##### 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, 2009
 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
 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):Condensed Consolidated Balance Sheets at June 30, 2009 and at December 31, 2008
    
    
    3Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2009 and 2008
    
    
    4Condensed Consolidated Statements of Stockholders Equity for the Six Months Ended June 30, 2009 and 2008
    
    
    5Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    25Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    42Item 4. Controls and Procedures
    
    
    44PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    44Item 1A. Risk Factors
    
    
    44Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    45Item 3. Defaults Upon Senior Securities
    
    
    45Item 4. Submission of Matters to a Vote of Security Holders
    
    
    45Item 5. Other Information
    
    
    45Item 6. Exhibits
    
    
    45EX-10.40EX-10.41EX-10.42EX-10.43EX-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 31,2009
    
    
    2008(Amounts in thousands, exceptper share data)AssetsInvested assets:Fixed income securities, at fair value (amortized cost: $1,109,007 and $1,041,816)
    
    $
    1,126,812
    
    
    $
    1,034,646Equity securities, at fair value (cost: $1,344 and $1,231)
    
    
    1,425
    
    
    
    1,231Short-term investments, at cost (approximates fair value)
    
    
    68,248
    
    
    
    80,606Total invested assets
    
    
    1,196,485
    
    
    
    1,116,483Cash
    
    
    7,503
    
    
    
    9,596Deferred policy acquisition costs
    
    
    105,189
    
    
    
    102,092Insurance receivables:Premiums, including $11,186 and $14,303 from affiliates, (net of allowance for
doubtful accounts: $1,049 and $1,307)
    
    
    47,505
    
    
    
    36,948Reinsurance, including $0 and $46,122 from affiliates
    
    
    46,299
    
    
    
    91,452Deposit with affiliated ceding company
    
    
    27,425
    
    
    
    29,693Intangible assets (net of accumulated amortization: $25,523 and $25,523)
    
    
    138,785
    
    
    
    138,785Current income taxes receivable
    
    
    431
    
    
    
    Property and
equipment, at cost (less accumulated depreciation and amortization: $36,057 and $33,506)
    
    
    24,144
    
    
    
    24,378Prepaid reinsurance premiums (including $0 and $105 from affiliates)
    
    
    328
    
    
    
    420Accrued investment income
    
    
    14,621
    
    
    
    13,464Other assets
    
    
    2,235
    
    
    
    2,208Total assets
    
    $
    1,610,950
    
    
    $
    1,565,519LiabilitiesReserves:Unpaid losses and loss adjustment expenses
    
    $
    419,812
    
    
    $
    428,724Unearned premiums
    
    
    266,020
    
    
    
    258,824Total reserves
    
    
    685,832
    
    
    
    687,548Long-term debt
    
    
    30,930
    
    
    
    30,892Deferred income taxes, net
    
    
    18,457
    
    
    
    9,647Reinsurance and other payables to affiliates
    
    
    278
    
    
    
    1,680Accrued expenses
    
    
    13,318
    
    
    
    20,056Liability for postretirement benefits
    
    
    9,673
    
    
    
    9,283Payable for securities purchased
    
    
    
    
    
    
    8,398Federal income tax payable
    
    
    
    
    
    
    1,581Other liabilities
    
    
    23,785
    
    
    
    29,139Total liabilities
    
    
    782,273
    
    
    
    798,224Commitments and contingencies (See Notes 3, 5, & 8)Stockholders EquityCommon stock, par value $.01 per share, 100,000 shares authorized; 45,626 shares
issued and 44,254 shares outstanding at June 30, 2009 and 45,544 shares issued and
44,168 shares outstanding at December 31, 2008
    
    
    456
    
    
    
    455Additional paid-in capital
    
    
    278,333
    
    
    
    276,255Retained earnings
    
    
    552,675
    
    
    
    509,644Accumulated other comprehensive income (loss)
    
    
    11,944
    
    
    
    (4,286
    )Treasury stock, 1,372 and 1,376 shares, at cost
    
    
    (14,731
    )
    
    
    (14,773
    )Total stockholders equity
    
    
    828,677
    
    
    
    767,295Total liabilities and stockholders equity
    
    $
    1,610,950
    
    
    $
    1,565,519
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CNA SURETY CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Amount in thousands, except per share data)Revenues:Net earned premium
    
    $
    105,695
    
    
    $
    108,477
    
    
    $
    206,846
    
    
    $
    211,118Net investment income
    
    
    12,577
    
    
    
    11,746
    
    
    
    24,823
    
    
    
    23,511Net 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)
    
    
    1,708
    
    
    
    
    
    
    
    1,708
    
    
    
    Net impairment losses recognized in earnings
    
    
    (116
    )
    
    
    
    
    
    
    (162
    )
    
    
    Net realized investment gains (losses), excluding
impairment losses on available-for-sale securities
    
    
    69
    
    
    
    (21
    )
    
    
    49
    
    
    
    (30
    )Total net realized investment losses
    
    
    (47
    )
    
    
    (21
    )
    
    
    (113
    )
    
    
    (30
    )Total revenues
    
    
    118,225
    
    
    
    120,202
    
    
    
    231,556
    
    
    
    234,599Expenses:Net losses and loss adjustment expenses
    
    
    30,975
    
    
    
    27,390
    
    
    
    60,563
    
    
    
    53,358Net commissions, brokerage and other underwriting expenses
    
    
    55,917
    
    
    
    57,825
    
    
    
    110,195
    
    
    
    113,112Interest expense
    
    
    359
    
    
    
    532
    
    
    
    777
    
    
    
    1,151Total expenses
    
    
    87,251
    
    
    
    85,747
    
    
    
    171,535
    
    
    
    167,621Income before income taxes
    
    
    30,974
    
    
    
    34,455
    
    
    
    60,021
    
    
    
    66,978Income tax expense
    
    
    8,807
    
    
    
    10,405
    
    
    
    16,990
    
    
    
    20,026Net income
    
    $
    22,167
    
    
    $
    24,050
    
    
    $
    43,031
    
    
    $
    46,952Earnings per common share
    
    $
    0.50
    
    
    $
    0.54
    
    
    $
    0.97
    
    
    $
    1.06Earnings per common share, assuming dilution
    
    $
    0.50
    
    
    $
    0.54
    
    
    $
    0.97
    
    
    $
    1.06Weighted average shares outstanding
    
    
    44,251
    
    
    
    44,132
    
    
    
    44,229
    
    
    
    44,134Weighted average shares outstanding, assuming dilution
    
    
    44,412
    
    
    
    44,231
    
    
    
    44,394
    
    
    
    44,255
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CNA SURETY CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED
STATEMENTS  OF STOCKHOLDERS EQUITY
 (UNAUDITED)
 Common
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    AccumulatedStock
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    Treasury
    
    
    TotalShares
    
    
    Common
    
    
    Paid-in
    
    
    Comprehensive
    
    
    Retained
    
    
    Comprehensive
    
    
    Stock
    
    
    StockholdersOutstanding
    
    
    Stock
    
    
    Capital
    
    
    Income
    
    
    Earnings
    
    
    Income (Loss)
    
    
    At Cost
    
    
    Equity(Amounts in thousands)Balance, January 1, 2008
    
    
    44,121
    
    
    $
    455
    
    
    $
    274,069
    
    
    
    
    
    
    $
    399,241
    
    
    $
    8,800
    
    
    $
    (14,860
    )
    
    $
    667,705Comprehensive income:Net income
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    46,952
    
    
    $
    46,952
    
    
    $
    
    
    
    $
    
    
    
    $
    46,952Other comprehensive income:Change in unrealized gains on
securities, after income tax
benefit of $6,100 (net of
reclassification adjustment of
($49), after income tax benefit
of $26)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,328
    )
    
