<PAGE>   1
 
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                   FORM 10-K
                            ------------------------
 
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
 
[ ]  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)
 
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<S>                                                           <C>
 
                       DELAWARE                                            36-4144905
   (STATE OR OTHER JURISDICTION OF INCORPORATION OR           (I.R.S. EMPLOYER IDENTIFICATION NO.)
                      ORGANIZATION)
 
             CNA PLAZA, CHICAGO, ILLINOIS                                    60685
       (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                            (ZIP CODE)
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                                 (312) 822-5000
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
 
                            ------------------------
 
        Securities registered pursuant to Section 12(b) of the Act: NONE
 
          Securities registered pursuant to Section 12(g) of the Act:
                         COMMON STOCK, $0.01 PAR VALUE
                                (Title of Class)
 
                            ------------------------
 
     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 [ ]
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  [ ]
 
     The aggregate market value of voting stock held by nonaffiliates was $221.1
million based upon the closing price of $13.00 per share on March 15, 1999,
using beneficial ownership of stock rules adopted pursuant to Section 13 of the
Securities Exchange Act of 1934 to exclude voting stock owned by Directors,
Officers and Major Stockholders, some of whom may not be held to be affiliates
upon judicial determination.
 
     At March 15, 1999, 44,101,463 shares of the Registrant's Common Stock were
outstanding.
 
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<PAGE>   2
 
                    CNA SURETY CORPORATION AND SUBSIDIARIES
 
                               TABLE OF CONTENTS
 
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                                                                              PAGE
                                                                              ----
<S>        <C>                                                                <C>
PART I
 Item 1.   Business.......................................................      3
              General.....................................................      3
              Formation of CNA Surety and Merger..........................      3
              Description of Business.....................................      3
              A.M. Best Ratings...........................................      4
              Product Information.........................................      4
              Marketing...................................................      6
              Underwriting................................................      8
              Competition.................................................      8
              Reinsurance.................................................      8
              Reserves for Unpaid Losses and Loss Adjustment Expenses.....      9
              Asbestos and Environmental Claims...........................     12
              Regulation..................................................     12
              Investments.................................................     13
              Employees...................................................     13
 Item 2.   Properties.....................................................     13
 Item 3.   Legal Proceedings..............................................     14
 Item 4.   Submission of Matters to a Vote of Security Holders............     14

PART II
 Item 5.   Market for the Registrant's Common Stock and Related
           Stockholder Matters............................................     14
 Item 6.   Selected Financial Data........................................     14
 Item 7.   Management's Discussion and Analysis of Financial Condition
           and Results of Operations......................................     17
 Item 7a.  Quantitative and Qualitative Discussions About Market
           Risk...........................................................     17
 Item 8.   Financial Statements and Supplementary Data....................     17
 Item 9.   Changes in and Disagreements with Accountants on Accounting
           and Financial Disclosure.......................................     17

PART III   
 Item 10.  Directors and Executive Officers of the Registrant.............     18
 Item 11.  Executive Compensation.........................................     18
 Item 12.  Security Ownership of Certain Beneficial Owners and
           Management.....................................................     18
 Item 13.  Certain Relationships and Related Transactions.................     18

PART IV    
 Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form
           8-K............................................................     18
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                                        2
<PAGE>   3
 
                    CNA SURETY CORPORATION AND SUBSIDIARIES
 
                                     PART I
 
ITEM 1. BUSINESS
 
GENERAL
 
     CNA Surety Corporation ("CNA Surety" or "Company") is an insurance holding
company in the United States formed through the September 30, 1997 combination
of the surety business of CNA Financial Corporation with Capsure Holdings
Corp.'s ("Capsure") insurance subsidiaries. CNA Surety is currently one of the
largest surety providers in the United States with approximately an 8.9% market
share. Its wide selection of products range from very small commercial bonds to
large contract bonds.
 
FORMATION OF CNA SURETY AND MERGER
 
     In December 1996, CNA Financial Corporation ("CNAF") and 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 a newly-formed holding company, CNA Surety Corporation.
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 61% of the outstanding common stock of CNA
Surety. Loews Corporation owns approximately 85% 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. The combined
surety operations of CCC and CIC are referred to herein as CCC Surety Operations
("Predecessor").
 
     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. CCC also
agreed to provide certain administrative services at specified rates, subject to
inflationary increases, for three years after the Merger, if CNA Surety chooses
to purchase such services.
 
DESCRIPTION OF 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. Western Surety writes, on a direct basis or as business assumed from CCC
and CIC, small fidelity and noncontract 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, as a licensed
insurer in all 50 states and the District of Columbia. Western Surety's
affiliated company, Surety Bonding Company of America ("SBCA"), writes
principally small commercial surety business and is licensed in 23 states. USA
specializes in the underwriting of small contract and commercial surety bonds.
USA is licensed in 43 states and the District of Columbia with most of its
business generated in Texas.
 
     The Company's strategy is to continue the underwriting focus of each of its
operating units and to achieve growth from cross-marketing opportunities and
building upon the established traditions of high-quality service and long-term
relationships.
 
                                        3
<PAGE>   4
 
A.M. BEST RATINGS
 
     Western Surety and USA are currently rated A+ (Superior) and A (Excellent),
respectively, by A.M. Best Company, Inc. ("A.M. Best"). Through intercompany
reinsurance and related agreements, CNA Surety's customers will continue to have
access to CCC's broader underwriting capacity. CCC is currently rated A by A.M.
Best. A.M. Best's letter ratings range from A++ (Superior) to D (Poor) with A++
being highest. An A+ (Superior) rating is assigned to those companies which A.M.
Best believes have achieved superior overall performance when compared to the
norms of the property and casualty insurance industry. A+ (Superior) rated
insurers have been shown to be among the strongest in ability to meet
policyholder and other contractual obligations. A rating of A (Excellent) is
assigned to those companies which A.M. Best believes have achieved excellent
overall performance when compared to the norms of the property and casualty
insurance industry and generally have demonstrated a strong ability to meet
their respective policyholder and other contractual obligations.
 
PRODUCT INFORMATION
 
     According to the Surety Association of America ("SAA") industry estimates,
approximately 80% of the $2.7 billion United States surety market is represented
by bonds required by federal statutes, state laws, and local ordinances. These
bonding requirements range from federal construction projects, where the
contractor is required to post performance and payment bonds which guarantee
performance of contracts to the government as well as payment of bills to
subcontractors and suppliers, to license and permit bonds which guarantee
compliance with legal requirements for business operations.
 
     PRODUCTS AND POLICIES
 
     Unlike a standard, two-party insurance policy, surety bonds are three-party
agreements in which the issuer of the bond (the surety) joins with a second
party (the principal) in guaranteeing to a third party (the owner/obligee) the
fulfillment of some obligation on the part of the principal. The surety is the
party who guarantees fulfillment of the principal's obligation to the obligee.
In addition, sureties are generally entitled to recover from the principal any
losses and expenses paid to third parties. The surety's responsibility is to
evaluate the risk and determine if the principal meets the underwriting
requirements for the bond. Accordingly, surety bond premiums primarily reflect
the type and class of risk and related costs associated with both processing the
bond transaction and investigating the applicant including, if necessary, an
analysis of the applicant's creditworthiness and ability to perform.
 
     The surety business is comprised of contract surety business and commercial
surety business, although the products comprising each are sold through the same
distribution system.
 
     Contract bond guarantee obligations include the following:
 
          Bid bonds: used by contractors submitting proposals on potential
     contracts.
 
          Performance bonds: guarantee to the owner the performance of the
     contractor's obligations according to the terms and conditions of the
     contract.
 
          Payment bonds: guarantee payment of the contractor's obligations under
     the contract for labor, subcontractors, and materials supplied to the
     project. Payment bonds are utilized in public projects where liens are not
     permitted.
 
          Other examples of contract bonds are completion, maintenance and
     supply bonds.
 
     Commercial surety business is comprised of bonds covering obligations
     typically required by law or regulation, such as the following:
 
          License and Permit bonds: required by statutes or ordinances for a
     number of purposes including guaranteeing the payment of certain taxes and
     fees and providing consumer protection as a condition to granting licenses
     related to selling real estate or motor vehicles and contracting services.
 
                                        4
<PAGE>   5
 
          Judicial and Fiduciary bonds: required by statutes, courts or legal
     documents for the protection of those on whose behalf a fiduciary acts.
     Examples of such fiduciaries include executors and administrators of
     estates, and guardians of minors and incompetents.
 
          Public Official bonds: required by statutes and ordinances to
     guarantee the lawful and faithful performance of the duties of office by
     public officials.
 
          Fidelity bonds: cover losses arising from employee dishonesty.
     Examples of purchasers of fidelity bonds are law firms, insurance agencies
     and janitorial service companies.
 
     In 1997, CNA Surety expanded into the international surety and credit
insurance market through a 50% U.S. dollar denominated quota share treaty with
an affiliate of CCC, CNA Reinsurance Company Limited (London). Western Surety
assumed $10.0 million and $10.1 million of premium through this relationship in
1998 and 1997, respectively. The assumed business is predominately European
based risks, approximately 86% of which is credit insurance and 14% is surety
and fidelity. Credit insurance provides protection against abnormal losses from
unpaid accounts receivable.
 
     CNA Surety also writes E&O policies through its subsidiary Western Surety
for three classes of insureds: notaries public, tax preparers and insurance
agents and brokers. The notary public E&O policy is marketed as a companion
product to the notary public bond and the tax preparer E&O policy is marketed to
small tax return preparation firms. Western Surety introduced an insurance
agents' and brokers' E&O insurance product in 1994 and expanded this product to
41 states as of December 31, 1998.
 
