratio
    
    
    $
    
    
    RatioGross losses and loss adjustment expenses
    
    $
    21
    
    
    
    0.2
    %
    
    $
    20,828
    
    
    
    16.9
    %Ceded amounts
    
    
    8,724
    
    
    
    (74.3
    )%
    
    
    3,007
    
    
    
    (30.5
    )%Net losses and loss adjustment expenses
    
    $
    8,745
    
    
    
    8.0
    %
    
    $
    23,835
    
    
    
    21.0
    %Nine Months Ended September 30,2008
    
    
    2007$
    
    
    Ratio
    
    
    $
    
    
    RatioGross losses and loss adjustment expenses
    
    $
    70,559
    
    
    
    20.2
    %
    
    $
    79,401
    
    
    
    22.8
    %Ceded amounts
    
    
    (8,456
    )
    
    
    30.4
    %
    
    
    (3,769
    )
    
    
    12.4
    %Net losses and loss adjustment expenses
    
    $
    62,103
    
    
    
    19.4
    %
    
    $
    75,632
    
    
    
    23.8
    %
  2008 Third Party Reinsurance Compared to 2007 Third Party Reinsurance
  Related Party Reinsurance
   11




---



##### 



12




---



##### 



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
   September 30, 2008Fair Value Measurements UsingAssets at FairLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    ValueAssets:Fixed income securities at fair value
    
    $
    18,564
    
    
    $
    946,906
    
    
    
    
    
    
    $
    965,470Equity securities at fair value
    
    
    1,405
    
    
    
    
    
    
    
    
    
    
    
    1,405Short term investments at fair value (a)
    
    
    48,929
    
    
    
    33,980
    
    
    
    
    
    
    
    82,909Total assets
    
    $
    68,898
    
    
    $
    980,886
    
    
    
    
    
    
    $
    1,049,784
 
 (a)
    
    Includes commercial paper and money market instruments.  13




---



##### 



5. Reserves for Losses and Loss Adjustment Expenses
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Reserves at beginning of period:Gross
    
    $
    495,041
    
    
    $
    435,569
    
    
    $
    472,842
    
    
    $
    434,224Ceded reinsurance
    
    
    152,296
    
    
    
    142,976
    
    
    
    150,496
    
    
    
    144,858Net reserves at beginning of period
    
    
    342,745
    
    
    
    292,593
    
    
    
    322,346
    
    
    
    289,366Net incurred loss and loss adjustment expenses:Provision for insured events of current year
    
    
    33,685
    
    
    
    28,863
    
    
    
    87,104
    
    
    
    80,710Decrease in provision for insured events of prior years
    
    
    (24,940
    )
    
    
    (5,028
    )
    
    
    (25,001
    )
    
    
    (5,078
    )Total net incurred
    
    
    8,745
    
    
    
    23,835
    
    
    
    62,103
    
    
    
    75,632Net payments attributable to:Current year events
    
    
    3,456
    
    
    
    1,470
    
    
    
    5,996
    
    
    
    7,044Prior year events
    
    
    5,854
    
    
    
    5,852
    
    
    
    36,273
    
    
    
    48,848Total net payments
    
    
    9,310
    
    
    
    7,322
    
    
    
    42,269
    
    
    
    55,892Net reserves at end of period
    
    
    342,180
    
    
    
    309,106
    
    
    
    342,180
    
    
    
    309,106Ceded reinsurance at end of period
    
    
    82,381
    
    
    
    138,352
    
    
    
    82,381
    
    
    
    138,352Gross reserves at end of period
    
    $
    424,561
    
    
    $
    447,458
    
    
    $
    424,561
    
    
    $
    447,458
 6. Debt
     14




---



##### 



7. Employee Benefits
   Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net periodic benefit cost:Service cost
    
    $
    26
    
    
    $
    97
    
    
    $
    144
    
    
    $
    250Interest cost
    
    
    74
    
    
    
    227
    
    
    
    364
    
    
    
    572Amortization of prior service cost
    
    
    (68
    )
    
    
    
    
    
    
    (121
    )
    
    
    (80
    )Net amortization of actuarial (gain) loss
    
    
    (12
    )
    
    
    127
    
    
    
    
    
    
    
    290Net periodic benefit cost
    
    $
    20
    
    
    $
    451
    
    
    $
    387
    
    
    $
    1,032
    8. Commitments and Contingencies
  9. Income Taxes
  10. Stockholders Equity
  15