    
    
    
    
    
    (11,328
    )
    
    
    
    
    
    
    (11,328
    )Net change related to
postretirement benefits, after
income tax benefit of $204
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (245
    )
    
    
    
    
    
    
    (245
    )
    
    
    
    
    
    
    (245
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    35,379
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    919
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    919Stock options exercised and other
    
    
    20
    
    
    
    
    
    
    
    205
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41
    
    
    
    246Balance, June 30, 2008
    
    
    44,141
    
    
    $
    455
    
    
    $
    275,193
    
    
    
    
    
    
    $
    446,193
    
    
    $
    (2,773
    )
    
    $
    (14,819
    )
    
    $
    704,249Balance, 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
impairment 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
    )
    
    $
    828,677
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CNA SURETY CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Six Months EndedJune 30,2009
    
    
    2008(Amounts in thousands)Cash Flows from Operating Activities:Net income
    
    $
    43,031
    
    
    $
    46,952Adjustments to reconcile net income to net cash provided by operating activities:Provision for doubtful accounts
    
    
    112
    
    
    
    80Depreciation and amortization
    
    
    3,050
    
    
    
    2,691Amortization of bond premium, net
    
    
    2,138
    
    
    
    1,391(Gain) loss on disposal of property and equipment
    
    
    (15
    )
    
    
    46Net realized investment losses
    
    
    113
    
    
    
    30Stock-based compensation
    
    
    1,022
    
    
    
    919Changes in:Insurance receivables
    
    
    34,484
    
    
    
    (23,225
    )Reserve for unearned premiums
    
    
    7,196
    
    
    
    13,689Reserve for unpaid losses and loss adjustment expenses
    
    
    (8,912
    )
    
    
    22,199Deposit with affiliated ceding company
    
    
    2,268
    
    
    
    (537
    )Deferred policy acquisition costs
    
    
    (3,097
    )
    
    
    (2,968
    )Deferred income taxes, net
    
    
    
    
    
    
    101Reinsurance and other payables to affiliates
    
    
    (1,402
    )
    
    
    (619
    )Prepaid reinsurance premiums
    
    
    92
    
    
    
    14Accrued expenses
    
    
    (6,738
    )
    
    
    (5,053
    )Other assets and liabilities
    
    
    (8,177
    )
    
    
    (1,431
    )Net cash provided by operating activities
    
    
    65,165
    
    
    
    54,279Cash Flows from Investing Activities:Fixed income securities:Purchases
    
    
    (128,846
    )
    
    
    (62,290
    )Maturities
    
    
    56,806
    
    
    
    20,206Sales
    
    
    2,581
    
    
    
    24,177Purchases of equity securities
    
    
    (677
    )
    
    
    (333
    )Proceeds from the sale of equity securities
    
    
    525
    
    
    
    460Changes in short-term investments
    
    
    12,415
    
    
    
    (37,028
    )Purchases of property and equipment, net
    
    
    (2,763
    )
    
    
    (3,825
    )Changes in receivables/payables for securities sold/purchased
    
    
    (8,398
    )
    
    
    Other, net
    
    
    
    
    
    
    200Net cash (used in) investing activities
    
    
    (68,357
    )
    
    
    (58,433
    )Cash Flows from Financing Activities:Employee stock option exercises and other
    
    
    1,099
    
    
    
    246Net cash provided by financing activities
    
    
    1,099
    
    
    
    246Decrease in cash
    
    
    (2,093
    )
    
    
    (3,908
    )Cash at beginning of period
    
    
    9,596
    
    
    
    10,230Cash at end of period
    
    $
    7,503
    
    
    $
    6,322Supplemental Disclosure of Cash Flow Information:Cash paid during the period for:Interest
    
    $
    789
    
    
    $
    1,187Income taxes
    
    $
    18,824
    
    
    $
    19,089
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CNA SURETY CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2009
(UNAUDITED)
 1. Significant Accounting Policies
 Formation of CNA Surety Corporation and Merger
  Principles of Consolidation
  Estimates
  Basis of Presentation
  Earnings Per Share
  7




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Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income
    
    $
    22,167
    
    
    $
    24,050
    
    
    $
    43,031
    
    
    $
    46,952Shares:Weighted average shares outstanding
    
    
    44,240
    
    
    
    44,130
    
    
    
    44,168
    
    
    
    44,121Weighted average shares of options exercised and
additional stock issuance
    
    
    11
    
    
    
    2
    
    
    
    61
    
    
    
    13Total weighted average shares outstanding
    
    
    44,251
    
    
    
    44,132
    
    
    
    44,229
    
    
    
    44,134Effect of dilutive options
    
    
    161
    
    
    
    99
    
    
    
    165
    
    
    
    121Total weighted average shares outstanding, assuming dilution
    
    
    44,412
    
    
    
    44,231
    
    
    
    44,394
    
    
    
    44,255Earnings per share
    
    $
    0.50
    
    
    $
    0.54
    
    
    $
    0.97
    
    
    $
    1.06Earnings per share, assuming dilution
    
    $
    0.50
    
    
    $
    0.54
    
    
    $
    0.97
    
    
    $
    1.06
  Subsequent Events
  Adopted Accounting Pronouncements
    8




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9




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##### Table of Contents



Pending Accounting Pronouncements
    2. Investments
  Three Months Ended June 30
    
    
    Six Months Ended June 302009
    
    
    2008
    
    
    2009
    
    
    2008Investment income:Fixed income securities
    
    $
    12,724
    
    
    $
    11,406
    
    
    $
    25,027
    
    
    $
    22,804Equity securities
    
    
    10
    
    
    
    12
    
    
    
    19
    
    
    
    25Short-term investments
    
    
    36
    
    
    
    349
    
    
    
    84
    
    
    
    730Other
    
    
    15
    
    
    
    11
    
    
    
    34
    
    
    
    24Total investment income on available-for-sale securities
    
    
    12,785
    
    
    
    11,778
    
    
    
    25,164
    
    
    
    23,583Investment income on deposit with affiliated ceding company
    
    
    115
    
    
    
    262
    
    
    
    272
    
    
    
    537Investment expenses
    
    
    (323
    )
    
    
    (294
    )
    
    
    (613
    )
    
    
    (609
    )Net investment income
    
    $
    12,577
    
    
    $
    11,746
    
    
    $
    24,823
    
    
    $
    23,511
 10




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##### Table of Contents



Three Months Ended June 30
    
    
    Six Months Ended June 302009
    
    
    2008
    
    
    2009
    
    
    2008Net realized investment gains (losses):Fixed income securities:Gross realized investment gains
    
    $
    43
    
    
    $
    
    
    
    $
    43
    
    
    $
    Gross realized investment losses:Other-than-temporary impairment losses
    
    
    (116
    )
    
    
    
    
    
    
    (116
    )
    
    
    Realized losses from sales
    
    
    
    
    
    
    (19
    )
    
    
    
    
    
    
    (19
    )Total gross realized investment losses
    
    
    (116
    )
    
    
    (19
    )
    
    
    (116
    )
    
    
    (19
    )Net realized investment losses on fixed income securities
    
    
    (73
    )
    
    
    (19
    )
    
    
    (73
    )
    
    
    (19
    )Equity securities:Gross realized investment gains
    
    
    27
    
    
    
    8
    
    
    
    27
    
    
    
    10Gross realized investment losses:Other-than-temporary impairment losses
    
    
    
    
    
    
    
    
    
    
    (46
    )
    
    
    Realized losses from sales
    
    
    
    
    
    
    (9
    )
    
    
    (20
    )
    
