##### 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 June 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
(State or other jurisdiction of 
incorporation or organization)
    
    36-4144905
(I.R.S. Employer
Identification No.)333 S. WABASH AVE., CHICAGO, ILLINOIS
(Address of principal executive offices)
    
    60604
(Zip Code)
 (312) 822-5000
(Registrants telephone number, including area code)
 þ o
 o þ
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    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):Condensed Consolidated Balance Sheets at June 30, 2010 and at December 31, 2009
    
    
    3Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2010 and 2009
    
    
    4Condensed Consolidated Statements of Stockholders Equity for the Six Months Ended June 30, 2010 and 2009
    
    
    5Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    24Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    42Item 4. Controls and Procedures
    
    
    43PART II. OTHER INFORMATION
    
    
    43Item 1. Legal Proceedings
    
    
    43Item 1A. Risk Factors
    
    
    43Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    43Item 3. Defaults Upon Senior Securities
    
    
    44Item 4.
    
    
    44Item 5. Other Information
    
    
    44Item 6. Exhibits
    
    
    44EX-31.1EX-31.2EX-32.1EX-32.2
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CNA SURETY CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (UNAUDITED)
 June 30,
    
    
    December 31,2010
    
    
    2009(Amounts in thousands, except pershare data)AssetsInvested assets:Fixed income securities, at fair value (amortized cost: $1,252,987 and $1,219,270)
    
    $
    1,324,980
    
    
    $
    1,266,223Equity securities, at fair value (cost: $1,687 and $1,429)
    
    
    1,830
    
    
    
    1,610Short-term investments, at amortized cost (approximates fair value)
    
    
    77,514
    
    
    
    48,999Total invested assets
    
    
    1,404,324
    
    
    
    1,316,832Cash
    
    
    4,875
    
    
    
    5,822Deferred policy acquisition costs
    
    
    103,748
    
    
    
    99,836Insurance receivables:Premiums, including $10,256 and $9,753 from affiliates, (net of allowance for doubtful
accounts: $1,407 and $1,110)
    
    
    47,224
    
    
    
    33,392Reinsurance
    
    
    51,044
    
    
    
    48,645Deposit with affiliated ceding company
    
    
    23,404
    
    
    
    26,878Goodwill and other intangible assets (net of accumulated amortization: $25,523 and $25,523)
    
    
    138,785
    
    
    
    138,785Property and equipment, at cost (less accumulated depreciation and amortization: $38,525
and $37,514)
    
    
    17,915
    
    
    
    19,681Prepaid reinsurance premiums
    
    
    202
    
    
    
    210Accrued investment income
    
    
    16,239
    
    
    
    15,832Other assets
    
    
    2,258
    
    
    
    3,122Total assets
    
    $
    1,810,018
    
    
    $
    1,709,035LiabilitiesReserves:Unpaid losses and loss adjustment expenses
    
    $
    439,344
    
    
    $
    406,123Unearned premiums
    
    
    259,706
    
    
    
    247,776Total reserves
    
    
    699,050
    
    
    
    653,899Long-term debt
    
    
    30,930
    
    
    
    30,930Deferred income taxes, net
    
    
    37,111
    
    
    
    28,065Reinsurance and other payables to affiliates
    
    
    104
    
    
    
    548Accrued expenses
    
    
    14,525
    
    
    
    18,586Liability for postretirement benefits
    
    
    11,092
    
    
    
    10,718Payable for securities purchased
    
    
    
    
    
    
    1,356Income tax payable
    
    
    3,481
    
    
    
    13,389Other liabilities
    
    
    23,555
    
    
    
    28,460Total liabilities
    
    
    819,848
    
    
    
    785,951Commitments and contingencies (See Notes 3, 5, & 8)Stockholders EquityCommon stock, par value $.01 per share, 100,000 shares authorized; 45,674 shares issued and
44,313 shares outstanding at June 30, 2010 and 45,635 shares issued and 44,268 shares
outstanding at December 31, 2009
    
    
    457
    
    
    
    456Additional paid-in capital
    
    
    280,761
    
    
    
    279,388Retained earnings
    
    
    676,935
    
    
    
    627,505Accumulated other comprehensive income
    
    
    46,623
    
    
    
    30,406Treasury stock, 1,361 and 1,367 shares, at cost
    
    
    (14,606
    )
    
    
    (14,671
    )Total stockholders equity
    
    
    990,170
    
    
    
    923,084Total liabilities and stockholders equity
    
    $
    1,810,018
    
    
    $
    1,709,035
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##### Table of Contents



CNA SURETY CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (UNAUDITED)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Amount in thousands, except per share data)Revenues:Net earned premium
    
    $
    105,214
    
    
    $
    105,695
    
    
    $
    203,466
    
    
    $
    206,846Net investment income
    
    
    12,787
    
    
    
    12,577
    
    
    
    26,164
    
    
    
    24,823Net realized investment gains (losses):Other-than-temporary impairment losses
    
    
    
    
    
    
    (1,824
    )
    
    
    
    
    
    
    (1,870
    )Portion of other-than-temporary impairment losses
recognized in other comprehensive income (before
taxes)
    
    
    (28
    )
    
    
    1,708
    
    
    
    (122
    )
    
    
    1,708Net impairment losses recognized in earnings
    
    
    (28
    )
    
    
    (116
    )
    
    
    (122
    )
    
    
    (162
    )Net realized investment gains, excluding impairment
losses on available-for-sale securities
    
    
    766
    
    
    
    69
    
    
    
    1,183
    
    
    
    49Total net realized investment gains (losses)
    
    
    738
    
    
    
    (47
    )
    
    
    1,061
    
    
    
    (113
    )Total revenues
    
    
    118,739
    
    
    
    118,225
    
    
    
    230,691
    
    
    
    231,556Expenses:Net losses and loss adjustment expenses
    
    
    21,596
    
    
    
    30,975
    
    
    
    50,177
    
    
    
    60,563Net commissions, brokerage and other underwriting expenses
    
    
    55,805
    
    
    
    55,917
    
    
    
    108,593
    
    
    
    110,195Interest expense
    
    
    291
    
    
    
    359
    
    
    
    572
    
    
    
    777Total expenses
    
    
    77,692
    
    
    
    87,251
    
    
    
    159,342
    
    
    
    171,535Income before income taxes
    
    
    41,047
    
    
    
    30,974
    
    
    
    71,349
    
    
    
    60,021Income tax expense
    
    
    12,422
    
    
    
    8,807
    
    
    
    21,919
    
    
    
    16,990Net income
    
    $
    28,625
    
    
    $
    22,167
    
    
    $
    49,430
    
    
    $
    43,031Earnings per common share
    
    $
    0.65
    
    
    $
    0.50
    
    
    $
    1.12
    
    
    $
    0.97Earnings per common share, assuming dilution
    
    $
    0.64
    
    
    $
    0.50
    
    
    $
    1.11
    
    
    $
    0.97Weighted average shares outstanding
    
    
    44,307
    
    
    