     The following tables set forth, for each principal class of bonds, gross
written premiums, net written premiums and number of bonds and policies in force
and the respective percentages of the total for the past three years. All tables
in this section contain information reflecting the pro forma combined operations
of CNA Surety, including Western Surety and USA results prior to the Merger
Date. As such, the financial information is not necessarily indicative of the
financial results that would have occurred under the ownership and management of
CNA Surety (amounts in thousands, except average bond amounts):
 
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<CAPTION>
                                                               GROSS WRITTEN PREMIUMS
                                        ---------------------------------------------------------------------
                                                                                  PRO FORMA
                                                                 --------------------------------------------
                                                      % OF                     % OF                     % OF
                                          1998        TOTAL        1997        TOTAL        1996        TOTAL
                                          ----        -----        ----        -----        ----        -----
<S>                                     <C>           <C>        <C>           <C>        <C>           <C>
Contract..........................      $132,242       47.5%     $123,014       46.2%     $124,477       49.6%
Commercial:
  License and permit..............        66,394       23.9        64,614       24.3        61,163       24.3
  Judicial and fiduciary..........        26,557        9.5        26,555       10.0        25,512       10.1
  Public official.................        16,430        5.9        16,705        6.3        15,830        6.3
  International and other.........        11,665        4.2        11,788        4.4         1,907        0.8
                                        --------      -----      --------      -----      --------      -----
  Total commercial................       121,046       43.5       119,662       45.0       104,412       41.5
                                        --------      -----      --------      -----      --------      -----
Fidelity..........................        17,113        6.2        16,760        6.2        16,123        6.4
E&O policies and other............         7,823        2.8         6,982        2.6         6,402        2.5
                                        --------      -----      --------      -----      --------      -----
                                        $278,224      100.0%     $266,418      100.0%     $251,414      100.0%
                                        ========      =====      ========      =====      ========      =====
</TABLE>
 
                                        5
<PAGE>   6
 
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<CAPTION>
                                                                NET WRITTEN PREMIUMS
                                        ---------------------------------------------------------------------
                                                                                  PRO FORMA
                                                                 --------------------------------------------
                                                      % OF                     % OF                     % OF
                                          1998        TOTAL        1997        TOTAL        1996        TOTAL
                                          ----        -----        ----        -----        ----        -----
<S>                                     <C>           <C>        <C>           <C>        <C>           <C>
Contract..........................      $127,114       47.0%     $118,138       45.9%     $118,268       50.3%
Commercial........................       120,638       44.6       117,162       45.6        96,421       41.0
Fidelity..........................        17,096        6.3        16,748        6.5        16,076        6.8
E&O policies and other............         5,754        2.1         5,019        2.0         4,421        1.9
                                        --------      -----      --------      -----      --------      -----
                                        $270,602      100.0%     $257,067      100.0%     $235,186      100.0%
                                        ========      =====      ========      =====      ========      =====
</TABLE>
 
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<CAPTION>
                                                           DOMESTIC BOND/POLICIES IN FORCE
                                        ---------------------------------------------------------------------
                                                                                  PRO FORMA
                                                                 --------------------------------------------
                                                      % OF                     % OF                     % OF
                                          1998        TOTAL        1997        TOTAL        1996        TOTAL
                                          ----        -----        ----        -----        ----        -----
<S>                                     <C>           <C>        <C>           <C>        <C>           <C>
Contract..........................           200       11.1%           30        1.7%           26        1.5%
Commercial........................         1,276       70.7         1,471       82.0         1,466       83.9
Fidelity..........................            98        5.4            99        5.5            98        5.6
E&O policies and other............           232       12.8           193       10.8           157        9.0
                                        --------      -----      --------      -----      --------      -----
                                           1,806      100.0%        1,793      100.0%        1,747      100.0%
                                        ========      =====      ========      =====      ========      =====
Average domestic bond
  penalty/policy limit(1).........      $ 29,377                 $ 25,802                 $ 24,883
                                        ========                 ========                 ========
</TABLE>
 
-------------------------
 
(1) The average bond penalty is a measure of the average limit of liability
    associated with in force contract and commercial surety bonds at each
    reporting period.
 
     In 1998, the agency with which CNA Surety did the most business generated
approximately $3.0 million of gross written premiums, or 1.1% of aggregate gross
written premiums. The ten agencies which did the most business with CNA Surety
produced a total of $17.5 million or 6.3% of aggregate gross written premiums.
In addition, $46.5 million of gross written premiums were generated from
national brokers during 1998 with the largest national broker generating $14.6
million of gross written premiums.
 
MARKETING
 
     The Company principally markets its products in all 50 states, as well as
the District of Columbia and Puerto Rico. Its products are marketed primarily
through independent producers, including multi-line agents and brokers such as
surety specialists, many of whom are members of the National Association of
Surety Bond Producers. CNA Surety enjoys broad national distribution of its
products, which are marketed through approximately 37,000 of the approximately
44,000 independent property and casualty insurance agencies in the United
States. In addition, the Company employs 58 full-time salaried marketing
representatives to continually service its vast producer network. Relationships
with these independent producers are maintained through the Company's 47 local
branch offices.
 
                                        6
<PAGE>   7
 
     The following table sets forth the distribution of the domestic business of
CNA Surety, by state based upon gross written premiums in each of the last three
years:
 
<TABLE>
<CAPTION>
                                                                  YEARS ENDED
                                                                 DECEMBER 31,
                                                          ---------------------------
                                                                   PRO FORMA
                                                          ---------------------------
                                                          1998       1997       1996
                                                          ----       ----       ----
<S>                                                       <C>        <C>        <C>
Gross Written Premiums by State:
  Texas...............................................     13.1%      12.7%      13.3%
  California..........................................      7.4        7.0        7.8
  Florida.............................................      5.5        5.6        5.8
  Illinois............................................      4.9        4.0        4.1
  New York............................................      4.5        4.5        4.8
  Pennsylvania........................................      3.8        3.8        3.6
  Michigan............................................      3.2        3.3        3.1
  All Other...........................................     57.6       59.1       57.5
                                                          -----      -----      -----
     Total............................................    100.0%     100.0%     100.0%
                                                          =====      =====      =====
</TABLE>
 
     Contract Surety
 
     With respect to the contract surety business, the core focus for the
Company is contractors with less than $50 million in contracted work in
progress. This segment is comprised of small contractors (less than $5 million
in work in progress), medium contractors ($5-$25 million) and the lower end of
the large contractors (greater than $25 million). These small and medium
contractors, as a group, represent a significant portion of the United States
construction market. The Company has a small number of accounts with contracted
work in progress in excess of $150 million, the majority of which have been
clients of the Company's predecessor for more than ten years. Some of these
accounts are maintained on a "co-surety" or joint insurer basis with other
sureties in order to manage aggregate exposure.
 
     The Company's USA unit continues to focus its marketing efforts on serving
the needs of small and specialty contractors. Contract bonds underwritten by USA
are primarily contractor performance and payment bonds in amounts under $3.0
million. The Company utilizes Western Surety's diverse agency relationships and
its nationwide branch structure to expand the geographic and agency distribution
of USA's small and specialty contract surety business.
 
     CNA Surety also participates in the non-standard contract surety market,
utilizing the federal government's Small Business Administration ("SBA") surety
bond guarantee programs. These programs provide that the SBA assumes 70% -- 90%
of the coverage in exchange for 10% -- 30% of the premium.
 
     Commercial Surety
 
     A large portion of the commercial surety market is comprised of small
obligations represented by licenses and permits that are routine in nature and
require minimal underwriting. Customers are focused principally on prompt and
efficient service.
 
     The Company continues to focus its marketing efforts on this small
commercial bond market through its Sioux Falls service center. In this market
segment, CNA Surety emphasizes one-day response service, easy-to-use forms and
an extensive array of commercial bond products. In addition, independent agents
are provided pre-executed bond forms, powers of attorney, and facsimile
authorizations that allow them to issue many standard bonds in their offices.
 
     While a large portion of the commercial surety market is represented by
small entities, CNA Surety also seeks to service the bonding needs of larger,
"Fortune 1000" firms, where a high level of technical and underwriting skill is
required. These larger customers are sophisticated, professional buyers of
commercial surety bonds who demand exceptional service and business expertise at
a reasonable cost. CNA Surety
 
                                        7
<PAGE>   8
 
maintains a specific underwriting staff in its Chicago home office and other
underwriting centers across the country dedicated to the "Fortune 1000" market.
 
     CNA Surety's insurance subsidiaries direct their marketing to particular
industries or classes of bonds on a broad basis. For instance, the Company
maintains programs directed at notary bonds, mortgage broker compliance bonds,
games of chance bonds (guaranteeing payment of prizes from promotional games)
and grain warehouse dealer bonds (protecting funds associated with grain
storage).
 
UNDERWRITING
 
     The underwriting philosophy of CNA Surety is disciplined, and focused on
consistent underwriting profitability. The extent and sophistication of
underwriting activity varies by type of risk. Contractor accounts and large
commercial surety customers undergo extensive credit, financial and managerial
review and analysis on a regular basis. Certain classifications of bonds, such
as fiduciary and court appeal bonds, also require more extensive underwriting.
 
     CNA Surety also targets various products in the surety and fidelity bond
market which are characterized by relatively low-risk exposure and small bond
amounts. The underwriting criteria, including the extent of bonding authority
granted to independent agents, varies depending on the class of business and the
type of bond. For example, relatively little underwriting information is
typically required of certain low-exposure risks such as notary bonds.
 
COMPETITION
 
     The surety and fidelity market is highly competitive. According to 1997
data from A.M. Best, the U.S. market aggregates approximately $3.6 billion in
direct written premiums, comprised of approximately $2.7 billion in surety
premiums and approximately $0.9 billion in fidelity premiums. The large
diversified insurance companies hold the largest market shares. For example, the
20 largest surety companies account for nearly 73% of the surety market. On a
pro forma basis for 1997, CNA Surety was the largest surety provider with an
8.9% market share.
 
