<PAGE>   1
                                    FORM 10-Q


                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   ----------

           [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                  For the quarterly period ended JUNE 30, 2001

                                       OR

          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934


                         Commission file number: 1-13277


                             CNA SURETY CORPORATION
             (Exact name of Registrant as specified in its Charter)

<TABLE>
<S>                                                                              <C>
                            DELAWARE                                                           36-4144905
(State or other jurisdiction of incorporation or organization)                   (I.R.S. Employer Identification No.)

                 CNA PLAZA, CHICAGO, ILLINOIS                                                    60685
           (Address of principal executive offices)                                           (Zip Code)
</TABLE>

                                 (312) 822-5000
              (Registrant's telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No


                      APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:

     42,755,454 shares of Common Stock, $.01 par value as of August 3, 2001.


<PAGE>   2

                     CNA SURETY CORPORATION AND SUBSIDIARIES



                                      INDEX

<TABLE>
<CAPTION>
                                                                                                                     Page
                                                                                                                     ----
<S>        <C>     <C>                                                                                               <C>
 Part I.   Financial Information (Unaudited):

           Item 1. Condensed Consolidated Financial Statements:

                   Independent Accountants' Report................................................................     3

                   Condensed Consolidated Balance Sheets at June 30, 2001 and
                   at December 31, 2000...........................................................................     4

                   Condensed Consolidated Statements of Income for the Three- and Six- Months
                   Ended June 30, 2001 and 2000...................................................................     5

                   Condensed Consolidated Statements of Stockholders' Equity for the Six
                   Months Ended June 30, 2001 and 2000............................................................     6

                   Condensed Consolidated Statements of Cash Flows for the Six Months Ended
                   June 30, 2001 and 2000.........................................................................     7

                   Notes to Condensed Consolidated Financial Statements at June 30, 2001 .........................     8

           Item 2. Management's Discussion and Analysis of Financial Condition and
                   Results of Operations..........................................................................    12

 Part II.  Other Information:

           Item 1. Legal Proceedings..............................................................................    21

           Item 2. Changes in the Rights of the Company's Security Holders........................................    21

           Item 3. Defaults Upon Senior Securities................................................................    21

           Item 4. Submission of Matters to a Vote of Security Holders............................................    21

           Item 5. Other Information..............................................................................    22

           Item 6. Exhibits and Reports on Form 8-K ..............................................................    22
</TABLE>


                                       2
<PAGE>   3

INDEPENDENT ACCOUNTANTS' REPORT



To the Board of Directors and Stockholders of
CNA Surety Corporation
Chicago, Illinois

We have reviewed the accompanying condensed consolidated balance sheet of CNA
Surety Corporation and subsidiaries as of June 30, 2001, and the related
condensed consolidated statements of income for the three-month and six-month
periods ended June 30, 2001 and 2000 and the related condensed consolidated
statements of stockholders' equity and of cash flows for the six-month periods
ended June 30, 2001 and 2000. These financial statements are the responsibility
of the Corporation's management.

We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.

We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of CNA
Surety Corporation and subsidiaries as of December 31, 2000, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended (not presented herein); and in our report dated February 12,
2001, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 2000 is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.



Deloitte & Touche LLP
Chicago, Illinois
July 30, 2001


                                       3
<PAGE>   4

                     CNA SURETY CORPORATION AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                  (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                        (Unaudited)
                                                                                           June 30,    December 31,
                                                                                            2001           2000
                                                                                        -----------      ---------
<S>                                                                                     <C>            <C>
ASSETS
Invested assets and cash:
  Fixed income securities, at fair value (amortized cost: $448,556 and $453,570) ....     $ 454,667      $ 458,284
  Equity securities, at fair value (cost: $41,703 and $37,761) ......................        36,694         33,927
  Short-term investments, at cost (approximates fair value) .........................        43,246         52,660
  Other investments, at fair value ..................................................         5,122          5,154
  Cash ..............................................................................         6,431          5,950
                                                                                          ---------      ---------
     Total invested assets and cash .................................................       546,160        555,975
Deferred policy acquisition costs ...................................................        95,381         91,403
Insurance receivables:
  Premiums, including $34,694 and $31,607 from affiliates ...........................        45,551         41,207
  Reinsurance, including $12,858 and $13,349 from affiliates ........................        84,665         75,330
Intangible assets  (net of accumulated amortization:  $22,474 and $19,426) ..........       146,834        149,882
Property and equipment, at cost (less accumulated
  depreciation: $14,810 and $13,677) ................................................        15,282         15,332
Prepaid reinsurance premiums ........................................................         4,913          2,532
Receivables for securities sold .....................................................            --         10,406
Other assets ........................................................................         7,881          8,501
                                                                                          ---------      ---------
       Total assets .................................................................     $ 946,667      $ 950,568
                                                                                          =========      =========


LIABILITIES
Reserves:
  Unpaid losses and loss adjustment expenses ........................................     $ 206,523      $ 204,457
  Unearned premiums .................................................................       202,411        202,179
                                                                                          ---------      ---------
     Total reserves .................................................................       408,934        406,636
Debt ................................................................................        76,556        101,556
Deferred income taxes, net ..........................................................        21,908         19,700
Payable for securities purchased ....................................................         4,384             --
Current income taxes payable ........................................................         4,665          6,820
Reinsurance and other payables to affiliates ........................................         7,233          8,117
Other liabilities ...................................................................        34,440         33,707
                                                                                          ---------      ---------
     Total liabilities ..............................................................     $ 558,120      $ 576,536
                                                                                          ---------      ---------

Commitments and contingencies (Note 4)


STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share, 20,000 shares authorized; none issued
  and outstanding ...................................................................            --             --
Common stock, par value $.01 per share, 100,000 shares authorized; 44,194 shares
  issued and 42,751 shares outstanding at June 30, 2001 and 44,146 shares issued
  and 42,702 shares outstanding at December 31, 2000 ................................           442            441
Additional paid-in capital ..........................................................       253,825        253,497
Retained earnings ...................................................................       149,338        135,308
Accumulated other comprehensive income ..............................................           423            267
Treasury stock, at cost .............................................................       (15,481)       (15,481)
                                                                                          ---------      ---------
     Total stockholders' equity .....................................................       388,547        374,032
                                                                                          ---------      ---------
     Total liabilities and stockholders' equity .....................................     $ 946,667      $ 950,568
                                                                                          =========      =========
</TABLE>

              The accompanying notes are an integral part of these
                  condensed consolidated financial statements.