    44,251
    
    
    
    44,294
    
    
    
    44,229Weighted average shares outstanding, assuming dilution
    
    
    44,477
    
    
    
    44,412
    
    
    
    44,447
    
    
    
    44,394
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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
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    43,031
    
    
    $
    43,031
    
    
    $
    
    
    
    $
    
    
    
    $
    43,031Other comprehensive income:Change in unrealized gains on
securities, after income tax
expense of $9,368 (net of
reclassification adjustment
of ($1,380), after income tax
benefit of $743)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,396
    
    
    
    
    
    
    
    17,396
    
    
    
    
    
    
    
    17,396Other-than-temporary losses
not recognized in the
Condensed Consolidated
Statements of Income, after
income tax benefit of $598
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,110
    )
    
    
    
    
    
    
    (1,110
    )
    
    
    
    
    
    
    (1,110
    )Net change related to
postretirement benefits, after
income tax benefit of $25
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (56
    )
    
    
    
    
    
    
    (56
    )
    
    
    
    
    
    
    (56
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    59,261
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    1,022
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,022Stock options exercised and other
    
    
    86
    
    
    
    1
    
    
    
    1,056
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42
    
    
    
    1,099Balance, June 30, 2009
    
    
    44,254
    
    
    $
    456
    
    
    $
    278,333
    
    
    
    
    
    
    $
    552,675
    
    
    $
    11,944
    
    
    $
    (14,731
    )
    
    $
    828,677Balance, January 1, 2010
    
    
    44,268
    
    
    $
    456
    
    
    $
    279,388
    
    
    
    
    
    
    $
    627,505
    
    
    $
    30,406
    
    
    $
    (14,671
    )
    
    $
    923,084Comprehensive income:Net income
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    49,430
    
    
    $
    49,430
    
    
    $
    
    
    
    $
    
    
    
    $
    49,430Other comprehensive income:Change in unrealized gains on
securities, after income tax
expense of $8,664 (net of
reclassification adjustment
of $828, after income tax
expense of $446)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,090
    
    
    
    
    
    
    
    16,090
    
    
    
    
    
    
    
    16,090Change in other-than-temporary
impairment losses not
recognized in the Condensed
Consolidated Statements of
Income, after income tax
expense of $87 (net of
reclassification adjustment of
($79), after income tax
benefit of $43)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    161
    
    
    
    
    
    
    
    161
    
    
    
    
    
    
    
    161Net change related to
postretirement benefits, after
income tax benefit of $19
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34
    )
    
    
    
    
    
    
    (34
    )
    
    
    
    
    
    
    (34
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    65,647
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    885
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    885Stock options exercised and other
    
    
    45
    
    
    
    1
    
    
    
    488
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65
    
    
    
    554Balance, June 30, 2010
    
    
    44,313
    
    
    $
    457
    
    
    $
    280,761
    
    
    
    
    
    
    $
    676,935
    
    
    $
    46,623
    
    
    $
    (14,606
    )
    
    $
    990,170
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##### Table of Contents



CNA SURETY CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Six Months EndedJune 30,2010
    
    
    2009(Amounts in thousands)Cash Flows from Operating Activities:Net income
    
    $
    49,430
    
    
    $
    43,031Adjustments to reconcile net income to net cash provided by operating activities:Provision for doubtful accounts
    
    
    381
    
    
    
    112Depreciation and amortization
    
    
    3,013
    
    
    
    3,050Amortization of bond premium, net
    
    
    3,611
    
    
    
    2,138Gain on disposal of property and equipment
    
    
    (78
    )
    
    
    (15
    )Net realized investment (gains) losses
    
    
    (1,061
    )
    
    
    113Stock-based compensation
    
    
    885
    
    
    
    1,022Deferred income tax expense
    
    
    247
    
    
    
    Changes in:Insurance receivables
    
    
    (16,612
    )
    
    
    34,484Reserve for unearned premiums
    
    
    11,930
    
    
    
    7,196Reserve for unpaid losses and loss adjustment expenses
    
    
    33,221
    
    
    
    (8,912
    )Deposit with affiliated ceding company
    
    
    3,474
    
    
    
    2,268Deferred policy acquisition costs
    
    
    (3,912
    )
    
    
    (3,097
    )Reinsurance and other payables to affiliates
    
    
    (444
    )
    
    
    (1,402
    )Prepaid reinsurance premiums
    
    
    8
    
    
    
    92Accrued expenses
    
    
    (4,061
    )
    
    
    (6,738
    )Other assets and liabilities
    
    
    (13,969
    )
    
    
    (8,177
    )Net cash provided by operating activities
    
    
    66,063
    
    
    
    65,165Cash Flows from Investing Activities:Fixed income securities:Purchases
    
    
    (90,421
    )
    
    
    (128,846
    )Maturities
    
    
    28,824
    
    
    
    56,806Sales
    
    
    25,295
    
    
    
    2,581Purchases of equity securities
    
    
    (311
    )
    
    
    (677
    )Proceeds from the sale of equity securities
    
    
    65
    
    
    
    525Changes in short-term investments
    
    
    (28,491
    )
    
    
    12,415Purchases of property and equipment, net
    
    
    (1,170
    )
    
    
    (2,763
    )Changes in receivables/payables for securities sold/purchased
    
    
    (1,355
    )
    
    
    (8,398
    )Net cash (used in) investing activities
    
    
    (67,564
    )
    
    
    (68,357
    )Cash Flows from Financing Activities:Employee stock option exercises and other
    
    
    554
    
    
    
    1,099Net cash provided by financing activities
    
    
    554
    
    
    
    1,099Decrease in cash
    
    
    (947
    )
    
    
    (2,093
    )Cash at beginning of period
    
    
    5,822
    
    
    
    9,596Cash at end of period
    
    $
    4,875
    
    
    $
    7,503Supplemental Disclosure of Cash Flow Information:Cash paid during the period for:Interest
    
    $
    565
    
    
    $
    789Income taxes
    
    $
    31,518
    
    
    $
    18,824
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##### Table of Contents



CNA SURETY CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income
    
    $
    28,625
    
    
    $
    22,167
    
    
    $
    49,430
    
    
    $
    43,031Shares:Weighted average shares outstanding
    
    
    44,298
    
    
    
    44,240
    
    
    
    44,268
    
    
    
    44,168Weighted average shares of options exercised and
additional stock issuance
    
    
    9
    
    
    
    11
    
    
    
    26
    
    
    
    61Total weighted average shares outstanding
    
    
    44,307
    
    
    
    44,251
    
    
    
    44,294
    
    
    
    44,229Effect of dilutive options
    
    
    170
    
    
    
    161
    
    
    
    153
    
    
    
    165Total weighted average shares outstanding, assuming dilution
    
    
    44,477
    
    
    
    44,412
    
    
    
    44,447
    
    
    