---



##### 



Equity Compensation Plans
       WeightedAverageShares
    
    ExerciseSubject
    
    Price PerTo Option
    
    ShareOutstanding options at January 1, 2007
    
    
    1,008,525
    
    
    $
    12.02Options granted
    
    
    334,100
    
    
    $
    20.70Options forfeited
    
    
    (32,075
    )
    
    $
    14.36Options expired
    
    
    (790
    )
    
    $
    15.20Options exercised
    
    
    (141,160
    )
    
    $
    12.49Outstanding options at September 30, 2007
    
    
    1,168,600
    
    
    $
    14.38Outstanding options at January 1, 2008
    
    
    1,054,588
    
    
    $
    14.53Options granted
    
    
    259,380
    
    
    $
    16.35Options forfeited
    
    
    (22,210
    )
    
    $
    16.99Options expired
    
    
    (6,125
    )
    
    $
    12.71Options exercised
    
    
    (29,800
    )
    
    $
    11.53Outstanding options at September 30, 2008
    
    
    1,255,833
    
    
    $
    14.94
 16




---



##### 



WeightedShares
    
    AverageSubject
    
    Grant DateTo Option
    
    Fair ValueNon-vested options at January 1, 2007
    
    
    481,613
    
    
    $
    4.51Options granted
    
    
    334,100
    
    
    $
    9.04Options vested
    
    
    (14,750
    )
    
    $
    3.73Options forfeited
    
    
    (32,075
    )
    
    $
    5.67Non-vested options at September 30, 2007
    
    
    768,888
    
    
    $
    6.45Non-vested options at January 1, 2008
    
    
    554,557
    
    
    $
    7.23Options granted
    
    
    259,380
    
    
    $
    6.32Options vested
    
    
    (80,785
    )
    
    $
    8.94Options forfeited
    
    
    (22,210
    )
    
    $
    6.95Non-vested options at September 30, 2008
    
    
    710,942
    
    
    $
    6.71
  Options Vested or Expected to VestWeighted
    
    
    
    
    
    Weighted AverageAverage
    
    Aggregate
    
    RemainingNumber
    
    Exercise Price
    
    Intrinsic Value
    
    Contractual LifeSeptember 30, 2008
    
    
    1,166,536
    
    
    $
    14.69
    
    
    $
    3,423,467
    
    
    7.0 years
 Options ExercisableWeighted
    
    
    
    
    
    Weighted AverageAverage
    
    Aggregate
    
    RemainingNumber
    
    Exercise Price
    
    Intrinsic Value
    
    Contractual LifeSeptember 30, 2008
    
    
    544,891
    
    
    $
    12.74
    
    
    $
    2,470,902
    
    
    5.6 years
   17




---



##### 



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
     18




---



##### 



Gross Case Loss
    
    
    Gross IBNR Loss
    
    
    Total Grossand LAE Reserves
    
    
    and LAE Reserves
    
    
    ReservesContract
    
    $
    104,125
    
    
    $
    198,866
    
    
    $
    302,991Commercial
    
    
    53,432
    
    
    
    52,588
    
    
    
    106,020Fidelity and other
    
    
    5,277
    
    
    
    10,273
    
    
    
    15,550Total
    
    $
    162,834
    
    
    $
    261,727
    
    
    $
    424,561
       
    
    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
 19




---



##### 




    
    Current economic conditions, especially corporate default rates and the condition of the construction economy.
   Gross Basis:Recorded loss reserves at December 31, 2007
    
    $
    472,842Actuarial point estimate at December 31, 2007
    
    
    469,589Difference at December 31, 2007
    
    $
    3,253Difference as a % of actuarial point estimate
    
    
    0.7
    %Recorded loss reserves at June 30, 2008
    
    $
    495,041Actuarial point estimate at June 30, 2008
    
    
    449,726Difference at June 30, 2008
    
    $
    45,315Difference as a % of actuarial point estimate
    
    
    10.1
    %Recorded loss reserves at September 30, 2008
    
    $
    424,561Net Basis:Recorded loss reserves at December 31, 2007
    
    $
    322,346Actuarial point estimate at December 31, 2007
    
    
    317,325Difference at December 31, 2007
    
    $
    5,021Difference as a % of actuarial point estimate
    
    
    1.6
    %Recorded loss reserves at June 30, 2008
    
    $
    342,745Actuarial point estimate at June 30, 2008
    
    
    298,101Difference at June 30, 2008
    
    $
    44,644Difference as a % of actuarial point estimate
    
    
    15.0
    %Recorded loss reserves at September 30, 2008
    
    $
    342,180
     20




---



##### 



Investments
    21




---



##### 



Intangible Assets
   Insurance Premiums
  Deferred Policy Acquisitions Costs
  Results of Operations
 Financial Measures
    22