                                       4
<PAGE>   5

                     CNA SURETY CORPORATION AND SUBSIDIARIES
                   CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                  (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                   Three Months Ended        Six Months Ended
                                                                         June 30,                 June 30,
                                                                 ---------------------     ---------------------
                                                                   2001         2000         2001         2000
                                                                 --------     --------     --------     --------
<S>                                                              <C>          <C>          <C>          <C>
Revenues:
  Net earned premiums ......................................     $ 78,850     $ 75,554     $155,599     $151,241
  Net investment income ....................................        7,480        7,267       15,215       14,468
  Net realized investment gains ............................          192          234          163          230
                                                                 --------     --------     --------     --------
                                                                   86,522       83,055      170,977      165,939
                                                                 --------     --------     --------     --------

Expenses:
  Net losses and loss adjustment expenses ..................       16,813       13,688       32,899       27,260
  Net commissions, brokerage and other underwriting ........       48,184       44,025       95,021       88,833
  Interest expense .........................................          957        1,729        2,545        3,350
  Non-recurring charge .....................................           --          500           --          500
  Amortization of intangible assets ........................        1,524        1,523        3,048        3,048
                                                                 --------     --------     --------     --------
                                                                   67,478       61,465      133,513      122,991
                                                                 --------     --------     --------     --------

Income before income taxes .................................       19,044       21,590       37,464       42,948
Income taxes ...............................................        6,701        7,483       13,177       14,728
                                                                 --------     --------     --------     --------
Net income .................................................     $ 12,343     $ 14,107     $ 24,287     $ 28,220
                                                                 ========     ========     ========     ========

Earnings per share .........................................     $   0.29     $   0.33     $   0.57     $   0.66
                                                                 ========     ========     ========     ========

Earnings per share, assuming dilution ......................     $   0.29     $   0.33     $   0.57     $   0.66
                                                                 ========     ========     ========     ========

Weighted average shares outstanding ........................       42,738       42,898       42,725       42,930
                                                                 ========     ========     ========     ========

Weighted average shares outstanding, assuming dilution .....       42,931       43,080       42,926       43,080
                                                                 ========     ========     ========     ========
</TABLE>


The accompanying notes are an integral part of these condensed consolidated
financial statements.


                                       5
<PAGE>   6

                     CNA SURETY CORPORATION AND SUBSIDIARIES
            CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                             (AMOUNTS IN THOUSANDS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                        Common                                               Accumulated
                                        Stock            Additional                             Other      Treasury       Total
                                        Shares    Common  Paid-In   Comprehensive Retained   Comprehensive   Stock    Stockholders'
                                      Outstanding  Stock  Capital       Income    Earnings   Income (Loss) (at cost)      Equity
                                      ----------- ------ ---------- ------------- ---------  ------------- ---------- -------------
<S>                                   <C>         <C>    <C>        <C>           <C>        <C>           <C>        <C>
Balance, December 31, 1999 ..........    43,006   $  441 $ 253,366                $  95,419    $ (11,150)  $ (11,772)   $ 326,304
Comprehensive income:
  Net income ........................        --       --        --    $  28,220      28,220           --          --       28,220
Other comprehensive income:
  Change in unrealized gains on
  securities (after income taxes),
  net of reclassification
  adjustment of $375 ................        --       --        --        1,837          --        1,837          --        1,837
                                                                      ---------
     Total comprehensive income .....                                 $  30,057
                                                                      =========
Purchase of treasury stock ..........      (110)      --        --                       --           --      (1,210)      (1,210)
Stock options exercised and other ...         3       --        23                       --           --          --           23
Dividends paid to stockholders ......        --       --        --                   (6,863)          --          --       (6,863)
                                       --------   ------ ---------                ---------    ---------   ---------    ---------
Balance, June 30, 2000 ..............    42,899   $  441 $ 253,389                $ 116,776    $  (9,313)  $ (12,982)   $ 348,311
                                       ========   ====== =========                =========    =========   =========    =========

Balance, December 31, 2000 ..........    42,702   $  441 $ 253,497                $ 135,308    $     267   $ (15,481)   $ 374,032
Comprehensive income:
  Net income ........................        --       --        --    $  24,287      24,287           --          --       24,287
Other comprehensive income:
  Change in unrealized gains on
  securities (after income taxes),
  net of reclassification
  adjustment of $152.................        --       --        --          156          --          156          --          156
                                                                      ---------
     Total comprehensive income .....                                 $  24,443
                                                                      =========

Purchase of treasury stock ..........        --       --        --                       --           --          --           --
Stock options exercised and other ...        49        1       328                       --           --          --          329
Dividends paid to stockholders ......        --       --        --                  (10,257)          --          --      (10,257)
                                       --------   ------ ---------                ---------    ---------   ---------    ---------
Balance, June 30, 2001 ..............    42,751   $  442 $ 253,825                $ 149,338    $     423   $ (15,481)   $ 388,547
                                       ========   ====== =========                =========    =========   =========    =========
</TABLE>

              The accompanying notes are an integral part of these
                  condensed consolidated financial statements.


                                       6
<PAGE>   7

                     CNA SURETY CORPORATION AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (AMOUNTS IN THOUSANDS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                               Six Months Ended
                                                                                                   June 30,
                                                                                            ----------------------
                                                                                              2001          2000
                                                                                            --------      --------
<S>                                                                                         <C>           <C>
OPERATING ACTIVITIES:
  Net income ..........................................................................     $ 24,287      $ 28,220
  Adjustments to reconcile net income to net cash provided by operating activities:
     Depreciation and amortization ....................................................        4,761         4,602
     Accretion of bond discount, net ..................................................          394           606
     Net realized investment losses ...................................................         (163)         (230)
  Changes in:
     Insurance receivables ............................................................      (13,679)        6,617
     Reserve for unearned premiums ....................................................          232         8,045
     Reserve for unpaid losses and loss adjustment expenses ...........................        2,066         8,236
     Deferred policy acquisition costs ................................................       (3,978)       (8,474)
     Deferred income taxes, net .......................................................        2,065         2,338
     Reinsurance and other payables to affiliates .....................................         (884)       (3,104)
     Other assets and liabilities, net ................................................       (2,716)       (8,225)
                                                                                            --------      --------

       Net cash provided by operating activities ......................................       12,385        38,631
                                                                                            --------      --------