    
    (20
    )Total gross realized investment losses
    
    
    
    
    
    
    (9
    )
    
    
    (66
    )
    
    
    (20
    )Net realized investment gains (losses) on equity securities
    
    
    27
    
    
    
    (1
    )
    
    
    (39
    )
    
    
    (10
    )Other
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )Net realized investment losses
    
    $
    (47
    )
    
    $
    (21
    )
    
    $
    (113
    )
    
    $
    (30
    )Net change in unrealized gains (losses):Fixed income securities
    
    $
    12,248
    
    
    $
    (13,107
    )
    
    $
    24,975
    
    
    $
    (17,303
    )Equity securities
    
    
    81
    
    
    
    (17
    )
    
    
    81
    
    
    
    (125
    )Total net change in unrealized gains (losses)
    
    $
    12,329
    
    
    $
    (13,124
    )
    
    $
    25,056
    
    
    $
    (17,428
    )Net realized gains (losses) and change in unrealized gains (losses)
    
    $
    12,282
    
    
    $
    (13,145
    )
    
    $
    24,943
    
    
    $
    (17,458
    )
   11




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##### Table of Contents



Gross
    
    
    Gross Unrealized LossesAmortized Cost
    
    
    Unrealized
    
    
    Less Than
    
    
    More Than
    
    
    Estimated
    
    
    UnrealizedJune 30, 2009
    
    or Cost
    
    
    Gains
    
    
    12 Months
    
    
    12 Months
    
    
    Fair Value
    
    

OTTI
LossesFixed income securities:U.S. Treasury securities and obligations of
U.S. Government and agencies:U.S. Treasury
    
    $
    32,770
    
    
    $
    1,204
    
    
    $
    (9
    )
    
    $
 
    
    
    $
    33,965
    
    
    $
 U.S. Agencies
    
    
    33,868
    
    
    
    621
    
    
    
 
    
    
    
 
    
    
    
    34,489
    
    
    
 Collateralized mortgage obligations  residential
    
    
    32,992
    
    
    
    1,337
    
    
    
 
    
    
    
 
    
    
    
    34,329
    
    
    
 Mortgage pass-through securities  residential
    
    
    61,453
    
    
    
    2,006
    
    
    
 
    
    
    
 
    
    
    
    63,459
    
    
    
 Obligations of states and political subdivisions
    
    
    690,451
    
    
    
    24,270
    
    
    
    (1,769
    )
    
    
    (9,148
    )
    
    
    703,804
    
    
    
 Corporate bonds
    
    
    188,342
    
    
    
    6,360
    
    
    
    (969
    )
    
    
    (1,049
    )
    
    
    192,684
    
    
    
 Collateralized mortgage obligations  commercial
    
    
    35,054
    
    
    
 
    
    
    
    (121
    )
    
    
    (3,129
    )
    
    
    31,804
    
    
    
 Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    6,576
    
    
    
 
    
    
    
 
    
    
    
    (2,588
    )
    
    
    3,988
    
    
    
    (1,708
    )Consumer credit receivables
    
    
    16,766
    
    
    
    564
    
    
    
 
    
    
    
    (241
    )
    
    
    17,089
    
    
    
 Other
    
    
    10,735
    
    
    
    466
    
    
    
 
    
    
    
 
    
    
    
    11,201
    
    
    
 Total fixed income securities
    
    
    1,109,007
    
    
    
    36,828
    
    
    
    (2,868
    )
    
    
    (16,155
    )
    
    
    1,126,812
    
    
    $
    (1,708
    )Equity securities
    
    
    1,344
    
    
    
    81
    
    
    
 
    
    
    
 
    
    
    
    1,425Total
    
    $
    1,110,351
    
    
    $
    36,909
    
    
    $
    (2,868
    )
    
    $
    (16,155
    )
    
    $
    1,128,237
 Gross
    
    
    Gross Unrealized LossesAmortized Cost
    
    
    Unrealized
    
    
    Less Than
    
    
    More Than
    
    
    EstimatedDecember 31, 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
    
    $
    33,140
    
    
    $
    3,519
    
    
    $
 
    
    
    $
 
    
    
    $
    36,659U.S. Agencies
    
    
    36,476
    
    
    
    1,116
    
    
    
 
    
    
    
 
    
    
    
    37,592Collateralized mortgage obligations  residential
    
    
    35,671
    
    
    
    984
    
    
    
 
    
    
    
 
    
    
    
    36,655Mortgage pass-through securities  residential
    
    
    72,203
    
    
    
    1,489
    
    
    
 
    
    
    
 
    
    
    
    73,692Obligations of states and political subdivisions
    
    
    697,305
    
    
    
    19,730
    
    
    
    (6,929
    )
    
    
    (13,943
    )
    
    
    696,163Corporate bonds
    
    
    96,048
    
    
    
    1,711
    
    
    
    (2,430
    )
    
    
    (1,853
    )
    
    
    93,476Collateralized mortgage obligations  commercial
    
    
    35,025
    
    
    
 
    
    
    
    (2,040
    )
    
    
    (3,607
    )
    
    
    29,378Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    7,956
    
    
    
 
    
    
    
    (779
    )
    
    
    (2,180
    )
    
    
    4,997Consumer credit receivables
    
    
    17,239
    
    
    
 
    
    
    
    (1,708
    )
    
    
 
    
    
    
    15,531Other
    
    
    10,753
    
    
    
    23
    
    
    
    (273
    )
    
    
 
    
    
    
    10,503Total fixed income securities
    
    
    1,041,816
    
    
    
    28,572
    
    
    
    (14,159
    )
    
    
    (21,583
    )
    
    
    1,034,646Equity securities
    
    
    1,231
    
    
    
 
    
    
    
 
    
    
    
 
    
    
    
    1,231Total
    
    $
    1,043,047
    
    
    $
    28,572
    
    
    $
    (14,159
    )
    
    $
    (21,583
    )
    
    $
    1,035,877
    12




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##### Table of Contents



Beginning 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
  13




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##### Table of Contents



June 30, 2009
    
    
    December 31, 2008Amortized
    
    
    Estimated Fair
    
    
    Amortized
    
    
    Estimated FairCost
    
    
    Value
    
    
    Cost
    
    
    ValueFixed income securities:Due within one year
    
    $
    5,585
    
    
    $
    5,668
    
    
    $
    4,535
    
    
    $
    4,590Due after one year but within five years
    
    
    259,680
    
    
    
    269,278
    
    
    
    216,232
    
    
    
    222,344Due after five years but within ten years
    
    
    373,917
    
    
    
    386,831
    
    
    
    345,285
    
    
    
    355,171Due after ten years
    
    
    306,249
    
    
    
    303,165
    
    
    
    296,917
    
    
    
    281,785945,431
    
    
    
    964,942
    
    
    
    862,969
    
    
    
    863,890Mortgage pass-through securities,
collateralized mortgage obligations and
asset-backed securities
    
    
    163,576
    
    
    
    161,870
    
    
    
    178,847
    
    
    
    170,756$
    1,109,007
    
    
    $
    1,126,812
    
    
    $
    1,041,816
    
    
    $
    1,034,646
  % ofEstimated
    
    % ofFair
    
    UnrealizedContractual Maturity
    
    Value
    
    LossDue after one year through five years
    
    
    11
    %
    
    
    6
    %Due after five years through ten years
    
    
    22
    
    
    
    12Due after ten years
    
    
    54
    
    
    
    50Asset-backed securities
    
    
    13
    
    
    
    32Total
    
    
    100
    %
    
    
    100
    %
  June 30, 2009
    
    
    December 31, 2008Gross
    
    
    
    
    