---



##### 



Comparison of CNA Surety Actual Results for the Three and Nine Months Ended September 30, 2008 and
2007
 Analysis of Net Income
    Results of Insurance Operations
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Gross written premiums
    
    $
    120,362
    
    
    $
    123,549
    
    
    $
    361,299
    
    
    $
    367,902Net written premiums
    
    $
    108,805
    
    
    $
    113,977
    
    
    $
    333,626
    
    
    $
    338,967Net earned premiums
    
    $
    109,696
    
    
    $
    113,617
    
    
    $
    320,814
    
    
    $
    317,607Net losses and loss adjustment expenses
    
    $
    8,745
    
    
    $
    23,835
    
    
    $
    62,103
    
    
    $
    75,632Net commissions, brokerage and other expenses
    
    $
    61,694
    
    
    $
    59,952
    
    
    $
    174,806
    
    
    $
    170,870Loss ratio
    
    
    8.0
    %
    
    
    21.0
    %
    
    
    19.4
    %
    
    
    23.8
    %Expense ratio
    
    
    56.2
    
    
    
    52.8
    
    
    
    54.5
    
    
    
    53.8Combined ratio
    
    
    64.2
    %
    
    
    73.8
    %
    
    
    73.9
    %
    
    
    77.6
    %
 Premiums Written/Earned
  23




---



##### 



Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Contract
    
    $
    78,418
    
    
    $
    82,381
    
    
    $
    233,766
    
    
    $
    240,397Commercial
    
    
    34,331
    
    
    
    33,361
    
    
    
    103,192
    
    
    
    103,048Fidelity and other
    
    
    7,613
    
    
    
    7,807
    
    
    
    24,341
    
    
    
    24,457$
    120,362
    
    
    $
    123,549
    
    
    $
    361,299
    
    
    $
    367,902
    Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Contract
    
    $
    67,692
    
    
    $
    73,824
    
    
    $
    208,490
    
    
    $
    214,344Commercial
    
    
    33,500
    
    
    
    32,346
    
    
    
    100,795
    
    
    
    100,166Fidelity and other
    
    
    7,613
    
    
    
    7,807
    
    
    
    24,341
    
    
    
    24,457$
    108,805
    
    
    $
    113,977
    
    
    $
    333,626
    
    
    $
    338,967
    Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Contract
    
    $
    68,274
    
    
    $
    72,482
    
    
    $
    198,772
    
    
    $
    196,424Commercial
    
    
    33,493
    
    
    
    33,162
    
    
    
    98,487
    
    
    
    97,545Fidelity and other
    
    
    7,929
    
    
    
    7,973
    
    
    
    23,555
    
    
    
    23,638$
    109,696
    
    
    $
    113,617
    
    
    $
    320,814
    
    
    $
    317,607
   24




---



##### 



Net Loss Ratio
    Expense Ratio
  Investment Income and Realized Investment Gains/Losses
    Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Gross realized investment gains
    
    $
    
    
    
    $
    123
    
    
    $
    11
    
    
    $
    514Gross realized investment losses
    
    
    (177
    )
    
    
    (58
    )
    
    
    (218
    )
    
    
    (1,000
    )Net realized investment (losses) gains
    
    $
    (177
    )
    
    $
    65
    
    
    $
    (207
    )
    
    $
    (486
    )
  25




---



##### 



Interest Expense
   Income Taxes
  Exposure Management
    Excess of Loss Reinsurance
  2008 Third Party Reinsurance Compared to 2007 Third Party Reinsurance
  26




---



##### 



Related Party Reinsurance
       27




---



##### 



Liquidity and Capital Resources
      28




---



##### 



Contractual Obligations as of September 30, 2008
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    Thereafter
    
    
    TotalDebt (a)
    