     Primary competitors of CNA Surety are approximately 20 national, multi-line
companies participating in the surety market throughout the country. Management
believes that its principal strengths are capacity, diverse product offering,
service and accessibility and long-term relationships with agents and accounts.
While the surety industry has experienced slow premium growth, competition has
increased as a result of ten years of profitable underwriting experience. This
competition has typically manifested itself through reduced premium rates and
greater tolerance for relaxation of underwriting standards. Management believes
such competition will continue.
 
REINSURANCE
 
     The Company's insurance subsidiaries, in the ordinary course of business,
cede reinsurance to other insurance companies to limit their exposure to loss.
Reinsurance arrangements are used to limit maximum loss, provide greater
diversification of risk and minimize exposure on larger risks. Reinsurance
contracts do not ordinarily relieve the Company of its primary obligations to
claimants. Therefore, a contingent liability exists with respect to reinsurance
ceded to the extent that any reinsurer is unable to meet the obligations assumed
under reinsurance contracts. The Company only places its insurance subsidiaries'
reinsurance with qualified carriers after conducting a detailed review of the
nature of the obligation and a thorough assessment of the reinsurers' credit
qualifications and claims settlement performance and capabilities. The
reinsurance coverages and terms are tailored to the specific risk
characteristics of the underlying products of the Company.
 
     For contract and commercial surety business an excess of loss reinsurance
program is in effect. The Excess of Loss Contract provides the insurance
subsidiaries of CNA Surety with the capacity to underwrite large surety bond
exposures by providing reinsurance support from CCC. The Excess of Loss Contract
provides $75 million of coverage in excess of the $55 million of coverage
provided to the insurance subsidiaries by third party reinsurers, which is in
turn in excess of the $5 million of coverage per principal to be retained by
 
                                        8
<PAGE>   9
 
the CNA Surety insurance subsidiaries. Subsequent to the Merger Date, the
Company entered into a second excess of loss contract with CCC ("Second Excess
of Loss Contract"). The Second Excess of Loss Contract provides additional
coverage for principal losses that exceed the foregoing coverage of $75 million
per principal provided by the Excess of Loss Contract, or aggregate losses per
principal in excess of $135 million. The Excess of Loss Contracts collectively
provide coverage for losses discovered on surety bonds in force as of the Merger
Date and for losses discovered on new and renewal business written, renewed or
assumed during the term of the Excess of Loss Contracts. CCC is also obligated
to act as a joint insurer, or "co-surety," for business covered by the Excess of
Loss Contract when requested by the CNA Surety insurance subsidiaries. In
consideration for the reinsurance coverage provided by the Excess of Loss
Contracts, the insurance subsidiaries pay to CCC, on a quarterly basis, a
premium equal to 1% of the net written premiums applicable to the Excess of Loss
Contract, subject to a minimum premium of $20,000 and $5,000 per quarter under
the Excess of Loss Contract and Second Excess of Loss Contract, respectively.
The CNA Surety insurance subsidiaries paid $80,000 for all minimum quarterly
premiums due through September 30, 1998 during the period from September 30,
1997 (date of inception) through December 31, 1997. CNA Surety insurance
subsidiaries paid the remaining $20,000 in premium for 1998 for Excess of Loss
Contract and the $20,000 in minimum quarterly premiums for the Second Excess of
Loss Contract during the year ended December 31, 1998. There were no amounts due
to CCC under the Excess of Loss Contract and Second Excess of Loss Contract as
of December 31, 1998. Both Excess of Loss Contracts have been made effective
immediately following the Merger Date and continue for a period of five years
from the Merger Date. For the USA business only, the Company has per principal
reinsurance coverage of 85% of losses up to $4.9 million in excess of $100,000.
The Company limits its net retention on its insurance agents and brokers E&O
liability insurance product to 20% through a third party quota share reinsurance
agreement.
 
     At December 31, 1998, CNA Surety's largest reinsurance receivable,
including prepaid reinsurance premiums of $1.0 million, was approximately $3.4
million with a company rated A++ (Superior) by A.M. Best.
 
RESERVES FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
 
     CNA Surety's insurance subsidiaries employ generally accepted reserving
approaches in establishing the estimated liability for unpaid loss and loss
adjustment expenses that give consideration to the inherent difficulty and
variability in the estimation process. In addition, CNA Surety utilizes an
independent actuarial firm of national standing to conduct periodic reviews of
claim procedures and loss reserving practices, and annually obtains actuarial
certification as to the reasonableness of actuarial assumptions used and the
sufficiency of year-end reserves for each of its principal insurance
subsidiaries.
 
     The estimated liability for unpaid losses and loss adjustment expenses
includes, on an undiscounted basis, estimates of (a) the ultimate settlement
value of reported claims, (b) incurred but not reported ("IBNR") claims, (c)
future expenses to be incurred in the settlement of claims and (d) claim
recoveries, exclusive of reinsurance recoveries which are reported as an asset.
These estimates are determined based on the Company's and surety industry loss
experience as well as consideration of current trends and conditions. The
estimated liability for unpaid losses and loss adjustment expenses is an
estimate and there is the potential that actual future loss payments will differ
significantly from initial estimates. The methods of determining such estimates
and the resulting estimated liability are regularly reviewed and updated.
Changes in the estimated liability are reflected in operating income in the year
in which such changes are determined to be needed.
 
                                        9
<PAGE>   10
 
     A table is included in Note 8 to the Consolidated Financial Statements of
the 1998 Annual Report to Shareholders which presents a table of the activity in
the reserves for unpaid losses and loss adjustment expenses for the Company and
the Predecessor. This table highlights the impact of revisions to the estimated
liability established in prior years.
 
     The following table sets forth a reconciliation of the consolidated loss
reserves reported in accordance with generally accepted accounting principles
("GAAP"), and the reserves reported to state insurance regulatory authorities in
accordance with statutory accounting principles ("SAP") for the year ended
December 31, 1998 (dollars in thousands):
 
<TABLE>
<S>                                                             <C>
Net reserves at end of year, GAAP basis.....................    $142,034
Ceded reinsurance, net of salvage and subrogation...........       7,986
                                                                --------
Gross reserves at end of year, GAAP basis...................     150,020
Estimated salvage and subrogation recoverable (gross of
  reinsurance), not anticipated under SAP...................      11,931
Estimated reinsurance recoverable netted against gross
  reserves for SAP..........................................     (13,710)
                                                                --------
Gross reserves at end of year, SAP basis....................    $148,241
                                                                ========
</TABLE>
 
                                       10
<PAGE>   11
 
     The loss reserve development table below illustrates the change over time
of reserves established for the Company's estimated losses and loss adjustment
expenses at the end of various calendar years. The first section shows the
reserves as originally reported at the end of the stated year. The second
section shows the cumulative amounts paid as of the end of successive years with
respect to that reserve liability. The third section shows re-estimates of the
original recorded reserve as of the end of each successive year which is the
result of management's expanded awareness of additional facts and circumstances
that pertain to the unsettled claims. The last section compares the latest
re-estimated reserve to the reserve originally established, and indicates
whether or not the original reserve was adequate or inadequate to cover the
estimated costs of unsettled claims.
 
     The loss reserve development table is cumulative as of each December 31,
and, therefore, ending balances should not be added since the amount at the end
of each calendar year includes activity for both the current and prior years.
The loss reserve development table reflects, on a pro forma basis, the reserves
of the Predecessor and Capsure since 1988 and CIC since its acquisition in May
of 1995. Such historical development is not necessarily indicative of the
financial results that would have occurred under the ownership and management of
CNA Surety nor of future operating results.
<TABLE>
<CAPTION>
                                                       AS OF DECEMBER 31,
                         ------------------------------------------------------------------------------
                          1988      1989      1990      1991      1992      1993      1994       1995
                          ----      ----      ----      ----      ----      ----      ----       ----
                                                     (DOLLARS IN THOUSANDS)
<S>                      <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>
Net reserves for losses
  and loss adjustment
  expenses.............  $60,959   $58,685   $69,733   $60,425   $61,998   $64,627   $70,398   $147,911
Net Paid (Cumulative)
  as of:
  One year later.......   11,700     7,618    13,456    16,287    17,636    12,923    12,018     42,552
  Two years later......   15,221    13,540    22,330    24,295    25,854    19,671    18,149     43,179
  Three years later....   17,823    18,033    26,835    29,857    29,495    21,990    21,229     46,782
  Four years later.....   20,723    20,758    31,591    31,273    30,582    23,070    22,313         --
  Five years later.....   22,575    22,089    32,133    31,909    30,817    23,864        --         --
  Six years later......   23,271    25,441    32,352    32,354    32,150        --        --         --
  Seven years later....   24,515    23,457    32,993    32,419        --        --        --         --
  Eight years later....   24,529    23,849    33,033        --        --        --        --         --
  Nine years later.....   24,877    23,839        --        --        --        --        --         --
  Ten years later......   24,858        --        --        --        --        --        --         --
Net Reserves
  Re-estimated as of:
  End of initial
    year...............   60,959    58,685    69,733    60,425    61,998    64,627    70,398    147,911
  One year later.......   49,285    53,486    50,822    58,644    58,603    54,568    51,471    132,267
  Two years later......   44,495    39,131    51,330    51,511    54,585    44,749    44,135    103,466
  Three years later....   36,635    39,978    46,439    46,826    47,911    38,972    38,829    101,745
  Four years later.....   37,200    34,357    42,946    42,212    42,542    28,094    38,628         --
  Five years later.....   32,134    31,405    40,747    39,945    33,699    30,335        --         --
  Six years later......   29,816    31,777    38,131    36,164    37,188        --        --         --
  Seven years later....   29,392    26,646    36,179    37,695        --        --        --         --
  Eight years later....   26,831    25,464    37,853        --        --        --        --         --
  Nine years later.....   25,514    28,027        --        --        --        --        --         --
  Ten years later......   27,842        --        --        --        --        --        --         --
                         =======   =======   =======   =======   =======   =======   =======   ========
Total net (deficiency)
  redundancy...........  $33,117   $30,658   $31,880   $22,730   $24,810   $34,292   $31,770   $ 46,166
                         =======   =======   =======   =======   =======   =======   =======   ========
Cumulative redundancy
  (deficiency) as a
  percentage of
  original estimate....     54.3%     52.2%     45.7%     37.6%     40.0%     53.1%     45.1%      31.2%
                         =======   =======   =======   =======   =======   =======   =======   ========
 