    
    GrossEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    UnrealizedUnrealized Loss Aging
    
    Fair Value
    
    
    Loss
    
    
    Fair Value
    
    
    LossFixed income securities:Investment grade(a):0-6 months
    
    $
    136,874
    
    
    $
    2,354
    
    
    $
    109,973
    
    
    $
    3,0957-12 months
    
    
    22,724
    
    
    
    514
    
    
    
    121,419
    
    
    
    11,06413-24 months
    
    
    46,733
    
    
    
    2,921
    
    
    
    81,395
    
    
    
    12,010Greater than 24 months
    
    
    96,619
    
    
    
    11,526
    
    
    
    33,450
    
    
    
    9,573Total investment grade
    
    
    302,950
    
    
    
    17,315
    
    
    
    346,237
    
    
    
    35,742Non-investment grade:Greater than 24 months
    
    
    1,755
    
    
    
    1,708
    
    
    
    
    
    
    
    Total
    
    $
    304,705
    
    
    $
    19,023
    
    
    $
    346,237
    
    
    $
    35,742
 
 (a)
    
    Investment grade is determined by using the Standard &
Poors (S&P) rating. If a security is not rated by S&P,
the Moodys Investor Services (Moodys) rating is used.
Currently, all of the Companys fixed income securities are
rated by S&P or Moodys.  14




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##### Table of Contents



(a)
 Gross Unrealized Losses
    
    
    EstimatedJune 30, 2009
    
    AAA
    
    
    AA
    
    
    A
    
    
    BBB
    
    
    Total
    
    
    Count
    
    
    Fair ValueFixed income securities:Investment grade:U.S. Treasury
    
    $
    9
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    9
    
    
    
    1
    
    
    $
    3,658Obligations of states and political subdivisions
    
    
    2,053
    
    
    
    3,517
    
    
    
    1,993
    
    
    
    3,354
    
    
    
    10,917
    
    
    
    42
    
    
    
    219,057Corporate bonds
    
    
    8
    
    
    
    69
    
    
    
    1,241
    
    
    
    700
    
    
    
    2,018
    
    
    
    11
    
    
    
    41,441Collateralized mortgage obligations  commercial
    
    
    3,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,250
    
    
    
    7
    
    
    
    31,804Other asset-backed securities:Second mortgages/home
 equity loans  residential
    
    
    880
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    880
    
    
    
    1
    
    
    
    2,232Consumer credit receivables
    
    
    
    
    
    
    
    
    
    
    241
    
    
    
    
    
    
    
    241
    
    
    
    1
    
    
    
    4,758Total investment grade
    
    
    6,200
    
    
    
    3,586
    
    
    
    3,475
    
    
    
    4,054
    
    
    
    17,315
    
    
    
    63
    
    
    
    302,950Non-investment grade:Other asset-backed securities:Second mortgages/home 
equity loans  residential
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,708
    
    
    
    1
    
    
    
    1,755Total non-investment grade
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,708
    
    
    
    1
    
    
    
    1,755Total
    
    $
    6,200
    
    
    $
    3,586
    
    
    $
    3,475
    
    
    $
    4,054
    
    
    $
    19,023
    
    
    
    64
    
    
    $
    304,705
 
 (a)
    
    Securities are categorized using the S&P rating. If a security is not rated by
S&P, the Moodys rating is used. Currently, all of the Companys fixed income securities are
rated by S&P or Moodys.     15




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##### Table of Contents



3. Reinsurance
  Three Months Ended June 30,2009
    
    
    2008Written
    
    
    Earned
    
    
    Written
    
    
    EarnedDirect
    
    $
    92,019
    
    
    $
    87,293
    
    
    $
    95,317
    
    
    $
    88,578Assumed
    
    
    24,815
    
    
    
    25,252
    
    
    
    28,995
    
    
    
    27,741Ceded
    
    
    (6,719
    )
    
    
    (6,850
    )
    
    
    (7,935
    )
    
    
    (7,842
    )$
    110,115
    
    
    $
    105,695
    
    
    $
    116,377
    
    
    $
    108,477
 Six Months Ended June 30,2009
    
    
    2008Written
    
    
    Earned
    
    
    Written
    
    
    EarnedDirect
    
    $
    181,147
    
    
    $
    170,634
    
    
    $
    186,377
    
    
    $
    172,924Assumed
    
    
    46,812
    
    
    
    50,128
    
    
    
    54,560
    
    
    
    54,324Ceded
    
    
    (13,825
    )
    
    
    (13,916
    )
    
    
    (16,116
    )
    
    
    (16,130
    )$
    214,134
    
    
    $
    206,846
    
    
    $
    224,821
    
    
    $
    211,118
  16




---



##### Table of Contents



Three Months Ended June 30,2009
    
    
    2008$
    
    
    Ratio
    
    
    $
    
    
    RatioGross losses and loss adjustment expenses
    
    $
    32,745
    
    
    
    29.1
    %
    
    $
    31,433
    
    
    
    27.0
    %Ceded amounts
    
    
    (1,770
    )
    
    
    25.8
    %
    
    
    (4,043
    )
    
    
    51.6
    %Net losses and loss adjustment expenses
    
    $
    30,975
    
    
    
    29.3
    %
    
    $
    27,390
    
    
    
    25.2
    %
 Six Months Ended June 30,2009
    
    
    2008$
    
    
    Ratio
    
    
    $
    
    
    RatioGross losses and loss adjustment expenses
    
    $
    64,053
    
    
    
    29.0
    %
    
    $
    70,538
    
    
    
    31.0
    %Ceded amounts
    
    
    (3,490
    )
    
    
    25.1
    %
    
    
    (17,180
    )
    
    
    106.5
    %Net losses and loss adjustment expenses
    
    $
    60,563
    
    
    
    29.3
    %
    
    $
    53,358
    
    
    
    25.3
    %
  2009 Third Party Reinsurance
  2008 Third Party Reinsurance
  Related Party Reinsurance
  17




---



##### Table of Contents



18




---



##### Table of Contents



4. Fair Value of Financial Instruments
  
    
    Level 1  Quoted prices for identical instruments in active markets.
    
    Level 2  Quoted prices for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active; and model-derived
valuations in which all significant inputs are observable in active markets.
    
    Level 3  Valuations derived from valuation techniques in which one or more significant
inputs are unobservable.
   Fixed Income Securities
  Equity Securities
  Short-Term Investments
  19




---



##### Table of Contents



June 30, 2009Fair Value Measurements UsingAssets 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
    
    $
    33,965
    
    
    $
    
    
    
    $
    
    
    
    $
    33,965U.S. Agencies
    
    
    
    
    
    
    34,489
    
    
    
    
    
    
    
    34,489Collateralized mortgage obligations  residential
    
    
    
    
    
    
    34,329
    
    
    
    
    
    
    
    34,329Mortgage pass-through securities  residential
    
    
    
    
    
    
    63,459
    
    
    
    
    
    
    
    63,459Obligations of states and political subdivisions
    
    
    
    
    
    
    703,804
    
    
    
    
    
    
    
    703,804Corporate bonds
    
    
    
    
    
    
    192,684
    
    
    
    
    
    
    
    192,684Collateralized mortgage obligations  commercial
    
    
    
    
    
    
    31,804
    
    
    
    
    
    
    
    31,804Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    
    
    
    
    3,988
    
    
    
    
    
    
    
    3,988Consumer credit receivables
    
    
    
    
    
    
    17,089
    
    
    
    
    
    
    
    17,089Other
    
    
    
    
    
    
    11,201
    
    
    
    
    
    
    
    11,201Total fixed income securities
    
    
    33,965
    
    
    
    1,092,847
    
    
    