INVESTING ACTIVITIES:
  Fixed income securities:
     Purchases ........................................................................      (72,060)      (70,472)
     Maturities .......................................................................       43,556        53,048
     Sales ............................................................................       33,287         7,197
  Purchases of equity securities ......................................................       (4,446)       (7,961)
  Proceeds from the sale of equity securities .........................................          505         5,621
  Changes in short-term investments ...................................................        9,414        (7,964)
  Purchases of property and equipment .................................................       (1,974)       (2,863)
  Changes in receivables/payables for securities sold/purchased, net ..................       14,791        (4,048)
  Other, net ..........................................................................           86           168
                                                                                            --------      --------

       Net cash provided by (used in) investing activities ............................       23,159       (27,274)
                                                                                            --------      --------

FINANCING ACTIVITIES:
  Principal payments on long-term debt ................................................      (25,000)           --
  Dividends to stockholders ...........................................................      (10,257)       (6,864)
  Purchase of treasury stock ..........................................................           --        (1,210)
  Other ...............................................................................          194            18
                                                                                            --------      --------

       Net cash used in financing activities ..........................................      (35,063)       (8,056)
                                                                                            --------      --------

Increase in cash ......................................................................          481         3,301
Cash at beginning of period ...........................................................        5,950         7,237
                                                                                            --------      --------
Cash at end of period .................................................................     $  6,431      $ 10,538
                                                                                            ========      ========

Supplemental Disclosure of Cash Flow Information:
  Cash paid during the period for:
     Interest .........................................................................     $  2,537      $  3,829
     Income taxes .....................................................................     $ 12,650      $ 13,050
</TABLE>


              The accompanying notes are an integral part of these
                  condensed consolidated financial statements.

                                       7
<PAGE>   8

                     CNA SURETY CORPORATION AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2001
                                   (UNAUDITED)

1.   SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation
     The consolidated financial statements include the accounts of CNA Surety
Corporation and all majority-owned subsidiaries.

Estimates
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Basis of Presentation
     These unaudited Condensed Consolidated Financial Statements should be read
in conjunction with the Consolidated Financial Statements and Notes thereto
included in the Company's 2000 Annual Report to Shareholders. Certain financial
information that is normally included in annual financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America, is not required for interim reporting and has been condensed or
omitted. The accompanying unaudited Condensed Consolidated Financial Statements
reflect, in the opinion of management, all adjustments necessary for a fair
presentation of the interim financial statements. All such adjustments are of a
normal and recurring nature. The financial results for interim periods may not
be indicative of financial results for a full year. Certain reclassifications
have been made to the 2000 Financial Statements to conform with the presentation
in the 2001 Condensed Consolidated Financial Statements.

Accounting Pronouncements
     In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 entitled "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133
was subsequently amended by SFAS No. 137, which delayed the effective date by
one year, and SFAS No. 138, which clarified four areas which were causing
difficulties in implementation. SFAS No. 133 requires the recognition of all
derivative financial instruments, including embedded derivative instruments, as
either assets or liabilities in the statement of financial position and
measurement of those instruments at fair value. The accounting for gains and
losses associated with changes in the fair value of a derivative and the effect
on the consolidated financial statements will depend on its hedge designation
and whether the hedge is highly effective in achieving offsetting changes in the
fair value or cash flows of the asset or liability hedged. If the derivative is
designated in a fair value hedge, the changes in the fair value of the
derivative and the hedged item will be recognized in earnings. If the derivative
is designated as a cash flow hedge, changes in the fair value of the derivative
will be recorded in other comprehensive income and will be recognized in the
income statement when the hedged item affects earnings. A derivative that does
not qualify as a hedge will be marked to fair value through earnings. The
transition adjustments resulting from adoption must be reported in net income or
other comprehensive income, as appropriate, as the cumulative effect of a change
in accounting principle. The Company has adopted this standard effective January
1, 2001, such adoption did not have an impact on the Company's financial
position or results of operations.


                                       8
<PAGE>   9
     In March of 1998, the National Association of Insurance Commissioners
adopted the Codification of Statutory Accounting Principles ("Codification").
Codification, which intends to standardize regulatory accounting and reporting
to state insurance departments, became effective on January 1, 2001. However,
statutory accounting principles will continue to be established by individual
state laws and permitted practices. The states in which CNA Surety's insurance
subsidiaries conduct business required adoption of Codification for the
preparation of statutory financial statements effective January 1, 2001. The
adoption of Codification increased the Company's statutory capital and surplus
as of January 1, 2001 by approximately $21.9 million.

     On April 1, 2001, the Company adopted Emerging Issues Task Force ("EITF")
Issue No. 99-20, RECOGNITION OF INTEREST INCOME AND IMPAIRMENT ON PURCHASED AND
RETAINED BENEFICIAL INTERESTS IN SECURITIZED FINANCIAL ASSETS ("EITF 99-20").
EITF 99-20 establishes how a transferor that retains an interest in securitized
financial assets or an enterprise that purchases a beneficial interest in
securitized financial assets or an enterprise that purchases a beneficial
interest in securitized financial assets should account for interest income and
impairment. This issue did not have a significant impact on the results of
operations or equity of the Company.

     In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 and No. 142 entitled
"Business Combinations" ("SFAS No. 141") and "Goodwill and Other Intangible
Assets" ("SFAS No. 142"), respectively. SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations subsequent to June
30, 2001 and specifies criteria for recognizing intangible assets acquired in a
business combination. SFAS No. 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually. Any impairment loss for the excess of the carrying
amount of an intangible asset over its fair value would be recognized as a
charge to operations. Intangible assets with definite useful lives will continue
to be amortized over their respective estimated useful lives. The Company plans
to adopt the provisions of Statement No. 142 effective January 1, 2002. The
Company has not completed a full analysis of the impact of SFAS No. 142, but
anticipates the adoption of SFAS No. 142 will have a favorable impact on the
Company's reported net income as amortization of goodwill, currently $5.1
million annually, will cease. The Company will have to review its accounting for
intangible assets and the related $1.0 million in annual amortization expense
under SFAS No. 142.