<CAPTION>
                               AS OF DECEMBER 31,
                         ------------------------------
                           1996       1997       1998
                           ----       ----       ----
                             (DOLLARS IN THOUSANDS)
<S>                      <C>        <C>        <C>
Net reserves for losses
  and loss adjustment
  expenses.............  $137,064   $122,725   $142,034
Net Paid (Cumulative)
  as of:
  One year later.......     9,866     19,595         --
  Two years later......    20,171         --         --
  Three years later....        --         --         --
  Four years later.....        --         --         --
  Five years later.....        --         --         --
  Six years later......        --         --         --
  Seven years later....        --         --         --
  Eight years later....        --         --         --
  Nine years later.....        --         --         --
  Ten years later......        --         --         --
Net Reserves
  Re-estimated as of:
  End of initial
    year...............   137,064    122,725    142,034
  One year later.......    96,178    118,373         --
  Two years later......    90,796         --         --
  Three years later....        --         --         --
  Four years later.....        --         --         --
  Five years later.....        --         --         --
  Six years later......        --         --         --
  Seven years later....        --         --         --
  Eight years later....        --         --         --
  Nine years later.....        --         --         --
  Ten years later......        --         --         --
                         ========   ========   ========
Total net (deficiency)
  redundancy...........  $ 46,268   $  4,352   $     --
                         ========   ========   ========
Cumulative redundancy
  (deficiency) as a
  percentage of
  original estimate....      33.8%       3.7%        --
                         ========   ========   ========
</TABLE>
 
                                       11
<PAGE>   12
 
ASBESTOS AND ENVIRONMENTAL CLAIMS
 
     The Company does not typically bond contractors that specialize in
hazardous environmental remediation work. The Company does however bond several
accounts that have incidental environmental exposure with respect to which the
Company provides limited bonding programs. In the commercial surety market, the
Company provides bonds to large corporations that are in the business of mining
various minerals and are obligated to post reclamation bonds that guarantee that
property which was disturbed during mining is returned to an acceptable
condition when the mining is completed. While no environmental responsibility is
overtly provided by commercial or contract bonds, some risk of environmental
exposure may exist if the surety were to assume certain rights in the completion
of a defaulted project or through salvage recovery.
 
     To date, the Company has not received any environmental claim notices nor
is management aware of any potential environmental claims.
 
REGULATION
 
     The Company's insurance subsidiaries are subject to varying degrees of
regulation and supervision in the jurisdictions in which they transact business
under statutes which delegate regulatory, supervisory and administrative powers
to state insurance regulators. In general, an insurer's state of domicile has
principal responsibility for such regulation which is designed generally to
protect policyholders rather than investors and relates to matters such as the
standards of solvency which must be maintained; the licensing of insurers and
their agents; the examination of the affairs of insurance companies, including
periodic financial and market conduct examinations; the filing of annual and
other reports, prepared on a statutory basis, on the financial condition of
insurers or for other purposes; establishment and maintenance of reserves for
unearned premiums and losses; and requirements regarding numerous other matters.
Licensed or admitted insurers generally must file with the insurance regulators
of such states, or have filed on its behalf, the premium rates and bond and
policy forms used within each state. In some states, approval of such rates and
forms must be received from the insurance regulators in advance of their use.
 
     Western Surety is domiciled in South Dakota and licensed in all 50 states
and the District of Columbia. SBCA is domiciled in South Dakota and licensed in
23 states. USA is domiciled in Texas and licensed in 43 states and the District
of Columbia.
 
     Insurance regulations generally also require registration and periodic
disclosure of certain information concerning ownership, financial condition,
capital structure, general business operations and any material transactions or
agreements by or among affiliates. Such regulation also typically restricts the
ability of any one person to acquire 10% or more, either directly or indirectly,
of a company's stock without prior approval of the applicable insurance
regulatory authority. In addition, dividends and other distributions to
stockholders generally may be paid only out of unreserved and unrestricted
statutory earned surplus. Such distributions may be subject to prior regulatory
approval, including a review of the implications on Risk-Based Capital
requirements. A discussion of Risk-Based Capital requirements for property and
casualty insurance companies is included in both Management's Discussion and
Analysis of Financial Condition and Results of Operations and Note 14 to the
Consolidated Financial Statements of the 1998 Annual Report to Shareholders.
Without prior regulatory approval in 1999, CNA Surety's insurance subsidiaries
may pay stockholder dividends of $32.7 million in the aggregate. For the year
ended December 31, 1998, CNA Surety received $6.6 million in dividends from its
insurance subsidiaries.
 
     CNA Surety's insurance subsidiaries are subject to periodic financial and
market conduct examinations. These examinations are generally performed by the
domiciliary state insurance regulatory authorities. The South Dakota Department
of Commerce and Regulation -- Division of Insurance (the "South Dakota
Department") conducted its financial and market conduct examination of Western
Surety for the five year period ended December 31, 1996. The South Dakota
Department made a finding of non-compliance with respect to the Company's
practices regarding return of premiums and recommended that Western Surety
change its current procedures regarding the return of premiums. The regulation
in question was subsequently amended to exclude surety products which eliminated
any non-compliance by the Company. The Texas
 
                                       12
<PAGE>   13
 
Department of Insurance conducted its last examination of USA's financial
matters as of December 31, 1996. There were no significant issues noted which
required corrective action by any of the insurance subsidiaries.
 
     Certain states in which CNA Surety's insurance subsidiaries conduct their
business require insurers to join a guaranty association. Guaranty associations
provide protection to policyholders of insurers licensed in such states against
the insolvency of those insurers. In order to provide the associations with
funds to pay certain claims under policies issued by insolvent insurers, the
guaranty associations charge members assessments based on the amount of direct
premiums written in that state. Such assessments were not material to CNA
Surety's results of operations in 1998.
 
     Western Surety and USA each qualifies as an acceptable surety for federal
and other public works project bonds pursuant to U.S. Department of Treasury
regulations. The underwriting limitations of Western Surety and USA, based on
each insurer's statutory surplus, are currently $12.5 million and $1.4 million,
respectively. Through intercompany reinsurance and related agreements with CCC,
CNA Surety has access to CCC's $452.2 million U.S. Treasury underwriting
limitation.
 
INVESTMENTS
 
     Insurance company investment practices must comply with insurance laws and
regulations and must also comply with certain covenants under CNA Surety's $130
million revolving credit facility. Generally, insurance laws and regulations
prescribe the nature and quality of, and set limits on, the various types of
investments which may be made by CNA Surety's insurance subsidiaries.
 
     The Company's investment portfolios generally are managed to maximize
after-tax investment returns, while minimizing credit risks with investments
concentrated in high quality, fixed income securities. CNA Surety's portfolios
are managed to provide diversification by limiting exposures to any one issue or
issuer, and to provide liquidity by investing in the public securities markets.
The portfolios are structured to support CNA Surety's operations and consider
the expected duration of liabilities and short-term cash needs.
 
     An investment committee of CNA Surety's Board of Directors establishes
investment policy and oversees the management of each portfolio. A professional
independent investment adviser has been engaged to assist in the management of
each of the Company's insurance subsidiaries investment portfolio pursuant to
established investment committee guidelines. The insurance subsidiaries pay an
advisory fee based on the market value of the assets under management.
 
EMPLOYEES
 
     As of December 31, 1998, the Company employed 848 persons. Since its
emergence from bankruptcy in 1986, Capsure has not experienced any work
stoppages nor has CCC Surety Operations ever experienced a work stoppage.
Management of CNA Surety believes its relations with its employees are good.
 
ITEM 2. PROPERTIES
 
     CNA Surety leases its executive offices and its shared branch locations
with CCC under an Administrative Services Agreement. CNA Surety currently uses
approximately 109,000 square feet and related personal property at 42 branch
locations and its home and executive offices (17,748 square feet), in Chicago,
Illinois. CNA Surety's annual rent for this space is approximately $2.0 million.
CNA Surety may terminate its use of these locations as set forth in the
Administrative Services Agreement, without penalty, by providing CCC with 60
days written notice.
 
     Western Surety leases office space for its executive offices at 101 South
Phillips Avenue, Sioux Falls, South Dakota, under a lease expiring in 2002.
Western Surety's office space, consisting of approximately 81,600 square feet,
is leased from a partnership in which Western Surety owns a 50% interest. The
annual rent, which is subject to annual adjustments, was $1.5 million as of
December 31, 1998. Western Surety also leases a 7,900 square foot branch office
in Dallas, Texas. Annual rent for the branch office was $0.2 million and the
lease expires in 1999. USA leases office space for its executive offices at 950
Echo Lane, Suite 250, Houston,
 
                                       13
<PAGE>   14
 
Texas, under a lease terminating in 2001 with an annual rent of $0.2 million.
USA also leases space for 4 branch offices for an additional annual rent of
approximately $0.1 million.
 
ITEM 3. LEGAL PROCEEDINGS
 
     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.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     None.
 
                                    PART II
 
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
 
     The Company's common stock ("Common Stock") trades on the New York Stock
Exchange under the symbol SUR. On March 15, 1999, the last reported sale price
for the Common Stock was $13.00 per share. The following table shows the range
of high and low sales prices for shares of the Common Stock as reported on the
New York Stock Exchange during 1998 and the fourth quarter of 1997. Prior to
September 30, 1997 the Company was not publicly traded.
 