    
    
    
    
    1,126,812Equity securities at fair value
    
    
    1,425
    
    
    
    
    
    
    
    
    
    
    
    1,425Short-term
investments at fair value (a)
    
    
    27,502
    
    
    
    40,746
    
    
    
    
    
    
    
    68,248Total assets
    
    $
    62,892
    
    
    $
    1,133,593
    
    
    $
    
    
    
    $
    1,196,485
 
 (a)
    
    Includes commercial paper and money market funds. 20




---



##### Table of Contents



December 31, 2008Fair Value Measurements UsingAssets 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
    
    $
    36,659
    
    
    $
    
    
    
    $
    
    
    
    $
    36,659U.S. Agencies
    
    
    
    
    
    
    37,592
    
    
    
    
    
    
    
    37,592Collateralized mortgage obligations  residential
    
    
    
    
    
    
    36,655
    
    
    
    
    
    
    
    36,655Mortgage pass-through securities  residential
    
    
    
    
    
    
    73,692
    
    
    
    
    
    
    
    73,692Obligations of states and political subdivisions
    
    
    
    
    
    
    696,163
    
    
    
    
    
    
    
    696,163Corporate bonds
    
    
    
    
    
    
    93,476
    
    
    
    
    
    
    
    93,476Collateralized mortgage obligations  commercial
    
    
    
    
    
    
    29,378
    
    
    
    
    
    
    
    29,378Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    
    
    
    
    4,997
    
    
    
    
    
    
    
    4,997Consumer credit receivables
    
    
    
    
    
    
    15,531
    
    
    
    
    
    
    
    15,531Other
    
    
    
    
    
    
    10,503
    
    
    
    
    
    
    
    10,503Total fixed income securities
    
    
    36,659
    
    
    
    997,987
    
    
    
    
    
    
    
    1,034,646Equity securities at fair value
    
    
    1,231
    
    
    
    
    
    
    
    
    
    
    
    1,231Short-term investments at fair value (a)
    
    
    30,616
    
    
    
    49,990
    
    
    
    
    
    
    
    80,606Total assets
    
    $
    68,506
    
    
    $
    1,047,977
    
    
    $
    
    
    
    $
    1,116,483
 
 (a)
    
    Includes commercial paper and money market funds. 5. Reserves for Losses and Loss Adjustment Expenses
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Reserves at beginning of period:Gross
    
    $
    453,724
    
    
    $
    482,188
    
    
    $
    428,724
    
    
    $
    472,842Ceded reinsurance
    
    
    91,659
    
    
    
    157,547
    
    
    
    83,691
    
    
    
    150,496Net reserves at beginning of period
    
    
    362,065
    
    
    
    324,641
    
    
    
    345,033
    
    
    
    322,346Net incurred loss and loss adjustment expenses:Provision for insured events of current year
    
    
    30,979
    
    
    
    27,453
    
    
    
    60,616
    
    
    
    53,419Decrease in provision for insured events of prior years
    
    
    (4
    )
    
    
    (63
    )
    
    
    (53
    )
    
    
    (61
    )Total net incurred
    
    
    30,975
    
    
    
    27,390
    
    
    
    60,563
    
    
    
    53,358Net payments attributable to:Current year events
    
    
    2,825
    
    
    
    1,725
    
    
    
    3,606
    
    
    
    2,540Prior year events
    
    
    11,199
    
    
    
    7,561
    
    
    
    22,974
    
    
    
    30,419Total net payments
    
    
    14,024
    
    
    
    9,286
    
    
    
    26,580
    
    
    
    32,959Net reserves at end of period
    
    
    379,016
    
    
    
    342,745
    
    
    
    379,016
    
    
    
    342,745Ceded reinsurance at end of period
    
    
    40,796
    
    
    
    152,296
    
    
    
    40,796
    
    
    
    152,296Gross reserves at end of period
    
    $
    419,812
    
    
    $
    495,041
    
    
    $
    419,812
    
    
    $
    495,041
 6. Debt
  21




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##### Table of Contents



7. Employee Benefits
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net periodic benefit cost:Service cost
    
    $
    53
    
    
    $
    59
    
    
    $
    106
    
    
    $
    118Interest cost
    
    
    135
    
    
    
    145
    
    
    
    269
    
    
    
    290Amortization of prior service cost
    
    
    (41
    )
    
    
    (26
    )
    
    
    (81
    )
    
    
    (53
    )Net amortization of actuarial loss
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    12Net periodic benefit cost
    
    $
    147
    
    
    $
    184
    
    
    $
    294
    
    
    $
    367
  22




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##### Table of Contents



8. Commitments and Contingencies
  9. Income Taxes
   10. Stockholders Equity
  Equity Compensation Plans
      23




---



##### Table of Contents



WeightedAverageShares
    
    ExerciseSubject
    
    Price PerTo Option
    
    ShareOutstanding options at January 1, 2008
    
    
    1,054,588
    
    
    $
    14.53Options granted
    
    
    259,380
    
    
    $
    16.35Options forfeited
    
    
    (20,060
    )
    
    $
    16.79Options expired
    
    
    (4,700
    )
    
    $
    12.11Options exercised
    
    
    (16,300
    )
    
    $
    11.32Outstanding options at June 30, 2008
    
    
    1,272,908
    
    
    $
    14.92Outstanding 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
    
    
    $
    15.76
  WeightedShares
    
    AverageSubject
    
    Grant DateTo Option
    
    Fair ValueNon-vested options at January 1, 2008
    
    
    554,557
    
    
    $
    7.23Options granted
    
    
    259,380
    
    
    $
    6.32Options vested
    
    
    (79,085
    )
    
    $
    9.04Options forfeited
    
    
    (20,060
    )
    
    $
    6.87Non-vested options at June 30, 2008
    
    
    714,792
    
    
    $
    6.71Non-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
    
    
    $
    7.76
  Options Vested or Expected to VestWeighted
    
    
    
    
    
    Weighted AverageAverage
    
    Aggregate
    
    RemainingNumber
    
    Exercise Price
    
    Intrinsic Value
    
    Contractual LifeJune 30, 2009
    
    
    1,270,966
    
    
    $
    15.58
    
    
    $
    993,191
    
    
    6.9 years
 Options ExercisableWeighted
    
    
    
    
    
    Weighted AverageAverage
    
    Aggregate
    
    RemainingNumber
    
    Exercise Price
    
    Intrinsic Value
    
    Contractual LifeJune 30, 2009
    
    
    729,502
    
    
    $
    13.94
    
    
    $
    962,683
    
    
    5.8 years
  24




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##### Table of Contents



CNA SURETY CORPORATION AND SUBSIDIARIES
 
 ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 General
  Critical Accounting Policies
  Reserves for Unpaid Losses and Loss Adjustment Expenses and Reinsurance
     25




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##### Table of Contents



Gross Case Loss
    
    
    Gross IBNR Loss
    
    
    Total Grossand LAE Reserves
    
    
    and LAE Reserves
    
    
    ReservesContract
    
    $
    45,982
    
    
    $
    253,893
    
    
    $
    299,875Commercial
    
    
    53,448
    
    
    
    51,283
    
    
    
    104,731Fidelity and other
    
    
    4,586
    
    
    
    10,620
    
    
    
    15,206Total
    
    $
    104,016
    
    
    $
    315,796
    
    
    $
    419,812
       
    
    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; and
    
    Current economic conditions, especially corporate default rates and the condition of the construction economy.
 26




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##### Table of Contents



Investments
      27




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##### Table of Contents



Intangible Assets
   Insurance Premiums
  Deferred Policy Acquisitions Costs
  Results of Operations
 Financial Measures
    28