    44,394Earnings per share
    
    $
    0.65
    
    
    $
    0.50
    
    
    $
    1.12
    
    
    $
    0.97Earnings per share, assuming dilution
    
    $
    0.64
    
    
    $
    0.50
    
    
    $
    1.11
    
    
    $
    0.97
  Adopted Accounting Pronouncements
     8




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##### Table of Contents



2. Investments
  Three Months Ended June 30
    
    
    Six Months Ended June 302010
    
    
    2009
    
    
    2010
    
    
    2009Investment income:Fixed income securities
    
    $
    13,067
    
    
    $
    12,724
    
    
    $
    26,733
    
    
    $
    25,027Equity securities
    
    
    10
    
    
    
    10
    
    
    
    18
    
    
    
    19Short-term investments
    
    
    21
    
    
    
    36
    
    
    
    36
    
    
    
    84Other
    
    
    11
    
    
    
    15
    
    
    
    24
    
    
    
    34Total investment income on available-for-sale securities
    
    
    13,109
    
    
    
    12,785
    
    
    
    26,811
    
    
    
    25,164Investment income on deposit with affiliated ceding company
    
    
    25
    
    
    
    115
    
    
    
    51
    
    
    
    272Investment expenses
    
    
    (347
    )
    
    
    (323
    )
    
    
    (698
    )
    
    
    (613
    )Net investment income
    
    $
    12,787
    
    
    $
    12,577
    
    
    $
    26,164
    
    
    $
    24,823
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net realized investment gains (losses):Fixed income securities:Gross realized investment gains
    
    $
    768
    
    
    $
    43
    
    
    $
    1,193
    
    
    $
    43Gross realized investment losses:Other-than-temporary impairment losses
    
    
    (28
    )
    
    
    (116
    )
    
    
    (122
    )
    
    
    (116
    )Realized losses from sales
    
    
    (2
    )
    
    
    
    
    
    
    (21
    )
    
    
    Total gross realized investment losses
    
    
    (30
    )
    
    
    (116
    )
    
    
    (143
    )
    
    
    (116
    )Net realized investment gains (losses) on fixed income securities
    
    
    738
    
    
    
    (73
    )
    
    
    1,050
    
    
    
    (73
    )Equity securities:Gross realized investment gains
    
    
    1
    
    
    
    27
    
    
    
    12
    
    
    
    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
    
    
    1
    
    
    
    27
    
    
    
    12
    
    
    
    (39
    )Other
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )Net realized investment gains (losses)
    
    $
    738
    
    
    $
    (47
    )
    
    $
    1,061
    
    
    $
    (113
    )Net change in unrealized gains (losses):Fixed income securities
    
    $
    22,471
    
    
    $
    12,248
    
    
    $
    25,040
    
    
    $
    24,975Equity securities
    
    
    (59
    )
    
    
    81
    
    
    
    (38
    )
    
    
    81Total net change in unrealized gains (losses)
    
    $
    22,412
    
    
    $
    12,329
    
    
    $
    25,002
    
    
    $
    25,056Net realized gains (losses) and change in unrealized gains (losses)
    
    $
    23,150
    
    
    $
    12,282
    
    
    $
    26,063
    
    
    $
    24,943
  9




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##### Table of Contents



Gross
    
    
    Gross Unrealized LossesAmortized Cost
    
    
    Unrealized
    
    
    Less Than
    
    
    More Than
    
    
    Estimated
    
    
    UnrealizedJune 30, 2010
    
    or Cost
    
    
    Gains
    
    
    12 Months
    
    
    12 Months
    
    
    Fair Value
    
    
    OTTI Losses(a)Fixed income securities:U.S. Treasury securities and obligations of U.S.
Government and agencies:U.S. Treasury
    
    $
    17,286
    
    
    $
    1,101
    
    
    $
    
    
    
    $
    
    
    
    $
    18,387
    
    
    $
    U.S. Agencies
    
    
    6,525
    
    
    
    332
    
    
    
    
    
    
    
    
    
    
    
    6,857
    
    
    
    Collateralized mortgage obligations  residential
    
    
    27,039
    
    
    
    1,926
    
    
    
    
    
    
    
    
    
    
    
    28,965
    
    
    
    Mortgage pass-through securities  residential
    
    
    81,617
    
    
    
    4,096
    
    
    
    
    
    
    
    
    
    
    
    85,713
    
    
    
    Obligations of states and political subdivisions
    
    
    719,868
    
    
    
    43,021
    
    
    
    (408
    )
    
    
    (2,285
    )
    
    
    760,196
    
    
    
    Corporate bonds
    
    
    366,333
    
    
    
    23,276
    
    
    
    (148
    )
    
    
    (147
    )
    
    
    389,314
    
    
    
    Collateralized mortgage obligations  commercial
    
    
    10,021
    
    
    
    421
    
    
    
    
    
    
    
    
    
    
    
    10,442
    
    
    
    Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    4,606
    
    
    
    
    
    
    
    
    
    
    
    (301
    )
    
    
    4,305
    
    
    
    (1,113
    )Consumer credit receivables
    
    
    9,996
    
    
    
    371
    
    
    
    
    
    
    
    
    
    
    
    10,367
    
    
    
    Other
    
    
    9,696
    
    
    
    738
    
    
    
    
    
    
    
    
    
    
    
    10,434
    
    
    
    Total fixed income securities
    
    
    1,252,987
    
    
    
    75,282
    
    
    
    (556
    )
    
    
    (2,733
    )
    
    
    1,324,980
    
    
    $
    (1,113
    )Equity securities
    
    
    1,687
    
    
    
    143
    
    
    
    
    
    
    
    
    
    
    
    1,830Total
    
    $
    1,254,674
    
    
    $
    75,425
    
    
    $
    (556
    )
    
    $
    (2,733
    )
    
    $
    1,326,810
 
 (a)
    
    The unrealized loss position of this security was $0.3 million at June 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 Losses(a)Fixed income securities:U.S. Treasury securities and obligations of U.S.
Government and agencies:U.S. Treasury
    
    $
    17,378
    
    
    $
    970
    
    
    $
    
    
    
    $
    
    
    
    $
    18,348
    
    
    $
    U.S. Agencies
    
    
    9,794
    
    
    
    337
    
    
    
    
    
    
    
    
    
    
    
    10,131
    
    
    
    Collateralized mortgage obligations  residential
    
    
    30,709
    
    
    
    1,383
    
    
    
    
    
    
    
    
    
    
    
    32,092
    
    
    
    Mortgage pass-through securities  residential
    
    
    94,453
    
    
    
    2,336
    
    
    
    (232
    )
    
    
    
    
    
    
    96,557
    
    
    
    Obligations of states and political subdivisions
    
    
    696,505
    
    
    
    35,847
    
    
    
    (882
    )
    
    
    (2,902
    )
    
    
    728,568
    
    
    
    Corporate bonds
    
    
    334,136
    
    
    
