##### Table of Contents





UNITED STATES SECURITIES AND
    EXCHANGE COMMISSIONWashington, D.C.
    20549
      FORM 10-K
      þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the Fiscal Year Ended
    December 31, 2008o

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)
  Delaware

36-4144905(State or other jurisdiction of
    incorporation organization)

(I.R.S. Employer Identification
    No.)333 South Wabash Avenue, Chicago, Illinois

60604(Address of principal executive
    offices)

(Zip Code)   (312) 822-5000
  (Registrants telephone
    number, including area code)
      None
   Common Stock, $0.01 Par Value
       o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
  Large accelerated filer  o

Accelerated filer  þ

Non-accelerated filero
    (Do not check if a smaller reporting company)

Smaller reporting company  o.   Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE:




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##### 





CNA
    SURETY CORPORATION AND SUBSIDIARIES
  TABLE OF
    CONTENTS
   
 PagePART IItem 1.

Business


2General


2Formation of CNA Surety and Merger


2Description of Business


2Financial Strength Ratings


2Product Information


3Marketing


5Underwriting


6Competition


6Reinsurance


7Reserves for Unpaid Losses and Loss
    Adjustment Expenses


7Claims


9Environmental Claims


9Regulation


10Investments


11Employees


11Availability of Securities and
    Exchange Commission Reports


11Item 1A.

Risk Factors


12Item 1B.

Unresolved Staff Comments


14Item 2.

Properties


14Item 3.

Legal Proceedings


15Item 4.

Submission of Matters to a Vote of Security
    Holders


15PART IIItem 5.

Market for the Registrants Common Stock,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities


15Item 6.

Selected Financial Data


17Item 7.

Managements Discussion and Analysis of
    Financial Condition and Results of Operations


18Item 7A.

Quantitative and Qualitative Discussions About
    Market Risk


41Item 8.

Financial Statements and Supplementary Data


44Item 9.

Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure


80Item 9A.

Controls and Procedures


80Item 9B.

Other Information


80PART IIIItem 10.

Directors and Executive Officers of the
    Registrant


80Item 11.

Executive Compensation


80Item 12.

Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters


80Item 13.

Certain Relationships and Related Transactions


80Item 14.

Principal Accountant Fees and Services


80PART IVItem 15.

Exhibits and Financial Statement Schedules


81EX-21EX-23EX-31.1EX-31.2EX-32.1EX-32.2   1




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##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
 PART I.  ITEM 1.
    BUSINESS General   Formation
    of CNA Surety and Merger   Description
    of Business   Financial
    Strength Ratings  A.M. Best
    Company, Inc.
     2




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##### Table of Contents



Standard
    and Poors
   Product
    Information    Products
    and Policies
    and/or
    Bid bonds:
  Performance bonds:
  Payment bonds:
      License and Permit bonds:
  Judicial and Fiduciary bonds:
 3




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##### Table of Contents



Public Official bonds:
          Gross Written Premiums% of





% of





% of2008


Total


2007


Total


2006


TotalContract

$
300,236



64.3
%

$
305,624



64.8
%

$
285,157



63.2
%Commercial:License and permit


80,291



17.2



78,875



16.7



79,144



17.5Judicial and fiduciary


23,227



5.0



23,348



5.0



23,949



5.3Public official


23,466



5.0



23,584



5.0



23,491



5.2Other


9,015



1.9



9,021



1.9



8,287



1.9Total commercial


135,999



29.1



134,828



28.6



134,871



29.9Fidelity and other


30,892



6.6



31,208



6.6



31,328



6.9$
467,127



100.0
%

$
471,660



100.0
%

$
451,356



100.0
%Domestic

$
461,998



98.9
%

$
467,285



99.1
%

$
448,387



99.3
%International


5,129



1.1



4,375



0.9



2,969



0.7$
467,127



100.0
%

$
471,660



100.0
%

$
451,356



100.0
%   Net Written Premiums% of





% of





% of2008


Total


2007


Total


2006


TotalContract

$
268,085



62.1
%

$
266,749



62.3
%

$
247,987



60.5
%Commercial


132,702



30.7



130,332



30.4



130,314



31.8Fidelity and other


30,892



7.2



31,208



7.3



31,328



7.7$
431,679



100.0
%

$
428,289



100.0
%

$
409,629



100.0
%Domestic

$
426,570



98.8
%

$
423,914



99.0
%

$
406,684



99.3
%International


5,109



1.2



4,375



1.0



2,945



0.7$
431,679



100.0
%

$
428,289



100.0
%

$
409,629



100.0
%   4




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##### Table of Contents



Domestic Bonds/Policies in Force as of December 31,% of





% of





% of2008


Total


2007


Total


2006


TotalContract


31



1.3
%


30



1.2
%


30



1.2
%Commercial


1,836



76.4



1,906



76.5



1,926



76.0Fidelity and other


537



22.3



557



22.3



579



22.82,404



100.0
%


2,493



100.0
%


2,535



100.0
%   Average Bond Penalty/Policy Limit as of December 31,2008


2007


2006Contract

$
1,236,663


$
1,191,817


$
1,180,538Commercial


14,460



14,115



14,236Fidelity and other


19,914



19,437



19,486    Marketing      Years Ended December 31,2008


2007


2006Gross Written Premiums by State:Texas


9.4
%


9.4
%


9.5
%California


9.2



9.1



8.9Florida


6.0



7.6



7.8New York


5.0



4.5



3.9Illinois


4.5



4.5



4.6Georgia


3.4



3.3



3.0Massachusetts


3.1



3.1



3.1Pennsylvania


2.8



2.9



3.2Colorado


2.7



2.3



2.3Maryland


2.7



2.8



2.4All
    other(a)


51.2



50.5



51.3Total


100.0
%


100.0
%


100.0
%     (a)

    
    Includes the District of Columbia and Puerto Rico. No other
    state represented more than 2.3% for the year ended
    December 31, 2008. 5




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##### Table of Contents



Contract
    Surety
    Commercial
    Surety
    one-day
   Underwriting     Competition     6




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##### Table of Contents



Reinsurance         Reserves
    for Unpaid Losses and Loss Adjustment Expenses     7




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##### Table of Contents



Net reserves at end of year, GAAP basis

$
345,033Ceded reinsurance, net of indemnification


83,691Gross reserves at end of year, GAAP basis


428,724Estimated reinsurance recoverable netted against gross reserves
    for SAP


(83,691
)Net reserves on retroactive reinsurance assumed


(11,064
)Net reserves at end of year, SAP basis

$
333,969   re-estimates
  8




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##### Table of Contents



As of December 31,1998


1999


2000


2001


2002


2003


2004


2005


2006


2007


2008Gross reserves for losses and loss adjustment expenses

$
150,020


$
157,933


$
204,457


$
315,811


$
303,433


$
413,539


$
363,387


$
424,449


$
434,224


$
472,842


$
428,724Originally reported ceded recoverable


7,986



20,464



70,159



166,318



137,301



158,357



116,831



147,435



144,858



150,496



83,691Net reserves for losses and loss adjustment expenses


142,034



137,469



134,298



149,493



166,132



255,182



246,556



277,014



289,366



322,346



345,033Net paid (cumulative) as of:One year later


32,428



35,825



44,763



64,832



59,567



88,857



65,353



76,623



55,879



46,203



Two years later


52,524



47,795



75,825



98,885



100,595



128,607



92,582



120,462



81,802







Three years later


58,421



73,341



87,011



117,396



115,034



145,895



114,984



133,942











Four years later


67,451



81,788



93,154



132,891



125,740



158,257



124,742















Five years later


71,352



86,539



99,117



139,051



133,696



161,978



















Six years later


74,462



91,520



100,628



139,125



136,669























Seven years later


77,916



92,727



98,737



145,058



























Eight years later


77,576



90,448



102,953































Nine years later


78,296



94,550



































Ten years later


78,908







































Net reserves re-estimated as of:End of initial year


142,034



137,469



134,298



149,493



166,132



255,182



246,556



277,014



289,366



322,346



345,033One year later


128,949



130,376



139,110



155,673



205,422



254,570



223,223



271,704



284,312



276,845



Two years later


114,605



128,134



140,094



182,812



199,865



231,619



224,919



264,794



230,205







Three years later


110,462



130,280



132,504



169,340



195,191



246,244



218,301



232,115











Four years later


113,748



122,469



120,051



174,346



203,488



237,544



202,416















Five years later


105,797



110,055



119,471



174,847



196,258



225,537



















Six years later


93,768



109,874



118,485



167,741



191,609























Seven years later


93,447



109,237



118,834



164,813



























Eight years later


93,556



109,672



116,344































Nine years later


93,632



107,397



































Ten years later


91,502







































Total net redundancy (deficiency)

$
50,532


$
30,072


$
17,954


$
(15,320)


$
(25,477)


$
29,645


$
44,140


$
44,899


$
59,161


$
45,501


$
Cumulative redundancy (deficiency) as a percentage of original
    estimate


35.6
%


21.9%



13.4%



(10.2)%



(15.3)%



11.6%



17.9%



16.2%



20.4%



14.1%



%Net reserves re-estimated

$
91,502


$
107,397


$
116,344


$
164,813


$
191,609


$
225,537


$
202,416


$
232,115


$
230,205


$
276,845Re-estimated ceded recoverable


14,120



76,480



114,602



126,596



148,234



97,078



98,184



144,883



149,882



156,859Gross reserves re-estimated

$
105,622


$
183,877


$
230,946


$
291,409


$
339,843


$
322,615


$
300,600


$
376,998


$
380,087


$
433,704  Claims   Environmental
    Claims   9




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Regulation           10




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##### Table of Contents



Investments       Employees   Availability
    of SEC Reports  Form 10-K, Form 10-Q, Form 8-K 1-800-SEC-0330.
 11