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##### Table of Contents



Comparison of CNA Surety Actual Results for the Three and Six Months Ended June 30, 2009 and 2008
 Analysis of Net Income
    Results of Insurance Operations
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Gross written premiums
    
    $
    116,834
    
    
    $
    124,312
    
    
    $
    227,959
    
    
    $
    240.937Net written premiums
    
    $
    110,115
    
    
    $
    116,377
    
    
    $
    214,134
    
    
    $
    224,821Net earned premiums
    
    $
    105,695
    
    
    $
    108,477
    
    
    $
    206,846
    
    
    $
    211,118Net losses and loss adjustment expenses
    
    $
    30,975
    
    
    $
    27,390
    
    
    $
    60,563
    
    
    $
    53,358Net commissions, brokerage and other expenses
    
    $
    55,917
    
    
    $
    57,825
    
    
    $
    110,195
    
    
    $
    113,112Loss ratio
    
    
    29.3
    %
    
    
    25.2
    %
    
    
    29.3
    %
    
    
    25.3
    %Expense ratio
    
    
    52.9
    
    
    
    53.3
    
    
    
    53.3
    
    
    
    53.6Combined ratio
    
    
    82.2
    %
    
    
    78.5
    %
    
    
    82.6
    %
    
    
    78.9
    %
 Premiums Written/Earned
   29




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##### Table of Contents



Three Months Ended June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Contract
    
    $
    76,129
    
    
    $
    83,396
    
    
    $
    143,484
    
    
    $
    155,348Commercial
    
    
    33,438
    
    
    
    33,266
    
    
    
    68,416
    
    
    
    68,861Fidelity and other
    
    
    7,267
    
    
    
    7,650
    
    
    
    16,059
    
    
    
    16,728$
    116,834
    
    
    $
    124,312
    
    
    $
    227,959
    
    
    $
    240,937
     Three Months Ended June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Contract
    
    $
    70,127
    
    
    $
    76,206
    
    
    $
    131,152
    
    
    $
    140,798Commercial
    
    
    32,721
    
    
    
    32,521
    
    
    
    66,923
    
    
    
    67,295Fidelity and other
    
    
    7,267
    
    
    
    7,650
    
    
    
    16,059
    
    
    
    16,728$
    110,115
    
    
    $
    116,377
    
    
    $
    214,134
    
    
    $
    224,821
    Three Months Ended June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Contract
    
    $
    65,207
    
    
    $
    67,708
    
    
    $
    126,499
    
    
    $
    130,498Commercial
    
    
    32,821
    
    
    
    32,917
    
    
    
    65,038
    
    
    
    64,994Fidelity and other
    
    
    7,667
    
    
    
    7,852
    
    
    
    15,309
    
    
    
    15,626$
    105,695
    
    
    $
    108,477
    
    
    $
    206,846
    
    
    $
    211,118
  30




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Net Loss Ratio
  Expense Ratio
  Investment Income and Realized Investment Gains/Losses
    Three Months Ended June 30
    
    
    Six Months Ended June 302009
    
    
    2008
    
    
    2009
    
    
    2008Net realized investment gains (losses):Fixed income securities:Gross realized investment gains
    
    $
    43
    
    
    $
    
    
    
    $
    43
    
    
    $
    Gross realized investment losses:Other-than-temporary impairment losses
    
    
    (116
    )
    
    
    
    
    
    
    (116
    )
    
    
    Realized losses from sales
    
    
    
    
    
    
    (19
    )
    
    
    
    
    
    
    (19
    )Total gross realized investment losses
    
    
    (116
    )
    
    
    (19
    )
    
    
    (116
    )
    
    
    (19
    )Net realized investment losses on fixed income securities
    
    
    (73
    )
    
    
    (19
    )
    
    
    (73
    )
    
    
    (19
    )Equity securities:Gross realized investment gains
    
    
    27
    
    
    
    8
    
    
    
    27
    
    
    
    10Gross realized investment losses:Other-than-temporary impairment losses
    
    
    
    
    
    
    
    
    
    
    (46
    )
    
    
    Realized losses from sales
    
    
    
    
    
    
    (9
    )
    
    
    (20
    )
    
    
    (20
    )Total gross realized investment losses
    
    
    
    
    
    
    (9
    )
    
    
    (66
    )
    
    
    (20
    )Net realized investment gains (losses) on equity securities
    
    
    27
    
    
    
    (1
    )
    
    
    (39
    )
    
    
    (10
    )Other
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )Net realized investment losses
    
    $
    (47
    )
    
    $
    (21
    )
    
    $
    (113
    )
    
    $
    (30
    )
  31




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##### Table of Contents



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




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##### Table of Contents



2008 Third Party Reinsurance
  Related Party Reinsurance
       33




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##### Table of Contents



Liquidity and Capital Resources
     34




---



##### Table of Contents



35




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##### Table of Contents



Contractual Obligations as of June 30, 2009
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    Thereafter
    
    
    TotalDebt (a)
    
    $
    0.7
    
    
    $
    1.3
    
    
    $
    1.3
    
    
    $
    1.3
    
    
    $
    1.3
    
    
    $
    57.9
    
    
    $
    63.8Operating leases
    
    
    1.1
    
    
    
    2.0
    
    
    
    1.9
    
    
    
    0.9
    
    
    
    
    
    
    
    
    
    
    
    5.9Loss and loss adjustment expense reserves
    
    
    61.6
    
    
    
    124.1
    
    
    
    91.4
    
    
    
    46.8
    
    
    
    30.2
    
    
    
    65.7
    
    
    
    419.8Other long-term liabilities (b)
    
    
    0.3
    
    
    
    1.1
    
    
    
    0.9
    
    
    
    0.6
    
    
    
    0.4
    
    
    
    9.1
    
    
    
    12.4Total
    
    $
    63.7
    
    
    $
    128.5
    
    
    $
    95.5
    
    
    $
    49.6
    
    
    $
    31.9
    
    
    $
    132.7
    
    
    $
    501.9
 
 (a)
    
    Reflects expected principal and interest payments.(b)
    
    Reflects unfunded postretirement benefit plans and long-term incentive plan payments to
certain executives.      36




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Insurance Regulation and Supervision
  Financial Condition
 Investment Portfolio
  Gross
    
    
    Gross Unrealized LossesAmortized Cost
    
    
    Unrealized
    
    
    Less Than
    
    
    More Than
    
    
    Estimated
    
    
    UnrealizedJune 30, 2009
    
    or Cost
    
    
    Gains
    
    
    12 Months
    
    
    12 Months
    
    
    Fair Value
    
    

OTTI
LossesFixed income securities:U.S. Treasury securities and obligations of
U.S. Government and agencies:U.S. Treasury
    
    $
    32,770
    
    
    $
    1,204
    
    
    $
    (9
    )
    
    $
 
    
    
    $
    33,965
    
    
    $
 U.S. Agencies
    
    
    33,868
    
    
    
    621
    
    
    
 
    
    
    
 
    
    
    
    34,489
    
    
    
 Collateralized mortgage obligations  residential
    
    
    32,992
    
    
    
    1,337
    
    
    
 
    
    
    
 
    
    
    
    34,329
    
    
    
 Mortgage pass-through securities  residential
    
    
    61,453
    
    
    
    2,006
    
    
    
 
    
    
    
 
    
    
    
    63,459
    
    
    
 Obligations of states and political subdivisions
    
    
    690,451
    
    
    
    24,270
    
    
    
    (1,769
    )
    
    
    (9,148
    )
    
    
    703,804
    
    
    
 Corporate bonds
    
    
    188,342
    
    
    
    6,360
    
    
    
    (969
    )
    