    11,478
    
    
    
    (1,248
    )
    
    
    (257
    )
    
    
    344,109
    
    
    
    Collateralized mortgage obligations  commercial
    
    
    10,024
    
    
    
    
    
    
    
    
    
    
    
    (351
    )
    
    
    9,673
    
    
    
    Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    5,501
    
    
    
    
    
    
    
    
    
    
    
    (740
    )
    
    
    4,761
    
    
    
    (1,399
    )Consumer credit receivables
    
    
    11,055
    
    
    
    528
    
    
    
    
    
    
    
    
    
    
    
    11,583
    
    
    
    Other
    
    
    9,715
    
    
    
    686
    
    
    
    
    
    
    
    
    
    
    
    10,401
    
    
    
    Total fixed income securities
    
    
    1,219,270
    
    
    
    53,565
    
    
    
    (2,362
    )
    
    
    (4,250
    )
    
    
    1,266,223
    
    
    $
    (1,399
    )Equity securities
    
    
    1,429
    
    
    
    181
    
    
    
    
    
    
    
    
    
    
    
    1,610Total
    
    $
    1,220,699
    
    
    $
    53,746
    
    
    $
    (2,362
    )
    
    $
    (4,250
    )
    
    $
    1,267,833
 
 (a)
    
    The unrealized loss position of this security was $0.5 million at December 31, 2009.   10




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11




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Three Months
    
    
    Six MonthsEnded June 30
    
    

Ended June 30Beginning balance
    
    $
    210
    
    
    $
    116Credit losses for which an OTTI loss was not previously recognized
    
    
    
    
    
    
    Credit losses for which an OTTI loss was previously recognized
    
    
    28
    
    
    
    122Ending balance
    
    $
    238
    
    
    $
    238
  Three MonthsEnded June 30Beginning balance
    
    $
    Credit losses for which an OTTI loss was not previously recognized
    
    
    116Credit losses for which an OTTI loss was previously recognized
    
    
    Ending balance
    
    $
    116
   June 30, 2010
    
    
    December 31, 2009Amortized
    
    
    Estimated Fair
    
    
    Amortized
    
    
    Estimated FairCost
    
    
    Value
    
    
    Cost
    
    
    ValueFixed income securities:Due within one year
    
    $
    36,616
    
    
    $
    37,571
    
    
    $
    13,006
    
    
    $
    13,224Due after one year but within five years
    
    
    355,530
    
    
    
    376,347
    
    
    
    304,654
    
    
    
    321,144Due after five years but within ten years
    
    
    417,573
    
    
    
    451,951
    
    
    
    447,485
    
    
    
    468,254Due after ten years
    
    
    300,293
    
    
    
    308,885
    
    
    
    292,668
    
    
    
    298,5341,110,012
    
    
    
    1,174,754
    
    
    
    1,057,813
    
    
    
    1,101,156Mortgage pass-through securities,
collateralized mortgage obligations and
asset-backed securities
    
    
    142,975
    
    
    
    150,226
    
    
    
    161,457
    
    
    
    165,067$
    1,252,987
    
    
    $
    1,324,980
    
    
    $
    1,219,270
    
    
    $
    1,266,223
  % ofEstimated
    
    
    % ofFair
    
    
    UnrealizedContractual Maturity
    
    Value
    
    
    LossDue after one year through five years
    
    
    13
    %
    
    
    9
    %Due after ten years
    
    
    81
    
    
    
    82Asset-backed securities
    
    
    6
    
    
    
    9Total
    
    
    100
    %
    
    
    100
    %
 12




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June 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
    
    $
    6,912
    
    
    $
    148
    
    
    $
    162,087
    
    
    $
    2,3627-12 months
    
    
    23,809
    
    
    
    408
    
    
    
    
    
    
    
    13-24 months
    
    
    
    
    
    
    
    
    
    
    11,176
    
    
    
    469Greater than 24 months
    
    
    25,847
    
    
    
    1,172
    
    
    
    32,932
    
    
    
    2,065Total investment grade
    
    
    56,568
    
    
    
    1,728
    
    
    
    206,195
    
    
    
    4,896Non-investment grade:Greater than 24 months
    
    
    17,019
    
    
    
    1,561
    
    
    
    17,346
    
    
    
    1,716Total
    
    $
    73,587
    
    
    $
    3,289
    
    
    $
    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 June 30, 2010
and December 31, 2009, all of the Companys fixed income
securities were rated by S&P or Moodys.   Gross Unrealized LossesEstimatedJune 30, 2010
    
    AAA
    
    
    AA
    
    
    A
    
    
    BBB
    
    
    Total
    
    
    Count
    
    
    Fair ValueFixed income securities:Investment grade(a):Obligations of states and political subdivisions
    
    $
    166
    
    
    $
    555
    
    
    $
    706
    
    
    $
    
    
    
    $
    1,427
    
    
    
    7
    
    
    $
    44,597Corporate bonds
    
    
    
    
    
    
    
    
    
    
    148
    
    
    
    147
    
    
    
    295
    
    
    
    2
    
    
    
    9,780Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    1
    
    
    
    2,191Total investment grade
    
    
    172
    
    
    
    555
    
    
    
    854
    
    
    
    147
    
    
    
    1,728
    
    
    
    10
    
    
    
    56,568Non-investment grade:Obligations of states and political subdivisions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,266
    
    
    
    2
    
    
    
    14,906Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    295
    
    
    
    1
    
    
    
    2,113Total non-investment grade
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,561
    
    
    
    3
    
    
    
    17,019Total
    
    $
    172
    
    
    $
    555
    
    
    $
    854
    
    
    $
    147
    
    
    $
    3,289
    
    
    
    13
    
    
    $
    73,587
 
 (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 June 30, 2010, all of the Companys fixed income
securities were rated by S&P or Moodys.  13




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14




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##### Table of Contents



3. Reinsurance
  Three Months Ended June 30,2010
    
    
    2009Written
    
    
    Earned
    
    
    Written
    
    
    EarnedDirect
    
    $
    91,316
    
    
    $
    87,982
    
    
    $
    92,019
    
    
    $
    87,293Assumed
    
    
    23,631
    
    
    
    23,430
    
    
    
    24,815
    
    
    
    25,252Ceded
    
    
    (6,203
    )
    
    
    (6,198
    )
    
    
    (6,719
    )
    
    
    (6,850
    )$
    108,744
    
    
    $
    105,214
    
    
    $
    110,115
    
    
    $
    105,695
 Six Months Ended June 30,2010
    
    
    2009Written
    
    
    Earned
    
    
    Written
    
    
    EarnedDirect
    
    $
    183,279
    
    
    $
    169,861
    
    
    $
    181,147
    
    
    $
    170,634Assumed
    
    
    44,195
    
    
    
    45,683
    
    
    
    46,812
    
    
    
    50,128Ceded
    
    
    (12,070
    )
    
    
    (12,078
    )
    