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##### Table of Contents



ITEM 1A.
    RISK
    FACTORS      We may
    determine that our loss reserves are insufficient to cover our
    estimated ultimate unpaid liability for claims and we may need
    to increase them.
      Surety
    losses and our results can be volatile.
    We have a
    significant concentration of exposure to construction
    firms.
    Our
    premium writings and profitability are impacted by the
    availability and cost of reinsurance and our reinsurance
    purchasing decisions.
   12




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##### Table of Contents



We may
    not be able to collect amounts owed to us by
    reinsurers.
    We rely
    upon affiliated companies that we do not control to conduct
    certain aspects of our business.
    Rating
    agencies may downgrade their ratings for us or for affiliated
    companies that we rely on to write business. This would
    adversely affect our ability to write business.
    We face
    intense competition.
    Demand
    for our products is created by laws that could be
    changed.
    We are
    subject to capital adequacy requirements and, if we do not meet
    these requirements, regulatory agencies may restrict or prohibit
    us from operating our business.
   13




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##### Table of Contents



Our
    insurance subsidiaries, upon whom we depend for dividends and
    advances in order to fund our working capital needs, are limited
    by state regulators in their ability to pay dividends.
    Some of
    the credit that may be extended to us requires ongoing
    compliance with conditions and limitations regarding our
    profitability and financial condition.
    Our
    investment portfolio may suffer reduced returns or
    losses.
    We rely
    on our information technology and telecommunications systems to
    conduct our business.
    ITEM 1B.
    UNRESOLVED
    STAFF COMMENTS    ITEM 2.
    PROPERTIES     14




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##### Table of Contents



ITEM 3.
    LEGAL
    PROCEEDINGS    ITEM 4.
    SUBMISSION
    OF MATTERS TO A VOTE OF SECURITY HOLDERS  Form 10-K.
 PART II.  ITEM 5.
    MARKET
    FOR THE REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER
    MATTERS    High


Low20084th Quarter

$
20.28


$
9.003rd Quarter

$
22.90


$
10.612nd Quarter

$
15.98


$
12.591st Quarter

$
19.79


$
13.1220074th Quarter

$
22.00


$
16.493rd Quarter

$
21.17


$
15.792nd Quarter

$
23.24


$
18.861st Quarter

$
22.44


$
19.43  15




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##### Table of Contents



Indexed ReturnsYears Ended December 31,Company/Index

2003


2004


2005


2006


2007


2008CNA Surety Corporation


100



140.38



153.21



226.08



208.10



201.89Standard & Poors 500 Stock Index


100



108.99



112.26



127.55



132.06



81.23Standard & Poors Property & Casualty
    Index


100



108.36



122.43



135.55



114.24



78.34   
      Number of Securities to be


Weighted-Average


Number of Securities RemainingIssued Upon the Exercise of


Exercise Price of


Available for Future IssuanceOutstanding Options


Outstanding Options


Under Equity Compensation PlansEquity compensation plans approved by security holders


1,221,118


$
14.93



2,451,995   Dividends
   16




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##### Table of Contents



ITEM 6.
    SELECTED
    FINANCIAL DATA      2008(b)(c)


2007(b)(c)


2006(b)(c)


2005


2004(Dollars in thousands, except per share data)Total revenues

$
477,624


$
465,697


$
431,693


$
384,082


$
350,789Gross written premiums

$
467,127


$
471,660


$
451,356


$
417,530


$
389,417Net written premiums

$
431,679


$
428,289


$
409,629


$
365,948


$
318,284Net earned premium

$
431,696


$
421,506


$
393,642


$
348,361


$
317,857Net losses and loss adjustment
    expenses(a)


80,844



103,124



95,830



127,841



87,356Net commissions, brokerage and other underwriting expenses


235,420



227,412



216,560



202,521



207,166Net investment income


47,302



44,636



39,324



33,747



30,181Net realized investment (losses) gains


(1,374
)


(445
)


(1,273
)


1,974



2,751Interest expense


2,148



2,918



3,669



3,545



2,260Income before income taxes


159,212



132,243



115,634



50,175



54,007Income tax expense


48,809



39,747



32,816



11,744



14,297Net income

$
110,403


$
92,496


$
82,818


$
38,431


$
39,710Basic earnings per common share

$
2.50


$
2.10


$
1.90


$
0.89


$
0.92Diluted earnings per common share

$
2.49


$
2.09


$
1.89


$
0.89


$
0.92Loss
    ratio(a)


18.7
%


24.5
%


24.3
%


36.7
%


27.5
%Expense ratio


54.5



54.0



55.0



58.1



65.2Combined
    ratio(a)


73.2
%


78.5
%


79.3
%


94.8
%


92.7
%Invested assets and cash

$
1,126,079


$
1,024,826


$
897,285


$
797,914


$
766,387Intangible assets, net of amortization


138,785



138,785



138,785



138,785



138,785Total assets


1,565,519



1,507,654



1,368,333



1,262,614



1,174,494Insurance reserves


687,548



731,772



688,027



665,496



589,406Debt


30,892



30,791



30,690



50,589



65,488Total liabilities


798,224



839,949



802,431



786,039



728,123Stockholders equity


767,295



667,705



565,902



476,575



446,371Book value per share

$
17.37


$
15.13


$
12.90


$
11.00


$
10.38     (a)

    
    Includes the effect of recording revisions of prior year
    reserves, known as reserve development. The dollar amount and
    the percentage point effect on the loss and combined ratios of
    these reserve revisions were a reduction of $45.5 million,
    or 10.6%, for the year ended December 31, 2008, a reduction
    of $5.1 million, or 1.2%, for the year ended
    December 31, 2007, a reduction of $5.3 million, or
    1.4%, for the year ended December 31, 2006, a reduction of
    $23.3 million, or 6.7%, for the year ended
    December 31, 2005 and a reduction of $0.6 million, or
    0.2%, for the year ended December 31, 2004.(b)

    
    Statement of Financial Accounting Standards (SFAS)
    No. 123 (revised 2004), Share-based Payment
    (SFAS 123R) was effective for the Company on
    January 1, 2006. Prior to 2006, the Company applied the 17




---



##### Table of Contents



intrinsic value method under Accounting Principles Board
    (APB) Opinion No. 25 (APB 25), and
    related interpretations, in accounting for its stock-based
    compensation plan as allowed under the provisions of
    SFAS No. 123, Accounting for Stock-based
    Compensation (SFAS 123). Under the
    recognition and measurement principles of APB 25, no stock-based
    compensation cost was recognized, as the exercise price of the
    granted options equaled the market price of the underlying stock
    at the grant date. Under SFAS 123R, entities generally are
    required to measure and record compensation expense using a
    fair-value based method. Adoption of SFAS 123R increased
    compensation expense by $1.7 million, $1.9 million and
    $1.2 million for the years ended December 31, 2008,
    2007 and 2006, respectively. Net of deferred tax benefit,
    adoption of SFAS 123R decreased net income by
    $1.1 million, $1.2 million and $0.8 million for
    the years ended December 31, 2008, 2007 and 2006,
    respectively.(c)

    
    As of December 31, 2006, the Company adopted
    SFAS No. 158, Employers Accounting for
    Defined Benefit Pension and Other Postretirement Plans (an
    amendment of FASB Statements No. 87, 88, 106 and 132(R)),
    (SFAS 158). SFAS 158 requires a company
    who sponsors one or more single-employer defined benefit plans
    to recognize the overfunded or underfunded status of a defined
    benefit postretirement plan as an asset or liability in its
    statement of financial position and to recognize changes in that
    funded status in the year in which the changes occur through
    other comprehensive income. The Companys postretirement
    benefit plans are unfunded. Recognition of the accumulated
    postretirement benefit obligation, measured as of
    December 31, 2008, decreased the liability for
    postretirement benefits by $1.2 million, gross of deferred
    tax benefit, and increased accumulated other comprehensive
    income by $0.5 million. Recognition of the accumulated
    postretirement benefit obligation, measured as of
    December 31, 2007, decreased the liability for
    postretirement benefits by $3.4 million, gross of deferred
    tax benefit, and increased accumulated other comprehensive
    income by $1.0 million. Recognition of the accumulated
    postretirement benefit obligation, measured as of
    December 31, 2006, increased the liability for
    postretirement benefits by $4.7 million, gross of deferred
    tax benefit, and decreased accumulated other comprehensive
    income by $2.7 million.  ITEM 7.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  Form 10-K.
  Critical
    Accounting Policies
    Reserves
    for Unpaid Losses and Loss Adjustment Expenses and
    Reinsurance
     18




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##### Table of Contents



and/or and/or and/or and/or
      Gross Case Loss


Gross IBNR Loss


Total Grossand LAE Reserves


and LAE Reserves


ReservesContract

$
96,372


$
211,166


$
307,538Commercial


53,585



52,043



105,628Fidelity and other


4,813



10,745



15,558Total

$
154,770


$
273,954


$
428,724         
    Historical development method, sometimes referred to as a link
    ratio method;
    Bornhuetter-Ferguson method on both a paid and incurred basis;
    Average hindsight outstanding projection method;
    Frequency-severity method; and
    Loss ratio method. 19




---



##### Table of Contents



Historical
    Development Method
    Bornhuetter-Ferguson
    Method
  and/or
      Average
    Hindsight Outstanding Method
    Frequency-Severity
    Method
    Loss
    Ratio Method
   20




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##### Table of Contents




    Current claim activity, including the frequency and severity of
    current claims;
    Changes in underwriting standards and business mix such as the
    Companys efforts to reduce exposures to large commercial
    bonds;
    Changes in the claims handling process;
    Potential changes in the Companys reinsurance
    program; and
    Current economic conditions, especially corporate default rates
    and the condition of the construction economy.   21