    $
    0.5
    
    
    $
    1.9
    
    
    $
    1.9
    
    
    $
    1.9
    
    
    $
    1.9
    
    
    $
    71.9
    
    
    $
    80.0Operating leases
    
    
    0.5
    
    
    
    2.0
    
    
    
    2.0
    
    
    
    1.8
    
    
    
    1.0
    
    
    
    
    
    
    
    7.3Loss and loss adjustment expense reserves
    
    
    35.5
    
    
    
    127.6
    
    
    
    109.8
    
    
    
    65.3
    
    
    
    29.4
    
    
    
    57.0
    
    
    
    424.6Other long-term liabilities (b)
    
    
    0.3
    
    
    
    1.3
    
    
    
    0.9
    
    
    
    0.8
    
    
    
    0.5
    
    
    
    8.2
    
    
    
    12.0Total
    
    $
    36.8
    
    
    $
    132.8
    
    
    $
    114.6
    
    
    $
    69.8
    
    
    $
    32.8
    
    
    $
    137.1
    
    
    $
    523.9
 
 (a)
    
    Reflects expected principal and interest payments.(b)
    
    Reflects unfunded postretirement benefit plans and long-term incentive plan payments to
certain executives.  29




---



##### 



30




---



##### 



Financial Condition
 Investment Portfolio
  Gross
    
    
    Gross Unrealized LossesAmortized Cost
    
    
    Unrealized
    
    
    Less Than
    
    
    More Than
    
    
    EstimatedSeptember 30, 2008
    
    or Cost
    
    
    Gains
    
    
    12 Months
    
    
    12 Months
    
    
    Fair ValueFixed income securities:U.S. Treasury securities and obligations of
U.S. Government and agencies:U.S. Treasury
    
    $
    17,744
    
    
    $
    820
    
    
    $
    
    
    
    $
    
    
    
    $
    18,564U.S. Agencies
    
    
    54,599
    
    
    
    504
    
    
    
    (9
    )
    
    
    
    
    
    
    55,094Collateralized mortgage obligations
    
    
    30,331
    
    
    
    395
    
    
    
    (235
    )
    
    
    
    
    
    
    30,491Mortgage pass-through securities
    
    
    73,648
    
    
    
    423
    
    
    
    (266
    )
    
    
    (386
    )
    
    
    73,419Obligations of states and political subdivisions
    
    
    651,811
    
    
    
    7,027
    
    
    
    (12,110
    )
    
    
    (14,648
    )
    
    
    632,080Corporate bonds
    
    
    97,033
    
    
    
    219
    
    
    
    (4,830
    )
    
    
    (4,077
    )
    
    
    88,345Non-agency collateralized mortgage obligations
    
    
    35,036
    
    
    
    
    
    
    
    (442
    )
    
    
    (2,096
    )
    
    
    32,498Other asset-backed securities:Second mortgages/home equity loans
    
    
    8,600
    
    
    
    
    
    
    
    (118
    )
    
    
    (472
    )
    
    
    8,010Credit card receivables
    
    
    17,238
    
    
    
    1
    
    
    
    (794
    )
    
    
    
    
    
    
    16,445Other
    
    
    10,762
    
    
    
    25
    
    
    
    (263
    )
    
    
    
    
    
    
    10,524Total fixed income securities
    
    
    996,802
    
    
    
    9,414
    
    
    
    (19,067
    )
    
    
    (21,679
    )
    
    
    965,470Equity securities
    
    
    1,405
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,405Total
    
    $
    998,207
    
    
    $
    9,414
    
    
    $
    (19,067
    )
    
    $
    (21,679
    )
    
    $
    966,875
 Gross
    
    
    Gross Unrealized LossesAmortized Cost
    
    
    Unrealized
    
    
    Less Than
    
    
    More Than
    
    
    EstimatedDecember 31, 2007
    
    or Cost
    
    
    Gains
    
    
    12 Months
    
    
    12 Months
    
    
    Fair ValueFixed income securities:U.S. Treasury securities and obligations of
U.S. Government and agencies:U.S. Treasury
    
    $
    17,790
    
    
    $
    485
    
    
    $
    
    
    
    $
    
    
    
    $
    18,275U.S. Agencies
    
    
    52,617
    
    
    
    706
    
    
    
    
    
    
    
    (15
    )
    