    
    (1,049
    )
    
    
    192,684
    
    
    
 Collateralized mortgage obligations  commercial
    
    
    35,054
    
    
    
 
    
    
    
    (121
    )
    
    
    (3,129
    )
    
    
    31,804
    
    
    
 Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    6,576
    
    
    
 
    
    
    
 
    
    
    
    (2,588
    )
    
    
    3,988
    
    
    
    (1,708
    )Consumer credit receivables
    
    
    16,766
    
    
    
    564
    
    
    
 
    
    
    
    (241
    )
    
    
    17,089
    
    
    
 Other
    
    
    10,735
    
    
    
    466
    
    
    
 
    
    
    
 
    
    
    
    11,201
    
    
    
 Total fixed income securities
    
    
    1,109,007
    
    
    
    36,828
    
    
    
    (2,868
    )
    
    
    (16,155
    )
    
    
    1,126,812
    
    
    $
    (1,708
    )Equity securities
    
    
    1,344
    
    
    
    81
    
    
    
 
    
    
    
 
    
    
    
    1,425Total
    
    $
    1,110,351
    
    
    $
    36,909
    
    
    $
    (2,868
    )
    
    $
    (16,155
    )
    
    $
    1,128,237
 37




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Gross
    
    
    Gross Unrealized LossesAmortized Cost
    
    
    Unrealized
    
    
    Less Than
    
    
    More Than
    
    
    EstimatedDecember 31, 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
    
    $
    33,140
    
    
    $
    3,519
    
    
    $
    
    
    
    $
    
    
    
    $
    36,659U.S. Agencies
    
    
    36,476
    
    
    
    1,116
    
    
    
    
    
    
    
    
    
    
    
    37,592Collateralized mortgage obligations  residential
    
    
    35,671
    
    
    
    984
    
    
    
    
    
    
    
    
    
    
    
    36,655Mortgage pass-through securities  residential
    
    
    72,203
    
    
    
    1,489
    
    
    
    
    
    
    
    
    
    
    
    73,692Obligations of states and political subdivisions
    
    
    697,305
    
    
    
    19,730
    
    
    
    (6,929
    )
    
    
    (13,943
    )
    
    
    696,163Corporate bonds
    
    
    96,048
    
    
    
    1,711
    
    
    
    (2,430
    )
    
    
    (1,853
    )
    
    
    93,476Collateralized mortgage obligations  commercial
    
    
    35,025
    
    
    
    
    
    
    
    (2,040
    )
    
    
    (3,607
    )
    
    
    29,378Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    7,956
    
    
    
    
    
    
    
    (779
    )
    
    
    (2,180
    )
    
    
    4,997Consumer credit receivables
    
    
    17,239
    
    
    
    
    
    
    
    (1,708
    )
    
    
    
    
    
    
    15,531Other
    
    
    10,753
    
    
    
    23
    
    
    
    (273
    )
    
    
    
    
    
    
    10,503Total fixed income securities
    
    
    1,041,816
    
    
    
    28,572
    
    
    
    (14,159
    )
    
    
    (21,583
    )
    
    
    1,034,646Equity securities
    
    
    1,231
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,231Total
    
    $
    1,043,047
    
    
    $
    28,572
    
    
    $
    (14,159
    )
    
    $
    (21,583
    )
    
    $
    1,035,877
  % ofEstimated
    
    % ofFair
    
    UnrealizedContractual Maturity
    
    Value
    
    LossDue after one year through five years
    
    
    11
    %
    
    
    6
    %Due after five years through ten years
    
    
    22
    
    
    
    12Due after ten years
    
    
    54
    
    
    
    50Asset-backed securities
    
    
    13
    
    
    
    32Total
    
    
    100
    %
    
    
    100
    %
  June 30, 2009
    
    
    December 31, 2008Gross
    
    
    
    
    
    
    GrossEstimated
    
    
    Unrealized
    
    
    Estimated
    
    
    UnrealizedUnrealized Loss Aging
    
    Fair Value
    
    
    Loss
    
    
    Fair Value
    
    
    LossFixed income securities:Investment grade(a):0-6 months
    
    $
    136,874
    
    
    $
    2,354
    
    
    $
    109,973
    
    
    $
    3,0957-12 months
    
    
    22,724
    
    
    
    514
    
    
    
    121,419
    
    
    
    11,06413-24 months
    
    
    46,733
    
    
    
    2,921
    
    
    
    81,395
    
    
    
    12,010Greater than 24 months
    
    
    96,619
    
    
    
    11,526
    
    
    
    33,450
    
    
    
    9,573Total investment grade
    
    
    302,950
    
    
    
    17,315
    
    
    
    346,237
    
    
    
    35,742Non-investment grade:Greater than 24 months
    
    
    1,755
    
    
    
    1,708
    
    
    
    
    
    
    
    Total
    
    $
    304,705
    
    
    $
    19,023
    
    
    $
    346,237
    
    
    $
    35,742
 
 (a)
    
    Investment grade is determined by using the Standard & Poors (S&P) rating. If a
security is not rated by S&P, the Moodys Investor Services (Moodys) rating is used. Currently,
all of the Companys fixed income securities are rated by S&P or Moodys.  38




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39




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##### Table of Contents



(a)
 Gross Unrealized Losses
    
    
    EstimatedJune 30, 2009
    
    AAA
    
    
    AA
    
    
    A
    
    
    BBB
    
    
    Total
    
    
    Count
    
    
    Fair ValueFixed income securities:Investment grade:U.S. Treasury
    
    $
    9
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    9
    
    
    
    1
    
    
    $
    3,658Obligations of states and political subdivisions
    
    
    2,053
    
    
    
    3,517
    
    
    
    1,993
    
    
    
    3,354
    
    
    
    10,917
    
    
    
    42
    
    
    
    219,057Corporate bonds
    
    
    8
    
    
    
    69
    
    
    
    1,241
    
    
    
    700
    
    
    
    2,018
    
    
    
    11
    
    
    
    41,441Collateralized mortgage obligations  commercial
    
    
    3,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,250
    
    
    
    7
    
    
    
    31,804Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    880
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    880
    
    
    
    1
    
    
    
    2,232Consumer credit receivables
    
    
    
    
    
    
    
    
    
    
    241
    
    
    
    
    
    
    
    241
    
    
    
    1
    
    
    
    4,758Total investment grade
    
    
    6,200
    
    
    
    3,586
    
    
    
    3,475
    
    
    
    4,054
    
    
    
    17,315
    
    
    
    63
    
    
    
    302,950Non-investment grade:Other asset-backed securities:Second mortgages/home equity loans  residential
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,708
    
    
    
    1
    
    
    
    1,755Total non-investment grade
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,708
    
    
    
    1
    
    
    
    1,755Total
    
    $
    6,200
    
    
    $
    3,586
    
    
    $
    3,475
    
    
    $
    4,054
    
    
    $
    19,023
    
    
    
    64
    
    
    $
    304,705
 
 (a)
    
    Securities are categorized using the S&P rating. If a security is not rated by
S&P, the Moodys rating is used. Currently, all of the Companys fixed income securities are
rated by S&P or Moodys.      40




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##### Table of Contents



Impact of Pending Accounting Standards
    FORWARD-LOOKING STATEMENTS
  41




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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 further changes in the Companys ratings by ratings agencies,
including the inability to access certain markets or distribution channels and the required
collateralization of future payment obligations as a result of such changes, and changes in
rating agency policies and practices.
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  42