---



##### Table of Contents



December 31,2008


2007Gross basis:Recorded loss reserves

$
428,724


$
472,842Actuarial point estimate


411,957



469,589Difference

$
16,767


$
3,253Difference as a % of actuarial point estimate


4.1
%


0.7
%Net basis:Recorded loss reserves

$
345,033


$
322,346Actuarial point estimate


327,194



317,325Difference

$
17,839


$
5,021Difference as a % of actuarial point estimate


5.5
%


1.6
%           and/or
   22




---



##### Table of Contents



and/or and/or
    Investments
          Intangible
    Assets
   23




---



##### Table of Contents



Insurance
    Premiums
    Deferred
    Policy Acquisition Costs
    Results
    of Operations
  Financial
    Measures
       24




---



##### Table of Contents



Comparison
    of CNA Surety Actual Results for the Years Ended
    December 31, 2008, 2007 and 2006
  Analysis
    of Net Income
      Results
    of Insurance Operations
    Years Ended December 31,2008


2007


2006Gross written premium

$
467,127


$
471,660


$
451,356Net written premium

$
431,679


$
428,289


$
409,629Net earned premium

$
431,696


$
421,506


$
393,642Net losses and loss adjustment expenses

$
80,844


$
103,124


$
95,830Net commissions, brokerage and other underwriting expenses

$
235,420


$
227,412


$
216,560Loss ratio


18.7
%


24.5
%


24.3
%Expense ratio


54.5



54.0



55.0Combined ratio


73.2
%


78.5
%


79.3
%   Premiums
    Written/Earned
  and/or
 25




---



##### Table of Contents



Years Ended December 31,2008


2007


2006Contract

$
300,236


$
305,624


$
285,157Commercial


135,999



134,828



134,871Fidelity and other


30,892



31,208



31,328$
467,127


$
471,660


$
451,356             Years Ended December 31,2008


2007


2006Contract

$
268,085


$
266,749


$
247,987Commercial


132,702



130,332



130,314Fidelity and other


30,892



31,208



31,328$
431,679


$
428,289


$
409,629  26




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##### Table of Contents



Years Ended December 31,2008


2007


2006Contract

$
266,551


$
259,362


$
230,856Commercial


133,699



130,541



129,208Fidelity and other


31,446



31,603



33,578$
431,696


$
421,506


$
393,642       Net Loss
    Ratio
          Expense
    Ratio
   27




---



##### Table of Contents



Investment
    Income
    Realized
    Investment Gains and Losses
      Years Ended December 31,2008


2007


2006Gross realized investment gains

$
13


$
511


$
265Gross realized investment losses:Other-than-temporary impairment losses


(1,321
)


(941
)


(903
)Realized losses from sales of securities


(66
)


(15
)


(635
)Total gross realized investment losses


(1,387
)


(956
)


(1,538
)Net realized investment losses

$
(1,374
)

$
(445
)

$
(1,273
)   Interest
    Expense
    Income
    Taxes
    Exposure
    Management
   28




---



##### Table of Contents



Excess of
    Loss Reinsurance
    2007
    Third Party Reinsurance
    2008
    Third Party Reinsurance
    2009
    Third Party Reinsurance
   29




---



##### Table of Contents



Related
    Party Reinsurance
             30




---



##### Table of Contents



Liquidity
    and Capital Resources
           31




---



##### Table of Contents



30-year
       32




---



##### Table of Contents



Contractual Obligations as ofDecember 31, 2008

2009


2010


2011


2012


2013


Thereafter


Total(In millions)Debt(a)

$
1.7


$
1.7


$
1.7


$
1.7


$
1.7


$
65.8


$
74.3Operating leases


2.0



2.0



1.8



1.0











6.8Loss and loss adjustment expense reserves


141.9



102.8



83.8



39.1



17.8



43.3



428.7Other long-term
    liabilities(b)


1.4



1.0



0.8



0.4



0.4



8.7



12.7Total

$
147.0


$
107.5


$
88.1


$
42.2


$
19.9


$
117.8


$
522.5     (a)

    
    Reflects expected principal and interest payments.(b)

    
    Reflects unfunded postretirement benefit plans and long term
    incentive plan payments to certain executives.  12-month
         33




---



##### Table of Contents



Financial
    Condition
  Investment
    Portfolio
    December 31,





December 31,2008





2007Estimated


% of


Estimated


% ofFair Value


Total


Fair Value


TotalFixed income securities:U.S. Treasury securities and obligations of U.S. Government and
    agencies:U.S. Treasury

$
36,659



3.6
%

$
18,275



1.9
%U.S. Agencies


37,592



3.6



53,308



5.5Collateralized mortgage obligations


36,655



3.5



30,470



3.2Mortgage pass-through securities


73,692



7.1



54,474



5.7Obligations of states and political subdivisions


696,163



67.2



638,125



66.1Corporate bonds


93,476



9.0



95,702



9.9Non-agency collateralized mortgage obligations


29,378



2.9



34,544



3.6Other asset-backed securities:Second mortgages/home equity loans


4,997



0.5



9,901



1.0Consumer credit receivables


15,531



1.5



17,685



1.8Other


10,503



1.0



10,870



1.1Total fixed income securities


1,034,646



99.9
%


963,354



99.8
%Equity securities


1,231



0.1



1,789



0.2Total

$
1,035,877



100.0
%

$
965,143



100.0
%      34




---



##### Table of Contents



Gross


Gross Unrealized LossesAmortized Cost


Unrealized


Less Than


More Than


Estimated FairDecember 31, 2008

or Cost


Gains


12 Months


12 Months


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


35,671



984











36,655Mortgage pass-through securities


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
)


93,476Non-agency collateralized mortgage obligations


35,025







(2,040
)


(3,607
)


29,378Other asset-backed securities:Second mortgages/home equity loans


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   Form 10-K.
    2008


2007Credit
    Rating(a)

Fair Value


% of Total


Fair Value


% of TotalAAA/Aaa

$
519,078



50.2
%

$
758,825



78.8
%AA/Aa


401,147



38.8



130,850



13.6A/Aa


101,350



9.8



62,118



6.4BBB/Baa


10,029



0.9



7,979



0.8Non-investment grade


3,042



0.3



3,582



0.4Total

$
1,034,646



100.0
%

$
963,354



100.0
%     (a)

    
    Credit rating is determined by the higher of the two ratings,
    S&P or Moodys, when a security has a split rating. 35




---



##### Table of Contents



% of


% ofFair


UnrealizedContractual Maturity

Value


LossDue after one year through five years


7
%


6
%Due after five years through ten years


20



12Due after ten years


56



52Asset-backed securities


17



30Total


100
%


100
%     December 31, 2008


December 31, 2007Estimated


Gross


Estimated


GrossUnrealized Loss Aging

Fair Value


Unrealized Loss


Fair Value


Unrealized LossFixed income securities:Investment
    grade(a):0-6 months

$
109,973


$
3,095


$
17,785


$
1757-12 months


121,419



11,064



112,914



2,43313-24 months


81,395



12,010



9,984



671Greater than 24 months


33,450



9,573



91,683



2,463Total investment grade


346,237



35,742



232,366



5,742Non-investment grade:Greater than 24 months










3,582



447Total

$
346,237


$
35,742


$
235,948


$
6,189     (a)

    
    Investment grade is determined by the higher of the two ratings,
    S&P or Moodys, when the security has a split rating.   36




---



##### Table of Contents



(a)
  Gross Unrealized Losses


EstimatedDecember 31, 2008

AAA/Aaa


AA/Aa


A/Aa


BBB/Baa


Total


Count


Fair ValueFixed income securities:Obligations of states and political subdivisions

$
3,993


$
13,886


$
2,993


$



$
20,872



51


$
235,941Corporate bonds


135



1



2,580



1,567



4,283



19



50,909Non-agency collateralized mortgage obligations


5,647















5,647



7



29,378Other asset-backed securities:Second mortgages/home equity loans


779











2,180



2,959



2



4,997Consumer credit receivables


573



1,135











1,708



4



15,531Other


273















273



2



9,481Total

$
11,400


$
15,022


$
5,573


$
3,747


$
35,742



85


$
346,237     (a)

    
    Credit rating is determined by the higher of the two ratings,
    S&P or Moodys, when a security has a split rating. 37




---



##### Table of Contents



Risk
    Based Capital (RBC) and Other Regulatory
    Ratios
  state-by-state
 38




---



##### Table of Contents



Impact of
    Pending Accounting Standards
    SFAS 157-2, SFAS 157-2), SFAS 157-2 SFAS 157-2
  FIN 45-1,
 39




---



##### Table of Contents



FIN 45-1). FIN 45-1
  FIN 45-1 45-1 45-1
      FORWARD-LOOKING
    STATEMENTS
      
    general economic and business conditions;
    changes in financial markets such as fluctuations in interest
    rates, long-term periods of low interest rates, credit
    conditions and currency, commodity and stock prices;
    the ability of the Companys contract principals to fulfill
    their bonded obligations;
    the effects of corporate bankruptcies on surety bond claims, as
    well as on capital markets;
    changes in foreign or domestic political, social and economic
    conditions;
    regulatory initiatives and compliance with governmental
    regulations, judicial decisions, including interpretation of
    policy provisions, decisions regarding coverage, trends in
    litigation and the outcome of any litigation involving the
    Company, and rulings and changes in tax laws and regulations; 40




---



##### Table of Contents




    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 7A.
    QUANTITATIVE
    AND QUALITATIVE DISCUSSIONS ABOUT MARKET RISK     41




---



##### 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 and all other


153,885



200 bp increase



141,512



(1.0
)100 bp increase



147,525



(0.5
)100 bp decrease



160,154



0.5200 bp decrease



163,981



0.9Total 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   42




---



##### Table of Contents



HypotheticalEstimated Fair


PercentageHypothetical


Value After


IncreaseFair Value at


Change in


Hypothetical


(Decrease) inDecember 31,


Interest Rate


Change in


Stockholders2007


(bp=basis points)


Interest Rate


Equity(Dollars in thousands)U.S. Government and government agencies and authorities

$
156,527



200 bp increase


$
143,016



(1.3
)%100 bp increase



150,653



(0.6
)100 bp decrease



160,156



0.4200 bp decrease



162,267



0.6States, municipalities and political subdivisions


638,125



200 bp increase



561,138



(7.5
)100 bp increase



598,496



(3.9
)100 bp decrease



680,200



4.1200 bp decrease



725,517



8.5Corporate bonds and all other


168,702



200 bp increase



153,539



(1.5
)100 bp increase



160,869



(0.8
)100 bp decrease



177,063



0.8200 bp decrease



185,960



1.7Total fixed income securities available-for-sale

$
963,354



200 bp increase



857,693



(10.3
)100 bp increase



910,018



(5.3
)100 bp decrease



1,017,419



5.3200 bp decrease



1,073,744



10.8  43




---



##### Table of Contents



ITEM 8.
    FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA  REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
      Internal Control 
    Integrated Framework
        Internal Control  Integrated Framework
    
    44




---



##### Table of Contents



MANAGEMENTS
    REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
      Internal
    Control  Integrated Framework.
    