<TABLE>
<CAPTION>
                                                                 HIGH      LOW
                                                                 ----      ---
<S>                                                             <C>       <C>
1998
  1st Quarter...............................................    $16.38    $14.38
  2nd Quarter...............................................    $16.75    $13.00
  3rd Quarter...............................................    $15.19    $12.56
  4th Quarter...............................................    $15.88    $13.06
1997
  4th Quarter...............................................    $16.50    $12.88
</TABLE>
 
     The number of stockholders of record of Common Stock on March 15, 1999, was
approximately 2,000.
 
DIVIDENDS
 
     On May 19, 1998, the CNA Surety Board of Directors adopted a dividend
policy under which the Company intends to pay a quarterly dividend beginning in
the fourth quarter of 1998. The initial quarterly dividend was 8 cents per share
and was paid on December 28, 1998. The declaration and payment of dividends to
holders of Common Stock, including the amount and frequency of such dividends,
is at the discretion of the board and depends upon many factors, including CNA
Surety's financial condition, operating characteristics, projected earnings and
growth, capital requirements of its insurance subsidiaries, debt service
obligations and such other factors as the Board deems relevant.
 
ITEM 6. SELECTED FINANCIAL DATA
 
     The following financial information has been derived from the Consolidated
Financial Statements and notes thereto which appear in the 1998 Annual Report to
Shareholders and are incorporated herein by reference.
 
     CNA Surety Corporation is a newly formed holding company for the combined
surety business of CNAF and Capsure. Pursuant to a reorganization agreement,
CNAF and Capsure merged their respective operations at the close of business on
September 30, 1997. The surety operations of CNAF are referred to as CCC Surety
Operations ("Predecessor"). For a more detailed description of the merger
transactions and their effects on the Company's financial data, see the
Consolidated Financial Statements and related notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations
appearing in the 1998 Annual Report to Shareholders which are incorporated
herein by reference.
 
                                       14
<PAGE>   15
 
     The following information presented for CNA Surety is for the year ended
December 31, 1998 and the period from September 30, 1997 (date of inception)
through December 31, 1997 and as of December 31, 1998 and 1997. Selected
financial data of the Predecessor is presented on the following page.
 
<TABLE>
<CAPTION>
                                                                  1998          1997
                                                                  ----          ----
                                                                (DOLLARS IN THOUSANDS,
                                                                EXCEPT PER SHARE DATA)
<S>                                                             <C>           <C>
Total revenues(1)...........................................    $283,840      $ 71,284
                                                                ========      ========
Gross written premiums......................................    $278,224      $ 72,755
                                                                ========      ========
Net written premiums........................................    $270,602      $ 73,989
                                                                ========      ========
Net earned premiums.........................................    $258,737      $ 65,433
                                                                ========      ========
Underwriting income(2)......................................    $ 61,773      $ 15,086
Net investment income.......................................      24,259         5,766
Net realized investment gains...............................         844            85
Interest expense............................................       7,218         1,831
Amortization of intangible assets...........................       5,900         1,447
                                                                --------      --------
Income before income taxes..................................      73,758        17,659
Income taxes................................................      28,243         6,663
                                                                --------      --------
Net income..................................................    $ 45,515      $ 10,996
                                                                ========      ========
Basic and diluted earnings per common share.................    $   1.04      $   0.25
                                                                ========      ========
Loss ratio(2)...............................................        17.4%         18.5%
Expense ratio...............................................        58.7          58.4
                                                                --------      --------
Combined ratio(2)...........................................        76.1%         76.9%
                                                                ========      ========
Invested assets and cash....................................    $505,355      $419,667
Intangible assets, net of amortization......................     156,062       161,962
Total assets................................................     819,370       725,131
Insurance reserves..........................................     333,728       302,168
Long-term debt..............................................     113,000       118,000
Total liabilities...........................................     509,473       468,399
Stockholders' equity........................................     309,897       256,732
Book value per share........................................    $   7.03      $   5.93
Dividends paid per share....................................    $   0.08      $     --
</TABLE>
 
-------------------------
(1) Includes investment income and investment gains for CNA Surety for the year
    ended December 31, 1998 and for the period from September 30, 1997 (date of
    inception) through December 31, 1997.
 
(2) Includes the effect of recording revisions of prior year reserves. The
    dollar amount and the percentage point effect on the loss ratio of these
    reserve revisions, all of which were favorable, were $4,352, or 1.7%, for
    the year ended December 31, 1998 and $647, or 1.0%, for the period from
    September 30, 1997 (date of inception) through December 31, 1997.
 
                                       15
<PAGE>   16
 
     The following information of the Predecessor is presented for the three
months ended December 31, 1996, for the nine months ended September 30, 1997 and
1996 and for the years ended December 31, 1996, 1995 and 1994. The selected
financial information of the Predecessor does not include data with respect to
assets, liabilities (other than insurance reserves) and equity because CNAF did
not customarily allocate the investment portfolio or equity of its operating
subsidiaries to its business units like CCC Surety Operations.
 
<TABLE>
<CAPTION>
                                    THREE        NINE MONTHS ENDED
                                    MONTHS         SEPTEMBER 30,             YEARS ENDED DECEMBER 31,
                                    ENDED      ----------------------    --------------------------------
                                   12/31/96      1997          1996        1996      1995(1)       1994
                                   --------      ----          ----        ----      -------       ----
                                                           (DOLLARS IN THOUSANDS)
<S>                                <C>         <C>           <C>         <C>         <C>         <C>
Gross written premiums.........    $ 40,654    $116,075      $114,554    $155,208    $136,605    $ 94,182
                                   ========    ========      ========    ========    ========    ========
Net written premiums...........    $ 37,641    $108,630      $106,263    $143,904    $122,012    $ 82,064
                                   ========    ========      ========    ========    ========    ========
Net earned premiums............    $ 36,767    $108,564      $112,302    $149,069    $130,603    $ 77,981
Net loss and LAE(2)............       9,394     (11,516)       23,612      33,006      32,440       8,580
Amortization of deferred policy
  acquisition costs(3).........      16,665      48,075        49,717      66,382      58,243      34,202
Other direct expenses..........       4,631      10,173         8,637      13,268      11,840       6,716
Policyholders' dividends.......         324       1,426         1,641       1,965       1,508       1,009
                                   --------    --------      --------    --------    --------    --------
Excess of net earned premiums
  over direct operating
  expenses before income
  taxes(2) (3).................    $  5,753    $ 60,406      $ 28,695    $ 34,448    $ 26,572    $ 27,474
                                   ========    ========      ========    ========    ========    ========
Loss ratio(2)..................        25.6%      (10.6)%        21.0%       22.1%       24.8%       11.0%
Expense ratio(3)...............        58.8        55.0          53.4        54.8        54.8        53.8
                                   --------    --------      --------    --------    --------    --------
Combined ratio(2)(3)...........        84.4%       44.4%         74.4%       76.9%       79.6%       64.8%
                                   ========    ========      ========    ========    ========    ========
Insurance reserves(4)..........    $214,828    $183,491      $210,340    $214,828    $239,716    $111,695
</TABLE>
 
-------------------------
(1) CNAF acquired The Continental Insurance Company ("Continental") in May 1995.
    Results include the surety operations of Continental since its acquisition
    in May 1995 which affects the comparability of financial information.
 
(2) Includes the effect of recording releases of prior year loss reserves. The
    dollar amount and the percentage point effect on the loss ratio of these
    reserve revisions, all of which were net reductions, were $1,232, or 3.4%,
    for the three months ended December 31, 1996, $35,000, or 32.2%, and $8,510,
    or 7.6%, for the nine months ended September 30, 1997 and 1996,
    respectively, and $9,742, or 6.5%, $10,846, or 8.3%, and $8,454, or 10.8%,
    for the years ended December 31, 1996, 1995, and 1994, respectively.
 
(3) Does not include the effects of certain general and administrative expenses,
    which are indirect or overhead in nature, since such costs were not
    historically allocated to the CCC Surety Operations by CNAF or its
    subsidiaries. Accordingly, the comparability of this data to other data that
    include such costs is affected.
 
(4) The insurance reserves include both loss and loss adjustment expense and
    unearned premium reserves. These reserves are shown before the effects of
    ceded reinsurance. In accordance with the reorganization and related
    reinsurance agreements, these reserves, as of the Merger Date, were
    transferred to Western Surety, net of reinsurance which totaled $9,979 and
    $23,876 for the nine months ended September 30, 1997 and 1996 and $21,779,
    $31,060, and $21,098 at December 31, 1996, 1995, and 1994, respectively.
 
                                       16
<PAGE>   17
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS
 
     Incorporated herein by reference from pages 13 through 28 of the 1998
Annual Report to Shareholders.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCUSSIONS ABOUT MARKET RISK
 
     Incorporated herein by reference from page 23 of the 1998 Annual Report to
Shareholders.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
FINANCIAL:
 
Consolidated Balance Sheets as of December 31, 1998 and 1997
 
Consolidated Statements of Income for the Year Ended December 31, 1998 and the
     Period from September 30, 1997 (date of inception) through December 31,
     1997 and Statements of Certain Revenues and Direct Operating Expenses of
     the Predecessor for the Nine Months Ended September 30, 1997 and Year Ended
     December 31, 1996
 
Consolidated Statements of Changes in Stockholders' Equity for the Year Ended
     December 31, 1998 and the Period from September 30, 1997 (date of
     inception) through December 31, 1997
 
Consolidated Statements of Cash Flows for the Year Ended December 31, 1998 and
     the Period from September 30, 1997 (date of inception) through December 31,
     1997
 
Notes to Consolidated Financial Statements
 
Independent Auditors' Report
 
     The above Consolidated Financial Statements, the related Notes to the
Consolidated Financial Statements and the Independent Auditors' Report are
incorporated herein by reference from pages 29 through 49 of the 1998 Annual
Report to Shareholders.
 