                                       9
<PAGE>   10

2.   INVESTMENTS

     The estimated amortized cost and fair value of fixed income securities held
by CNA Surety at June 30, 2001 and December 31, 2000, by investment category,
were as follows (dollars in thousands):

<TABLE>
<CAPTION>
                                                                           Gross       Gross
                                                        Amortized Cost  Unrealized   Unrealized   Estimated Fair
June 30, 2001                                              or Cost        Gains        Losses         Value
------------------------------------------------------  --------------  ----------   ----------   --------------
<S>                                                     <C>             <C>          <C>          <C>
Fixed income securities:
U.S. Treasury securities and obligations of
  U.S. Government and agencies:
     U.S. Treasury ...................................     $ 15,206      $    234     $    (82)     $ 15,358
     U.S. Agencies ...................................       55,567         1,379         (685)       56,261
     Collateralized mortgage obligations .............          652             3           (3)          652
     Mortgage pass-through securities ................       34,856           256         (214)       34,898
Obligations of states and political subdivisions .....      199,330         5,512         (607)      204,235
Corporate bonds ......................................       82,291         1,008       (1,529)       81,770
Non-agency collateralized mortgage obligations .......        7,293           125          (41)        7,377
Other asset-backed securities:
  Second mortgages/home equity loans .................       16,918           272            0        17,190
  Credit card receivables ............................       10,426           178         (104)       10,500
  Manufactured housing ...............................        7,540           235          (70)        7,705
  Other ..............................................        1,032            73           (1)        1,104
Redeemable preferred stock ...........................       17,445           196          (24)       17,617
                                                           --------      --------     --------      --------
     Total fixed income securities ...................      448,556         9,471       (3,360)      454,667

Equity securities ....................................       41,703         3,054       (8,063)       36,694
                                                           --------      --------     --------      --------
     Total ...........................................     $490,259      $ 12,525     $(11,423)     $491,361
                                                           ========      ========     ========      ========
</TABLE>

<TABLE>
<CAPTION>
                                                                           Gross       Gross
                                                        Amortized Cost   Unrealized  Unrealized   Estimated Fair
December 31, 2000                                          or Cost         Gains        Losses        Value
------------------------------------------------------  --------------   ----------  ----------   --------------
<S>                                                     <C>              <C>         <C>          <C>
Fixed income securities:
U.S. Treasury securities and obligations of
  U.S. Government and agencies:
     U.S. Treasury ...................................     $ 19,727       $    279     $     (8)     $ 19,998
     U.S. Agencies ...................................       52,760          1,835         (212)       54,383
     Collateralized mortgage obligations .............        1,098              1           (9)        1,090
     Mortgage pass-through securities ................       42,054            149         (189)       42,014
Obligations of states and political subdivisions .....      208,423          5,136         (929)      212,630
Corporate bonds ......................................       62,055            675       (2,011)       60,719
Non-agency collateralized mortgage obligations .......       12,319             70         (132)       12,257
Other asset-backed securities:
  Second mortgages/home equity loans .................       18,043            160         (210)       17,993
  Credit card receivables ............................       10,490            106           (5)       10,591
  Manufactured housing ...............................       12,967            143         (235)       12,875
  Other ..............................................        1,272             69           (3)        1,338
Redeemable preferred stock ...........................       12,362             89          (55)       12,396
                                                           --------       --------     --------      --------
     Total fixed income securities ...................      453,570          8,712       (3,998)      458,284

Equity securities ....................................       37,761          3,562       (7,396)       33,927
                                                           --------       --------     --------      --------
     Total ...........................................     $491,331       $ 12,274     $(11,394)     $492,211
                                                           ========       ========     ========      ========
</TABLE>


                                       10
<PAGE>   11

3.   REINSURANCE

     The effect of reinsurance on the Company's written and earned premium was
as follows (dollars in thousands):

<TABLE>
<CAPTION>
                                                                              Six Months Ended June 30,
                                                                -------------------------------------------------------
                                                                          2001                          2000
                                                                -------------------------    --------------------------
                                                                   Written       Earned        Written         Earned
                                                                -----------   -----------    -----------   ------------
<S>                                                             <C>           <C>            <C>           <C>
Direct........................................................  $    64,156   $    57,006    $    58,601   $     52,686
Assumed from affiliates.......................................       97,110       104,086        104,430        104,631
Ceded.........................................................       (7,815)       (5,493)        (5,442)        (6,076)
                                                                -----------   -----------    -----------    -----------
                                                                $   153,451   $   155,599    $   157,589    $   151,241
                                                                ===========   ===========    ===========    ===========
</TABLE>

     The effect of reinsurance on the Company's provision for loss and loss
adjustment expenses was as follows (dollars in thousands):

<TABLE>
<CAPTION>
                                                                                                Six Months Ended
                                                                                                    June 30,
                                                                                           --------------------------
                                                                                              2001            2000
                                                                                           -----------    -----------
<S>                                                                                        <C>            <C>
Gross losses and loss adjustment expenses...............................................   $    50,684    $    53,896
Ceded amounts...........................................................................       (17,785)       (26,636)
                                                                                           -----------    -----------
Net losses and loss adjustment expenses.................................................   $    32,899    $    27,260
                                                                                           ===========    ===========
</TABLE>

4.   COMMITMENTS AND CONTINGENCIES

     The Company and its subsidiaries are parties to various lawsuits arising in
the normal course of business, some seeking material damages. The Company
believes the resolution of these lawsuits will not have a material adverse
effect on its financial condition or its results of operations.


                                       11
<PAGE>   12

                     CNA SURETY CORPORATION AND SUBSIDIARIES

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS


GENERAL

     The following is a discussion and analysis of CNA Surety Corporation ("CNA
Surety" or the "Company") and its insurance subsidiaries' operating results,
liquidity and capital resources, and financial condition. This discussion should
be read in conjunction with the Condensed Consolidated Financial Statements of
CNA Surety and notes thereto.

FORMATION OF CNA SURETY AND MERGER

     In December 1996, CNA Financial Corporation ("CNAF") and Capsure Holdings
Corp. ("Capsure") agreed to merge (the "Merger") the surety business of CNAF
with Capsure's insurance subsidiaries, Western Surety Company ("Western Surety")
and Universal Surety of America ("USA"), into CNA Surety Corporation ("CNA
Surety" or the "Company"). CNAF, through its operating subsidiaries, writes
multiple lines of property and casualty insurance, including surety business
that is reinsured by Western Surety. CNAF owns approximately 64% of the
outstanding common stock of CNA Surety. Loews Corporation owns approximately 87%
of the outstanding common stock of CNAF. The principal operating subsidiaries of
CNAF that wrote the surety line of business for their own account prior to the
Merger were Continental Casualty Company and its property and casualty
affiliates (collectively, "CCC") and The Continental Insurance Company and its
property and casualty affiliates (collectively, "CIC"). CIC was acquired by CNAF
on May 10, 1995.

     Pursuant to a reorganization agreement, CCC Surety Operations and Capsure
merged their respective operations at the close of business on September 30,
1997 ("Merger Date"). CNAF, through its property and casualty subsidiaries, CCC
and CIC, contributed $52.25 million of capital to CNA Surety. Through
reinsurance agreements, CCC and CIC ceded to Western Surety all of their net
unearned premiums and loss and loss adjustment expense reserves, as of the
Merger Date, and will cede to Western Surety all surety business written or
renewed by CCC and CIC for a period of five years thereafter. Further, CCC and
CIC have agreed to assume the obligation for any adverse development on recorded
reserves for CCC Surety Operations as of the Merger Date, to limit the loss
ratio on certain defined business written by CNA Surety through December 31,
2000 and to provide certain additional excess of loss reinsurance.