   45




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
            Internal Control  Integrated Framework
  
    46




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  CONSOLIDATED
    BALANCE SHEETS
  December 31,2008


2007(Amounts in thousands, except per share data)AssetsInvested assets:Fixed income securities, at fair value (amortized cost:
    $1,041,816 and $949,708)

$
1,034,646


$
963,354Equity securities, at fair value (cost: $1,231 and $1,683)


1,231



1,789Short-term investments, at cost (approximates fair value)


80,606



49,453Total invested assets


1,116,483



1,014,596Cash


9,596



10,230Deferred policy acquisition costs


102,092



104,280Insurance receivables:Premiums, including $14,303 and $12,317 from affiliates, (net of
    allowance for doubtful accounts: $1,307 and $1,145)


36,948



36,317Reinsurance, including $46,122 and $50,547 from affiliates


91,452



127,119Deposit with affiliated ceding company


29,693



34,644Intangible assets (net of accumulated amortization: $25,523 and
    $25,523)


138,785



138,785Current income taxes receivable






1,960Property and equipment, at cost (less accumulated depreciation
    and amortization: $33,506 and $29,467)


24,378



24,288Prepaid reinsurance premiums (including $105 and $322 from
    affiliates)


420



510Accrued investment income


13,464



12,242Other assets


2,208



2,683Total assets

$
1,565,519


$
1,507,654LiabilitiesReserves:Unpaid losses and loss adjustment expenses

$
428,724


$
472,842Unearned premiums


258,824



258,930Total reserves


687,548



731,772Debt


30,892



30,791Deferred income taxes, net


9,647



17,756Reinsurance and other payables to affiliates


1,680



643Accrued expenses


20,056



18,273Liability for postretirement benefits


9,283



10,001Payable for securities purchased


8,398



Federal income tax payable


1,581



Other liabilities


29,139



30,713Total liabilities


798,224



839,949Commitments and contingencies (See Notes 6, 7, & 8)Stockholders EquityPreferred 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; 45,544 shares issued and 44,168 shares
    outstanding at December 31, 2008 and 45,505 shares
    issued and 44,121 shares outstanding at December 31,
    2007


455



455Additional paid-in capital


276,255



274,069Retained earnings


509,644



399,241Accumulated other comprehensive (loss) income


(4,286
)


8,800Treasury stock, 1,376 and 1,384 shares, at cost


(14,773
)


(14,860
)Total stockholders equity


767,295



667,705Total liabilities and stockholders equity

$
1,565,519


$
1,507,654    47




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENTS OF INCOME
  Years Ended December 31,2008


2007


2006(Amounts in thousands,except per share data)Revenues:Net earned premium

$
431,696


$
421,506


$
393,642Net investment income


47,302



44,636



39,324Net realized investment (losses)


(1,374
)


(445
)


(1,273
)Total revenues


477,624



465,697



431,693Expenses:Net losses and loss adjustment expenses


80,844



103,124



95,830Net commissions, brokerage and other underwriting expenses


235,420



227,412



216,560Interest expense


2,148



2,918



3,669Total expenses


318,412



333,454



316,059Income before income taxes


159,212



132,243



115,634Income tax expense


48,809



39,747



32,816Net income

$
110,403


$
92,496


$
82,818Earnings per common share

$
2.50


$
2.10


$
1.90Earnings per common share, assuming dilution

$
2.49


$
2.09


$
1.89Weighted average shares outstanding


44,145



44,000



43,654Weighted average shares outstanding, assuming dilution


44,260



44,267



43,922    48




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENTS OF STOCKHOLDERS EQUITY
  AccumulatedCommon





Additional








Other


Treasury


TotalStock Shares


Common


Paid-in


Comprehensive


Retained


Comprehensive


Stock


StockholdersOutstanding


Stock


Capital


Income


Earnings


Income (Loss)


At Cost


Equity(Amounts in thousands)Balance, January 1, 2006


43,334


$
447


$
259,684






$
223,927


$
7,546


$
(15,029
)

$
476,575Comprehensive income:Net income





$



$



$
82,818


$
82,818


$



$



$
82,818Other comprehensive income:Change in unrealized gains on securities, after income tax
    expense of $57 (net of reclassification adjustment of ($819),
    after income tax benefit of $441)














107







107







107Total comprehensive income













$
82,925















Adjustment to initially recognize accumulated postretirement
    benefit obligations, net of tax benefit of $1,997






















(2,660
)






(2,660
)Stock-based compensation










1,207



















1,207Stock options exercised and other


538



6



7,760















89



7,855Balance, December 31, 2006


43,872


$
453


$
268,651






$
306,745


$
4,993


$
(14,940
)

$
565,902Comprehensive income:Net income





$



$



$
92,496


$
92,496


$



$



$
92,496Other comprehensive income:Change in unrealized gains on securities, after income tax
    expense of $693 (net of reclassification adjustment of ($120),
    after income tax benefit of $64)














1,286







1,286







1,286Net change related to postretirement benefits, after income tax
    expense of $1,117














2,521







2,521







2,521Total comprehensive income













$
96,303















Stock-based compensation










1,892



















1,892Stock options exercised and other


249



2



3,526















80



3,608Balance, December 31, 2007


44,121


$
455


$
274,069






$
399,241


$
8,800


$
(14,860
)

$
667,705Comprehensive income:Net income





$



$



$
110,403


$
110,403


$



$



$
110,403Other comprehensive income (loss):Change in unrealized gains (losses) on securities, after income
    tax benefit of $7,323 (net of reclassification adjustment of
    ($282), after income tax benefit of $152)














(13,599
)






(13,599
)






(13,599
)Net change related to postretirement benefits, after income tax
    expense of $565














513







513







513Total comprehensive income













$
97,317















Stock-based compensation










1,693



















1,693Stock options exercised and other


47







493















87



580Balance, December 31, 2008


44,168


$
455


$
276,255






$
509,644


$
(4,286
)

$
(14,773
)

$
767,295    49




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
  Years Ended December 31,2008


2007


2006(Amounts in thousands)Cash Flows From Operating Activities:Net income

$
110,403


$
92,496


$
82,818Adjustments to reconcile net income to net cash provided by
    operating activities:Provision for doubtful accounts


443



393



594Depreciation and amortization


5,809



6,179



5,302Amortization of bond premium, net


2,888



369



1,149Loss on disposal of property and equipment


1,155



279



141Net realized investment losses


1,374



445



1,273Stock-based compensation


1,693



1,892



1,207Changes in:Insurance receivables


34,593



(8,212
)


(3,182
)Reserve for unearned premiums


(106
)


5,127



12,756Reserve for unpaid losses and loss adjustment expenses


(44,118
)


38,618



9,775Deposit with affiliated ceding company


4,951



(1,499
)


(859
)Deferred policy acquisition costs


2,188



(1,343
)


(104
)Deferred income taxes, net


(1,406
)


(1,523
)


(1,630
)Reinsurance and other payables to affiliates


1,037



477



(8
)Prepaid reinsurance premiums


90



1,655



3,231Accrued expenses


1,783



(1,974
)


3,715Other assets and liabilities


1,435



(4,173
)


8,070Net cash provided by operating activities


124,212



129,206



124,248Cash Flows From Investing Activities:Fixed income securities:Purchases


(183,949
)


(350,480
)


(337,848
)Maturities


62,802



55,357



47,288Sales


24,402



114,303



224,338Purchases of equity securities


(550
)


(822
)


(1,193
)Proceeds from the sale of equity securities


626



844



1,041Changes in short-term investments


(30,403
)


56,897



(37,180
)Purchases of property and equipment, net


(6,952
)


(5,838
)


(10,475
)Changes in payables for securities purchased


8,398







Other, net


200



(9
)


767Net cash (used in) investing activities


(125,426
)


(129,748
)


(113,262
)Cash Flows From Financing Activities:Principal payments on debt










(20,000
)Employee stock option exercises and other


580



3,608



7,855Net cash provided by (used in) financing activities


580



3,608



(12,145
)(Decrease) increase in cash


(634
)


3,066



(1,159
)Cash at beginning of period


10,230



7,164



8,323Cash at end of period

$
9,596


$
10,230


$
7,164Supplemental Disclosure of Cash Flow Information:Cash paid during the period for:Interest

$
2,154


$
2,837


$
3,628Income taxes

$
46,600


$
42,219


$
38,349    50




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  1.
    Significant
    Accounting Policies  Formation
    of CNA Surety Corporation and Merger
    Principles
    of Consolidation
    Estimates
    Investments
        Deferred
    Policy Acquisition Costs
   51