<TABLE>
<CAPTION>
                                                                PAGE
                                                                ----
<S>                                                             <C>
FINANCIAL STATEMENT SCHEDULES:
Schedule I -- Summary of Investments........................     20
Schedule II -- Condensed Financial Information of
  Registrant................................................     21
Schedule III -- Supplementary Insurance Information.........     24
Schedule IV -- Reinsurance..................................     25
Schedule V -- Valuation and Qualifying Accounts.............     26
Schedule VI -- Supplemental Information Concerning
  Property -- Casualty Insurance Operations.................     27
</TABLE>
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
 
     None.
 
                                       17
<PAGE>   18
 
                                    PART III
 
ITEMS 10, 11, 12, AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT,
                          EXECUTIVE COMPENSATION, SECURITY OWNERSHIP OF CERTAIN
                          BENEFICIAL OWNERS AND MANAGEMENT, AND CERTAIN
                          RELATIONSHIPS AND RELATED TRANSACTIONS
 
     The Company will file a definitive proxy statement with the Securities and
Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act
of 1934 (the "Proxy Statement") relating to the Company's Annual Meeting of
Stockholders to be held on May 11, 1999, not later than 120 days after the end
of the fiscal year covered by this Form 10-K. Information required by Items 10
through 13 will appear in the Proxy Statement and is incorporated herein by
reference.
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
<TABLE>
<CAPTION>
                                                                PAGE
                                                                ----
<S>                                                             <C>
     (a)(1) Financial Statements:
             A separate index to the Consolidated Financial
             Statements is presented in Part II, Item 8. ...     17
 
     (a)(2) Financial Statement Schedules:
             Independent Auditors' Report...................     19
             Schedule I -- Summary of Investments...........     20
             Schedule II -- Condensed Financial Information
             of Registrant..................................     21
             Schedule III -- Supplementary Insurance
             Information....................................     24
             Schedule IV -- Reinsurance.....................     25
             Schedule V -- Valuation and Qualifying
             Accounts.......................................     26
             Schedule VI -- Supplemental Information
             Concerning Property -- Casualty Insurance
             Operations.....................................     27
 
     (a)(3) Exhibits........................................     28
 
     (b) Reports on Form 8-K:
</TABLE>
 
     November 13, 1998: CNA Surety announces 17% increase in quarterly
underwriting income.
 
                                       18
<PAGE>   19
 
                          INDEPENDENT AUDITORS' REPORT
 
The Board of Directors and Stockholders of
CNA Surety Corporation
 
     We have audited the consolidated balance sheets of CNA Surety Corporation
and subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity, and cash flows for the year ended
December 31, 1998 and for the period from September 30, 1997 (date of inception)
through December 31, 1997, and have also audited the special-purpose statements
of certain revenues and direct operating expenses of CCC Surety Operations, a
business unit of CNA Financial Corporation, for the year ended December 31, 1996
and for the nine month period ended September 30, 1997, and have issued our
report thereon dated February 8, 1999. Such consolidated financial statements
and report are included in the Company's 1998 Annual Report to Shareholders and
are incorporated herein by reference. Our audit also included the financial
statement schedules listed in the Index at Item 14. These financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.
 
Deloitte & Touche LLP
Chicago, Illinois
February 8, 1999
 
                                       19
<PAGE>   20
 
                                                                      SCHEDULE I
 
                    CNA SURETY CORPORATION AND SUBSIDIARIES
 
                             SUMMARY OF INVESTMENTS
                   OTHER THAN INVESTMENTS IN RELATED PARTIES
                        AS OF DECEMBER 31, 1998 AND 1997
 
<TABLE>
<CAPTION>
                                                                    AS OF DECEMBER 31, 1998
                                                                --------------------------------
                                                                              FAIR      CARRYING
                                                                  COST       VALUE       VALUE
                                                                  ----       -----      --------
                                                                     (AMOUNTS IN THOUSANDS)
<S>                                                             <C>         <C>         <C>
Fixed Income Securities:
  U.S. Government and government agencies and authorities...    $130,506    $133,280    $133,280
  States, municipalities and political subdivisions.........     206,264     208,238     208,238
  All other corporate bonds.................................      82,096      82,396      82,396
                                                                --------    --------    --------
       Total fixed income securities........................     418,866    $423,914     423,914
                                                                --------    ========    --------
Short-term investments......................................      57,865                  57,865
Other investments...........................................       5,867                   5,830
                                                                --------                --------
       Total investments....................................    $482,598                $487,609
                                                                ========                ========
</TABLE>
 
<TABLE>
<CAPTION>
                                                                    AS OF DECEMBER 31, 1997
                                                                --------------------------------
                                                                              FAIR      CARRYING
                                                                  COST       VALUE       VALUE
                                                                  ----       -----      --------
                                                                     (AMOUNTS IN THOUSANDS)
<S>                                                             <C>         <C>         <C>
Fixed Income Securities:
  U.S. Government and government agencies and authorities...    $182,238    $182,721    $182,721
  States, municipalities and political subdivisions.........       3,556       3,570       3,570
  All other corporate bonds.................................      79,751      80,010      80,010
                                                                --------    --------    --------
       Total fixed income securities........................     265,545    $266,301     266,301
                                                                --------    ========    --------
Short-term investments......................................     147,235                 147,235
Other investments...........................................       6,027                   6,001
                                                                --------                --------
       Total investments....................................    $418,807                $419,537
                                                                ========                ========
</TABLE>
 
                                       20
<PAGE>   21
 
                                                                     SCHEDULE II
 
                             CNA SURETY CORPORATION
 
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                                (PARENT COMPANY)
                                 BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                              DECEMBER 31,
                                                                         ----------------------
                                                                           1998         1997
                                                                           ----         ----
                                                                         (AMOUNTS IN THOUSANDS)
<S>                                                                      <C>          <C>
                           ASSETS
Investments in and advances to subsidiaries............................  $405,141     $368,843
Short-term investments.................................................    14,492        7,021
Cash...................................................................    15,919           26
Other assets...........................................................     1,303        1,421
                                                                         --------     --------
     Total assets......................................................  $436,855     $377,311
                                                                         ========     ========
                        LIABILITIES
Long-term debt.........................................................  $113,000     $118,000
Other liabilities......................................................    13,958        2,579
                                                                         --------     --------
     Total liabilities.................................................   126,958      120,579
                                                                         ========     ========
                    STOCKHOLDERS' EQUITY
Common stock...........................................................       441          433
Additional paid-in capital.............................................   253,215      244,829
Retained earnings......................................................    52,984       10,996
Accumulated other comprehensive income.................................     3,257          474
                                                                         --------     --------
     Total stockholders' equity........................................   309,897      256,732
                                                                         --------     --------
          Total liabilities and stockholders' equity...................  $436,855     $377,311
                                                                         ========     ========
</TABLE>
 
                                       21
<PAGE>   22
 
                                                                     SCHEDULE II
 
                             CNA SURETY CORPORATION
 
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                        (PARENT COMPANY) -- (CONTINUED)
                              STATEMENTS OF INCOME
 
<TABLE>
<CAPTION>
                                                                                SEPTEMBER 30,
                                                                                  (DATE OF
                                                                                 INCEPTION),
                                                                 YEAR ENDED        THROUGH
                                                                DECEMBER 31,    DECEMBER 31,
                                                                    1998            1997
                                                                ------------    -------------
                                                                   (AMOUNTS IN THOUSANDS)
<S>                                                             <C>             <C>
Revenues:
  Net investment income.....................................      $   695          $    33
                                                                  -------          -------
     Total revenues.........................................          695               33
                                                                  -------          -------
Expenses:
  Interest expense..........................................        7,218            1,831
  Corporate expense.........................................        3,062            1,364
                                                                  -------          -------
     Total expenses.........................................       10,280            3,195
                                                                  -------          -------
Loss from operations before income taxes and equity in net
  income of subsidiaries....................................       (9,585)          (3,162)
Income taxes................................................       (3,399)          (1,107)
                                                                  -------          -------
Net loss before equity in net income of
  subsidiaries -- Parent Company only.......................       (6,186)          (2,055)
Equity in net income of subsidiaries........................       51,701           13,051
                                                                  -------          -------
Net income..................................................      $45,515          $10,996
                                                                  =======          =======
</TABLE>
 
                                       22
<PAGE>   23
 
                                                                     SCHEDULE II
 
                             CNA SURETY CORPORATION
 
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                        (PARENT COMPANY) -- (CONTINUED)
                            STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                                SEPTEMBER 30,
                                                                                  (DATE OF
                                                                                 INCEPTION),
                                                                 YEAR ENDED        THROUGH
                                                                DECEMBER 31,    DECEMBER 31,
                                                                    1998            1997
                                                                ------------    -------------
                                                                   (AMOUNTS IN THOUSANDS)
<S>                                                             <C>             <C>
OPERATING ACTIVITIES:
  Net loss before equity in net income of subsidiaries --
     Parent Company only....................................      $ (6,186)       $  (2,055)
     Cash dividends from subsidiaries.......................         6,610            4,970
     Tax payments received from subsidiaries................        28,499            2,449
     Federal and state income tax payments..................       (17,750)              --
     Adjustments to reconcile net loss to net cash provided
      by operating activities:
       Other assets and liabilities.........................           749           (1,368)
                                                                  --------        ---------
Net cash provided by operating activities...................        11,922            3,996
                                                                  --------        ---------
INVESTING ACTIVITIES:
  Net advances from (to) subsidiaries.......................        11,935          (65,075)
  Capital contribution to Western Surety Company............            --          (50,000)
  Changes in short-term investments.........................        (7,471)          (7,021)
                                                                  --------        ---------
Net cash provided by (used in) investing activities.........         4,464         (122,096)
                                                                  --------        ---------
FINANCING ACTIVITIES:
  Proceeds from long-term debt..............................            --          118,000
  Principal payments on long-term debt......................        (5,000)              --
  Proceeds from issuance of common stock....................         7,531               --
  Dividend to stockholders..................................        (3,527)              --
  Other.....................................................           503              126
                                                                  --------        ---------
Net cash (used in) provided by financing activities.........          (493)         118,126
                                                                  --------        ---------
Increase in cash............................................        15,893               26
Cash at beginning of period.................................            26               --
                                                                  --------        ---------
Cash at end of period.......................................      $ 15,919        $      26
                                                                  ========        =========
</TABLE>
 