    
    (13,825
    )
    
    
    (13,916
    )$
    215,404
    
    
    $
    203,466
    
    
    $
    214,134
    
    
    $
    206,846
     Three Months Ended June 30,2010

    
    2009$
        
    Ratio
    
    $

    
    RatioGross losses and loss adjustment expenses
    
    $
    23,307
    
    
    
    20.9
    %
    
    $
    32,745
    
    
    
    29.1
    %Ceded amounts
    
    
    (1,711
    )
    
    
    27.6
    %
    
    
    (1,770
    )
    
    
    25.8
    %Net losses and loss adjustment expenses
    
    $
    21,596
    
    
    
    20.5
    %
    
    $
    30,975
    
    
    
    29.3
    %
 Six Months Ended June 30,2010

    

    2009$
    
    
    Ratio

    
    $
    
    
    RatioGross losses and loss adjustment expenses
    
    $
    51,122
    
    
    
    23.7
    %
    
    $
    64,053
    
    
    
    29.0
    %Ceded amounts
    
    
    (945
    )
    
    
    7.8
    %
    
    
    (3,490
    )
    
    
    25.1
    %Net losses and loss adjustment expenses
    
    $
    50,177
    
    
    
    24.7
    %
    
    $
    60,563
    
    
    
    29.3
    %
 15




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##### Table of Contents



Excess of Loss Reinsurance
  2009 Third Party Reinsurance
  2010 Third Party Reinsurance
  Related Party Reinsurance
     16




---



##### Table of Contents



17




---



##### 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
  18




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##### Table of Contents



June 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
    
    $
    18,387
    
    
    $
    
    
    
    $
    
    
    
    $
    18,387U.S. Agencies
    
    
    
    
    
    
    6,857
    
    
    
    
    
    
    
    6,857Collateralized mortgage obligations  residential
    
    
    
    
    
    
    28,965
    
    
    
    
    
    
    
    28,965Mortgage pass-through securities  residential
    
    
    
    
    
    
    85,713
    
    
    
    
    
    
    
    85,713Obligations of states and political subdivisions
    
    
    
    
    
    
    760,196
    
    
    
    
    
    
    
    760,196Corporate bonds
    
    
    
    
    
    
    389,314
    
    
    
    
    
    
    
    389,314Collateralized mortgage obligations  commercial
    
    
    
    
    
    
    10,442
    
    
    
    
    
    
    
    10,442Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    
    
    
    
    4,305
    
    
    
    
    
    
    
    4,305Consumer credit receivables
    
    
    
    
    
    
    10,367
    
    
    
    
    
    
    
    10,367Other
    
    
    
    
    
    
    10,434
    
    
    
    
    
    
    
    10,434Total fixed income securities
    
    
    18,387
    
    
    
    1,306,593
    
    
    
    
    
    
    
    1,324,980Equity securities at fair value
    
    
    1,830
    
    
    
    
    
    
    
    
    
    
    
    1,830Short-term investments at fair value (a)
    
    
    29,544
    
    
    
    47,970
    
    
    
    
    
    
    
    77,514Total assets
    
    $
    49,761
    
    
    $
    1,354,563
    
    
    $
    
    
    
    $
    1,404,324
 
 (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.  19




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##### Table of Contents



5. Reserves for Losses and Loss Adjustment Expenses
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Reserves at beginning of period:Gross
    
    $
    426,458
    
    
    $
    453,724
    
    
    $
    406,123
    
    
    $
    428,724Ceded reinsurance
    
    
    51,430
    
    
    
    91,659
    
    
    
    50,968
    
    
    
    83,691Net reserves at beginning of period
    
    
    375,028
    
    
    
    362,065
    
    
    
    355,155
    
    
    
    345,033Net incurred loss and loss adjustment expenses:Provision for insured events of current year
    
    
    30,596
    
    
    
    30,979
    
    
    
    59,177
    
    
    
    60,616(Decrease) in provision for insured events of prior years
    
    
    (9,000
    )
    
    
    (4
    )
    
    
    (9,000
    )
    
    
    (53
    )Total net incurred
    
    
    21,596
    
    
    
    30,975
    
    
    
    50,177
    
    
    
    60,563Net payments attributable to:Current year events
    
    
    3,403
    
    
    
    2,825
    
    
    
    4,093
    
    
    
    3,606Prior year events
    
    
    6,823
    
    
    
    11,199
    
    
    
    14,915
    
    
    
    22,974Total net payments
    
    
    10,226
    
    
    
    14,024
    
    
    
    19,008
    
    
    
    26,580Foreign currency transaction adjustments
    
    
    (94
    )
    
    
    
    
    
    
    (20
    )
    
    
    Net reserves at end of period
    
    
    386,304
    
    
    
    379,016
    
    
    
    386,304
    
    
    
    379,016Ceded reinsurance at end of period
    
    
    53,040
    
    
    
    40,796
    
    
    
    53,040
    
    
    
    40,796Gross reserves at end of period
    
    $
    439,344
    
    
    $
    419,812
    
    
    $
    439,344
    
    
    $
    419,812
   6. Debt
     20




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##### Table of Contents



7. Employee Benefits
    Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net periodic benefit cost:Service cost
    
    $
    61
    
    
    $
    53
    
    
    $
    122
    
    
    $
    106Interest cost
    
    
    158
    
    
    
    135
    
    
    
    316
    
    
    
    269Amortization of prior service cost
    
    
    (27
    )
    
    
    (41
    )
    
    
    (55
    )
    
    
    (81
    )Net amortization of actuarial loss
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    Net periodic benefit cost
    
    $
    192
    
    
    $
    147
    
    
    $
    384
    
    
    $
    294
  8. Commitments and Contingencies
  9. Income Taxes
    21




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##### Table of Contents



10. Stockholders Equity
  Equity Compensation Plans
      22




---



##### 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
    
    
    (4,030
    )
    
    $
    17.74Options expired
    
    
    (1,690
    )
    
    $
    15.79Options exercised
    
    
    (81,680
    )
    
    $
    11.54Outstanding options at June 30, 2009
    
    
    1,351,678
    
    
    $
    15.76Outstanding options at January 1, 2010
    
    
    1,318,288
    
    
    $
    15.78Options granted
    
    
    281,260
    
    
    $
    14.32Options forfeited
    
    
    (7,755
    )
    
    $
    17.98Options expired
    
    
    (2,555
    )
    
    $
    19.98Options exercised
    
    
    (38,920
    )
    
    $
    12.50Outstanding options at June 30, 2010
    
    
    1,550,318
    
    
    $
    15.58
  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
    
    
    (4,030
    )
    
    $
    7.57Non-vested options at June 30, 2009
    
    
    622,176
    
    
    $
    7.76Non-vested options at January 1, 2010
    
    
    539,396
    
    
    $
    8.10Options granted
    
    
    281,260
    
    
    $
    7.25Options vested
    
    
    (185,202
    )
    