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##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Intangible
    Assets
        Reserves
    for Unpaid Losses and Loss Adjustment Expenses
    Insurance
    Premiums
    Reinsurance
   52




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##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Stock-Based
    Compensation
    Income
    Taxes
      Property
    and Equipment
    Earnings
    Per Share
   53




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##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Years Ended December 31,2008


2007


2006Net income

$
110,403


$
92,496


$
82,818Shares:Weighted average shares outstanding


44,121



43,872



43,334Weighted average shares of options exercised and additional
    stock issuance


24



128



320Total weighted average shares outstanding


44,145



44,000



43,654Effect of dilutive options


115



267



268Total weighted average shares outstanding, assuming dilution


44,260



44,267



43,922Earnings per share

$
2.50


$
2.10


$
1.90Earnings per share, assuming dilution

$
2.49


$
2.09


$
1.89     Accounting
    Pronouncements
     54




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##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  SFAS 157-2, SFAS 157-2), SFAS 157-3, SFAS 157-3), SFAS 157-3
  SFAS 157-3 SFAS 157-2 SFAS 157-2
  2.
    Investments    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


35,671



984











36,655Mortgage pass-through securities


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
)


93,476Non-agency collateralized mortgage obligations


35,025







(2,040
)


(3,607
)


29,378Other asset-backed securities:Second mortgages/home equity loans


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   55




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Gross


Gross Unrealized LossesAmortized Cost


Unrealized


Less Than


More Than


EstimatedDecember 31, 2007

or Cost


Gains


12 Months


12 Months


Fair ValueFixed income securities:U.S. Treasury securities and obligations of U.S. Government and
    agencies:U.S. Treasury

$
17,790


$
485


$



$



$
18,275U.S. Agencies


52,617



706







(15
)


53,308Collateralized mortgage obligations


30,086



502



(11
)


(107
)


30,470Mortgage pass-through securities


54,659



401







(586
)


54,474Obligations of states and political subdivisions


625,858



15,408



(2,500
)


(641
)


638,125Corporate bonds


95,714



1,493



(97
)


(1,408
)


95,702Non-agency collateralized mortgage obligations


35,011



232







(699
)


34,544Other asset-backed securities:Second mortgages/home equity loans


9,951











(50
)


9,901Consumer credit receivables


17,234



451











17,685Other


10,788



157







(75
)


10,870Total fixed income securities


949,708



19,835



(2,608
)


(3,581
)


963,354Equity securities


1,683



106











1,789Total

$
951,391


$
19,941


$
(2,608
)

$
(3,581
)

$
965,143       2008


2007Amortized


Estimated Fair


Amortized


Estimated FairCost


Value


Cost


ValueFixed income securities:Due within one year

$
4,535


$
4,590


$
4,133


$
4,164Due after one year but within five years


216,232



222,344



189,384



193,656Due after five years but within ten years


345,285



355,171



323,327



332,657Due after ten years


296,917



281,785



275,135



274,933862,969



863,890



791,979



805,410Mortgage pass-through securities, collateralized mortgage
    obligations and asset-backed securities


178,847



170,756



157,729



157,944$
1,041,816


$
1,034,646


$
949,708


$
963,354  56




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Years Ended December 31,2008


2007


2006Investment income:Fixed income securities

$
46,134


$
39,990


$
35,648Equity securities


56



72



41Short-term investments


1,340



4,265



3,333Other


45







4Total investment income on available-for-sale securities


47,575



44,327



39,026Investment income on deposit with affiliated ceding company


912



1,611



1,513Investment expenses


(1,185
)


(1,302
)


(1,215
)Net investment income

$
47,302


$
44,636


$
39,324     Years Ended December 31,2008


2007


2006Net realized investment gains (losses):Fixed income securities:Gross realized investment gains

$



$
345


$
140Gross realized investment losses:Other-than-temporary impairment losses


(978
)


(941
)


(903
)Realized losses from sales


(19
)


(14
)


(488
)Total gross realized investment losses


(997
)


(955
)


(1,391
)Net realized investment losses on fixed income securities


(997
)


(610
)


(1,251
)Equity securities:Gross realized investment gains


13



147



125Gross realized investment losses:Other-than-temporary impairment losses


(343
)






Realized losses from sales


(46
)


(1
)


(8
)Total gross realized investment losses


(389
)


(1
)


(8
)Net realized investment (losses) gains on equity securities


(376
)


146



117Other


(1
)


19



(139
)Net realized investment losses

$
(1,374
)

$
(445
)

$
(1,273
)Net change in unrealized gains (losses)Fixed income securities

$
(20,816
)

$
2,032


$
109Equity securities


(106
)


(53
)


55Total net change in unrealized (losses) gains

$
(20,922
)

$
1,979


$
164Net realized (losses) gains and change in unrealized (losses)
    gains

$
(22,296
)

$
1,534


$
(1,109
)  57




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      % ofEstimated


% ofFair


UnrealizedContractual Maturity

Value


LossDue after one year through five years


7
%


6
%Due after five years through ten years


20



12Due after ten years


56



52Asset-backed securities


17



30Total


100
%


100
%     December 31, 2008


December 31, 2007Gross





GrossEstimated


Unrealized


Estimated


UnrealizedUnrealized Loss Aging

Fair Value


Loss


Fair Value


LossFixed income securities:Investment
    grade(a):0-6 months

$
109,973


$
3,095


$
17,785


$
1757-12 months


121,419



11,064



112,914



2,43313-24 months


81,395



12,010



9,984



671Greater than 24 months


33,450



9,573



91,683



2,463Total investment grade


346,237



35,742



232,366



5,742Non-investment grade:Greater than 24 months










3,582



447Total

$
346,237


$
35,742


$
235,948


$
6,189     (a)

    
    Investment grade is determined by the higher of the two ratings,
    Standard & Poors (S&P) or
    Moodys Investor Services (Moodys), when
    the security has a split rating.     58




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##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        (a)
  Gross Unrealized Losses


Estimated FairDecember 31, 2008

AAA/Aaa


AA/Aa


A/Aa


BBB/Baa


Total


Count


ValueFixed income securities:Obligations of states and political subdivisions

$
3,993


$
13,886


$
2,993


$



$
20,872



51


$
235,941Corporate bonds


135



1



2,580



1,567



4,283



19



50,909Non-agency collateralized mortgage obligations


5,647















5,647



7



29,378Other asset-backed securities:Second mortgages/home equity loans


779











2,180



2,959



2



4,997Consumer credit receivables


573



1,135











1,708



4



15,531Other


273















273



2



9,481Total

$
11,400


$
15,022


$
5,573


$
3,747


$
35,742



85


$
346,237     (a)

    
    Credit rating is determined by the higher of the two ratings,
    S&P or Moodys, when a security has a split rating.     59




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##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    3.
    Debt  30-year
            4.
    Fair
    Value of Financial Instruments    
    Level 1  Quoted prices for identical
    instruments in active markets. 60




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##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   
    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
      December 31, 2008Fair Value Measurements Using


Assets at FairLevel 1


Level 2


Level 3


ValueAssets:Fixed income securities at fair value

$
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 instruments.   61




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##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  5.
    Deferred
    Policy Acquisition Costs and Other Operating Expenses    Years Ended December 31,2008


2007


2006Balance at beginning of period

$
104,280


$
102,937


$
102,833Costs deferred


171,117



171,689



164,614Amortization


(173,305
)


(170,346
)


(164,510
)Balance at end of period

$
102,092


$
104,280


$
102,937     Years Ended December 31,2008


2007


2006Amortization of deferred policy acquisition costs

$
173,305


$
170,346


$
164,510Other operating expenses


62,115



57,066



52,050Net commissions, brokerage and other underwriting expenses

$
235,420


$
227,412


$
216,560   6.
    Reinsurance      Years Ended December 31,2008


2007


2006Written


Earned


Written


Earned


Written


EarnedDirect

$
358,625


$
357,771


$
360,877


$
353,594


$
334,020


$
324,831Assumed


108,502



109,463



110,783



112,938



117,336



113,769Ceded


(35,448
)


(35,538
)


(43,371
)


(45,026
)


(41,727
)


(44,958
)Net premiums

$
431,679


$
431,696


$
428,289


$
421,506


$
409,629


$
393,642    62




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Years Ended December 31,2008


2007


2006$


Ratio


$


Ratio


$


RatioGross losses and loss adjustment expenses

$
93,151



19.9
%

$
119,567



25.6
%

$
94,520



21.6
%(Increase) decrease in reinsurance recoverables


(12,307
)


34.6
%


(16,443
)


36.5
%


1,310



(2.9
)%Net losses and loss adjustment expenses

$
80,844



18.7
%

$
103,124



24.5
%

$
95,830



24.3
%       Excess of
    Loss Reinsurance
  2007
    Third Party Reinsurance
   63




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  2008
    Third Party Reinsurance
    2009
    Third Party Reinsurance
    Related
    Party Reinsurance
       64




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
         65




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      7.
    Reserves
    for Losses and Loss Adjustment Expenses    Years Ended December 31,2008


2007


2006Reserves at beginning of year:Gross

$
472,842


$
434,224


$
424,449Ceded reinsurance


150,496



144,858



147,435Net reserves at beginning of year


322,346



289,366



277,014Net incurred loss and loss adjustment expenses:Provision for insured events of current year


126,345



108,178



101,140Decrease in provision for insured events of prior years


(45,501
)


(5,054
)


(5,310
)Total net incurred


80,844



103,124



95,830Net payments attributable to:Current year events


11,954



14,265



6,855Prior year events


46,203



55,879



76,623Total net payments


58,157



70,144



83,478Net reserves at end of year


345,033



322,346



289,366Ceded reinsurance at end of year


83,691



150,496



144,858Gross reserves at end of year

$
428,724


$
472,842


$
434,224          66




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    8.
    Commitments
    and Contingencies      9.
    Income
    Taxes    2008