                                       23
<PAGE>   24
 
                                                                    SCHEDULE III
 
            CNA SURETY CORPORATION AND SUBSIDIARIES AND PREDECESSOR
 
                      SUPPLEMENTARY INSURANCE INFORMATION
              CNA SURETY CORPORATION AS OF AND FOR THE YEAR ENDED
                    DECEMBER 31, 1998 AND FOR THE YEAR ENDED
            DECEMBER 31, 1997 AND FOR THE PERIOD SEPTEMBER 30, 1997
                          (DATE OF INCEPTION) THROUGH
                  DECEMBER 31, 1997 AND PREDECESSOR AS OF AND
                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
                        AND YEAR ENDED DECEMBER 31, 1996
 
<TABLE>
<CAPTION>
                                                                                          PREDECESSOR
                                                                SEPTEMBER 30,    -----------------------------
                                                                  (DATE OF           NINE
                                                                 INCEPTION)         MONTHS
                                                 YEAR ENDED        THROUGH           ENDED         YEAR ENDED
                                                DECEMBER 31,    DECEMBER 31,     SEPTEMBER 30,    DECEMBER 31,
                                                    1998            1997             1997             1996
                                                ------------    -------------    -------------    ------------
                                                                    (AMOUNTS IN THOUSANDS)
<S>                                             <C>             <C>              <C>              <C>
Deferred policy acquisition costs...........      $ 74,488        $ 64,144         $ 37,740         $ 37,689
                                                  ========        ========         ========         ========
Future policy benefits, losses, claims and
  loss expenses.............................      $150,020        $130,381         $ 88,914         $119,151
                                                  ========        ========         ========         ========
Unearned premiums...........................      $183,708        $171,787         $ 94,577         $ 95,677
                                                  ========        ========         ========         ========
Other policy claims and benefits payable....      $     --        $     --         $     --         $     --
                                                  ========        ========         ========         ========
Net premium revenue.........................      $258,737        $ 65,433         $108,564         $149,069
                                                  ========        ========         ========         ========
Net investment income.......................      $ 24,259        $  5,766         $     --         $     --
                                                  ========        ========         ========         ========
Benefits, claims, losses and settlement
  expenses..................................      $ 44,998        $ 12,134         $(11,516)        $ 33,006
                                                  ========        ========         ========         ========
Amortization of deferred policy acquisition
  costs.....................................      $105,420        $ 25,881         $ 48,075         $ 66,382
                                                  ========        ========         ========         ========
Other operating expenses....................      $ 46,546        $ 12,332         $ 11,599         $ 15,233
                                                  ========        ========         ========         ========
Net premiums written........................      $270,602        $ 73,989         $108,630         $143,904
                                                  ========        ========         ========         ========
</TABLE>
 
                                       24
<PAGE>   25
 
                                                                     SCHEDULE IV
 
            CNA SURETY CORPORATION AND SUBSIDIARIES AND PREDECESSOR
 
                                  REINSURANCE
      CNA SURETY CORPORATION FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE
    PERIOD SEPTEMBER 30, 1997 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1997
      AND PREDECESSOR FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND THE
                          YEAR ENDED DECEMBER 31, 1996
 
<TABLE>
<CAPTION>
                                                                                                 PERCENTAGE
                                                          CEDED TO      ASSUMED                  OF AMOUNT
                                               GROSS        OTHER      FROM OTHER      NET        ASSUMED
                                               AMOUNT     COMPANIES    COMPANIES      AMOUNT       TO NET
                                               ------     ---------    ----------     ------     ----------
                                                                 (AMOUNTS IN THOUSANDS)
<S>                                           <C>         <C>          <C>           <C>         <C>
CNA SURETY CORPORATION
YEAR ENDED DECEMBER 31, 1998
Premiums:
  Property and casualty insurance.........    $103,298     $ 7,564      $163,003     $258,737      63.0%
                                              --------     -------      --------     --------      -----
     Total premiums.......................    $103,298     $ 7,564      $163,003     $258,737      63.0%
                                              ========     =======      ========     ========      =====
SEPTEMBER 30, 1997 (DATE OF INCEPTION)
  THROUGH DECEMBER 31, 1997
Premiums:
  Property and casualty insurance.........    $ 27,159     $ 2,379      $ 40,653     $ 65,433      62.1%
                                              --------     -------      --------     --------      -----
     Total premiums.......................    $ 27,159     $ 2,379      $ 40,653     $ 65,433      62.1%
                                              ========     =======      ========     ========      =====
PREDECESSOR
NINE MONTHS ENDED SEPTEMBER 30, 1997
Premiums:
  Property and casualty insurance.........    $112,751     $ 6,221      $  2,034     $108,564       1.9%
                                              --------     -------      --------     --------      -----
     Total premiums.......................    $112,751     $ 6,221      $  2,034     $108,564       1.9%
                                              ========     =======      ========     ========      =====
YEAR ENDED DECEMBER 31, 1996
Premiums:
  Property and casualty insurance.........    $158,160     $11,520      $  2,429     $149,069       1.6%
                                              --------     -------      --------     --------      -----
     Total premiums.......................    $158,160     $11,520      $  2,429     $149,069       1.6%
                                              ========     =======      ========     ========      =====
</TABLE>
 
                                       25
<PAGE>   26
 
                                                                      SCHEDULE V
 
            CNA SURETY CORPORATION AND SUBSIDIARIES AND PREDECESSOR
 
                       VALUATION AND QUALIFYING ACCOUNTS
        CNA SURETY CORPORATION FOR THE YEAR ENDED DECEMBER 31, 1998 AND
THE PERIOD SEPTEMBER 30, 1997 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1997 AND
        PREDECESSOR FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND THE
                          YEAR ENDED DECEMBER 31, 1996
 
<TABLE>
<CAPTION>
                                                                   ADDITIONS
                                                            ------------------------
                                          BALANCE AT        CHARGED TO    CHARGED TO                      BALANCE
                                         BEGINNING OF       COSTS AND       OTHER                        AT END OF
                                            PERIOD           EXPENSES      ACCOUNTS     DEDUCTIONS(2)     PERIOD
                                         ------------       ----------    ----------    -------------    ---------
                                                                  (AMOUNTS IN THOUSANDS)
<S>                                      <C>                <C>           <C>           <C>              <C>
CNA SURETY CORPORATION
YEAR ENDED DECEMBER 31, 1998
  Allowance for possible losses on
     premiums receivable.............        $968             $1,041          $--           $(544)        $1,465
                                             ====             ======          ==            =====         ======
  Allowance for possible losses on
     reinsurance receivable..........        $ --             $   --          $--           $  --         $   --
                                             ====             ======          ==            =====         ======
SEPTEMBER 30, 1997 (DATE OF
  INCEPTION) THROUGH DECEMBER 31,
  1997
  Allowance for possible losses on
     premiums receivable.............        $893(1)          $  250          $--           $(175)        $  968
                                             ====             ======          ==            =====         ======
  Allowance for possible losses on
     reinsurance receivable..........        $ --             $   --          $--           $  --         $   --
                                             ====             ======          ==            =====         ======
PREDECESSOR
NINE MONTHS ENDED SEPTEMBER 30, 1997
  Allowance for possible losses on
     premiums receivable.............        $ --             $   --          $--           $  --         $   --
                                             ====             ======          ==            =====         ======
  Allowance for possible losses on
     reinsurance receivable..........        $ --             $   --          $--           $  --         $   --
                                             ====             ======          ==            =====         ======
YEAR ENDED DECEMBER 31, 1996
  Allowance for possible losses on
     premiums receivable.............        $ --             $   --          $--           $  --         $   --
                                             ====             ======          ==            =====         ======
  Allowance for possible losses on
     reinsurance receivable..........        $ --             $   --          $--           $  --         $   --
                                             ====             ======          ==            =====         ======
</TABLE>
 
-------------------------
(1) Acquired balance of Capsure Holdings Corp. on September 30, 1997.
 
(2) Accounts charged against allowance.
 