BUSINESS

     CNA Surety's insurance subsidiaries write surety and fidelity bonds in all
50 states through a combined network of approximately 37,000 independent
agencies. CNA Surety's principal insurance subsidiaries are Western Surety and
USA. The insurance subsidiaries write, on a direct basis or as business assumed
from CCC and CIC, small fidelity and non-contract surety bonds, referred to as
commercial bonds; small, medium and large contract bonds; international surety
and credit insurance; and errors and omissions ("E&O") liability insurance.
Western Surety is a licensed insurer in all 50 states and the District of
Columbia. USA is licensed in 44 states and the District of Columbia. Western
Surety's affiliated company, Surety Bonding Company of America ("SBCA"), is
licensed in 25 states and the District of Columbia.


                                       12
<PAGE>   13

"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995

The statements which are not historical facts contained in this Form 10-Q are
forward-looking statements that involve risks and uncertainties, including, but
not limited to, product and policy demand and market response risks, the effect
of economic conditions, the impact of competitive products, policies and
pricing, product and policy development, regulatory changes and conditions,
rating agency policies and practices, development of claims and the effect on
loss reserves, the performance of reinsurance companies under reinsurance
contracts with the Company, investment portfolio developments and reaction to
market conditions, the results of financing efforts, the actual closing of
contemplated transactions and agreements, the effect of the Company's accounting
policies, and other risks detailed in the Company's Securities and Exchange
Commission filings. No assurance can be given that the actual results of
operations and financial condition will conform to the forward-looking
statements contained herein.

RESULTS OF OPERATIONS

     CNA SURETY RESULTS FOR THREE- AND SIX- MONTHS ENDED JUNE 30, 2001 AND 2000

     The components of net income for the Company for the three and six months
ended June 30, 2001 and 2000 are summarized as follows (dollars in thousands,
except per share amounts):

<TABLE>
<CAPTION>
                                                                   Three Months Ended               Six Months Ended
                                                                         June 30,                       June 30,
                                                                -------------------------      --------------------------
                                                                   2001           2000            2001            2000
                                                                ----------     ----------      ----------      ----------
      <S>                                                       <C>            <C>             <C>             <C>
      Total revenues................................            $   86,522     $   83,055      $  170,977      $  165,939
                                                                ==========     ==========      ==========      ==========

      Underwriting income...........................            $   13,853     $   17,841      $   27,679      $   35,148
      Net investment income.........................                 7,480          7,267          15,215          14,468
      Net realized investment gains.................                   192            234             163             230
      Interest expense..............................                   957          1,729           2,545           3,350
      Non-recurring charge..........................                    --            500              --             500
      Amortization of intangible assets.............                 1,524          1,523           3,048           3,048
                                                                ----------     ----------      ----------      ----------
      Income before income taxes....................                19,044         21,590          37,464          42,948
      Income taxes..................................                 6,701          7,483          13,177          14,728
                                                                ----------     ----------      ----------      ----------
      Net income....................................            $   12,343     $   14,107      $   24,287      $   28,220
                                                                ==========     ==========      ==========      ==========

      Net income per share..........................            $     0.29     $     0.33      $     0.57      $     0.66
                                                                ==========     ==========      ==========      ==========
</TABLE>


                                       13
<PAGE>   14

     Insurance Underwriting

     Underwriting results for the Company for the three and six months ended
June 30, 2001 and 2000 are summarized in the following table (dollars in
thousands):

<TABLE>
<CAPTION>
                                                                   Three Months Ended               Six Months Ended
                                                                         June 30,                       June 30,
                                                                ------------------------       -------------------------
                                                                   2001           2000            2001            2000
                                                                ---------      ---------       ---------       ---------
      <S>                                                       <C>            <C>             <C>             <C>
      Gross written premiums........................            $  85,782      $  82,376       $ 161,266       $ 163,031
                                                                =========      =========       =========       =========

      Net written premiums..........................            $  80,824      $  78,410       $ 153,451       $ 157,589
                                                                =========      =========       =========       =========

      Net earned premiums...........................            $  78,850      $  75,554       $ 155,599       $ 151,241
      Net losses and loss adjustment expenses.......               16,813         13,688          32,899          27,260
      Net commissions, brokerage and other..........               48,184         44,025          95,021          88,833
                                                                ---------      ---------       ---------       ---------
      Underwriting income...........................            $  13,853      $  17,841       $  27,679       $  35,148
                                                                =========      =========       =========       =========

      Loss ratio....................................                 21.3%          18.1%           21.1%           18.0%
      Expense ratio.................................                 61.1           58.3            61.1            58.8
                                                                ---------      ---------       ---------       ---------
      Combined ratio................................                 82.4%          76.4%           82.2%           76.8%
                                                                =========      =========       =========       =========
</TABLE>

     Premiums Written

     CNA Surety primarily markets contract and commercial surety bonds. Contract
surety bonds generally secure a contractor's performance and/or payment
obligation with respect to a construction project. Contract surety bonds are
generally required by federal, state and local governments for public works
projects. The most common types include bid, performance and payment bonds.
Commercial surety bonds include all surety bonds other than contract and cover
obligations typically required by law or regulation. The commercial surety
market includes numerous types of bonds categorized as court judicial, court
fiduciary, public official, license and permit and many miscellaneous bonds that
include guarantees of financial performance. The Company also writes fidelity
bonds which cover losses arising from employee dishonesty and other insurance
products.

     Effective January 1, 2001, the Company began delaying the recording of
written premium until the effective date of the bond, rather than recording on
the date the bond is processed ("processed premium"). The change did not impact
the recognition of net earned premium but did impact gross written premiums.