2007Deferred tax assets related to:Unearned premium reserve

$
18,286


$
18,361Loss and loss adjustment expense reserve


4,249



3,946Accrued expenses


2,082



2,253Accumulated postretirement benefit obligation


3,826



4,233Policyholder dividends


3,192



2,958Unrealized net losses on securities


2,510



Other


2,722



1,681Total deferred tax assets


36,867



33,432Deferred tax liabilities related to:Deferred policy acquisition costs


35,732



36,498Intangible assets


5,650



5,650Unrealized net gains on securities






4,813Difference between book and tax depreciation


3,332



2,461Other


1,800



1,766Total deferred tax liabilities


46,514



51,188Net deferred tax liability

$
9,647


$
17,756    67




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Years Ended December 31,2008


2007


2006Current tax expense

$
50,215


$
41,270


$
34,446Deferred tax benefit


(1,406
)


(1,523
)


(1,630
)Total income tax expense

$
48,809


$
39,747


$
32,816     Years Ended December 31,2008


2007


2006Federal statutory rate


35.0
%


35.0
%


35.0
%Tax-exempt income deduction


(5.3
)


(5.7
)


(5.5
)Non-deductible expenses


0.2



0.2



0.2State income tax, net of federal income tax benefit


0.8



0.9



1.0Other






(0.3
)


(2.3
)Total income tax expense


30.7
%


30.1
%


28.4
%       10.
    Employee
    Benefits       68




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          2008


2007Reconciliation of benefit obligation:Benefit obligation at beginning of the year

$
10,001


$
12,466Service cost


192



334Interest cost


486



761Actuarial gain


(1,240
)


(3,359
)Benefits and expenses paid


(182
)


(201
)Medicare subsidy received


26



Benefit obligation at end of year

$
9,283


$
10,001      69




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2008


2007


2006Amounts not yet recognized in net periodic benefit cost:Net prior service benefit

$
(349
)

$
(511
)

$
(672
)Net actuarial loss


288



1,528



5,329Total pre-tax accumulated other comprehensive (income) loss

$
(61
)

$
1,017


$
4,657Pre-tax accumulated other comprehensive loss 
    beginning of year related to postretirement benefit obligation

$
1,017


$
4,657


$
Reclassification adjustments recognized in net periodic benefit
    cost:Amortization of prior service cost


162



106



Amortization of net actuarial loss






(387
)


Amounts recognized in AOCI arising during the year:Net actuarial gains


(1,240
)


(3,359
)


Increase to initially recognize accumulated postretirement
    benefit obligations










4,657Pre-tax accumulated other comprehensive (income)
    loss  end of year, related to postretirement benefit
    obligation

$
(61
)

$
1,017


$
4,657       2008


2007Liability for postretirement benefits

$
9,283


$
10,001Deferred income taxes, net


(3,826
)


(4,223
)Accumulated other comprehensive (income) loss, net of tax


(375
)


138     Difference Due toIncluding Effects


Without Effects of


Effects ofof Tax-Free Subsidy


Tax-Free Subsidy


Tax-Free SubsidyDecember 31, 2008

$
9,283


$
10,931


$
1,648December 31, 2007

$
10,001


$
11,495


$
1,494  70




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2008


2007


2006Net periodic benefit cost:Service cost

$
192


$
333


$
259Interest cost


486



761



584Amortization of prior service cost (benefit)


(162
)


(106
)


(162
)Net amortization of actuarial loss






387



270Net periodic benefit cost

$
516


$
1,375


$
951   2008


2007


2006Key Assumptions:Discount rate


5.870
%


5.875
%


5.625
%Rate of compensation increases (postretirement sick leave plan
    only)


5.0
%


5.0
%


5.0
%Initial health care cost trend rate, pre-Medicare


9.0
%


10.0
%


10.0
%Initial health care cost trend rate, post-Medicare


9.0
%


10.0
%


10.0
%Ultimate health care cost trend rate


5.0
%


5.0
%


5.0
%Year in which ultimate trend rate is reached


2017



2013



2012Mortality


RP 2000 Projected



RP 2000 Projected



RP 2000 ProjectedAverage remaining service life  postretirement
    medical plan


12.3 Years



12.7 Years



12.7 YearsAverage life expectancy  postretirement medical plan


14.0 Years



14.3 Years



13.5 YearsAverage remaining service life  sick leave plan


12.3 Years



12.7 Years



12.6 Years      71




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##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Amortization of prior service cost (credit)

$
(162
)Amortization of net actuarial loss


Total estimated benefit to be recognized

$
(162
)     Before Impact of Federal Subsidy


Net of Federal Subsidy2009

$
236


$
2072010


256



2192011


274



2312012


308



2622013


360



3102014-2018


2,843



2,518   11.
    Stockholders
    Equity    Equity
    Compensation Plans
       72




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        WeightedAverage OptionShares Subject


Price perto Option


ShareOutstanding options at January 1, 2008


1,054,588


$
14.53Options granted


259,380


$
16.35Options forfeited


(45,600
)

$
16.70Options expired


(8,900
)

$
14.14Options exercised


(38,350
)

$
11.77Outstanding options at December 31, 2008


1,221,118


$
14.93     WeightedShares


AverageSubject


Grant DateTo Option


Fair ValueNon-vested options at January 1, 2008


554,557


$
7.23Options granted


259,380


$
6.32Options vested


(223,242
)

$
6.11Options forfeited


(45,600
)

$
6.76Non-vested options at December 31, 2008


545,095


$
7.29    73




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Options OutstandingWeighted Average





Options ExercisableNumber


Remaining


Weighted Average


Number


Weighted AverageRange of Exercise Prices

Outstanding


Contractual Life


Exercise Price


Exercisable


Exercise Price$9.35 to $11.50


221,775



3.9 years


$
9.89



221,775


$
9.89$12.06 to $15.875


451,338



6.1 years



12.77



378,363



12.71$16.00 and above


548,005



8.6 years



18.75



75,885



20.70     Options Vested or Expected to VestWeighted





Weighted AverageAverage


Aggregate


RemainingNumber


Exercise Price


Intrinsic Value


Contractual LifeDecember 31, 2008


1,148,878


$
14.71


$
5,560,565



6.7 years   Options ExercisableWeighted





Weighted AverageAverage


Aggregate


RemainingNumber


Exercise Price


Intrinsic Value


Contractual LifeDecember 31, 2008


676,023


$
12.68


$
4,520,224



5.6 years         12.
    Segment
    Information      and/or
 74




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##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Gross Written Premiums% of





% of





% of2008


Total


2007


Total


2006


TotalContract

$
300,236



64.3
%

$
305,624



64.8
%

$
285,157



63.2
%Commercial:License and permit


80,291



17.2



78,875



16.7



79,144



17.5Judicial and fiduciary


23,227



5.0



23,348



5.0



23,949



5.3Public official


23,466



5.0



23,584



5.0



23,491



5.2Other


9,015



1.9



9,021



1.9



8,287



1.9Total commercial


135,999



29.1



134,828



28.6



134,871



29.9Fidelity and other


30,892



6.6



31,208



6.6



31,328



6.9$
467,127



100.0
%

$
471,660



100.0
%

$
451,356



100.0
%Domestic

$
461,998



98.9
%

$
467,285



99.1
%

$
448,387



99.3
%International


5,129



1.1



4,375



0.9



2,969



0.7$
467,127



100.0
%

$
471,660



100.0
%

$
451,356



100.0
%   Net Written Premiums% of





% of





% of2008


Total


2007


Total


2006


TotalContract

$
268,085



62.1
%

$
266,749



62.3
%

$
247,987



60.5
%Commercial


132,702



30.7



130,332



30.4



130,314



31.8Fidelity and other


30,892



7.2



31,208



7.3



31,328



7.7$
431,679



100.0
%

$
428,289



100.0
%

$
409,629



100.0
%Domestic

$
426,570



98.8
%

$
423,914



99.0
%

$
406,684



99.3
%International


5,109



1.2



4,375



1.0



2,945



0.7$
431,679



100.0
%

$
428,289



100.0
%

$
409,629



100.0
%    75




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  13.
    Statutory
    Financial Data (unaudited)      2008


2007Consolidated equity per GAAP

$
767,295


$
667,705Impact of non-insurance companies and eliminations


18,809



18,063Insurance company equity per GAAP


786,104



685,768Intangible assets


(133,361
)


(133,361
)Net unrealized loss (gain) on fixed income securities


4,991



(14,092
)Deferred policy acquisition costs


(102,092
)


(104,280
)Deferred income taxes, net


30,205



34,134Accumulated postretirement benefit obligations


(61
)


1,017Non-admitted assets and other


(31,149
)


(26,961
)Total statutory capital and surplus per statutory accounting
    practices

$
554,637


$
442,225   state-by-state
   76




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##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    14.
    Related
    Party Transactions    and/or
       77




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
           78




---



##### Table of Contents



CNA
    SURETY CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  15.
    Selected
    Quarterly Financial Data (unaudited)    First