                                       26
<PAGE>   27
 
                                                                     SCHEDULE VI
 
            CNA SURETY CORPORATION AND SUBSIDIARIES AND PREDECESSOR
 
             SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY
                              INSURANCE OPERATIONS
     CNA SURETY CORPORATION AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1998
          AND FOR THE YEAR ENDED DECEMBER 31, 1997 AND FOR THE PERIOD
        SEPTEMBER 30, 1997 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1997
              AND PREDECESSOR AS OF AND FOR THE NINE MONTHS ENDED
            SEPTEMBER 30, 1997 AND THE YEAR ENDED DECEMBER 31, 1996
 
<TABLE>
<CAPTION>
                                                                SEPTEMBER 30,             PREDECESSOR
                                                                  (DATE OF       -----------------------------
                                                                 INCEPTION)       NINE MONTHS
                                                 YEAR ENDED        THROUGH           ENDED         YEAR ENDED
                                                DECEMBER 31,    DECEMBER 31,     SEPTEMBER 30,    DECEMBER 31,
                                                    1998            1997             1997             1996
                                                ------------    -------------    -------------    ------------
                                                                    (AMOUNTS IN THOUSANDS)
<S>                                             <C>             <C>              <C>              <C>
Deferred policy acquisition costs...........      $ 74,488        $ 64,144         $ 37,740         $ 37,689
                                                  ========        ========         ========         ========
Reserves for unpaid claims and claim
  adjustment expenses.......................      $150,020        $130,381         $ 88,914         $119,151
                                                  ========        ========         ========         ========
Discount (if any) deducted..................      $     --        $     --         $     --         $     --
                                                  ========        ========         ========         ========
Unearned premiums...........................      $183,708        $171,787         $ 94,577         $ 95,677
                                                  ========        ========         ========         ========
Net premium revenue.........................      $258,737        $ 65,433         $108,564         $149,069
                                                  ========        ========         ========         ========
Net investment income.......................      $ 24,259        $  5,766         $     --         $     --
                                                  ========        ========         ========         ========
Net claims and claim expenses incurred
  related to:
  Current year..............................      $ 49,350        $ 12,781         $ 23,484         $ 42,748
                                                  ========        ========         ========         ========
  Prior years...............................      $ (4,352)       $   (647)        $(35,000)        $ (9,742)
                                                  ========        ========         ========         ========
Amortization of deferred policy acquisition
  costs.....................................      $105,420        $ 25,881         $ 48,075         $ 66,382
                                                  ========        ========         ========         ========
Net paid claims and claim adjustment
  expenses..................................      $ 25,689        $  4,417         $  8,087         $ 43,448
                                                  ========        ========         ========         ========
Net premiums written........................      $270,602        $ 73,989         $108,630         $143,904
                                                  ========        ========         ========         ========
</TABLE>
 
                                       27
<PAGE>   28
 
(A)(3) EXHIBITS
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
 2(1)     Reorganization Agreement dated as of December 19, 1996 among
          Capsure Holdings Corp., Continental Casualty Company, CNA
          Surety Corporation, Surety Acquisition Company and certain
          affiliates of Continental Casualty Company (filed on
          December 27, 1996 as Exhibit 2 to Capsure Holdings Corp.'s
          Form 8-K, and incorporated herein by reference).
 2(2)     First Amendment to the Reorganization Agreement dated as of
          July 14, 1997 among Capsure Holdings Corp., Continental
          Casualty Company, CNA Surety Corporation, Surety Acquisition
          Company and certain affiliates of Continental Casualty
          Company (filed on July 16, 1997 as Exhibit 2 to Capsure
          Holdings Corp.'s Form 8-K, and incorporated herein by
          reference).
 3(1)     Certificate of Incorporation of CNA Surety Corporation dated
          December 10, 1996 (filed on August 15, 1997 as Exhibit 3(1)
          to CNA Surety Corporation's Registration Statement on Form
          S-4 (Registration No. 333-33753), and incorporated herein by
          reference).
 3(2)     Amendment to Certificate of Incorporation of CNA Surety
          Corporation dated May 27, 1997 (filed on August 15, 1997 as
          Exhibit 3(2) to CNA Surety Corporation's Registration
          Statement on Form S-4 (Registration No. 333-33753), and
          incorporated herein by reference).
 3(3)     Bylaws of CNA Surety Corporation (filed on August 15, 1997
          as Exhibit 3(3) to CNA Surety Corporation's Registration
          Statement on Form S-4 (Registration No. 333-33753), and
          incorporated herein by reference).
 3(4)     Amendment to Bylaws of CNA Surety Corporation (filed on
          September 23, 1998 as Exhibit 4(3) to CNA Surety
          Corporation's Registration Statement on Form S-8
          (Registration No. 333-64135), and incorporated herein by
          reference).
 4(1)     Specimen certificate of CNA Surety Corporation (filed on
          August 15, 1997 as Exhibit 4(1) to CNA Surety Corporation's
          Registration Statement on Form S-4 (Registration No.
          333-33753), and incorporated herein by reference).
 4(2)     Form of Registration Rights Agreement, between CNA Surety
          Corporation and Equity Capsure Limited Partnership (filed on
          August 15, 1997 as Exhibit 4(2) to CNA Surety Corporation's
          Registration Statement on Form S-4 (Registration No.
          333-33753), and incorporated herein by reference).
 9        Not applicable.
10(1)     Non-Competition and Non-Solicitation Agreement between
          Capsure Holdings Corp. and Frontier Insurance Company, dated
          as of May 22, 1996 (filed on August 15, 1997 as Exhibit
          10(9) to CNA Surety Corporation's Registration Statement on
          Form S-4 (Registration No. 333-33753), and incorporated
          herein by reference).
10(2)     Contract Surety Bond Reinsurance Agreement dated as of
          September 22, 1994 between Western Surety Company, a South
          Dakota corporation, and Universal Surety of America, a Texas
          corporation (filed on March 30, 1995 as Exhibit 10(23) to
          Capsure Holding Corp.'s Annual Report on Form 10-K, and
          incorporated herein by reference).
10(3)     Co-Employee Agreement dated as of September 22, 1994 between
          Western Surety Company and Universal Surety of America
          (filed on March 30, 1995 as Exhibit 10(24) to Capsure
          Holding Corp.'s Annual Report on Form 10-K, and incorporated
          herein by reference).
10(4)     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(5)     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).
</TABLE>
 
                                       28
<PAGE>   29
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<C>       <S>
10(6)     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(7)     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 December 27, 1996 as Exhibit 2 to Capsure
          Holdings Corp.'s Form 8-K, and incorporated herein by
          reference).
10(8)     Form of Surety Quota Share Treaty by and between Western
          Surety Company 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(9)     Employment Agreement dated as of October 1, 1997 by and
          between CNA Surety Corporation and Dan L. Kirby (filed on
          March 20, 1998 as Exhibit 10(13) to CNA Surety Corporation's
          Annual Report on Form 10-K, and incorporated herein by
          reference).
10(10)    Employment Agreement dated as of October 3, 1997 by and
          between CNA Surety Corporation and Mark C. Vonnahme (filed
          on March 20, 1998 as Exhibit 10(13) to CNA Surety
          Corporation's Annual Report on Form 10-K, and incorporated
          herein by reference).
10(11)    Credit Agreement dated as of September 30, 1997, among CNA
          Surety Corporation, the lenders party thereto, and Chase
          Manhattan Bank, as Administrative Agent (filed on July 9,
          1998 as Exhibit 10(13) to CNA Surety Corporation's
          Registration Statement on Form S-1 (Registration No.
          333-56063), and incorporated herein by reference).
10(12)    Surety Second 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 July 9, 1998 as Exhibit 10(14) to CNA
          Surety Corporation's Registration Statement on Form S-1
          (Registration No. 333-56063), and incorporated herein by
          reference).
10(13)    Form of CNA Surety Corporation Non-Employee Directors
          Deferred Compensation Plan (filed on July 9, 1998 as Exhibit
          10(15) to CNA Surety Corporation's Registration Statement on
          Form S-1 (Registration No. 333-56063), and incorporated
          herein by reference).
11        Earnings per share computation.
12        Not Applicable.
13        1998 Annual Report to Shareholders.
21        Subsidiaries of the Registrant.
22        Not Applicable.
23        Consent of Deloitte & Touche LLP dated March 22, 1999.
24        Not Applicable.
27        Financial Data Schedule.
</TABLE>
 
                                       29
<PAGE>   30
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
 
                                          CNA SURETY CORPORATION
                                          
                                                /s/ MARK C. VONNAHME
                                           -------------------------------------
                                                     Mark C. Vonnahme
                                          President and Chief Executive Officer
                                              (Principal Executive Officer)
 
                                                /s/ JOHN S. HENEGHAN
                                           -------------------------------------
                                                     John S. Heneghan
                                            Vice President and Chief Financial
                                                         Officer
                                           (Principal Financial and Accounting
                                                         Officer)
 
Dated: March 22, 1999
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
     DATE                TITLE                             SIGNATURE
     ----                -----                             ---------
<S>              <C>                     <C>
 
March 22, 1999   Chairman of the Board             /s/ ROBERT T. VAN GIESON
                 and Director            ---------------------------------------------
                                                     Robert T. Van Gieson
 
March 22, 1999         Director                       /s/ GIORGIO BALZER
                                         ---------------------------------------------
                                                        Giorgio Balzer
 
March 22, 1999         Director                       /s/ PHILIP H. BRITT
                                         ---------------------------------------------
                                                         Philip Britt
 
March 22, 1999         Director                       /s/ ROD F. DAMMEYER
                                         ---------------------------------------------
                                                        Rod F. Dammeyer
 
March 22, 1999         Director                        /s/ EDWARD DUNLOP
                                         ---------------------------------------------
                                                         Edward Dunlop
 
March 22, 1999         Director                         /s/ MELVIN GRAY
                                         ---------------------------------------------
                                                          Melvin Gray
 
March 22, 1999         Director                        /s/ JOE P. KIRBY
                                         ---------------------------------------------
                                                         Joe P. Kirby
 
March 22, 1999         Director                       /s/ WILLIAM C. PATE
                                         ---------------------------------------------
                                                        William C. Pate
</TABLE>
 
                                       30
<PAGE>   31
 
<TABLE>
<CAPTION>
     DATE                TITLE                             SIGNATURE
     ----                -----                             ---------
<S>              <C>                     <C>
March 22, 1999         Director                        /s/ ROY E. POSNER
                                         ---------------------------------------------
                                                         Roy E. Posner
 
March 22, 1999         Director                      /s/ ADRIAN M. TOCKLIN
                                         ---------------------------------------------
                                                       Adrian M. Tocklin
 
March 22, 1999         Director                      /s/ MARK C. VONNAHME
                                         ---------------------------------------------
                                                       Mark C. Vonnahme
</TABLE>
 
                                       31