     Gross written premiums are shown in the table below (dollars in thousands):

<TABLE>
<CAPTION>
                                                                   Three Months Ended               Six Months Ended
                                                                         June 30,                       June 30,
                                                                -------------------------      --------------------------
                                                                   2001           2000            2001            2000
                                                                ----------     ----------      ----------      ----------
      <S>                                                       <C>            <C>             <C>             <C>
      Contract......................................            $   48,012     $   42,152      $   86,344      $   79,567
      Commercial....................................                31,432         33,739          60,423          69,486
      Fidelity and other............................                 6,338          6,485          14,499          13,978
                                                                ----------     ----------      ----------      ----------
                                                                $   85,782     $   82,376      $  161,266      $  163,031
                                                                ==========     ==========      ==========      ==========
</TABLE>

     Gross written premiums increased 4.1% to $85.8 million, for the three
months ended June 30, 2001 over the comparable period in 2000. The impact of the
change in the timing of recording written premiums for the three months ended
June 30, 2001, as compared to 2000, was insignificant. Excluding the
discontinuance of the CNA Reinsurance Company, Limited (London) ("CNA Re")
assumed international credit and surety business, core direct gross written
premiums increased 8.1%. Contract surety accounted for the majority of this
increase with growth of 13.9% to $48.0 million in gross written premiums as
compared to 2000. This increase is primarily attributable to continued strength
in public construction nationwide particularly highway and road, airport and
school related projects. Gross written premiums for core direct commercial
surety (excluding international reinsurance business assumed from CNA Re)
increased 2.3% to $31.4 million, for the three months ended June 30, 2001
reflecting increased business with key distribution partners. Fidelity and


                                       14
<PAGE>   15
other products decreased 2.3% to $6.3 million for the three months ended June
30, 2001 as compared to the same period in 2000.

     Gross written premiums decreased 1.1% to $161.3 million for the six months
ended June 30, 2001 over the comparable period in 2000. Six month gross written
premium reflects a decrease associated with the change in the timing of
recording written premiums of $10.2 million and the discontinuance of the CNA Re
assumed international credit and surety business of $6.0 million. Excluding
international reinsurance business assumed from CNA Re, core direct gross
processed premiums increased 9.2% to $171.5 million with contract surety and
commercial surety up 10.2% and 8.2%, respectively. These increases were
primarily due to continued strength in public construction spending for contract
surety and reflect increased commercial business with key distribution partners
and positive fluctuations in large commercial account activity.

     Gross written premiums for contract surety increased 8.5% to $86.3 million,
for the six months ended June 30, 2001. Gross written premiums for core direct
commercial surety (excluding international reinsurance business assumed from CNA
Re) decreased 4.8% to $60.4 million. Fidelity and other products increased 3.7%
to $14.5 million for the six months ended June 30, 2001 as compared to the same
period in 2000.

     Net written premiums are shown in the table below (dollars in thousands):

<TABLE>
<CAPTION>
                                                                   Three Months Ended               Six Months Ended
                                                                         June 30,                       June 30,
                                                                -------------------------      --------------------------
                                                                   2001           2000            2001            2000
                                                                ----------     ----------      ----------      ----------
      <S>                                                       <C>            <C>             <C>             <C>
      Contract......................................            $   43,512     $   38,546      $   79,279      $   74,476
      Commercial....................................                30,974         33,354          59,673          68,669
      Fidelity and other............................                 6,338          6,510          14,499          14,444
                                                                ----------     ----------      ----------      ----------
                                                                $   80,824     $   78,410      $  153,451      $  157,589
                                                                ==========     ==========      ==========      ==========
</TABLE>

     For the three months ended June 30, 2001, net written premiums increased
3.1% to $80.8 million as compared to the same period in 2000, reflecting the
aforementioned gross production changes partially offset by higher reinsurance
costs. The reinsurance costs reflected in ceded premiums are based upon
reinsurers' loss experience under the Company's surety excess of loss
reinsurance contract. Due primarily to increased large losses reported to the
Company's excess of loss reinsurers, ceded written premiums increased $1.2
million to $5.2 million for the three months ended June 30, 2001. Net written
premiums for contract surety business increased 12.9% To $43.5 million. Net
written premiums for commercial surety, excluding international reinsurance
business assumed, increased 2.0% to $31.0 million for the second quarter in
2001. The fidelity and other products decreased 2.6% to $6.3 million, for the
second quarter in 2001 as compared to the same period in 2000.

     For the first half of 2001, net written premiums decreased 2.6% to $153.5
million, over the comparable period in 2000 with contract surety up 6.4% and
core commercial surety down 4.8%. The fidelity and other book of business
increased 0.4% to $14.5 million, for the six months ended june 30, 2001 as
compared to the same period in 2000.

     Since the second half of calendar year 1999, the Company has experienced an
increase in claim severity in the most recent accident years, primarily with
respect to large commercial risks. As a result of this


                                       15
<PAGE>   16

increase in large loss activity where the Company cedes loss amounts in excess
of $5 million per principal under its excess of loss reinsurance program, CNA
Surety is paying higher costs for reinsurance. Given the current economic
weakness, the Company's reinsurance costs are unlikely to return to historical
levels in 2001. The higher reinsurance costs will have an adverse impact on the
Company's future results of operations.

     Underwriting Income

     Underwriting income decreased 22.4% to $13.9 million for the three months
ended June 30, 2001 compared to $17.8 million for the same period in 2000. This
decrease is primarily due to higher incurred losses. Increased claim severity,
primarily in large commercial risks, has reduced underwriting profits by
increasing the estimates of incurred losses for more recent accident years. The
period to period changes in underwriting income reflect a 22.8% increase in net
losses and loss adjustment expenses. Underwriting income decreased 21.3% to
$27.7 million for the six months ended June 30, 2001 compared to the same period
in 2000. The six month period to period change in underwriting income reflects a
20.7% increase in net losses and loss adjustment expenses.

     Loss Ratio

     The loss ratios for the three months ended June 30, 2001 and 2000 were
21.3% and 18.1%, respectively. The loss ratios included $0.1 million of net
unfavorable loss reserve development and $1.8 million of net favorable loss
reserve development for the three months ended June 30, 2001 and 2000,
respectively. Excluding the impact of loss reserve development, the loss ratios
would have been 21.2% and 20.5% for the period ended June 30, 2001 and June 30,
2000, respectively. The surety business assumed from CCC and CIC is subject to
an aggregate stop loss reinsurance contract between CCC and the Company that
limits the Company's accident year net loss ratio on this business to 24% for
accident years 1997 (October 1, 1997 to December 31, 1997), 1998, 1999 and 2000.
For the six months ended June 30, 2001 and 2000, the loss ratios were 21.1% and
18.0%, respectively. The loss ratios included $0.2 million and $3.9 million of
net favorable reserve development for the six months ended June 30, 2001 and
2000, respectively. Excluding the impact of the favorable reserve development,
the loss ratios would have been 21.2% and 20.6% for the six month periods ended
June 30, 2001 and June 30, 2000, respectively. The increases in the adjusted
loss ratio for the three and six month periods in 2001 relate primarily to
higher incurred losses and changes in business mix.