Second


Third


FourthQuarter


Quarter


Quarter


Quarter2008Revenues

$
114,397


$
120,202


$
121,300


$
121,725Income before income taxes

$
32,523


$
34,455


$
50,353


$
41,881Income tax expense


9,621



10,405



16,020



12,763Net income

$
22,902


$
24,050


$
34,333


$
29,118Basic earnings per common share

$
0.52


$
0.54


$
0.78


$
0.66Diluted earnings per common share

$
0.52


$
0.54


$
0.78


$
0.662007Revenues

$
109,283


$
115,620


$
125,010


$
115,784Income before income taxes

$
29,721


$
31,018


$
40,478


$
31,026Income tax expense


8,972



9,124



12,481



9,170Net income

$
20,749


$
21,894


$
27,997


$
21,856Basic earnings per common share

$
0.47


$
0.50


$
0.64


$
0.50Diluted earnings per common share

$
0.47


$
0.50


$
0.63


$
0.492006Revenues

$
101,060


$
107,145


$
111,649


$
111,839Income before income taxes

$
25,599


$
27,674


$
33,022


$
29,339Income tax expense


7,598



8,185



9,402



7,631Net income

$
18,001


$
19,489


$
23,620


$
21,708Basic earnings per common share

$
0.41


$
0.45


$
0.54


$
0.50Diluted earnings per common share

$
0.41


$
0.45


$
0.54


$
0.49  79




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##### Table of Contents



ITEM 9.
    CHANGES
    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
    FINANCIAL DISCLOSURE    ITEM 9A.
    CONTROLS
    AND PROCEDURES  Rules 13a-15(e) and 15d-15(e) under
  Form 10-K
  Rules 13a-15(f) 15d-15(f) under
  ITEM 9B.
    OTHER
    INFORMATION   PART III.  ITEMS 10,
    11, 12, 13, and 14.
    DIRECTORS
    AND EXECUTIVE OFFICERS OF THE REGISTRANT, EXECUTIVE
    COMPENSATION, SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
    AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS, CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS, AND PRINCIPAL ACCOUNTANT
    FEES AND SERVICES  Form 10-K.
 80




---



##### 



PART IV.  ITEM 15.
    EXHIBITS,
    FINANCIAL STATEMENT SCHEDULES   
 PageFinancial Statement Schedules:Schedule I  Summary of
    Investments


82Schedule II  Condensed Financial
    Information of Registrant


83Schedule III  Supplementary
    Insurance Information


87Schedule IV  Reinsurance


88Schedule V  Valuation and
    Qualifying Accounts


89Schedule VI  Supplemental
    Information Concerning Property  Casualty Insurance
    Operations


90(a)(3) Exhibits


91   81




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##### Table of Contents



SCHEDULE I  CNA
    SURETY CORPORATION AND SUBSIDIARIES
    SUMMARY OF INVESTMENTS
    OTHER THAN INVESTMENTS IN RELATED PARTIES
    As of December 31, 2008 and 2007
  As of December 31, 2008Cost orAmortized


Fair


CarryingCost


Value


Value(Amounts in thousands)Fixed Income Securities:U.S. Government and government agencies and authorities

$
177,490


$
184,598


$
184,598States, municipalities and political subdivisions


697,305



696,163



696,163All other bonds, including corporate bonds and other
    asset-backed securities


167,021



153,885



153,885Total fixed income securities


1,041,816



1,034,646



1,034,646Equity securities


1,231



1,231



1,231Short-term investments


80,606







80,606Total investments

$
1,123,653






$
1,116,483   As of December 31, 2007Cost orAmortized


Fair


CarryingCost


Value


Value(Amounts in thousands)Fixed Income Securities:U.S. Government and government agencies and authorities

$
155,152


$
156,527


$
156,527States, municipalities and political subdivisions


625,858



638,125



638,125All other bonds, including corporate bonds and other
    asset-backed securities


168,698



168,702



168,702Total fixed income securities


949,708



963,354



963,354Equity securities


1,683



1,789



1,789Short-term investments


49,453







49,453Total investments

$
1,000,844






$
1,014,596  82




---



##### Table of Contents



SCHEDULE II  CNA
    SURETY CORPORATION
    CONDENSED FINANCIAL INFORMATION OF REGISTRANT
    (PARENT COMPANY)
    BALANCE SHEETS
  December 31,2008


2007(Amounts in thousands)AssetsInvestments in and advances to subsidiaries

$
779,743


$
680,923Equity investments (cost: $1,231 and $1,683)


1,231



1,789Short-term investments, at cost (which approximates fair value)


8,533



7,294Cash (restricted: $4,190 and $4,765)


4,605



4,767Other assets


6,386



6,384Total assets

$
800,498


$
701,157LiabilitiesDebt

$
30,892


$
30,791Other liabilities


2,311



2,661Total liabilities


33,203



33,452Stockholders EquityCommon stock


455



455Additional paid-in capital


276,255



274,069Retained earnings


509,644



399,241Accumulated other comprehensive income (loss)


(4,286
)


8,800Treasury stock, at cost


(14,773
)


(14,860
)Total stockholders equity


767,295



667,705Total liabilities and stockholders equity

$
800,498


$
701,157    83




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##### Table of Contents



SCHEDULE II
  CNA
    SURETY CORPORATION
    CONDENSED FINANCIAL INFORMATION OF REGISTRANT
    (PARENT COMPANY)  (Continued)
    STATEMENTS OF INCOME
  Years Ended December 31,2008


2007


2006(Amounts in thousands)Revenues:Net investment income

$
347


$
677


$
854Net realized investment (losses) gains


(376
)


146



117Total revenues


(29
)


823



971Expenses:Interest expense


2,148



2,918



3,669Corporate expense


6,968



7,193



7,672Total expenses


9,116



10,111



11,341Loss from operations before income taxes and equity in net
    income of subsidiaries


(9,145
)


(9,288
)


(10,370
)Income tax benefit


(3,161
)


(3,367
)


(5,235
)Net loss before equity in net income of subsidiaries


(5,984
)


(5,921
)


(5,135
)Equity in net income of subsidiaries


116,387



98,417



87,953Net income

$
110,403


$
92,496


$
82,818    84




---



##### Table of Contents



SCHEDULE II
  CNA
    SURETY CORPORATION
    CONDENSED FINANCIAL INFORMATION OF REGISTRANT
    (PARENT COMPANY)  (Continued)
    STATEMENTS OF CASH FLOWS
  Years Ended December 31,2008


2007


2006(Amounts in thousands)Operating Activities:Net income

$
110,403


$
92,496


$
82,818Adjustments to reconcile net income to net cash (used in)
    provided by operating activities:Equity in net income of subsidiaries


(116,387
)


(98,417
)


(87,953
)Depreciation and amortization


101



101



101Net realized investment losses (gains)


376



(146
)


(117
)Stock-based compensation


1,693



1,892



1,207Cash dividends from subsidiaries


3,000



2,000



11,513Tax payments received from subsidiaries


48,570



43,385



42,449Federal income tax payments


(45,248
)


(41,000
)


(37,250
)Changes in:Deferred income taxes, net


(490
)


(483
)


(653
)Accrued expenses


(701
)


(747
)


642Change in other assets and liabilities


(2,048
)


(3,380
)


(5,358
)Net cash (used in) provided by operating activities


(731
)


(4,299
)


7,399Investing Activities:Net advances from (to) subsidiaries


1,152



232



(2,032
)Net sales of fixed income securities






200



200Net sales (purchases) of equity securities


76



(29
)


(190
)Changes in short-term investments


(1,239
)


2,158



7,099Net cash (used in) provided by investing activities


(11
)


2,561



5,077Financing Activities:Principal payments on debt










(20,000
)Employee stock option exercises and other


580



3,608



7,855Net cash provided by (used in) financing activities


580



3,608



(12,145
)(Decrease) increase in cash


(162
)


1,870



331Cash at beginning of period


4,767



2,897



2,566Cash at end of period

$
4,605


$
4,767


$
2,897    85




---



##### Table of Contents



SCHEDULE II
  CNA
    SURETY CORPORATION
  CONDENSED
    FINANCIAL INFORMATION OF REGISTRANT
 (PARENT
    COMPANY)  (Continued)
 NOTES TO
    CONDENSED FINANCIAL INFORMATION
  1.
    Restricted
    Cash and Short-Term Investments    2.
    Debt  30-year
         86




---



##### Table of Contents



SCHEDULE III  CNA
    SURETY CORPORATION AND SUBSIDIARIES
    SUPPLEMENTARY INSURANCE INFORMATION
    As of and for the Years Ended
    December 31, 2008, 2007 and 2006
  Years Ended December 31,2008


2007


2006(Amounts in thousands)Deferred policy acquisition costs

$
102,092


$
104,280Unpaid losses and loss adjustment expense reserves

$
428,724


$
472,842Unearned premiums

$
258,824


$
258,930Net premium revenue

$
431,696


$
421,506


$
393,642Net investment income

$
47,302


$
44,636


$
39,324Benefits, claims, losses and settlement expenses

$
80,844


$
103,124


$
95,830Amortization of deferred policy acquisition costs

$
173,305


$
170,346


$
164,510Other operating expenses

$
62,115


$
57,066


$
52,050Net premiums written

$
431,679


$
428,289


$
409,629  87




---



##### Table of Contents



SCHEDULE IV  CNA
    SURETY CORPORATION AND SUBSIDIARIES
  REINSURANCE
 For the
    Years Ended December 31, 2008, 2007 and 2006
  PercentageCeded to


Assumed





of AmountGross


Other


from Other


Net


AssumedAmount


Companies


Companies(1)


Amount


to Net(Amounts in thousands)Year Ended December 31, 2008Premiums written:Property and casualty insurance

$
358,625


$
35,448


$
108,502


$
431,679



25.1
%Total premiums written

$
358,625


$
35,448


$
108,502


$
431,679



25.1
%Premiums earned:Property and casualty insurance

$
357,771


$
35,538


$
109,463


$
431,696



25.4
%Total premiums earned

$
357,771


$
35,538


$
109,463


$
431,696



25.4
%Year Ended December 31, 2007Premiums written:Property and casualty insurance

$
360,877


$
43,371


$
110,783


$
428,289



25.9
%Total premiums written

$
360,877


$
43,371


$
110,783


$
428,289



25.9
%Premiums earned:Property and casualty insurance

$
353,594


$
45,026


$
112,938


$
421,506



26.8
%Total premiums earned

$
353,594


$
45,026


$
112,938


$
421,506



26.8
%Year Ended December 31, 2006Premiums written:Property and casualty insurance