    $
    8.14Options forfeited
    
    
    (7,755
    )
    
    $
    7.96Non-vested options at June 30, 2010
    
    
    627,699
    
    
    $
    7.71
  Options Vested or Expected to VestWeighted
    
    
    
    
    
    Weighted AverageAverage
    
    Aggregate
    
    RemainingNumber
    
    Exercise Price
    
    Intrinsic Value
    
    Contractual LifeJune 30, 2010
    
    
    1,474,102
    
    
    $
    15.53
    
    
    $
    2,694,992
    
    
    6.6 years
 Options ExercisableWeighted
    
    
    
    
    
    Weighted AverageAverage
    
    Aggregate
    
    RemainingNumber
    
    Exercise Price
    
    Intrinsic Value
    
    Contractual LifeJune 30, 2010
    
    
    922,619
    
    
    $
    14.90
    
    
    $
    2,264,314
    
    
    5.4 years
   23




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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
     24




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##### Table of Contents



Gross Case Loss
    
    
    Gross IBNR Loss
    
    
    Total Grossand LAE Reserves
    
    
    and LAE Reserves
    
    
    ReservesContract
    
    $
    71,048
    
    
    $
    248,146
    
    
    $
    319,194Commercial
    
    
    53,400
    
    
    
    55,224
    
    
    
    108,624Fidelity and other
    
    
    4,047
    
    
    
    7,479
    
    
    
    11,526Total
    
    $
    128,495
    
    
    $
    310,849
    
    
    $
    439,344
   
    
    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
  25




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##### Table of Contents



Goodwill and Other Intangible Assets
   Insurance Premiums
  26




---



##### Table of Contents



Deferred Policy Acquisitions Costs
  Results of Operations
 Financial Measures
     27




---



##### Table of Contents



Comparison of CNA Surety Actual Results for the Three and Six Months Ended June 30, 2010 and 2009
 Analysis of Net Income
    Results of Insurance Operations
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Gross written premiums
    
    $
    114,947
    
    
    $
    116,834
    
    
    $
    227,474
    
    
    $
    227,959Net written premiums
    
    $
    108,744
    
    
    $
    110,115
    
    
    $
    215,404
    
    
    $
    214,134Net earned premiums
    
    $
    105,214
    
    
    $
    105,695
    
    
    $
    203,466
    
    
    $
    206,846Net losses and loss adjustment expenses
    
    $
    21,596
    
    
    $
    30,975
    
    
    $
    50,177
    
    
    $
    60,563Net
commissions, brokerage and other underwriting expenses
    
    $
    55,805
    
    
    $
    55,917
    
    
    $
    108,593
    
    
    $
    110,195Loss ratio
    
    
    20.5
    %
    
    
    29.3
    %
    
    
    24.7
    %
    
    
    29.3
    %Expense ratio
    
    
    53.0
    
    
    
    52.9
    
    
    
    53.4
    
    
    
    53.3Combined ratio
    
    
    73.5
    %
    
    
    82.2
    %
    
    
    78.1
    %
    
    
    82.6
    %
 Premiums Written/Earned
    28




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##### Table of Contents



Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Contract
    
    $
    74,892
    
    
    $
    76,129
    
    
    $
    143,349
    
    
    $
    143,484Commercial
    
    
    32,622
    
    
    
    33,438
    
    
    
    67,843
    
    
    
    68,416Fidelity and other
    
    
    7,433
    
    
    
    7,267
    
    
    
    16,282
    
    
    
    16,059$
    114,947
    
    
    $
    116,834
    
    
    $
    227,474
    
    
    $
    227,959
     Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Contract
    
    $
    69,424
    
    
    $
    70,127
    
    
    $
    132,737
    
    
    $
    131,152Commercial
    
    
    31,887
    
    
    
    32,721
    
    
    
    66,385
    
    
    
    66,923Fidelity and other
    
    
    7,433
    
    
    
    7,267
    
    
    
    16,282
    
    
    
    16,059$
    108,744
    
    
    $
    110,115
    
    
    $
    215,404
    
    
    $
    214,134
    Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Contract
    
    $
    65,010
    
    
    $
    65,207
    
    
    $
    123,536
    
    
    $
    126,499Commercial
    
    
    32,642
    
    
    
    32,821
    
    
    
    64,918
    
    
    
    65,038Fidelity and other
    
    
    7,562
    
    
    
    7,667
    
    
    
    15,012
    
    
    
    15,309$
    105,214
    
    
    $
    105,695
    
    
    $
    203,466
    
    
    $
    206,846
  29




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Net Loss Ratio
  Expense Ratio
  Investment Income and Realized Investment Gains/Losses
   30




---



##### Table of Contents



Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net realized investment gains (losses):Fixed income securities:Gross realized investment gains
    
    $
    768
    
    
    $
    43
    
    
    $
    1,193
    
    
    $
    43Gross realized investment losses:Other-than-temporary impairment losses
    
    
    (28
    )
    
    
    (116
    )
    
    
    (122
    )
    
    
    (116
    )Realized losses from sales
    
    
    (2
    )
    
    
    
    
    
    
    (21
    )
    
    
    Total gross realized investment losses
    
    
    (30
    )
    
    
    (116
    )
    
    
    (143
    )
    
    
    (116
    )Net realized investment gains (losses) on fixed income securities
    
    
    738
    
    
    
    (73
    )
    
    
    1,050
    
    
    
    (73
    )Equity securities:Gross realized investment gains
    
    
    1
    
    
    
    27
    
    
    
    12
    
    
    
    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
    
    
    1
    
    
    
    27
    
    
    
    12
    
    
    
    (39
    )Other
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )Net realized investment gains (losses)
    
    $
    738
    
    
    $
    (47
    )
    
    $
    1,061
    
    
    $
    (113
    )
  Interest Expense
  Income Taxes
   31




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##### Table of Contents



Exposure Management
    Excess of Loss Reinsurance
  2009 Third Party Reinsurance
  2010 Third Party Reinsurance
  Related Party Reinsurance
  32




---



##### Table of Contents



33




---



##### Table of Contents



Liquidity and Capital Resources
        34




---



##### Table of Contents



Contractual Obligations as of June 30, 2010
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    2014
    
    
    Thereafter
    
    
    TotalDebt (a)
    
    $
    0.6
    
    
    $
    1.2
    
    
    $
    1.2
    
    
    $
    1.2
    
    
    $
    1.2
    
    
    $
    53.7
    
    
    $
    59.1Operating leases
    
    
    1.0
    
    
    
    1.9
    
    
    
    1.0
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    
    
    
    
    4.1Loss and loss adjustment expense reserves
    
    
    49.6
    
    
    
    121.5
    
    
    
    85.0
    
    
    
    58.8
    
    
    
    49.7
    
    
    
    74.7
    
    
    
    439.3Other long-term liabilities(b)
    
    
    0.2
    
    
    
    1.4
    
    
    
    1.1
    
    
    