     Expense Ratio

     The expense ratio increased to 61.1% for the three months ended June 30,
2001 compared to 58.3% for the same period in 2000. For the six months ended
June 30, 2001, the expense ratio increased to 61.1% from 58.8% for the same
period in 2000. The increase in the expense ratio for the three- and six- months
ended June 30, 2001 primarily reflects higher operating costs, primarily
technology related expenditures, and the impact of higher reinsurance costs on
net earned premiums. For the first half of 2001, net earned premiums increased
2.9% and operating expenses increased at a higher rate of 7.0%, primarily
associated with increased technology related expenditures.

     Investment Income

     For the three months ended June 30, 2001, net investment income was $7.5
million compared to net investment income for the three months ended June 30,
2000 of $7.3 million. The increase in investment income primarily reflects
higher average invested assets. The annualized pretax yields for the Company's


                                       16
<PAGE>   17

equity and fixed income portfolio were 5.5% and 5.4% for the three months ended
June 30, 2001 and 2000, respectively. The annualized after-tax yields for the
Company's equity and fixed income portfolio were 4.0% and 4.1% for the three
months ended June 30, 2001 and 2000, respectively. Net investment income for the
six months ended June 30, 2001 and 2000 was $15.2 million and $14.5 million,
respectively. The average pretax yields were 5.6% for the six months ended June
30, 2001 and 2000. The annualized after-tax yields for the Company's equity and
fixed income portfolio were 4.1% and 4.2% for the six months ended June 30, 2001
and 2000, respectively.

     Net realized investment gains were approximately $0.2 million for the three
and six months ended June 30, 2001 and 2000.

     Analysis of Other Operations

     Amortization expense was $1.5 million for the three months ended June 30,
2001 and 2000. For the six months ended June 30, 2001 and 2000, amortization of
intangibles was $3.0 million. Intangible assets primarily represent goodwill and
identified intangibles arising from the acquisition of Capsure. Intangible
assets are generally amortized over 30 years.

     Interest expense decreased 44.7% for the second quarter of 2001 as compared
to the same period in 2000, primarily due to lower outstanding debt levels and
lower interest rates. Average debt outstanding was $78.0 million for the second
quarter in 2001 compared to $101.9 million in the second quarter of 2000. The
weighted average interest rate for the three months ended June 30, 2001 was 4.7%
compared to 6.5% for the same period in 2000. Interest expense decreased 24.0%
for the first six months of 2001 as compared to the same period in 2000. Average
debt outstanding was $89.4 million for the first six months in 2000 compared to
$101.9 million in the first six months of 2000. The weighted average interest
rate for the six months ended June 30, 2001 was 5.4% compared to 6.4% for the
same period in 2000.

     Income Taxes

     Income tax expense was $6.7 million and $7.5 million and the effective
income tax rates were 35.2% and 34.7% for the three months ended June 30, 2001
and 2000, respectively. For the six months ended June 30, 2001 and 2000, income
tax expense was $13.2 million and $14.7 million and the effective income tax
rates were 35.2% and 34.3%, respectively. The increases in the estimated
effective tax rate in 2001 primarily relates to anticipated decreases in tax
exempt investment income.


                                       17
<PAGE>   18

LIQUIDITY AND CAPITAL RESOURCES


     It is anticipated that the liquidity requirements of CNA Surety will be met
primarily by funds generated from operations. The principal sources of operating
cash flows are premiums, investment income, and sales and maturities of
investments. CNA Surety also may generate funds from additional borrowings under
the credit facility described below. The primary cash flow uses are payments for
claims, operating expenses, federal income taxes, debt service for the credit
facility, as well as dividends to CNA Surety stockholders. In general, surety
operations generate premium collections from customers in advance of cash
outlays for claims. Premiums are invested until such time as funds are required
to pay claims and claims adjusting expenses.

     On May 16, 2001, the CNA Surety Board of Directors increased the quarterly
dividend from $0.09 to $0.15 per share beginning with the quarterly dividend
payable on July 5, 2001.

     The Company believes that total invested assets, including cash and
short-term investments, are sufficient in the aggregate and have suitably
scheduled maturities to satisfy all policy claims and other operating
liabilities, including dividend and income tax sharing payments of its insurance
subsidiaries. At June 30, 2001, the carrying value of the Company's insurance
subsidiaries' invested assets was comprised of $449.7 million of fixed income
securities, $36.7 million of equity securities, $12.0 million of short-term
investments, $5.1 million of other investments and $4.4 million of cash. At
December 31, 2000, the carrying value of the Company's insurance subsidiaries'
invested assets was comprised of $453.2 million of fixed income securities,
$33.9 million of equity securities, $8.7 million of short-term investments, $5.1
million of other investments and $4.0 million of cash.

     Cash flow at the parent company level is derived principally from dividend
and tax sharing payments from its insurance subsidiaries. The principal
obligations at the parent company level are to service debt, pay operating
expenses, including income taxes, and pay dividends to stockholders. At June 30,
2001, the parent company's invested assets consisted of $5.0 million of fixed
income securities and $31.3 million of short-term investments and $2.0 million
of cash. At December 31, 2000, the parent company's invested assets consisted of
$5.1 million of fixed income securities, $44.0 million of short-term investments
and $2.0 million of cash.

     The Company's consolidated net cash flow provided by operating activities
was $12.4 million for the six months ended June 30, 2001 and $38.6 million for
the comparable period in 2000. The decrease in net cash flow provided by
operating activities primarily relates to increases in insurance receivables,
primarily reinsurance recoverables, and higher net loss payments in the current
period.

     CNA Surety's bank borrowings are under a five-year unsecured revolving
credit facility (the "Credit Facility") that provides for borrowings of up to
$130 million. As of June 30, 2001, the Company has unused capacity under the
revolver of approximately $55 million.

     The interest rate on borrowings under the Credit Facility may be fixed, at
CNA Surety's option, for a period of one, two, three, or six months and is based
on, among other rates, the London Interbank Offered Rate ("LIBOR"), plus the
applicable margin. The margin, including the facility fee, was 0.30% at June 30,
2001 and can vary based on CNA Surety's leverage ratio (debt to total
capitalization) from 0.25% to 0.40%. As of June 30, 2001, the weighted average
interest rate was 4.0% on the $75.0 million of outstanding borrowings. As of
December 31, 2000, the weighted average interest rate was 6.9% on the $100.0
million of outstanding borrowings.