$
334,020


$
41,727


$
117,336


$
409,629



28.6
%Total premiums written

$
334,020


$
41,727


$
117,336


$
409,629



28.6
%Premiums earned:Property and casualty insurance

$
324,831


$
44,958


$
113,769


$
393,642



28.9
%Total premiums earned

$
324,831


$
44,958


$
113,769


$
393,642



28.9
%     (1)

    
    Primarily from affiliates. 88




---



##### Table of Contents



SCHEDULE V  CNA
    SURETY CORPORATION AND SUBSIDIARIES
  VALUATION
    AND QUALIFYING ACCOUNTS
 As of and
    for the Years Ended December 31, 2008, 2007 and
    2006
  AdditionsBalance at


Charged to


Charged to





Balance atBeginning


Costs and


Other





End ofof Period


Expenses


Accounts


Deductions(1)


Period(Amounts in thousands)Year Ended December 31, 2008Allowance for doubtful accounts on premiums receivable

$
1,145


$
443


$



$
281


$
1,307Allowance for doubtful accounts on reinsurance receivable

$



$



$



$



$
Year Ended December 31, 2007Allowance for doubtful accounts on premiums receivable

$
1,369


$
393


$



$
617


$
1,145Allowance for doubtful accounts on reinsurance receivable

$



$



$



$



$
Year Ended December 31, 2006Allowance for doubtful accounts on premiums receivable

$
1,490


$
594


$



$
715


$
1,369Allowance for doubtful accounts on reinsurance receivable

$



$



$



$



$
     (1)

    
    Write-offs charged against allowance. 89




---



##### Table of Contents



SCHEDULE VI  CNA
    SURETY CORPORATION AND SUBSIDIARIES
    SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY
    INSURANCE OPERATIONS
    As of and for the Years Ended December 31, 2008, 2007 and
    2006
  Years Ended December 31,2008


2007


2006(Amounts in thousands)Deferred policy acquisition costs

$
102,092


$
104,280Reserves for unpaid claims and claim adjustment expenses

$
428,724


$
472,842Discount (if any) deducted

$



$
Unearned premiums

$
258,824


$
258,930Net premium revenue

$
431,696


$
421,506


$
393,642Net investment income

$
47,302


$
44,636


$
39,324Net claims and claim expenses incurred related to:Current year

$
126,345


$
108,178


$
101,140Prior years

$
(45,501
)

$
(5,054
)

$
(5,310
)Amortization of deferred policy acquisition costs

$
173,305


$
170,346


$
164,510Net paid claims and claim adjustment expenses

$
58,157


$
70,144


$
83,478Net premiums written

$
431,679


$
428,289


$
409,629  90




---



##### Table of Contents



(a)(3)
    Exhibits  ExhibitNumber

Description9


Not applicable.10
(1)

Form of The CNA Surety Corporation Replacement Stock Option Plan
    (filed on August 15, 1997 as Exhibit 10(12) to CNA
    Surety Corporations Registration Statement on
    Form S-4
    (Registration
    No. 333-33753),
    and incorporated herein by reference.)10
(2)

Form of CNA Surety Corporation 1997 Long-Term Equity
    Compensation Plan (filed on August 15, 1997 as
    Exhibit 10(13) to CNA Surety Corporations
    Registration Statement on
    Form S-4
    (Registration
    No. 333-33753),
    and incorporated herein by reference.)10
(3)

Form of Aggregate Stop Loss Reinsurance Contract by and between
    Western Surety Company, Universal Surety of America, Surety
    Bonding Company of America and Continental Casualty Company
    (filed on December 27, 1996 as Exhibit 2 to Capsure
    Holdings Corp.s
    Form 8-K,
    and incorporated herein by reference.)10
(13)

Form of Surety Excess of Loss Reinsurance Contract by and
    between Western Surety Company, Universal Surety of America,
    Surety Bonding Company of America and Continental Casualty
    Company (filed on March 15, 2004 as Exhibit 10(13) to
    CNA Surety Corporations
    Form 10-K,
    and incorporated herein by reference.)10
(15)

Credit Agreement between CNA Surety Corporation and LaSalle Bank
    National Association (filed on November 14, 2002 as
    Exhibit 10(3) to CNA Surety Corporations
    Form 10-Q,
    and incorporated herein by reference.)10
(16)

Amendment to Credit Agreement between CNA Surety Corporation and
    LaSalle Bank National Association (filed on March 26, 2003
    as Exhibit 10(9) to CNA Surety Corporations
    Form 10-K,
    and incorporated herein by reference.)10
(17)

Second Amendment to Credit Agreement between CNA Surety
    Corporation and LaSalle Bank National Association (filed on
    November 13, 2003 as Exhibit 10(2) to CNA Surety
    Corporations
    Form 10-Q,
    and incorporated herein by reference.)10
(18)

Third Amendment to Credit Agreement between CNA Surety
    Corporation and LaSalle Bank National Association (filed on
    November 13, 2003 as Exhibit 10(2) to CNA Surety
    Corporations
    Form 10-Q,
    and incorporated herein by reference.)10
(19)

Form of 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
(23)

Form of CNA Surety Corporation 2000 Employee Stock Purchase Plan
    (filed on January 26, 2001 (incorporated by reference) to
    CNA Surety Corporations Registration Statement on
    Form S-8
    (Registration
    No. 333-54440),
    and incorporated herein by reference.)10
(27)

Form of CNA Surety Corporation 2005 Deferred Compensation Plan
    (filed on May 2, 2005 as Exhibit 10(27) to CNA Surety
    Corporations
    Form 10-Q,
    and incorporated herein by reference).10
(28)

Form of CNA Surety Corporation 2005 Deferred Compensation Plan
    Trust (filed on May 2, 2005 as Exhibit 10(28) to CNA
    Surety Corporations
    Form 10-Q,
    and incorporated herein by reference).10
(29)

Form of Third Amendment to CNA Surety Corporation 2005 Deferred
    Compensation Plan (filed on May 2, 2005 as
    Exhibit 10(29) to CNA Surety Corporations
    Form 10-Q,
    and incorporated herein by reference).10
(30)

Form of Employment Agreement dated as of January 1, 2006 by
    and between CNA Surety Corporation and John F. Welch (filed on
    December 14, 2005 as Exhibit 10(30) to CNA Surety
    Corporations
    Form 8-K,
    and incorporated herein by reference.)10
(32)

Amendment to Form of Surety Excess of Loss Reinsurance Contract
    by and between Western Surety Company, Universal Surety of
    America, Surety Bonding Company of America and Continental
    Casualty Company (filed on August 2, 2005 as
    Exhibit 10(31) to CNA Surety Corporations
    Form 10-Q,
    and incorporated herein by reference).10
(33)

Amendment to Form of Surety Quota Share Reinsurance Contract by
    and between Western Surety Company and Continental Casualty
    Company (filed on August 2, 2005 as Exhibit 10(32) to
    CNA Surety Corporations
    Form 10-Q,
    and incorporated herein by reference). 91




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##### Table of Contents



ExhibitNumber

Description10
(34)

Form of CNA Surety Corporation 2006 Long-Term Equity
    Compensation Plan (filed on February 16, 2006 as
    Exhibit 10(34) to CNA Surety Corporations
    Form 8-K,
    and incorporated herein by reference).10
(35)

Refinancing of Credit Agreement between CNA Surety Corporation
    and LaSalle Bank National Association (filed on July 28,
    2005 as CNA Surety Corporations
    Form 8-K,
    and incorporated herein by reference.)10
(36)

CNA Surety Corporation 2006 Long-Term Equity Compensation Plan
    (filed on December 21, 2006 as Exhibit 10(36) to CNA
    Surety Corporations Registration Statement on
    Form S-8
    (Registration
    No. 333-139551),
    and incorporated herein by reference.)10
(37)

Post-Effective Amendment to CNA Surety Corporation 1997
    Long-Term Equity Compensation Plan (filed on December 21,
    2006 as Exhibit 10(37) to CNA Surety Corporations
    Registration Statement on
    Form S-8
    POS (Registration
    No. 333-37207),
    and incorporated herein by reference.)10
(38)

Form of 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
(39)

Form of Employment Agreement dated as of January 1, 2009 by
    and between CNA Surety Corporation and John F. Welch (filed on
    October 28, 2008 as Exhibit 10(39) to CNA Surety
    Corporations
    Form 8-K,
    and incorporated herein by reference.)11


Not Applicable.12


Not Applicable.13


Not Applicable.16


Not Applicable.18


Not Applicable.21


Subsidiaries of the Registrant.22


Not Applicable.23


Consent of Deloitte & Touche LLP dated
    February 17, 2009.24


Not Applicable.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 2002.32
(2)

Certification Pursuant to 18 U.S.C. Section 1350, as
    adopted pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002.  92




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##### Table of Contents



SIGNATURES
      /s/  John
    F. Welch         John
    F. Corcoran
           Date

Title

SignatureFebruary 17, 2009

Chairman of the Board
    and Director

/s/  David
    B. EdelsonDavid
    B. EdelsonFebruary 17, 2009

Director

/s/  Philip
    H. BrittPhilip
    H. BrittFebruary 17, 2009

Director

/s/  Anthony
    S. ClebergAnthony
    S. ClebergFebruary 17, 2009

Director

/s/  D.
    Craig MenseD.
    Craig MenseFebruary 17, 2009

Director

/s/  Robert
    A. TinstmanRobert
    A. TinstmanFebruary 17, 2009

Director

/s/  John
    F. WelchJohn
    F. WelchFebruary 17, 2009

Director

/s/  Peter
    W. WilsonPeter
    W. Wilson  93