    
    53,308Collateralized mortgage obligations
    
    
    30,086
    
    
    
    502
    
    
    
    (11
    )
    
    
    (107
    )
    
    
    30,470Mortgage pass-through securities
    
    
    54,659
    
    
    
    401
    
    
    
    
    
    
    
    (586
    )
    
    
    54,474Obligations of states and political subdivisions
    
    
    625,858
    
    
    
    15,408
    
    
    
    (2,500
    )
    
    
    (641
    )
    
    
    638,125Corporate bonds
    
    
    95,714
    
    
    
    1,493
    
    
    
    (97
    )
    
    
    (1,408
    )
    
    
    95,702Non-agency collateralized mortgage obligations
    
    
    35,011
    
    
    
    232
    
    
    
    
    
    
    
    (699
    )
    
    
    34,544Other asset-backed securities:Second mortgages/home equity loans
    
    
    9,951
    
    
    
    
    
    
    
    
    
    
    
    (50
    )
    
    
    9,901Credit card receivables
    
    
    17,234
    
    
    
    451
    
    
    
    
    
    
    
    
    
    
    
    17,685Other
    
    
    10,788
    
    
    
    157
    
    
    
    
    
    
    
    (75
    )
    
    
    10,870Total fixed income securities
    
    
    949,708
    
    
    
    19,835
    
    
    
    (2,608
    )
    
    
    (3,581
    )
    
    
    963,354Equity securities
    
    
    1,683
    
    
    
    106
    
    
    
    
    
    
    
    
    
    
    
    1,789Total
    
    $
    951,391
    
    
    $
    19,941
    
    
    $
    (2,608
    )
    
    $
    (3,581
    )
    
    $
    965,143
 31




---



##### 



September 30, 2008
    
    
    December 31, 2007Gross
    
    
    
    
    
    
    GrossEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    UnrealizedUnrealized Loss Aging
    
    Fair Value
    
    
    Loss
    
    
    Fair Value
    
    
    LossFixed income securities:Investment grade (a):0-6 months
    
    $
    286,207
    
    
    $
    10,841
    
    
    $
    17,785
    
    
    $
    1757-12 months
    
    
    99,489
    
    
    
    8,226
    
    
    
    112,914
    
    
    
    2,43313-24 months
    
    
    84,473
    
    
    
    14,648
    
    
    
    9,984
    
    
    
    671Greater than 24 months
    
    
    45,839
    
    
    
    5,667
    
    
    
    91,683
    
    
    
    2,463Total investment grade
    
    
    516,008
    
    
    
    39,382
    
    
    
    232,366
    
    
    
    5,742Non-investment grade:Greater than 24 months
    
    
    2,658
    
    
    
    1,364
    
    
    
    3,582
    
    
    
    447Total
    
    $
    518,666
    
    
    $
    40,746
    
    
    $
    235,948
    
    
    $
    6,189
 
 (a)
    
    Investment grade is determined by the higher of the two ratings, Standard & Poors or Moodys
Investor Services, when a security has a split rating.        32




---



##### 



Impact of Pending Accounting Standards
 s
 33




---



##### 



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;
 34




---



##### 




    
    the performance of reinsurance companies under reinsurance contracts with the Company;
    
    results of financing efforts, including the availability of bank credit facilities;
    
    changes in the Companys composition of operating segments;
    
    the sufficiency of the Companys loss reserves and the possibility of future increases in
reserves;
    
    the risks and uncertainties associated with the Companys loss reserves; and,
    
    the possibility of further changes in the Companys ratings by ratings agencies, including
the inability to access certain markets or distribution channels and the required
collateralization of future payment obligations as a result of such changes and changes in
rating agency policies and practices.
  
 TEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   35




---



##### 



HypotheticalEstimated Fair
    
    
    PercentageHypothetical
    
    
    Value After
    
    
    IncreaseFair Value at
    
    
    Change in
    
    
    Hypothetical
    
    
    (Decrease) inSeptember 30,
    
    
    Interest Rate
    
    
    Change in
    
    
    Stockholders2008
    
    
    (bp=basis points)
    
    
    Interest Rate
    
    
    Equity(Dollars in thousands)U.S. Government and government agencies and authorities
    
    $
    177,568
    
    
    200 bp increase
    
    $
    162,387
    
    
    
    (1.4
    )%100 bp increase
    
    
    170,456
    
    
    
    (0.6
    )100 bp decrease
    
    
    181,932
    
    
    
    0.4200 bp decrease
    
    
    183,670
    
    
    
    0.5States, municipalities and political subdivisions
    
    
    632,080
    
    
    200 bp increase
    
    
    556,436
    
    
    
    (6.8
    )100 bp increase
    
    
    592,431
    
    
    
    (3.6
    )100 bp decrease
    
    
    675,842
    
    
    
    3.9200 bp decrease
    
    
    724,127
    
    
    
    8.3Corporate bonds and all other
    
    
    155,822
    
    
    200 bp increase
    
    
    143,386
    
    
    
    (1.1
    )100 bp increase
    
    
    149,450
    
    
    
    (0.6
    )100 bp decrease
    
    
    162,569
    
    
    
    0.6200 bp decrease
    
    
    169,621
    
    
    
    1.2Total fixed income securities available-for-sale
    
    $
    965,470
    
    
    200 bp increase
    
    
    862,209
    
    
    
    (9.3
    )100 bp increase
    
    
    912,337
    
    
    
    (4.8
    )100 bp decrease
    
    
    1,020,343
    
    
    
    4.9200 bp decrease
    
    
    1,077,418
    
    
    
    10.1HypotheticalEstimated Fair
    
    
    PercentageHypothetical
    
    
    Value After
    
    
    IncreaseFair Value at
    
    
    Change in
    
    
    Hypothetical
    
    
    (Decrease) inDecember 31,
    
    
    Interest Rate
    
    
    Change in
    
    
    Stockholders2007
    
    
    (bp=basis points)
    
    
    Interest Rate
    
    
    Equity(Dollars in thousands)U.S. Government and government agencies and authorities
    
    $
    156,527
    
    
    200 bp increase
    
    $
    143,016
    
    
    
    (1.3
    )%100 bp increase
    
    
    150,653
    
    
    
    (0.6
    )100 bp decrease
    
    
    160,156
    
    
    
    0.4200 bp decrease
    
    
    162,267
    
    
    
    0.6States, municipalities and political subdivisions
    
    
    638,125
    
    
    200 bp increase
    
    
    561,138
    
    
    
    (7.5
    )100 bp increase
    
    
    598,496
    
    
    
    (3.9
    )100 bp decrease
    
    
    680,200
    
    
    
    4.1200 bp decrease
    
    
    725,517
    
    
    
    8.5Corporate bonds and all other
    
    
    168,702
    
    
    200 bp increase
    
    
    153,539
    
    
    
    (1.5
    )100 bp increase
    
    
    160,869
    
    
    
    (0.8
    )100 bp decrease
    
    
    177,063
    
    
    
    0.8200 bp decrease
    
    
    185,960
    
    
    
    1.7Total fixed income securities available-for-sale
    
    $
    963,354
    
    
    200 bp increase
    
    
    857,693
    
    
    
    (10.3
    )100 bp increase
    
    
    910,018
    
    
    
    (5.3
    )100 bp decrease
    
    
    1,017,419
    
    
    
    5.3200 bp decrease
    
    
    1,073,744
    
    
    
    10.8
 
 ITEM 4. CONTROLS AND PROCEDURES
  36




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##### 



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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS  None
 
 ITEM 5. OTHER INFORMATION  Reports on Form 8-K:
  
 ITEM 6. EXHIBITS
 Exhibit NumberCertification of Chief Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
    
    
    31.1Certification of Chief Financial Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
    
    
    31.2Certification of Chief Executive Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
    
    
    32.1*Certification of Chief Financial Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
    
    
    32.2*
 
 *
    
    Exhibits 32.1 and 32.2 are being furnished and shall not be deemed filed for the purpose of
Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the
liabilities of that Section. These Exhibits shall not be incorporated by reference into any
registration statement or other document pursuant to the Securities Act of 1933, as amended. 37




---



##### 



/s/ John F. WelchJohn F. WelchPresident and Chief Executive Officer/s/ John F. CorcoranJohn F. CorcoranSenior Vice President and Chief Financial Officer
  38




---



##### 



31(1)
    
    Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  Chief Executive Officer.31(2)
    
    Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002  Chief Financial Officer.32(1)
    
    Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  Chief Executive Officer.32(2)
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002  Chief Financial Officer.
 39