                                       18
<PAGE>   19

     The Credit Facility contains, among other conditions, limitations on CNA
Surety with respect to the incurrence of additional indebtedness and requires
the maintenance of certain financial ratios. As of June 30, 2001, the Company
was in compliance with all restrictions and covenants contained in the Credit
Facility agreement. The Credit Facility provides for the payment of all
outstanding principal balances by September 30, 2002 with no required principal
payments prior to such time. Principal prepayments, if any, and interest
payments are expected to be funded primarily through dividends from CNA Surety's
insurance subsidiaries.

     In 1999 CNA Surety acquired certain assets of Clark Bonding Company, Inc.,
a Charlotte, North Carolina, insurance agency and brokerage doing business as
The Bond Exchange for $5.9 million. As part of this acquisition, the Company
incurred an additional $1.9 million of debt in the form of a promissory note.
The promissory note matures on July 27, 2004 and has an interest rate of 5.0%.
The balance of this promissory note at June 30, 2001 was $1.6 million.

     As an insurance holding company, CNA Surety is dependent upon dividends and
other permitted payments from its insurance subsidiaries to pay operating
expenses, meet debt service requirements, as well as to pay cash dividends. The
payment of dividends by the insurance subsidiaries is subject to varying degrees
of supervision by the insurance regulatory authorities in South Dakota and
Texas. In South Dakota, where Western Surety and SBCA are domiciled, insurance
companies may only pay dividends from earned surplus excluding surplus arising
from unrealized capital gains or revaluation of assets. In Texas, where USA is
domiciled, an insurance company may only declare or pay dividends to
stockholders from the insurer's earned surplus. The insurance subsidiaries may
pay dividends without obtaining prior regulatory approval only if such dividend
or distribution (together with dividends or distributions made within the
preceding 12-month period) is less than, as of the end of the immediately
preceding year, the greater of (i) 10% of the insurer's surplus to policyholders
or (ii) statutory net income. In South Dakota, net income includes net realized
capital gains in an amount not to exceed 20% of net unrealized capital gains.
All dividends must be reported to the appropriate insurance department prior to
payment.

     The dividends that may be paid without prior regulatory approval are
determined by formulas established by the applicable insurance regulations, as
described above. The formulas that determine dividend capacity in the current
year are dependent on, among other items, the prior year's ending statutory
surplus and statutory net income. Dividend capacity for 2001 is based on
statutory surplus and income at and for the year ended December 31, 2000.
Without prior regulatory approval in 2001, CNA Surety's insurance subsidiaries
may pay stockholder dividends of $60.2 million in the aggregate. CNA Surety
received $35.0 million in dividends from its insurance subsidiaries during the
first six months of 2001 and $20.0 million in the first six months of 2000.

     In accordance with the provisions of intercompany tax sharing agreements
between CNA Surety and its subsidiaries, the tax of each subsidiary shall be
determined based upon each subsidiary's separate return liability. Intercompany
tax payments are made at such times as estimated tax payments would be required
by the Internal Revenue Service ("IRS"). CNA Surety received tax sharing
payments from its subsidiaries of $12.2 million for the six months ended June
30, 2001 and $15.2 million for the same period in 2000.


     CNA Surety management believes that it will have sufficient available
resources to meet its present capital needs.


                                       19
<PAGE>   20

IMPACT OF ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

     In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 and No. 142 entitled
"Business Combinations" ("SFAS No. 141") and "Goodwill and Other Intangible
Assets" ("SFAS No. 142"), respectively. SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations subsequent to June
30, 2001 and specifies criteria for recognizing intangible assets acquired in a
business combination. SFAS No. 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually. Any impairment loss for the excess of the carrying
amount of an intangible asset over its fair value would be recognized as a
charge to operations. Intangible assets with definite useful lives will continue
to be amortized over their respective estimated useful lives. The Company plans
to adopt the provisions of Statement No. 142 effective January 1, 2002. The
Company has not completed a full analysis of the impact of SFAS No. 142, but
anticipates the adoption of SFAS No. 142 will have a favorable impact on the
Company's reported net income as amortization of goodwill, currently $5.1
million annually, will cease. The Company will have to review its accounting for
intangible assets and the related $1.0 million in annual amortization expense
under SFAS No. 142.


                                       20
<PAGE>   21

                     CNA SURETY CORPORATION AND SUBSIDIARIES


                           PART II - OTHER INFORMATION

ITEM 1.        Legal Proceedings - None.

ITEM 2.        Changes in the Rights of the Company's Security Holders - None.

ITEM 3.        Defaults Upon Senior Securities - None.

ITEM 4.        Submission of Matters to a Vote of Security Holders -

               At the Annual Meeting of Shareholders of CNA Surety Corporation
               held on May 15, 2001, the Company's shareholders voted on the
               following proposals. The number of shares issued, outstanding and
               eligible to vote as of the record date of March 19, 2001 were
               42,724,558. Proxies representing 40,890,003 shares or 96 percent
               of the eligible voting shares were tabulated.

               PROPOSAL I
               Election of Directors.
                                         Number of Shares/Votes
                                         ----------------------

                                       For             Authority Withheld
                                       ---             ------------------
               Giorgio Balzer       40,496,888               393,115
               Philip H. Britt      40,751,588               138,415
               Edward Dunlop        40,496,888               393,115
               Melvin Gray          40,496,888               393,015
               Joe P. Kirby         40,492,268               397,735
               Roy E. Posner        40,745,488               144,515
               Thomas F. Taylor     40,491,663               398,340
               Adrian M. Tocklin    40,745,633               144,370
               Mark C. Vonnahme     39,532,290             1,357,713

               PROPOSAL II
               To ratify the Board of Directors' appointment of the Company's
               independent auditors, Deloitte & Touche LLP for fiscal year 2001.

               For                  40,814,240
               Against                  71,507
               Abstain                   4,256


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<PAGE>   22

                     CNA SURETY CORPORATION AND SUBSIDIARIES


                     PART II - OTHER INFORMATION (continued)

ITEM 5.        Other Information - None.

ITEM 6.        Exhibits and Reports on Form 8-K:
               (a)    Exhibits: - None.

               (b)    Reports on Form 8-K:
                      May 11, 2001; CNA Surety Corporation Press Release issued
                      on April 30, 2001.
                      May 16, 2001; CNA Surety Corporation Press Release issued
                      on May 16, 2001.


                                       22
<PAGE>   23

                                   SIGNATURES


     Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.



                                      CNA SURETY CORPORATION
                                      (Registrant)


                                      /s/ John S. Heneghan
                                      ------------------------------------------
                                      John S. Heneghan
                                      Vice President and Chief Financial Officer



Date:  August 13, 2001


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