    0.5
    
    
    
    0.4
    
    
    
    10.4
    
    
    
    14.0Total
    
    $
    51.4
    
    
    $
    126.0
    
    
    $
    88.3
    
    
    $
    60.6
    
    
    $
    51.4
    
    
    $
    138.8
    
    
    $
    516.5
 
 (a)
    
    Reflects expected principal and interest payments.(b)
    
    Reflects unfunded postretirement benefit plans and long-term incentive plan payments
to certain executives.    35




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##### Table of Contents



Insurance Regulation and Supervision
  36




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##### Table of Contents



Financial Condition
 Investment Portfolio
  Gross
    
    
    Gross Unrealized LossesAmortized Cost
    
    
    Unrealized
    
    
    Less Than
    
    
    More Than
    
    
    Estimated
    
    
    UnrealizedJune 30, 2010
    

    or Cost
    
    
    Gains
    
    
    12 Months
    
    
    12 Months
    
    
    Fair Value
    
    
    OTTI Losses(a)Fixed income securities:U.S. Treasury securities and obligations of U.S.
Government and agencies:U.S. Treasury
    
    $
    17,286
    
    
    $
    1,101
    
    
    $
    
    
    
    $
    
    
    
    $
    18,387
    
    
    $
    U.S. Agencies
    
    
    6,525
    
    
    
    332
    
    
    
    
    
    
    
    
    
    
    
    6,857
    
    
    
    Collateralized mortgage obligations  residential
    
    
    27,039
    
    
    
    1,926
    
    
    
    
    
    
    
    
    
    
    
    28,965
    
    
    
    Mortgage pass-through securities  residential
    
    
    81,617
    
    
    
    4,096
    
    
    
    
    
    
    
    
    
    
    
    85,713
    
    
    
    Obligations of states and political subdivisions
    
    
    719,868
    
    
    
    43,021
    
    
    
    (408
    )
    
    
    (2,285
    )
    
    
    760,196
    
    
    
    Corporate bonds
    
    
    366,333
    
    
    
    23,276
    
    
    
    (148
    )
    
    
    (147
    )
    
    
    389,314
    
    
    
    Collateralized mortgage obligations  commercial
    
    
    10,021
    
    
    
    421
    
    
    
    
    
    
    
    
    
    
    
    10,442
    
    
    
    Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    4,606
    
    
    
    
    
    
    
    
    
    
    
    (301
    )
    
    
    4,305
    
    
    
    (1,113
    )Consumer credit receivables
    
    
    9,996
    
    
    
    371
    
    
    
    
    
    
    
    
    
    
    
    10,367
    
    
    
    Other
    
    
    9,696
    
    
    
    738
    
    
    
    
    
    
    
    
    
    
    
    10,434
    
    
    
    Total fixed income securities
    
    
    1,252,987
    
    
    
    75,282
    
    
    
    (556
    )
    
    
    (2,733
    )
    
    
    1,324,980
    
    
    $
    (1,113
    )Equity securities
    
    
    1,687
    
    
    
    143
    
    
    
    
    
    
    
    
    
    
    
    1,830Total
    
    $
    1,254,674
    
    
    $
    75,425
    
    
    $
    (556
    )
    
    $
    (2,733
    )
    
    $
    1,326,810
 
 (a)
    
    The unrealized loss position of this security was $0.3 million at June 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 Losses(a)Fixed income securities:U.S. Treasury securities and obligations of U.S.
Government and agencies:U.S. Treasury
    
    $
    17,378
    
    
    $
    970
    
    
    $
    
    
    
    $
    
    
    
    $
    18,348
    
    
    $
    U.S. Agencies
    
    
    9,794
    
    
    
    337
    
    
    
    
    
    
    
    
    
    
    
    10,131
    
    
    
    Collateralized mortgage obligations  residential
    
    
    30,709
    
    
    
    1,383
    
    
    
    
    
    
    
    
    
    
    
    32,092
    
    
    
    Mortgage pass-through securities  residential
    
    
    94,453
    
    
    
    2,336
    
    
    
    (232
    )
    
    
    
    
    
    
    96,557
    
    
    
    Obligations of states and political subdivisions
    
    
    696,505
    
    
    
    35,847
    
    
    
    (882
    )
    
    
    (2,902
    )
    
    
    728,568
    
    
    
    Corporate bonds
    
    
    334,136
    
    
    
    11,478
    
    
    
    (1,248
    )
    
    
    (257
    )
    
    
    344,109
    
    
    
    Collateralized mortgage obligations  commercial
    
    
    10,024
    
    
    
    
    
    
    
    
    
    
    
    (351
    )
    
    
    9,673
    
    
    
    Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    5,501
    
    
    
    
    
    
    
    
    
    
    
    (740
    )
    
    
    4,761
    
    
    
    (1,399
    )Consumer credit receivables
    
    
    11,055
    
    
    
    528
    
    
    
    
    
    
    
    
    
    
    
    11,583
    
    
    
    Other
    
    
    9,715
    
    
    
    686
    
    
    
    
    
    
    
    
    
    
    
    10,401
    
    
    
    Total fixed income securities
    
    
    1,219,270
    
    
    
    53,565
    
    
    
    (2,362
    )
    
    
    (4,250
    )
    
    
    1,266,223
    
    
    $
    (1,399
    )Equity securities
    
    
    1,429
    
    
    
    181
    
    
    
    
    
    
    
    
    
    
    
    1,610Total
    
    $
    1,220,699
    
    
    $
    53,746
    
    
    $
    (2,362
    )
    
    $
    (4,250
    )
    
    $
    1,267,833
 
 (a)
    
    The unrealized loss position of this security was $0.5 million at December 31, 2009. 37




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##### Table of Contents



% ofEstimated
    
    
    % ofFair
    
    
    UnrealizedContractual Maturity
    
    Value
    
    
    LossDue after one year through five years
    
    
    13
    %
    
    
    9
    %Due after ten years
    
    
    81
    
    
    
    82Asset-backed securities
    
    
    6
    
    
    
    9Total
    
    
    100
    %
    
    
    100
    %
  June 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
    
    $
    6,912
    
    
    $
    148
    
    
    $
    162,087
    
    
    $
    2,3627-12 months
    
    
    23,809
    
    
    
    408
    
    
    
    
    
    
    
    13-24 months
    
    
    
    
    
    
    
    
    
    
    11,176
    
    
    
    469Greater than 24 months
    
    
    25,847
    
    
    
    1,172
    
    
    
    32,932
    
    
    
    2,065Total investment grade
    
    
    56,568
    
    
    
    1,728
    
    
    
    206,195
    
    
    
    4,896Non-investment grade:Greater than 24 months
    
    
    17,019
    
    
    
    1,561
    
    
    
    17,346
    
    
    
    1,716Total
    
    $
    73,587
    
    
    $
    3,289
    
    
    $
    223,541
    
    
    $
    6,612
 
 (a)
    