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##### Table of Contents



HypotheticalEstimated Fair
    
    
    PercentageHypothetical
    
    
    Value After
    
    
    IncreaseFair Value at
    
    
    Change in
    
    
    Hypothetical
    
    
    (Decrease) inJune 30,
    
    
    Interest Rate
    
    
    Change in
    
    
    Stockholders2009
    
    
    (bp=basis points)
    
    
    Interest Rate
    
    
    Equity(Dollars in thousands)U.S. Government and government agencies and
authorities
    
    $
    166,242
    
    
    200 bp increase
    
    $
    154,870
    
    
    
    (0.9
    )%150 bp increase
    
    
    157,967
    
    
    
    (0.6
    )100 bp increase
    
    
    160,947
    
    
    
    (0.4
    )50 bp increase
    
    
    163,760
    
    
    
    (0.2
    )States, municipalities and political subdivisions
    
    
    703,804
    
    
    200 bp increase
    
    
    618,970
    
    
    
    (6.7
    )150 bp increase
    
    
    638,364
    
    
    
    (5.1
    )100 bp increase
    
    
    661,434
    
    
    
    (3.3
    )50 bp increase
    
    
    682,255
    
    
    
    (1.7
    )Corporate bonds
    
    
    192,684
    
    
    200 bp increase
    
    
    172,805
    
    
    
    (1.6
    )150 bp increase
    
    
    177,498
    
    
    
    (1.2
    )100 bp increase
    
    
    182,370
    
    
    
    (0.8
    )50 bp increase
    
    
    187,429
    
    
    
    (0.4
    )Mortgage-backed and asset-backed
    
    
    64,082
    
    
    200 bp increase
    
    
    60,886
    
    
    
    (0.3
    )150 bp increase
    
    
    61,659
    
    
    
    (0.2
    )100 bp increase
    
    
    62,450
    
    
    
    (0.1
    )50 bp increase
    
    
    63,257
    
    
    
    (0.1
    )Total fixed income securities available-for-sale
    
    $
    1,126,812
    
    
    200 bp increase
    
    
    1,007,531
    
    
    
    (9.4
    )150 bp increase
    
    
    1,035,488
    
    
    
    (7.2
    )100 bp increase
    
    
    1,067,201
    
    
    
    (4.7
    )50 bp increase
    
    
    1,096,701
    
    
    
    (2.4
    )
 43




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##### Table of Contents



HypotheticalEstimated Fair
    
    
    PercentageHypothetical
    
    
    Value After
    
    
    IncreaseFair Value at
    
    
    Change in
    
    
    Hypothetical
    
    
    (Decrease) inDecember 31,
    
    
    Interest Rate
    
    
    Change in
    
    
    Stockholders2008
    
    
    (bp=basis points)
    
    
    Interest Rate
    
    
    Equity(Dollars in thousands)U.S. Government and government agencies and
authorities
    
    $
    184,598
    
    
    200 bp increase
    
    $
    172,966
    
    
    
    (1.0
    )%100 bp increase
    
    
    179,485
    
    
    
    (0.4
    )100 bp decrease
    
    
    187,485
    
    
    
    0.2200 bp decrease
    
    
    189,197
    
    
    
    0.4States, municipalities and political subdivisions
    
    
    696,163
    
    
    200 bp increase
    
    
    613,030
    
    
    
    (7.0
    )100 bp increase
    
    
    652,614
    
    
    
    (3.7
    )100 bp decrease
    
    
    743,635
    
    
    
    4.0200 bp decrease
    
    
    786,829
    
    
    
    7.7Corporate bonds
    
    
    93,476
    
    
    200 bp increase
    
    
    84,743
    
    
    
    (0.7
    )100 bp increase
    
    
    88,962
    
    
    
    (0.4
    )100 bp decrease
    
    
    98,115
    
    
    
    0.4200 bp decrease
    
    
    101,424
    
    
    
    0.7Mortgage-backed and asset-backed
    
    
    60,409
    
    
    200 bp increase
    
    
    56,769
    
    
    
    (0.3
    )100 bp increase
    
    
    58,563
    
    
    
    (0.2
    )100 bp decrease
    
    
    62,039
    
    
    
    0.1200 bp decrease
    
    
    62,557
    
    
    
    0.2Total fixed income securities available-for-sale
    
    $
    1,034,646
    
    
    200 bp increase
    
    
    927,508
    
    
    
    (9.1
    )100 bp increase
    
    
    979,624
    
    
    
    (4.7
    )100 bp decrease
    
    
    1,091,274
    
    
    
    4.8200 bp decrease
    
    
    1,140,007
    
    
    
    8.9
 
 ITEM 4. CONTROLS AND PROCEDURES
    
 PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 
 ITEM 1a. RISK FACTORS
 44




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##### Table of Contents



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 NumberForm of Commutation and Release Agreement as
respects certain business under the Surety Quota Share
Reinsurance Contract by and between Western Surety
Company and Continental Casualty Company (filed on
February 19, 2008 as Exhibit 10(38) to CNA Surety
Corporations Form 10-K, and incorporated herein by
reference)
    
    
    10
    (40)Form of Termination Addendum to Surety Excess of Loss
Reinsurance Contract by and between Western Surety
Company, Universal Surety of America and Surety Bonding
Company of America and Continental Casualty Company
(filed on March 1, 2005 as Exhibit 10(13) to CNA Surety
Corporations Form 10-K, and incorporated herein by
reference)
    
    
    10
    (41)Form of Addendum No. 1 to the Services and Indemnity
Agreement by and between Western Surety Company and
Continental Casualty Company (filed on November 14,
2002 as Exhibit 10(5) to CNA Surety Corporations
Form 10-Q, and incorporated herein by reference)
    
    
    10
    (42)Form of Administrative Services Agreement by and
between Western Surety Company and Continental Casualty
Company
    
    
    10
    (43)Certification of Chief Executive Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
    
    
    31
    (1)Certification of Chief Financial Officer pursuant to 18
U.S.C. 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
    
    
    31
    (2)Certification 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. 45




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##### Table of Contents



CNA SURETY CORPORATION (Registrant)/s/ John F. Welch

John F. WelchPresident and Chief Executive Officer/s/ John F. Corcoran

John F. CorcoranSenior Vice President and Chief Financial OfficerDate: July 31, 2009
 46




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##### Table of Contents



10(40)
    
    Form of Commutation and Release Agreement as respects certain business under the Surety
Quota Share Reinsurance Contract by and between Western Surety Company and Continental
Casualty Company (filed on February 19, 2008 as Exhibit 10(38) to CNA Surety Corporations
Form 10-K, and incorporated herein by reference).10(41)
    
    Form of Termination Addendum to Surety Excess of Loss Reinsurance Contract by and between
Western Surety Company, Universal Surety of America and Surety Bonding Company of America and
Continental Casualty Company (filed on March 1, 2005 as Exhibit 10(13) to CNA Surety
Corporations Form 10-K, and incorporated herein by reference).10(42)
    
    Form of Addendum No.1 to the Services and Indemnity Agreement by and between Western Surety
Company and Continental Casualty Company (filed on November 14, 2002 as Exhibit 10(5) to CNA
Surety Corporations Form 10-Q, and incorporated herein by reference).10(43)
    
    Form of Administrative Services Agreement by and between Western Surety Company and
Continental Casualty Company.31(1)
    
    Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  Chief Executive Officer.31(2)
    
    Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  Chief Financial Officer.32(1)
    
    Certification
pursuant to 18
U.S.C. Section
1350, as adopted
pursuant to Section
906 of the
Sarbanes-Oxley Act
of 2002  Chief Executive Officer.32(2)
    
    Certification
pursuant to 18
U.S.C. Section
1350, as adopted
pursuant to Section
906 of the
Sarbanes-Oxley Act
of 2002  Chief Financial Officer.
 47