    Investment grade is determined by using the S&P rating. If
a security is not rated by Standard & Poors (S&P), the
Moodys Investor Services (Moodys) rating is used. As of
June 30, 2010 and December 31, 2009, all of the Companys
fixed income securities were rated by S&P or Moodys.      38




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##### Table of Contents



Gross Unrealized LossesEstimatedJune 30, 2010
    
    AAA
    
    
    AA
    
    
    A
    
    
    BBB
    
    
    Total
    
    
    Count
    
    
    Fair ValueFixed income securities:Investment grade(a):Obligations of states and political subdivisions
    
    $
    166
    
    
    $
    555
    
    
    $
    706
    
    
    $
    
    
    
    $
    1,427
    
    
    
    7
    
    
    $
    44,597Corporate bonds
    
    
    
    
    
    
    
    
    
    
    148
    
    
    
    147
    
    
    
    295
    
    
    
    2
    
    
    
    9,780Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    1
    
    
    
    2,191Total investment grade
    
    
    172
    
    
    
    555
    
    
    
    854
    
    
    
    147
    
    
    
    1,728
    
    
    
    10
    
    
    
    56,568Non-investment grade:Obligations of states and political subdivisions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,266
    
    
    
    2
    
    
    
    14,906Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    295
    
    
    
    1
    
    
    
    2,113Total non-investment grade
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,561
    
    
    
    3
    
    
    
    17,019Total
    
    $
    172
    
    
    $
    555
    
    
    $
    854
    
    
    $
    147
    
    
    $
    3,289
    
    
    
    13
    
    
    $
    73,587
 
 (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 June 30, 2010, all of the Companys fixed income
securities were rated by S&P or Moodys. 39




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##### Table of Contents



FORWARD-LOOKING STATEMENTS
  40




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##### Table of Contents




    
    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,
    
    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.
  41




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   Estimated Fair
    
    
    HypotheticalHypothetical
    
    Value After
    
    
    PercentageFair Value at
    
    
    Change in
    
    Hypothetical
    
    
    Decrease inJune 30,
    
    
    Interest Rate
    
    Change in
    
    
    Stockholders2010
    
    
    (bp=basis points)
    
    Interest Rate
    
    
    Equity(Dollars in thousands)U.S. Government and government agencies and
authorities
    
    $
    139,922
    
    
    200 bp increase
    
    $
    131,469
    
    
    
    (0.6)
    %150 bp increase
    
    
    134,016
    
    
    
    (0.4)100 bp increase
    
    
    136,351
    
    
    
    (0.2)50 bp increase
    
    
    138,345
    
    
    
    (0.1)States, municipalities and political subdivisions
    
    
    760,196
    
    
    200 bp increase
    
    
    671,913
    
    
    
    (5.8)150 bp increase
    
    
    692,761
    
    
    
    (4.4)100 bp increase
    
    
    714,412
    
    
    
    (3.0)50 bp increase
    
    
    736,891
    
    
    
    (1.5)Corporate bonds
    
    
    389,314
    
    
    200 bp increase
    
    
    354,798
    
    
    
    (2.3)150 bp increase
    
    
    363,003
    
    
    
    (1.7)100 bp increase
    
    
    371,483
    
    
    
    (1.2)50 bp increase
    
    
    380,249
    
    
    
    (0.6)Mortgage-backed and asset-backed
    
    
    35,548
    
    
    200 bp increase
    
    
    33,619
    
    
    
    (0.1)150 bp increase
    
    
    34,080
    
    
    
    (0.1)100 bp increase
    
    
    34,555
    
    
    
    (0.1)50 bp increase
    
    
    35,044
    
    
    
    Total fixed income securities available-for-sale
    
    $
    1,324,980
    
    
    200 bp increase
    
    
    1,191,799
    
    
    
    (8.8)150 bp increase
    
    
    1,223,860
    
    
    
    (6.6)100 bp increase
    
    
    1,256,801
    
    
    
    (4.5)50 bp increase
    
    
    1,290,529
    
    
    
    (2.2)
 42




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##### Table of Contents



Estimated Fair
    
    

    HypotheticalHypothetical
    
    Value After
    
    

    PercentageFair Value at
    
    
    Change in
    
    Hypothetical
    
    

    Decrease inDecember 31,
    
    
    Interest Rate
    
    Change in
    
    

    Stockholders2009
    
    
    (bp=basis points)
    
    Interest Rate
    
    

    Equity(Dollars in thousands)U.S. Government and government agencies and
authorities
    
    $
    157,128
    
    
    200 bp increase
    
    $
    144,937
    
    
    
    (0.9)
    %150 bp increase
    
    
    148,310
    
    
    
    (0.6)100 bp increase
    
    
    151,570
    
    
    
    (0.4)50 bp increase
    
    
    154,580
    
    
    
    (0.2)States, municipalities and political subdivisions
    
    
    728,568
    
    
    200 bp increase
    
    
    641,122
    
    
    
    (6.2)150 bp increase
    
    
    661,735
    
    
    
    (4.7)100 bp increase
    
    
    683,176
    
    
    
    (3.2)50 bp increase
    
    
    705,453
    
    
    
    (1.6)Corporate bonds
    
    
    344,109
    
    
    200 bp increase
    
    
    310,703
    
    
    
    (2.4)150 bp increase
    
    
    318,610
    
    
    
    (1.8)100 bp increase
    
    
    326,806
    
    
    
    (1.2)50 bp increase
    
    
    335,301
    
    
    
    (0.6)Mortgage-backed and asset-backed
    
    
    36,418
    
    
    200 bp increase
    
    
    34,525
    
    
    
    (0.1)150 bp increase
    
    
    34,982
    
    
    
    (0.1)100 bp increase
    
    
    35,450
    
    
    
    (0.1)50 bp increase
    
    
    35,928
    
    
    
    Total fixed income securities available-for-sale
    
    $
    1,266,223
    
    
    200 bp increase
    
    
    1,131,287
    
    
    
    (9.6)150 bp increase
    
    
    1,163,637
    
    
    
    (7.2)100 bp increase
    
    
    1,197,002
    
    
    
    (4.9)50 bp increase
    
    
    1,231,262
    
    
    
    (2.4)
 
 ITEM 4. CONTROLS AND PROCEDURES
    
 PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 
 ITEM 1A. RISK FACTORS
 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS  None
 43




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##### Table of Contents



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)Certification  pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the SarbanesOxley Act of 2002  Chief
Executive Officer.
    
    
    32
    (1)*Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the SarbanesOxley Act of 2002  Chief
Financial Officer.
    
    
    32

(2)*
 
 *
    
    Exhibits 32(1) and 32(2) are being furnished and shall not be deemed filed for the purpose
of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the
liabilities of that Section. These Exhibits shall not be incorporated by reference into any
registration statement or other document pursuant to the Securities Act of 1933, as amended. 44




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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  45




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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)
    
    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.
 46